We Study Billionaires - The Investor’s Podcast Network - TIP528: Mastermind Q1 2023 w/ Tobias Carlisle and Hari Ramachandra

Episode Date: February 26, 2023

Stig speaks to Tobias Carlisle and Hari Ramachandra. Stig only owns five individual stocks, and in this episode, he outlines why he added Spotify as the newest addition to his portfolio. Hari’s pick, Disney, has recently been extremely volatile, and Tobias pitches Amgen, a value stock with strong downside protection in uncertain times. IN THIS EPISODE YOU’LL LEARN: 0:00 - Intro 01:24 - Why Hari is bullish on Disney (Ticker: DIS) 34:39 - Why Stig has invested in Spotify (Ticker: SPOT) as one of the five stocks he owns 1:00:46 - Why Toby is bull on Amgen (Ticker: AMGN) 1:31:18 - Whether Chatbot GPT will disrupt Google’s wide moat.  Disclaimer: Slight discrepancies in the timestamps may occur due to podcast platform differences. BOOKS AND RESOURCES Join the exclusive TIP Mastermind Community to engage in meaningful stock investing discussions with Stig, Clay, and the other community members. Meet up with Stig, Toby, and Hari at the TIP events at the Berkshire Hathaway Annual Shareholder’s meeting.   Listen to Mastermind Discussion Q1 2022 - TIP418 or watch the video. Listen to Mastermind Discussion Q2 2022 - TIP450 or watch the video.   Listen to Mastermind Discussion Q3 2022 - TIP475 or watch the video. Listen to Mastermind Discussion Q4 2022 - TIP496 or watch the video. Our FREE stock analysis resource, Intrinsic Value Index. Subscribe to our FREE Intrinsic Value Assessments. Tobias Carlisle's podcast, The Acquires Podcast. Tobias Carlisle's ETF, ZIG. Tobias Carlisle's ETF, Deep. Tobias Carlisle's book, The Acquirer's Multiple – read reviews of this book Tobias Carlisle's Acquirer's Multiple stock screener: AcquirersMultiple.com. Tweet directly to Tobias Carlisle.  Hari's Blog: BitsBusiness.com Tweet directly to Hari Ramachandra. NEW TO THE SHOW? Check out our We Study Billionaires Starter Packs. Browse through all our episodes (complete with transcripts) here. Try our tool for picking stock winners and managing our portfolios: TIP Finance Tool. Enjoy exclusive perks from our favorite Apps and Services. Stay up-to-date on financial markets and investing strategies through our daily newsletter, We Study Markets. Learn how to better start, manage, and grow your business with the best business podcasts.   SPONSORS Support our free podcast by supporting our sponsors: Bluehost Fintool PrizePicks Vanta Onramp SimpleMining Fundrise TurboTax HELP US OUT! Help us reach new listeners by leaving us a rating and review on Apple Podcasts! It takes less than 30 seconds, and really helps our show grow, which allows us to bring on even better guests for you all! Thank you – we really appreciate it! Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Learn more about your ad choices. Visit megaphone.fm/adchoices Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm

You're listening to TIP. As some of our listeners know, I run a very concentrated portfolio. Until recently, I only owned four stocks, but I just added a fifth. In this chorus massed my meeting, I'll outline why I did that and walked you through the bold thesis. As usual, I'm joined by my good friends, Tobias Carlisle and Hire Ramachandra. Toby is pitching a wonderful value pick, Amgen and Howie is presenting Disney, a company who won their strongest brands in the world. Speaking of strong brands and competitive modes, we enter the commitment.

talking about Microsoft back chatbot GPT versus Google's Bard. I hope you'll enjoy this episode as much as we did. So without further ado, here's this quarter's mastermind meeting. 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 informed and prepared for the unexpected. Welcome to The Investors podcast. I'm your host, Dick Broderson, and I'm here for the 2021-2020 Mastermind Meaning. Together with Harry and Toby as always, how are you today, Jens? Hey, Stig.

Hey, Harry. Good to see you guys. Good to see you guys. Fantastic. Doing fantastic stick. Thank you for inviting us back. Always. Always, Jen.

