We Study Billionaires - The Investor’s Podcast Network - TIP400: Mastermind Q4 2021

Starting point is 00:00:00 You're listening to TIP. Every quarter I sit down with my friends, Tobias Carlisle and Harri Ramachandra, to discuss with stocks that are on our radar. And every quarter, you're invited. In this episode, Hari is taking a closer look at Verizon. Tobis has invested in Lockheed Martin, and I'm pitching GoDaddy. I hope you enjoy the conversation as much as I did. Here is the Q4-2021 Mastermind episode.

Starting point is 00:00:25 You are listening to The Investors Podcast, where we study the financial market. markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Welcome to The Investors Podcast. I'm your host Dick Broderson, and as always for a mastermind discussion, I'm here with Tobias Kyleyle and Harry Romachandra. Gents, how are you today? Wonderful. Great seeing you guys. Yeah, same here. Great seeing you guys. Thank you, Stig, for hosting us again. Guys, it's always great to have you here. And before we talk about our individual picks, as we always do for our mastermind discussions,

Starting point is 00:01:13 I want to first throw it over to you, Toby, because you have some interesting thoughts about the general market, and then afterwards over to Hari, who was seeing some very interesting things too in the valley. Yeah, I think folks who know me know, you know, I'm a deep value guy, and I've got this deep value attitude to the market. So I'm always probably a little bit more conservative than many other investors. the absolute level of the market really doesn't make much difference to me one way or the other. But I do think that it's something that I just kind of keep it in the back of my mind and I keep an eye on it.

Starting point is 00:01:43 One of the things that I've noticed recently is the Schillopee, which is cyclically adjusted price earnings, takes a 10-year inflation-adjusted average of the earnings of the market and compares it to the current price. That's pushing up now almost to 40, which is exceptionally high. There are very few instances where it is higher than where it is now. If you go back through the data, really the only other time was the last of 1999 before it crashed. And of course, that was the peak of the dot com 1.0 boom led to the wreck that followed. I use this other indicator too. None of this sort of factors into my process.

Starting point is 00:02:24 I just as an observation, I think it's kind of interesting. There's a fear and greed indicator, which you can find on. CNN. They look at a variety of valuation and volatility and option pricing type metrics to come up with this simplified sort of temperature reading on what the market is doing. That can range from extreme fear through to extreme greed. And right now it's an extreme greed. So you've got this combination of a very overvalued market that is extremely greedy, extremely bullish. And typically, that's something that you see closer to the end of ball market. It's not portending a giant crash or anything like that. It's just saying that you probably don't need to chase stuff right now. There's a

Starting point is 00:03:10 reasonable chance that it's going to come back to you. If you're feeling the FOMO, just step back a little bit because you might get some better prices in the not too distant future. And if you are fearing the FOMO, I don't know if you should go to Silicon Valley because before we hit record here, Harry had like crazy story from the Valley and Toby was like, you should actually just tell that story. So Harry, with that being said, that's true it over to you. What are you seeing right now there in the Valley? As Toby was saying, he can see it in the numbers in terms of similarities within the dot-com 99 era and now in terms of numbers like fear ratio or fear and greed indicator, but I can feel it here in the atmosphere and the sentiments and the trends that I see

Starting point is 00:04:02 in the valley. A couple of things that I was talking about is everybody and anybody I know, a lot of my former colleagues or friends, everybody is starting a startup now. And they're all getting funding. And in fact, one of the things that has happened recently here is there are funds who have taken a indexing approach to angel and venture investing, wherein instead of doing due diligence, they are just spreading it across without my due diligence. And this is hurting those who are trying to do due diligence, angel investors, because money is cheap. That sounds so much similar to what was happening in the dot-com era. And one of my friends forwarded me a blind app conversation where an engineer from a startup had posted a message saying, hey, not much work

Starting point is 00:04:54 is being done in the startup. We are having parties all the time. The founders are enjoying all the funds they have got, but they're promising a lot of growth in the future to the VCs and they're buying it. And then in the thread, there were others also chiming in saying that they're seeing similar things happening. So in terms of people switching jobs, jobs easily getting high or pay raises, people upgrading their homes or buying bigger and bigger homes, all the, and a lot of constructions happening in Bay Area, by the way. And even condos that are built are a million dollar plus and they just sell like hotcakes. A ton of stuff happening. And, you know, it's, it's really a grateful task we're giving ourselves. You know, we kick off the

Starting point is 00:05:41 episode talking about how ridiculously expensive everything is. And here we are sitting three value investors and then talking about, oh, so where do we see value? Can you find any individual stock picks right now with the prices we're saying? It's a funny market because value has been so crushed for so long. I've talked about this. It's one of the longest, most drawn-out value underperformance in the data. So I'm actually, I feel the portfolio that we can put together is very high quality for very reasonable prices.

Starting point is 00:06:13 And one example I have right now is Lockheed Martin. which is my stock pick for today, which is something that I hold in the Acquirers Fund in Zieg. I've held it for a little while. The reason that I like it is I think that it's reasonably certain to keep on growing into the future, and it's very well managed from the perspective of the business and also from the perspective of the capital structure and the balance sheet.