So the market has been crazy. I'm supposed to say as always, but it seems like right now, I mean, after 2022, when we saw that bear market and then the market has bounced here, at least so far here in in 2023. We do see a lot of volatility right now. so it's very exciting. And perhaps we should just jump right into it and talk about the picks.

Hari, you have Disney and Toby, you have Amgen. Who wants to go first? Flip a coin. All right? I can go first. Yeah, so I think the market is definitely schizophrenic. It's like every week the mold is different. So I don't know how Disney will be positioned

by the time we go on air for this episode. But Disney has been my long time favorite. I think most of us grew watching Disney characters and so are our kids. And I'm a captive subscriber to Disney Plus and will be for many years to come till my kids grow out of it. But the reason I'm pitching Disney is it's in a very interesting market or ecosystem and it's playing in that, but it has some inherent advantages. So as Professor Ashvad Damodran recently on CNBC described that the direct. to consumer or streaming content business model is fundamentally broken thanks to Netflix. They have driven up the cost exorbitantly and hence they have kind of, you know, started this

war for talent and war for content. And it's almost like all these mega players like Apple, Amazon and Netflix, Disney and everybody else outbidding each other. So it's good for content creators and might not be as good as, for the content aggregators. And I see Disney as like a railroad in this context. All right. It's almost like they have some inherent advantages that others don't.

First of all, they have a huge inventory of content that is evergreen. I don't know how many times we can watch House of Cards or any other show, a later show, but I can tell you based on my experience, my daughter can watch the same Disney episodes many, many times and the same movies. I've sat and watched Cinderella with her for more than a dozen times already, and I guess I'll continue to do that. So there are very few other media houses, or even the direct-to-consumer streaming businesses like Netflix or Apple,

that can come up with an ever-win content. It's very rare. And the second thing is the sheer volume of content. both through organic production and through acquisitions of Marvel, Pixar, Fox, they have over time. So it's been like more than 50 years in the making that they have aggregated this content. And the reason I said I compare it to railroads is because if somebody wants to build a new rail railroad today, the cost of acquisition of land is so high that it's almost impossible to create a new track. And somehow even for content, I'm trying to use the same analogy because Disney produced

Cinderella or whatever shows they produced back in the day, they're still rubbed today. And on Disney Plus Day, you can even see the year of production, 1956 or 1949. The cost was really low or insignificant in today's price context. But to produce something that can be as successful today will cost much, much more. and it's almost prohibitive for many players. So that's one advantage. The second advantage they have is that they have other sources as well to reach to customers. One of them is the pay television,

even though everybody is kind of dunking on it and there is a lot of cable cutting going on, but still 60% of US household watch pay television. So it's not like it's going to go away tomorrow. However, I think the more interesting piece they have is their parks and cruises. As demonstrated by the public failure of Metaverse, people still like to go places. That's also in their quarterly reserve this time, their revenue grew 21% for their parks compared to last year. So as soon as the pandemic was over, people are rushing to the parks because they want to go there before their kids turned, teenagers and don't want to talk to them anymore.

And I'm one of them. As soon as I could, I took my kids to Disneyland in Los Angeles. And then they also have a foot in the future with their Disney Plus, Hulu bundle with ESPN Plus. So they kind of are capturing that market as well. I think it's in a nascent stage. Their losses are reducing. For example, compared to previous quarters, their losses is kind of steadily declining. in fact, this time the loss was better than expected, in the sense, lower than expected.

And their revenues are steadily growing at 8%. But I think for me, the reason I am interested in Disney at this part of time is one return of Wau Weger. There was a fundamental cultural shift that was happening, which was in the long run not good for Disney. That is centralizing both the creative and distributive decision. making. And Bob Hager is basically returning it back to the original state. So that's good for Disney. And also he's talking about cost restructuring. There might be even a spin-off of ESPN because I feel that is their weakest link. Because one, the sports content is not evergreen. Its shelf life is kind of much less than other content. And there is a huge bidding war for these events, whether it's