Starting point is 00:06:38 For those who don't know, Lockheed Martin, they make high-end military aircraft. They're probably, I mean, it's hard to say what they're most famous. for because they have lots and lots of stuff that they make, but they're probably most famous currently for the F-35. That's like a 20-year project, which is sort of a good representation of what Lockheed Mutton does. They get these very long projects. There just aren't very many competitors in this space because it's hard to get all of the technological know-how employees and scale to build this stuff. So they do compete when they bid for these contracts from the

Starting point is 00:07:11 government. But once they get them, they're very long contracts. There's always cost over runs and there's not really much that the government can do. They kind of have to eventually pay up. So they get a pretty good return. They make Sikorsky helicopters. They make mission systems, space systems, missile defense systems, all this stuff that's just, you just cannot break into the industry. The incumbents are the ones who are going to be there forever. They had a recent earnings release and they've dropped on that earnings release. And the reason for that is they've had revenues have backed off a little bit. And then there's a new president. There's always a risk that the White House or Congress or someone is going to curtail spending. It's never happened

Starting point is 00:07:53 in the past. It's not going to happen in the future. Biden has already increased the spending 2% over Trump's level. It's very likely that it continues to grow. It's very likely that Lockheed Martin is a beneficiary of it. Let's just talk a little bit about the quantitative numbers. So Lockheed Martin is a $92 billion company as of today. It's got a $100 billion enterprise value. It's very cash rich. It's got some debt, but there's no near-term payments that are material relative to the amount of cash that it has.

Starting point is 00:08:24 Revenues were 67.5 estimated for the expected for the end of the year, maybe 68.5. It's generating lots of revenue. On a per share basis, so stocks around $330 today. on a per share basis, it's about $237 in REVs, $18 per share in free cash flow, $26 to $27 per share for the year in earnings. And it pays out a dividend likely to the end of the year about $10.50. So it's like a 3% plus dividend yield here. And that's on a 42% payout ratio. So it's reinvesting most of its money. The return on investment is like 90%. It's got this massive. return and equity. So all of that money is reinvested at very high rates. And that's why it's

Starting point is 00:09:11 continued to grow so consistently for so long. The thing that I really like about it, they managed their share count really well. So over the last decade, they've reduced it by about 17%. In Q3, when they had the little wobble from the revenues backing off a little bit year and year, this is just what happens. Like, it's not a straight line up. It is a little bit wobbly. They bought back $2 billion in stock, which is something that, you know, has a value. guy I love to see. They've got $6 billion left in that stock repurchase program, which if they executed it here, it would be like more than 6, 6, 7 percent of the outstanding stock. They're just going to keep on doing that. If it's cheap, they're going to buy back stock.

Starting point is 00:09:50 They've got plenty of free cash flow to keep on doing that. They've got plenty of cash on hand. I don't think that this is not something that's going to go up 10 times, but it is something that's going to go up. I think it could go up kind of mid-teens pretty consistently for a very long period to time because of the valuation and the underlying business. And so that's exactly the sort of thing that I like in the funds, consistent, pretty certain where it's going to be in the future. The risk for these kind of things is always that, you know, you've got one, essentially one contract provider.

Starting point is 00:10:22 That's the main risk that they decide that they're not going to spend on defense, but I think that it's a pretty low risk that defense spending is actually ever cut and more likely that it's just going to keep growing over time. What do you think, fellas? Whenever I look at the numbers, I like everything that I see. It looks very, very safe. Like, in the best way possible, I'm going to say, it looks like a really, really boring company. It does.

Starting point is 00:10:48 Like, you look at the margin, like, really, really stable with a nice upward slope. And then you look at the revenue. Same story. It actually looks a bit like Harris pick, I have to say, which is a bit around here two days ago. They actually are starting to work with Toby's pick. So I'll just leave that little cliff hangar there if anyone find that interesting. And so it looks like a good placeholder for cash. It looks like a very, very stable business.

Starting point is 00:11:14 It sounds like there's a new sheriff in town, right? Whenever you go through that last earnings call and you're like, we have a new metric now. It's going to be called Growing Free Cash Flow, because yeah. And I was like, what was it called before? And so that was kind of interesting in itself. And he was also very much like the new CEO, like, it's on my recommendation. And we made an intrinsic value assessment.

Starting point is 00:11:38 And it is undervalued. So he's also like doing his job in terms of talking to stock up. And obviously he's biased. He probably also believes it. But if I can throw it all back over to you, Toby, I guess one thing I'd like to understand a little better is, you know, we all know monopolies. You know, we have one seller and then a lot of buyers. And then we have what economists would call monopsony.

Starting point is 00:11:58 But it's basically like you have one buyer. That's the US government. And then you also have a lot of sellers. So how does the whole pricing power thing work? Where's the mode? Then another question, how would you as a contract to make sure that you get your fair share of whenever the government says, oh, let's spend 2% more on a budget? They do have the risk that there is, as you say, a monopsony, which is one buyer and

Starting point is 00:12:21 multiple providers, although it's really, I don't know what you would call it where you have an oligopoly on one side and a monopoly supply, but it's a monogopole. They need them healthy because they're crucial for defence the US. So they're always going to be spending money on it. And they just aren't that many providers. Lockheed Martin, you know, it's a storied name that's been around for a very long period of time. And so they're always going to be one of guys in there who's able to, they understand that process. They know how to get that money. That's kind of what they do, as well as being, you know, technologically proficient. they're good at negotiating the contracts. I think that it's not the kind of business that

Starting point is 00:13:03 ordinarily you would look at. That's always a huge risk when you have a single consumer of the product and they can dictate the terms. But in this instance, they need these guys healthy because they can't starve them for capital. And so you can be the beneficiary of that. You know, where most of the time government spending is kind of running against you as a taxpayer. This is one of the few places where you can sort of participate alongside it. and at a reasonable price, which that's the hardest thing. You can find plenty of monopolies that are doing plenty of gouging and you're on the wrong side of that, but it's also hard to participate because the stock's so expensive. The stock could move around here. I think

Starting point is 00:13:43 they're reasonably valued to likely undervalued. And I think that the mid-teens kind of return that you're going to get from this is pretty good. That's a pretty good return for the risk that you're taking. 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 height of the summer. 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 entering its 18th year, bringing together activists, technologists, journalists, investors, and builders from all over the world. many of them operating on the front lines of history.

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Starting point is 00:18:07 Yeah, Toby, I think I was trying hard to find ways to figure out if I should not buy this stock, but frankly, I really like this big. So, however, I think it goes back to our theme today. The market is overvalued. The greed index is at its all-time high. Fed is very monetarily easy in its outlook. So where do you look for a safe place? And I think it fits really well in that theme.

Starting point is 00:18:37 I don't see it as concerns, but areas where I wanted to get your insight is, one, their concentration of revenue in F-35 program of 30% and 28% of their revenue coming from international, which is subject to geopolitical risks. I mean, recently, the U.S. government shut down Turkey out of the F-35 program. So those kind of things might happen. And also their supply chain risks in the current environment,

Starting point is 00:19:06 but I discounted because if that was the case, you can't buy anything. So security risk, because there might be, one of the prime targets for state actors to attack them. How would that, are they well protected? Will that impede their operations? So that is one. And the last, it's not really a concern, but I thought I had was,

Starting point is 00:19:28 are they the name, because they are actually big tech in defense in a way. They are a tech company at the core, and they need really good engineers. Will they be able to continue to attract talent at the same rate? they did in the past. I don't know. I couldn't check their average employee age, but I was just curious about that. Yeah, I think those are great questions, and I think there's probably the real risks for it. Let's just working backwards, attracting talent. It's tough. As you pointed out earlier,

Starting point is 00:20:00 you can get pay raises, and you can work at some very sexy companies, some very sexy startups, and that's very attractive to younger folks. It's partly that's where the market cycle is, though, I think that if not everybody sort of is looking for that massive upsides, some people that are probably like me, a little bit more conservative, like looking for a reasonable return. And if you go to Lockheed Martin, you're reasonably certain of tenure and good pay over a long period of time. And that might be, at this point in the cycle, you might say that's a better risk than going to a startup where we don't know if they're going to be here in 12 months time because everybody's partying and spending the money on that. So there'll be some

Starting point is 00:20:37 folks who'll make that assessment. There'll be some folks who want to be working with aeronautic type engineering, there'll be some folks who like the defense aspect and are attracted to that. And I think that definition of those are the kind of people who you want working in that business. So I think from that perspective, they'll be okay. The security front, yeah, that's a huge risk. That's like they're clearly a target for like state level security issues from other countries. And so I'm sure that they work very closely with the US government to protect themselves as much as they can, but there's no guarantees that continues to be a sort of metaphysical, existential risk for them, but they spend a lot of money trying to protect themselves. On the supply chain front,

Starting point is 00:21:20 I would say that they probably a priority, they probably get priority. If it came to the crunch where it was Lockheed Martin or someone else, I'm sure they lean on the government, they say, we need this more than anybody else because this is defense of the realm. And I'm sure the government would say, okay, you get priority on whatever chip or widget or thing that you need. Just remind me of the first risk again. The first was the 30% revenue coming out of F-35. Yeah, I mean, that project has been very successful, which is sort of one of the reasons why there's so much revenue coming out of that.

Starting point is 00:21:56 It's taken a really long time to get that operational, and I think that that'll be in service for a very long period of time. And it's likely that when the next generation comes along too, I think that's going to be, you know, Lockheed Martin's got to be in the best seat to be sort of getting access because they've developed all of the technology. It isn't a huge advantage to have all of that revenue flowing to you as you developing the technology. Have I missed one? Yes, Toby, the international revenue, 28% of the revenue is international. Yeah, that's like a geopolitical thing, right, where the government can come along and say Turkey's out of the program.