W.W.E or any of the games, and if Disney is able to spin off or sell it off, because that's not their core strength anyway, that might be the catalyst for both their growth in their trading margins as well as profits. So there are certain risks as well to the stock. For example, I feel the biggest risk for them is if they continue to be in businesses that are not their core strengths like sports ESPN and they get carried away in the bidding wars with Netflix and Apple and other players and become irrational. And the second risk is that their exposure to the general economic weaknesses, like whether ads or park visits or subscribers, they can all go down when there is economic weakness. But I think one of the key things to watch out in

case of Disney is are they able to still churn out good creative contents? I think that is their IP. They have a huge pool of talent and are they able to organically come up with good content that will keep them going. Otherwise, over the long run, that is what I would be worried about. So today, their price to earning, I'm pretty sure Toby will not like it. And knowing you still I know that I'm actually getting ready for your counterpoints on those aspects, especially with 65 PE ratio. But the reason I'm pitching is the PE ratio is based on the current earnings. And without significant growth in revenue, I'm expecting, I'm not expecting more than 6 to 7% revenue growth for them over the next couple of years for the foreseeable future. But what I am expecting is that they will take some measures, especially with the encouragement of activist investors who have taken major stake in the company, they will engage in significant cost-free structuring.

They have already announced job cuts, reduction in non-park expenses and stuff like that. So I expect that to continue and their profits to improve and there are nicks to increase and their P.E ratio. to come down. And in the long run, as this model of streaming is broken until it is fixed, I feel Disney has the most strongest position, actually, among the players to come out better as they are diversified and they don't need to engage in this bidding war. So that's my pitch and I am ready for your questions. I like Disney as a business. I like Disney as a company. I think that's a, I think that the idea of having IP that appeals to little girls mostly. And then I, I know they have other than, they own Marvel and so on for boys. But little girls get that

Disney princess and then they can remember who the Disney princess was, who they sort of attached to. And they remain attached to that, I think, for most of their lives. So it's a, it's a powerful connection if they can make it. The question that I have is, given that that is so important. I have a nine-year-old daughter who we have Disney as well. And I sort of, I'm interested in which movies that the kids want to watch because I have five-year-old boy, a seven-year-old boy, and they're not really interested in the Disney princess driven movies. And so the only way we're going to watch those movies is if my daughter and I want to watch it. So I quite like Moana. I want to watch Moana. She wants to watch Moana, but she doesn't connect to

Moana. She connects it to Elsa, but Elsa, she was a little bit young. So she really hasn't had a princess for a little while. And I think she's sort of sailing through a little bit and they're going to miss her if they don't get a princess for her in there sometime soon. So I just wonder, you know, how important is that to connect with them early on? Do they have a lot of other content too? They have all of the Marvel stuff. They have Pixar. Although Pixar my kid, it's funny, I sort of, I'm intensely interested in which of those things my kids connected. And they don't, they don't really seem to have connected to any of it really for a little while. I think maybe the pandemic stopped some of the production. What do you think about that? Is that an issue that anybody discusses or is that

totally peculiar to me? No, I think that's a very good point, Toby. And you're absolutely right. If they don't keep updating their characters to the current generation, there is a significant chance that they will miss on making those connections with them, like how they have made with the previous generations. And that is the risk I see. And that's why I feel. I feel. I feel, I felt comfortable when Bob Eiger came back and he said, like, you know, creativity and profitability. These are the two key things that he will be focusing on. He's like back to creativity. I think that gives me comfort.

My son connects to Pixar movies quite a bit, like Incredibles or cars. But I guess it's like each kid has their own preference. And that's the key that they have to really understand their market segment. And I feel Disney plus more than a revenue generator, I see it as a cost center for them because it is kind of aggregating user feedback and user preferences, which it's very hard for them to do through movie theaters. But this is an amazing platform they have. And I'm pretty sure they will have a good analytics team looking at all these things because Netflix has mastered that model. Yeah, that's very interesting. That's a good point.

thought about that. That was my next question. To what extent did they need to own something like Disney Plus? But if there's a feedback mechanism, that does make a lot of sense. My kids don't like, and I think that, you know, for us, we have stuff that was made in our lifetime, we consider to be, you know, newish. And I think they feel the same way. So I try to show them stuff that's just a little bit before their time. And they think the animation's too old. They don't want to watch it. I've tried to show, like, you know, the very first thing that they made, I'm blanking on a little bit, it Alice in Wonderland? Earlier ones.