Starting point is 00:22:30 But then likely they'll come in and say we've got a new best friend. it's whoever. I think Australia probably picked up some planes, and I'm sure there's a few other people around who just, they just get told you're going to get some more planes and you can pay for them too, so good luck. I think one more point that actually in favor of Lockheed Martin, and I wanted to know your thoughts, is are they insulated from economic cycles? I think that's right. I think they are. And this is sort of one of the reasons that I like Lockheed Martin at this point, that it really doesn't matter what happens in the business cycle. because for them, they're more interested in probably the presidential cycle and what happens

Starting point is 00:23:09 in Congress. And that's always the risk. That's why when they have the revenue backing off recently, it was like off 10% pretty quickly the stock. And I think that that's largely because people are nervous about the incoming administration. Are they going to spend more money? It's funny. It happens every single time and they always spend more money.

Starting point is 00:23:27 So I guess you've got to worry about that risk, but it's more like a stock price volatility risk than an actual impact to the underlying business. And that's the kind of business that I like to invest in. If the stock price goes backwards, then, you know, I'm probably a buyer at that level, because I'm not too concerned about the underlying business. I'm pretty certain that in 10 years time, it'll be quite a bit bigger than it currently is. And if they're buying back stock the way that they are, then there's just going to be fewer shares around. So a bigger business with fewer shareholders, you know, you can work out what that does the stock price. And it's a good thing. So that's the kind of stuff that I like. Having said that, you know, it could underperform the market. The market could do

Starting point is 00:24:02 anything from here. It could double or it could halve. And I've got no control over that. All I can control is sort of which positions I'm in that deliver a reasonable return for the amount of risk that we're taking on. Lockheed Martin's one of my favorite here. Wonderful. Wonderful pick also for income investors, especially now that the new metric, I'm sorry, I have to say it again, now that the new metric is free cash lopez. Yeah. But like, all joking aside, that is what you need to look for. If you are looking as a dividend investor or income investor, and with that type of yield, what, 3.3 now and the payout ratio is like just shorter 50%, have a very good track record. So just want to mention that. Okay, so I would like to pitch a stock

Starting point is 00:24:45 now to the group. But before I do, I would like to talk about my latest investment because it's the last mastermind discussion we had back on episode 374. I talked about Alibaba. And because the greed index is all-time high, I doubled down today. And it wasn't at a bar, and it's the second time I've been doubling down. So today, the price is 167, and it's now 7% of my portfolio. So I just wanted to mention that. Every time we have mastermind discussion and talk about a pick, I always get a bunch of emails afterwards, so I'm going to preempt some of that and say, yes, it's 167, and at the time,

Starting point is 00:25:22 and it's now 7% of my portfolio. So for what it's worth. And what will be interesting and what we will see here as this goes out is how there's a lot of value investors right now, prominent names who are invested in Alibaba. It'd be interesting to see what's going to go down whenever we have all the data. For the time being, we can see that Chalemonger has doubled down, which was interesting in itself. He doesn't move his portfolio a lot. Let me just put it like that. So interesting, interesting stuff.

Starting point is 00:25:50 So my pick here for today is GoDaddy. the stock ticker G, D, D, D, Y. I don't have a position in. Sometimes I do take a small position in just to start learning more, but it's a stock that has just come on my radar a few weeks ago. I probably should have had it on my radar before because yesterday it rose by 10% on their quarterly earning speed, but it is what it is.

Starting point is 00:26:13 This is a company that's relatively old for a tech company was founded in 1997, and today it's most famous for the domains on the management. They have 82 million. And it's a little more than 20% of the market. Yeah. It's actually not how they make most of the money, but we'll get back to that. But that's typically what people think of whenever they think Go Daddy. Workforce close to 10,000. They have more than 20 million customers or entrepreneurs, if you want. And they IPO in 2015 at a price of $20. And today, it's trading at 745-ish. I've known Go-Dady for some time. I remember Preston calling me back in 2014, and he said,

Starting point is 00:26:53 We should buy a domain and call it the investor's podcast. And he's, I remember he said that it was hosting on something called GoDaddy. I actually thought I heard something wrong because the name sounded so ridiculous. I was like, what now? But apparently it was a legit side. And so I never thought too much about it. To me, it really seems like it's just a commoditized market. I mean, it's a domain.

Starting point is 00:27:12 It's not like one domain is better than the other depending on where you bought it. So it's never really been too much of my interests. We bought several domains since then. And what I've realized is that they kept on sitting me different emails with upselling. So I took a closer look and lo and behold, they have a full suite of different products now. And so today, domains are only 46% of the revenue. 54% are in two different business segments. It's called hosting and presence and also one called business applications.

Starting point is 00:27:43 You can basically see this as a one-stop shop for what you need as a small business owner. say that you have a podcast or something similar to that. And so you would go there, you would buy whatever domain you need. But you can also get your email there. They even do resales for like Microsoft Office or like basically anything you need. You can build your website there as well. So COVID took a toll, like short term as it did on most companies, when that shock came out because it did hit a lot of small businesses.

Starting point is 00:28:12 But it also gave you a longer lasting tailwinds for the economy as it's been growing more digital with everything this has happened. And if we look at the investing thesis, the investment thesis is relatively simple in the sense that GoDaddy back in the day, they were a domain company, so they competed in a $5 billion market. And now they made this pivot to new business areas, so now they're competing in $180 billion market. So far, so good. Since 2016, the top line has grown with annually by 16% on average. Domain, that's actually still growing, not just new domains, but they're also doing sales of existing domains. If you have cars.com or whatever, like,

Starting point is 00:28:51 if you're so lucky to gobble up some of those back in the day, that's actually one of the fastest growing segments within the domain business unit. So that's growing 13%. Best is business applications. That's growing by almost 26% annually since 2016, but it's also the smallest unit. And what's really interesting is that in that growth category,

Starting point is 00:29:12 you have a much larger total addressable market because you also have an average annual consumer spend between $600,000, so it's not just you buying your domain for $10 bucks or whatnot, it's people there spending real money. The bad news, of course, is that it's also much more competitive. We will be competing with Wix and Squarespace and a lot of companies you probably don't want to compete with. So, yes, the total addressable to the market, or TAMS, as it's called, like, yes, that's

Starting point is 00:29:41 much, much better, but they're not a big player in that market. It is not yet. I always want to say something bad about whatever I pits here. One thing that I know that Torb and I, we talked about multiple times have been like the fewer inflation. And if we look at the macro environment right now, if we look at what's priced in in terms of inflation, we are around the 3%. And the way I'm looking at that and saying, what is priced in, I'm not talking about

Starting point is 00:30:06 the headline inflation number. I'm looking at the five-year treasury yield and then comparing that to the tips. because then you can see, and the tips that would be the Treasury inflation protected. So you can sort of like see what the market includes in that, like what is the general consensus? And it's baked into it be around 3%. So right now, if you really want to lock your money in for like five years, with a tip, you can, I think it's 1.8 minus 1.8 right now. But it will go together with up and down together with inflation.

Starting point is 00:30:35 So why am I saying that? Well, I'm saying it because my best guess, and it's a guesstimate, is this, that inflation is here to stay for quite some time. I don't think it's a transitory as it's been told and retold in the media. Harri said himself not too long ago about the supply chain issues. I can only see that persisting for the foreseeable future. And so all eyes are on the fat whenever that comes. And not too much to try and predict what they're going to do. And we heard that start tapering now and everything that's happening with that. But Godaida did take out some debt as they've been expanding. And that was being renewed in 2024. So,

Starting point is 00:31:12 To make a long story short, I'm looking at the debt level right now. It's not alarmingly high, but it will have to be refinanced. And how will it be refinanced? What does the macro environment look like that? And often you would like to invest in companies where you don't have to look at that, where it's not an issue in the first place. So it is something I'm looking at. And just to give you some numbers, the free cash flow for the train 12 months,

Starting point is 00:31:34 that's $712 million. And you had interest expense of 112. So again, not alarming right now. But whenever you log in debt at these levels, by definition, like just a few percentage points in terms of the interest rate can give you multiples of the current interest expense. So it's just something to keep in mind. Whenever I look at the valuation, I'm looking at like a price of free cash flows in the high teens, and I'm looking at a company that's growing in the high teens too.

Starting point is 00:32:02 And whenever you look at some of the trend lines, you know, you see revenue growing faster, like 16%, and you see some of the newer segments really making good results. And then you see GNA cost, you know, it's gone up by 12% in comparison. So it's a scalable model also because it's upselling. And you just see, I know it comes off as a very plain and simple, but you see revenue increase more than costs, which is something you want to see as an investor. And if you do look at comparable companies, and I'm not saying that something like Wix is completely comparable, because it's comparable to one of their business. units, but just as an example, you know, we have a price to free cash flow of 138. The investment

Starting point is 00:32:43 thesis is different from Wix, but we are seeing some crazy valuations for Veracine, which is much more comparable to their, to the domain business. It's 33. And, you know, domains are as SaaS, almost if we can use that as this example, because you don't change. Like, I don't think I've ever had the thought of changing my provider because I can save one buck because I don't want the hassle of changing my domain. Once you're locked in, you're locked in. And of course, there's a huge difference regarding how much they can then start upselling you. But like once you're locked in with your domain and you have their retention, that's just how it is. And it's very, very sticky. Which is also one of the reason why you would have at least at these levels and this

Starting point is 00:33:23 crazy market, it makes sense why something like Verasai would have a in the 30s in terms of price of free cash flow, because it's like a bond. So those were my first part of the pitch. I sort of wanted to throw it back over to you, Harry, because I know it's not Silicon Valley based, but I wanted to know more about the reputation. It seems like there was so much fighting for talent right now. And without having any prior knowledge to this, I do not expect GoDaddy to be like at top of the tournament pole for talent. But like how is it seen like from programmers?