That's like the very first thing that I went back and watched that with them. I thought it was absolutely spectacular for the time when they hand drew all of it. I think it's an incredible movie. You haven't seen it in like your adult life. You should go back and watch it because it's fantastic. But for my kids, it was just torture. They were just like, this is too old. And I've showed them progressively like stuff all the way up to probably just before Pixar

was acquired. And they're not interested in any of that stuff. It's sort of like they want that newer looking. stuff. Absolutely. I think that is the key. I guess you wrote of an interesting point over. Maybe the content they produced long time back is something the adults watch and the newest is watched by the kids. I guess, Harry, that pot is still important. I gave my two nieces. They were eight and ten a trip to Disneyland. They really want to eat a pancake with a princess and it's like 150 bucks per kit.

I don't know if pancakes are included. And so it's like 45 minutes. You could get a photo with a princess and apparently there are pancakes too. Who knows? And you hear yourself saying things like, that sounds like a great idea. And so whenever something like that happens,

you just know that there's just something there, right? Like, would I have done the same thing if it wasn't a Disney princess, if it was, I don't know, you said House of Cards. I don't think necessarily think they're directly, I watched House of Cards four times, and I didn't see any Disciplines in there for sure, but like, would we do that for our kits for Netflix's franchise?

I don't know. There's something there, and, you know, Disney just turned 100 years, and the economists had, like, a fantastic series of articles about that, and anyone who's interested in investing in Disney, I would highly recommend reading those. But I remember saying a long time ago to a friend, of mind that whenever Disney hit a hundred bucks, I would buy. And what happened was that, you know,

they hit like 86 or something, like somewhere in the 80s, and I chickened out, you know, as it very often happens. Partly because whenever something tanks, a lot of other things also tank, but Disney tanked more than than other stocks for a number of reasons. So partly you have the leadership issue. I think the market seemed that are really excited about getting Bob Iger back and like, who wouldn't. But the task that he has now are just different. Coming in, he has two years to hand it off. And we all forgotten everything that happened with the Eisner and the whole, when everything just exploded.

And like, Igo came in and he saved the day and, you know, he bought Pixar, he bought Marvel. And, like, those type of eco projects that just never worked out. And they did work out, which is just amazing in itself. And so I guess I would be a bit worried about that, like what's going to happen. And I guess that's also part of the watch trading. I think at the time recording is trading that $113. So it is a wonderful stock.

I also want to say, like in Horace defense, whenever he talked about PE ratios and so forth. So one of the things that we've learned whenever the interest rate was low and everyone just started investing, some with success and others, not so much, was to have increased, focused on normalizing earnings. And I'm saying that because I'm going to pit the stock afterwards, that's going to look ridiculous too. So I'm sort of like doing it to ask for forgiveness. But, you know, the streaming services, they're losing a Disney Plus. They're losing a billion

dollars a quarter. And so it would be outrageous to say that it has no value. Of course it has value. But like if you have to normalize earnings if you want to do that, if you look at where Disney makes their money, they make slightly more on cable and broadcast channels here in 2022. They did like around $8 billion in operating income. And the parks, experience in products are slightly less. And of course, whenever you look back, you have to remember we also had COVID. So the parks experienced in products didn't rebound before fiscal year of 2022. And so it doesn't look as crazy. Like if you just like take a look at you like, oh my God, that looks ridiculous. It doesn't look as ridiculous as it might sound like. I do agree with you,