Starting point is 00:33:52 It's all due to talent at the end of the day for these type of companies. Stick, I think this is a very interesting pick because many of us are customers of GoDaddy. So, and it has been, it's like the granddaddy of public cloud, way, way before AWS or anybody came in. It's sad that they didn't really capitalize on that and move into other segments. Basically, they just stuck to domain and web hosting. I think the positives I see in this company is, of course, the brand recognition among all the small businesses mainly. And also they're diversified customer base, huge tale of customers. And also recently, I think they also bought a new payments platform and for e-commerce enablement

Starting point is 00:34:37 that might also have some tailwind for this company in terms of revenue and growth. And obviously, customers are sticky. So those are all the positives. In terms of your question about talent, before I come to that, I see some issues with the talent aspect because what is happening is this is one of those markets or areas where the barrier to entry is not very high. So you see a lot of new iterations. Every now and then you'll hear about a new hosting company,

Starting point is 00:35:08 whether it's VIX, you talked about, Blue Host was there, Squarespace, I guess there's another one. And then there is all these other companies like Shopify and others. This being a very low barrier to entry, no network effects, you will see a lot of new iterations coming in and they will attract a lot of talent, even from GoDaddy, I believe, because they are much cooler new ventures with a new take. And then there is also pricing pressure, pricing competition and stuff like that. So in Silicon Valley, it's not really seen as a tech company in the

Starting point is 00:35:42 sense that programmers from top school would even consider it. I think it will be at the bottom. So I think that's one of their weaknesses, I would say. And along with the competition, those are the things that worries me about them in terms of their future growth. There must be some some ceiling for them because of that. I was just going to agree with Hari that I don't view it as a tech company either. I think it's what it is is a marketing. They've got this great setup, right? They used to have these very kind of attention grabbing ads.

Starting point is 00:36:19 And now they've sort of transitioned away from that a little bit. But they're still heavy ad spend. So ask the average small business owner, like where do you go to get your domain? I'll bet you that most of the time they'll say GoDaddy first. And then you go to GoDaddy and I say this as a customer many times over. I hate to think what I spend every year on domains that I don't use. It's a lot. Could be a thousand bucks a year or something like that.

Starting point is 00:36:45 I go and I go to buy a domain and they say, hey, guess what? First year or so, it's like $9.99. You're like, that's not very much money. I'll get one of those. And then I just get this email every now and again that says, oh, by the way, you just spent $80 on domains. and so cleverly, and I'm not going to switch away. It's just too hard. I couldn't name another one off the top of my head. As a portion of my business, it's not very much money, but it's this consistent little tale of money that I'm going to spend. And I'm not going to give up these domains because who knows, maybe I want to use one of them one day. So I think it's a clever kind of marketing business that does have this little software as a service recurring revenue model. And so that is a good little business. And then they can upsell you all of the other stuff. I think the fact that they can't get, they're not going to get top level engineering talent. And that's why they did. figure out that they should have transitioned from or that cloud hosting over to like an

Starting point is 00:37:34 AWS style thing. If they'd had those guys, maybe they would have done that, but they didn't. So they probably, as Harry points out, they're going to miss out on those kind of ideas. But it's going to be a very consistent, solid, growing business for a very long period of time. So I think the business is actually not too bad for it. And it's, you know, very high returns on, it doesn't cost them much to provide those domains. But as Harry points out, it's going to be hard for them to charge much more for them either because

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Starting point is 00:41:26 This is a paid advertisement. All right. Back to the show. If I can just put to Harri's point about like the payment platform, they bought a payment platform called Point for $320 million, not too long ago. And the numbers haven't come in there yet. It will be probably come in next year of 2023, so we don't really know that. It's a part of the one-stop shop type of thing.

Starting point is 00:41:49 I think we can all say that it's very attractive to be in payments, but it's also one of the most competitive fields ever, and I cannot necessarily see why GoDaddy would perform better. My best guess is that there was some point in time CEO who said, we need to have the full suite, so we need to buy these five different or whatever that was, bold-on acquisitions, and, oh, let's do one of them, and then one of them, and then it's also a way to acquire talent. Do you think that's probably what went down. Are they going to do a better job in the growth segment?

Starting point is 00:42:22 Probably not. And the one thing that they have working for there, I know I'm talking my own pick down now, but I do think that the evaluation is quite attractive. That's the other side of the coin. But what they do have going for them is that whenever you're in sales, you realize how difficult sales is. Everyone who has a sales job would tell you how difficult it is. And it is difficult.

Starting point is 00:42:41 The fun thing about sales is that getting the attention of the customers is really like 80%. Once you're there, and it's so hard to get there, it's such a huge advantage. Of course, you can still mess up, but just getting there really means a lot. And so by having, like, it was 82 million domains, and also being in a space where most people are generally not interested, most people, we don't care. Like, we want what is easiest. And if we get a discount offer for Microsoft Office and it's bundled together with... Of course, price still matters, but how can we make it convenient for ourselves? And I think that's the mode they have because in the market that they're entering right now,

Starting point is 00:43:25 there's like no mode and not the best talent. And so the thing that they do have going for them is that. And I do also do think that they have the track record going for them in the sense that the period that they did, like, it's many years ago now and you can just look back at the last five, seven years, it has proven to be successful. I think if you've told me like seven years ago, oh, they're going to do this. I would just be like, I don't know if they can swing that. And now we can just look back and say, well, it's probably not being completely appreciated

Starting point is 00:43:52 by the market. So if I'm looking at returns, I would also say probably mid-teens. That's sort of like what the model is saying at this price point. That was my pick. I don't know if you have any questions, thoughts, anything like that. All right. Hari, you're up. Awesome.