Harry, that they have a stronger position in streaming. I guess my question is, one of the concerns I have is, do you want to compete in that space? You know, it's one of those where yes, they're better, but are they like one of the better in a terrible industry? And I don't know about that. Like, whenever you look at some of the money that Amazon is spending right now and, you know, Apple have started, you know, with that thing too. And of course, you have Netflix. You know, it's just, I mean, one of Netflix production companies reached out to us to create a series about us for crying out loud. That just means they must be pretty desperate. That was sort of like my take on it. But, you know, it's like that type of like volume game and like what you see happening right now,

it just seems to be one of those where they just pressure each other's Martins. And that's also what you're seeing now. You have this narrative about Disney. I want to say that Disney probably have more synergies than whenever Netflix are now starting to do their oh, come and we have gaming also. I guess I see other synergies with Disney

than I do see with Netflix, but it's just a tough, tough industry that they're in. So I guess that's my two cents. Yeah, no, I think the great points, Stig, especially the last one that you mentioned is like, do they want to be in the streaming war? And my proposition is actually they can participate peripherally and limit the damage compared to other players. Because the way I think about Disney is they are in the business of creating assets that can be monetized for a long time.

It's almost like a pharmaceutical company or a, you know, think about it that way. And I think Toby reminded me that they do have an expiry date and like a pharmaceutical company. company. The IP goes off after a while. But like, think about every character that they have created, whether it is Elsa or Moana, 10, 12 years after the movie comes in,

they're monetizing it in their parts and they're merchandising and a lot of other ways, basically. And for me, it's like if you think about Disney, they're not really doing anything special for streaming. All they're doing

is they're taking their offline content that they would have produced anyway for movies and then digitizing it and putting it on their streaming service. So, let's say they didn't have Disney Plus, they would still come up with Avatar as a movie. Now you have Avatar special edition,

making of Avatar on Disney Plus, and then finally you'll have Avatar at some point on Disney Plus that people can watch. as well. So that is the reason I feel they are better position in the streaming war. In fact, they don't have to participate, but still benefit. They have these little spin-offs too. My daughter loves the descendants. Do you know what that show is? It's like all of the Disney villains, like Maleficent and so on, they have these angsty teenage kids who get up to shenanigans at high school. And so that's my daughter's favorite show. So that's another Disney property. So that's a good

argument for them, that they can repackage that IP over and over again for different audiences. And all of those Disney villains and those, that's very old stuff. It's all the very classic ones from back in the kind of golden age, their kids. And I think you bring up a good point, Harry, like they don't have to pay some crews $100 million to do Top Gun too, right? Like they own the IP and, you know, the characters aren't as expensive. I did hear someone I think it was a Hollywood producer who said that one of the concerns that they felt about their movies was that they were not as captivating as back in the olden day because they didn't have the big screen. It's harder to build that franchise today because of that, but also because

you don't get the same type of wow experience because so much is now produced for the streaming services. They're not produced for the big screen. On the valuation piece, my main thesis is that PE is high today, but the denominator, the earnings will keep going up. Right now, they don't have to do much in terms of growing the revenue, and that's the sweet spot they are in. They, I think, have distracted themselves. Personally, I feel ESPN is a distraction. It doesn't add value to their franchisee. It is just kind of an empire-building exercise that happens in many companies.

and if they can get rid of such non-value accretive franchises or assets, not only will they improve their balance sheet, but they'll also improve their earnings. To me, it will be a catalyst. So in that sense, I feel right now they're at least they can improve their earnings by 30, 40% over a period of three to five years. And relatively, the stock price will also improve.

So that's my kind of back of the envelope. Math, if you will, my fair value comes around 150 to 170, depending on how you look at it. See, I see I got a 3% free cash flow yield in a market where the 10 year is over four and a half and probably going higher from here. So that says to me that the free cash flow yield has to come up quite a lot before.

I don't know how much growth you can rely. I mean, it's been, I sort of, I feel like the number for me, and I admit it, I'm a very conservative deep value investor. So Disney's sort of not really in my area of strength. So for me, it looks expensive. And I would say even 100 is expensive. For me, like I would want it down in, honestly, somewhere between $15 and $30. is sort of my range to get a reasonable return out of it.

That might be too harsh. It's possible that they do some rationalizing spin-off, some of the spinoff ESPN, you know, right-sized Disney Plus, maybe all of that changes the valuation. But I think it has the core of a very good business there. But I also think the market is a little bit over at skis. If you're looking at a long enough period of time where the valuation starts to matter,

I would be much more comfortable of quite a bit lower than here. I don't mean to be too aggressive on that, Harry, because I do like Disney. And I like you too. It's nothing personal. It's just, that's my bias. I prefer stuff to be closer to fair value. So you said, I just want to make sure, Toby, you said 15 to 30, and then Hardy you said 150 to 170. Is that sort of like?

I mean, we're talking about a wide range here. We are talking about a very wide range. But this is a 3% free cash flow yield. market where, you know, you can get risk-free, pretty good rates. And I, my bias is probably that that risk-free rate is going high still. You know, in a market where you get to 6% on the 10-year, which is the long-run trend, the very long-run trend, and who knows if we get there or not, but that is the long-run trend. You know, a 3% free cash flow yield for Disney, admittedly, a growing 3% free cash-load yield. Like, where should that trade quite a bit lower to get to,

you know, to de-risk it and get to get down there? I think there's been a little bit of a regime change in the market where previously really high rates of growth, really good IP, protect competitive position and so on, that was probably more important than valuation. And I think that was from like 2015 to 2022 or 2021. I think that the market is changing a little bit right here. And it's going to be more of a, you know, show me kind of market for a while at least. I think that's a fair point, Toby. I think especially considering the risk we rate today.

for the foreseeable future, it becomes really hard to justify a 3% pre-cash flow yield. In that sense, I feel from a timing perspective, this might not be a great timing. I see Disney more as a long-term bet that I can buy at a price that is not exorbitant, where I can park my fund safely for some decent returns for a long period of time. But is this price the right price, I think I am also not very sure. So I would be more comfortable when it gets the low 100 for sure. I said 100 before. I do think that the intrinsic value is lower than 100.

So how do you square that circle? Partly is that whenever I originally made a valuation of Disney, the interest rate was very different. So we also have to remember that. So to Toby's point before about what's the 10-year, and to all remember, until long ago, the 10-year was almost nonexisting. I guess another reason is that I see the competition differently now

in streaming services. It's sort of like how much is something worse that that's losing a billion dollars a quarter? Like we can probably do an entire series on how to value that. But of course it has it has some value. But if you look at it, like the really attractive thing here would be the Park Experience and Products. And just, I know we can take that income segment, you know, a long way back, but we're around like $7, $8 billion.

Then you have, you know, what's the cable broadcast? Let's call it $8 billion-ish. Like, that's a dying segment. It's slow and steady. but it is in the wrong direction. And of course, you can also make the argument, you know, that it does create some bearers entry to some extent because it's not a market

a lot of competitors want to enter because it is declining. But then you also have to remember that there are a lot of different things today that can substitute cable and broadcast channels. So I don't know, I'm definitely below 100 today on the intrinsic value because of those reasons. The thing about Disney, though,

The thing that it does have, and I think where you alluded to this at the start, was that there is this transition from the pipes to the content creators. And that has always been the, you know, you can go back and look at broadcast TV, cable and so on. There has always been an initial value bump to the pipes, but it has always, the value has always trended back to the content creators. So it's good to be a content creator. And they have these two machines. They've got Disney animation and Pixar, both of which are very good.

Marvel now. All of those are really great content, IP libraries and content creators. That's, that is where I see all of the value in this thing. And the parks. The parks is a way of monetizing that and all of the Disney stores is a way of further monetizing that. I think their problems are the streaming, but you point out that that's a way of generating analytics. It's $4 billion a year in analytics. Could you get that cheaper? I don't know. Maybe somewhere else. ESPN, that's a tough asset because there's so many places to get you sport now. And ESPN sort of become a political, they've taken a political view on a lot of the things. It's turned off half of the population already in a market where the bundles going away. And so you have to pay, you have to actively

seek it out and pay for it. And there are other options. But, you know, there's still the core of this amazing IP there that is valuable. And I would want to de-risk a lot before I would want to have a look at something like that. But I can see, you know, Disney's not going away. Disney's not a donut. So there's a lot going forward. You really have to do a lot to hurt that franchise. But sometimes it feels like they are doing a lot to hurt that franchise, honestly. To your point, Toby, we all, you know, being students of Buffett and talks about that replacement cost of Disney, that would be humongous, right? Even for this company with the EV of 250 plus billion, it's tough. I'm sure that there are,

Extra Magnus to, it came up with this interesting stat here because today, whenever you include Hulu and ESPN, they're the biggest in the world. Netflix and is number two. They have, what do we have? They have a bit more than 200 million subscribers. Sixty-one million of them are in India. The main reason why they do that is for cricket, and it's 58 cents a month. So I just, I just think it's important whenever you look at those numbers, like some of those are vanity metrics to some extent. Plenty of pricing power there. Plenty of Plenty of pricing power. Yes.