Starting point is 00:44:10 Going with the theme of being conservative, my pick today is. Verizon and I see it as a bond with a kicker considering the environment today. And the reason I say this is Verizon is a proven player in communications. One of the three majors recently grabbed my attention because Buffett invested through Berkshire $8 billion, which is a significant amount. In terms of absolute dollar amounts, I believe it is right next to Apple. when he made that investment. After that, I think this is one of his biggest investments. It's in the top eight or top ten. Verizon is the biggest player in the communication industry. The industry is going through consolidation. There are two other major players, AT&T and T-Mobile.

Starting point is 00:45:02 Verizon has the largest wireless user base among all of them. They have 121 million. The next one is T-Mobile at 104 after they consolidated with Sprit. They also have extensive communication infrastructure among all the players across the bands, where there's 3G, 4G, 5G. 5G T-Mobile is ahead, but they are closing the gap with their recent acquisition of C-Bands spectrum for $53 billion. And they also have a very good network of fiber laid out through their Fios as well as VAN. So in fact, thousand miles or more of fiber laid out. And then they have van network as well.

Starting point is 00:45:49 That helps other ISPs leverage them. Verizon works with other companies like Microsoft, Azure or AWS for edge computing through their latest 5G MMWave acquisition. They do have some vectors of growth, whether it is in 5G IoT, 5G Edge Comput, And also broadband for home, which they plan to cover with Fiji for more than 100 million homes. So that's a huge market as well. I'm not too much looking at growth, but they project around 3 to 4% revenue growth in the next couple of years. And these spectrum auctions are valid for up to 10 years.

Starting point is 00:46:38 So they have a long runway that way where they're protected. So with the 4.5% dividend yield and a 50% payout ratio, the dividend is safe. And if you get a 3 to 5% earnings growth, I'm looking at a low teen at least growth overall. So what I would like to know from Toby and you regarding the financials more. One of the things that really jumps out when you look at Telcos particularly is always the amount of debt that they carry. It's kind of like every time I see it's just a little heart. starter, it's like a $217 billion market cap with $178 billion, 178 billion with a B in debt. Why are they able to support such a huge debt load?

Starting point is 00:47:23 I think my assumption is that their cash flow and revenue are pretty stable, and hence they have a good rating for their debt. And that considering that if you look at their interest payment versus their cash flow or their dividend payout versus their cash flow, they are comfortable. I was just going to say, that's it. They've got all the infrastructure in the ground. They can borrow against the infrastructure, and they've got pretty good cash flow against it, and so it makes sense for them to leave it up.

Starting point is 00:47:50 Sometimes I'm a little bit surprised at Buffett, but I guess Buffett's sort of comfortable with your ability to cover the debt, and I'm not going to argue with Buffett. Whenever I look at the peg, Harry, I think, please correct me if I'm wrong, Harry, but it's trading around 52, and I think it's a little cheaper than whenever Buffett bought it. I used to own this stock. I'm not really sure what's. say about it and you might be like, well, it's like, how do you own it in the first place?

Starting point is 00:48:16 So I was in this funk last year where I had some cash and I wasn't sure where to put it because I couldn't really find anything interesting at those price levels. I could put into Berkshire. It was trading an okay level last year, but it's already a huge equity position of mine. Other people might want to put them into an ETF for tax reasons. I'm taxed on unrealized gains. And it's a horrible system. And so like ETFs were really not possible.

Starting point is 00:48:47 And so I was thinking, well, how can I find perhaps a basket of stocks and put my cash in that would just hold its value while I figure out what to do about it? And Verizon was one of those stocks that I've found because it seemed to me that there was, even at that time that inflation was high. And whether it's 3%, whether it's 5%, whether it's much, much higher, you know, I think that's always up for discussion. But I guess what appealed to me was the safety and stability of Verizon that was clearly not going to be the best performing stock, but it was also clear that it wasn't going to go anywhere,

Starting point is 00:49:22 which was very comfortable at the time, and we all remember 2020 and everything that went down. So a ton of stuff I don't like about this company, with all of that being said. I don't like the CAPEX. Like, the CAPEX for this company is just huge, and it's just, that's just how it works. They bought this very expensive license for 5G that they're now utilizing together with Toby's pick for the military. You sort of like want someone else to pay for your launch if you can. And I don't want to keep on pitching GoDaddy, but like one example for a company like

Starting point is 00:49:54 GoDaddy, they take advantage of companies like Verizon spending billions and billions of dollars, building infrastructure for them to make money. It's not necessarily because GoDaddy, you can say the same thing about, you know, same advance for Facebook or Google or whatever you want to want to say. And so obviously, this is something that Buffett already already knows. And so whenever I saw that pick and also the magnitude of how much was invested, it seemed to me that perhaps, and I know Buffett doesn't talk about individual stock picks, it was a placeholder for cash, not in the sense that they need to be shifted out right away, but he's sitting on, what, 140 billion? There's only so many stocks he can go after. The downside is really,