I saw a statistic that of the dollar, every dollar spent in cricket globally, something like 89 cents of it comes from India. Yeah, I can imagine that. It's practically a religion in India. All right. Anything more here to Disney before we move on? Well, I think this is really good insights.

Thank you. I think some of the facts that you brought up actually does make sense to me. And I will go back and revise my fair value based on some of the points that you brought up, Toby and Stig. So thank you. That was very helpful. Thank you for saying so. And, Harry, please make sure to push back whenever you hear my pick, because my pick is facing a lot of the same competitors, so you can just throw it back into

my face afterwards. But, Toby, would it be okay if I go next? Because it's somewhat, I don't know if it's how much really it is, but thank you. Thank you, Toby. Mine will be very short and sweet, so you can stick mine at the end. 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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All right. Back to the show. So, Jens, my pick is Spotify. And it's not the first time that I have pitted that here to the group. I bought it originally back in June 2020 and sold it 318 January in 2021.

And, you know, this is my, This is my humble brag. This is actually not so much a humble brag. And what happened now is that I bought it at 78. Whenever it buttoned out, close to bottom out in December and it's turning 123 at the time of recording. So let's call 57% return in two months.

But who's counting, right? No, this is not, this is... Well done. Congrats. Hey, Jens, this is just because I'm usually wrong in my picks. So whenever, you know, it's the broken clock theory, whenever it happens... then write twice a day. I have to bring it up. But guys, let me give you the pitch of Spotify. The business model is somewhat simple. It's a service where you can stream music, you can listen to podcasts, and more recently you can also buy audiobooks. They have two tiers, premium subscription

with no ads and access to all the features, and then a free version with ads and you like some of the features. And the main purpose of the free tier is to convert to users to be paid users. If you read the financial statements, you can see that all the money is being made by premium subscribers, and it looks like the ad-supported gross margin is just around 5%. So it looks like it's barely breaking even. And that's true, but also they put a lot of the cost, a lot of the content creation in that segment too. So it's just something to consider. Spotify was founded in Stockholm, Sweden. It's technically registered in Luxembourg today due to tax reasons. It was found in 2006 and was the first company to bring stream music to the masses.

As some of the listeners might remember, this was at the time where iTunes ruled the world. They had access to 800 million credit card details at the time. Stephen Jobs has publicly said that no one wanted to rent music, so he had like a really hard time seeing how you could disrupt iTunes. I kind of feel I want to give him a pass on that one because he's been right and so many other things, but it does show you how brutal capitalism is. With 30% market share, Spotify is by a large margin, the biggest streaming, the biggest music streaming service in the world. And whenever Spotify launched, they were really at the mercy of the major labels. And whenever I read the label, so EMI,

Sony Music, Universal, Warner Music Group, together, they have more than 85% of the market share. So what you see now after Spotify made agreements for all of these labels, what you see now is that a lot of of the smaller competitors. I'm not just talking about the main competitors like YouTube music and Apple Music and whatnot. They're using, to some extent, the type of contracts that were pioneered back then by Spotify. So Spotify, for obvious reasons, knew from the very beginning that they needed to limit the influence of the labels. The labels really pushed hard against free music. This was at the time of NASPERS and Pirate Bay and all of that. And so today it seems like an obvious thing to go to Spotify or whatnot, but that was not the case at all back then.