Starting point is 00:50:37 really nice. The company has a very sticky product. You don't want to change your provider because it's just a pain. And it's already locked in. Branding value was really, really high. And as I was going through it, compared to the other players, AT&T, T-Mobile, Telstra, whatnot, like, the numbers are really, really good. They had the highest return of assets, the second biggest EBIT margin, highest revenue employee. They had a lot of good things going for it. The question you had to ask yourself an investor was, are you the best of the worst? And so I do think that they're really good in what they're doing. The industry isn't that attractive. But on the other hand, at $52, I think it's a very decent pick because the price also reflects all of the things

Starting point is 00:51:24 that I'm mentioning right now, which is known to the market. It's not everyone knows how expensive to run a company like that. Everyone who looks at this also knows how much debt they're carrying. So it's the, I do think they're top of the class. So yeah, I do think they're top of the class. So yes, Ari, I don't know if that was useful at all. I'd like to add that, you know, we still don't know how the 5G usage will evolve, especially with ER, VR, VR, VR, as well as autonomous cars, IoT. And that's where the usage might be much, much different in five to 10 years than what we see now. So that's the only kicker I see as the vector of growth. But otherwise, I totally agree with

Starting point is 00:52:05 it's a place to safely park your money and protect yourself against inflation. It's inevitable, right, that we're just going to consume more and more data over time, because as fast as everything is, everything can be faster than it currently is. It can be in higher definition. There's going to be more things, internet of things, sucking down more bandwidth. These guys are basically monopolies in the areas where they are and they get very, even, they get very long-term contracts. Like, I think a minimum is it'd be like two years. which is why it's so easy for them to borrow. These are great little regulated businesses that basically just infrastructure that will probably earn better returns than what you would

Starting point is 00:52:45 expect from most utilities. And so they're going to do that for an extended period of time. So I think that this is a pretty good safe pick from Harry. One thing that I can't help but point out that irony in is that very often whenever when we're having this mastermind discussion, I'm pitching something from the valley, something that's a bit more high flying trading at high multiples. And then, Hari, perhaps because he is in Silicon Valley, always choose like these really boring, high-quality companies like Union Pacific or, you know, Verizon. I just can't help but put out the irony.

Starting point is 00:53:18 But if I can ask specifically about your approach, Harry, because you do have those high-quality companies in your portfolio, would you call yourself an income investor who are living off? Well, not living off. I know you have a – you're doing your thing with Salesforce. That's not so much my point. but like, how do you see your portfolio with these type of high quality companies? Are you building your own ETF of like high dividend yield companies? So like, how do you see it? After you pointed out, I am also starting to see the irony, but at least my thinking is it's more like

Starting point is 00:53:52 a barbell approach to me. I'm living in the Silicon Valley. I'm working in Silicon Valley. I hold Silicon Valley stocks based on my employment and other avenues. So I'm, I'm. heavily invested in in the high tech growths right now. And for me, I need to balance it out with other things, which are value or income-oriented stocks. So that way, when there are cycles, I'm protected. So that's my approach. That's a good bubble. If value ever starts working again, you'll be retired off the value stocks. All right, guys. I would definitely like to give you an opportunity to hand off to wherever people can find you. Toby, why don't we start with you? Where can the audience learn more about you?

Starting point is 00:54:40 I run a firm called Acquirers Funds and we have two funds. The Acquirers Fund, which is ZIG, that's Mid-Cap, Large Cap, US, domestic, deep value style picks like Lockheed Martin, which I pitched earlier and then I have a small and micro version of it. It's exactly the same strategy just in a different, slightly different universe. That's called Roundtill Acquirers Deep Value Fund and the ticket is Deep D-E-E-E-P, small and microred type picks. And I've also got a website, Acquireasmultable.com, which has got free stock picks. And I'm on Twitter at Greenbacked. It's a funny spelling, G-R-E-N-B-A-C-K-D.

Starting point is 00:55:17 I've written some books too, but all of that stuff you can find on the Acquireasmultable.com. Wonderful. Definitely recommend to check that out. Hari, where can the audience learn more about you? You can head to my blog, B-I-T-S-I-N-E-S-S-D-S-com. I'm also active on Twitter. Hari-Rama is my handle. So look forward to the conversation's feedback.

Starting point is 00:55:42 Fantastic. And I just want to say, Toby and Hari, thank you so much for yet again making time for the mastermind discussion. We've been doing this for what, five, six years, something like that? It's crazy. Yeah, I love it. Just you keep on inviting me. I'll keep on coming back.

Starting point is 00:55:57 Yeah, same here. Yeah, same here. Well, do, definitely. I always learn a ton whenever we have this discussion. So thank you for sharing your knowledge. All right, so for listeners out there, make sure to follow us on your favorite podcast app. If you're watching this on YouTube, make sure to subscribe. That's all what we have for you for this episode of The Investors Podcast.

Starting point is 00:56:15 We'll be back again next week and next quarter with a new mastermind discussion. Thank you for listening to TIP. Make sure to subscribe to Millennial Investing by the Investors Podcast Net and learn how to achieve financial independence. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision consult a professional, this show is copyrighted by the Investors podcast network.

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We Study Billionaires - The Investor’s Podcast Network - TIP400: Mastermind Q4 2021

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