And one of the things that they had to do to get them on board was to give them equity at the time. And you might be saying that sounds completely counterintuitive. How can you say that's part of independence if they gave equity to the labels? Well, as it turned out, some of those, a lot of that was sold back during the IPO in 2018, but also they made agreements where the co-founders Daniel Egg and Martin Lawrence got the voting rights, even though they did, so it's more like European system, but you can more or less compare to ambitious. And the States is not completely the same that happened here, but they still remain in control today, even though they do not have a majority of the equity. So music streaming is just a

tough business. It's an absolutely terrible business. I want to say it might be marginal better than streaming, but, you know, I can completely agree. I completely sympathize with Harry, if he wants to bring up the bats whenever I was talking about music. streaming. The gross margins are in the 25% range. If you look at this for Spotify, it probably will be a bit higher as we go along for different reasons. Perhaps we can get to later. And that's also one of the reasons why they're going to podcasting. So I want to point out the irony of that because the business case for going into podcasting is that partly they're independent from the labels, but also because they're lowering the production cost per listener. But then you can make the same

argument for streaming services, and I just, I just batch that. But you do have better margins with podcasts than music. You can't really scale music in terms of expanding margins. Spotify would more or less have the same margins with music if they were half or twice as big. And if you look into how Spotify calculate the cost of good souls in financial reporting, it all looks like a big mess. the way to really understand that is just going to shamelessly promote this book. I think that it's one of the good sources to understand. For those of actually, it doesn't really make sense. I just put this up to the camera whenever this is a podcast. It's called Spotify Play. So you can sort of like reverse engineer some of those things of how they're constructed, but they probably won't be getting much higher gross margins, probably a few percentage points higher than what they do today. But it's not going to be like, oh, we're just going to scale and then we're going to have half the cost or anything like that. That's just not how those contracts work. Of course, for podcasts, which is the second business,

second biggest business unit, and perhaps in time could be the biggest to knows, they are betting really, really hard on that. Even so much that Daniel Eck, the CEO, has said that he probably got carried away in 2022. But they have their premium content that's only available for paid subscribers. Some of their acquisitions have been quite good in the podcasting space. There will also be a few dots in between. That's how it goes. And so what I want to highlight is that in 2018, Spotify came out basically from nothing and said,

we're going to be the biggest in podcasting. And at the time, you know, there were only Apple Podcasts and more or less, no one else. There were other platforms, but no one anywhere near Apple Podcast. And, you know, you also had Apple Podcasts, you know, pre-installed on iPhones. You know, there are so many things where you could say, how can Spotify ever compete with Apple Podcast? and here we are. They're bigger than Apple Podcast in a bit more than four years. It's just amazing what they have achieved. As someone who is an insider in the podcasting space, I can say that they're both the best studios. They have the best companies in the podcast ecosystem. They're just miles ahead of everyone else whenever comes to advertising, attribution. And I can say that because I've used their pay tools for years on a daily basis. And I speak with them on a regular basis. They know what they're doing. And let me just give you an adult example. So, we have three shows here in the feed you're listening to right now. So we have We Study Billioners when you're listening to right now. We have Presence Bitcoin show and we have Williams, Richard Weiser-Havrier show. So if you listen to this on Spotify, you can see that. You can see

the artwork change. Apple Podcasts have said the past two years that you're going to get the right to it and it hasn't happened. Like everything with Apple podcast is just like a black box. They still have the auto-download function, which is just like a, no one advertises just hated. and Spotify is just, they got to figure it out. So if I had to sum it up, I would say that Spotify is best positioned in this space. So let's transition talking about competitive advantage and competitors. So whenever I look at Spotify's competitors, they're mainly competing with Apple Music, Amazon Music, and YouTube music, and that order. Spotify's market here is just above 30%, Apple Music 13, Tencent.

They're not really competing with Tencent. actually they also own sharing each other companies with sort of like a different story, but that's a 132. And then they have Amazon Music, that's 13, and YouTube, that's 9%. So this might sound a bit counterintuitive whenever I say that they have this huge advantage that they're an audio platform first, because then you could say, what about Netflix? You just talked about how your Netflix do not have the same benefits as Disney, even though they're just focused on one thing. you might be thinking that Spotify is a disadvantage, for example, compared to Apple Music, because Apple Music, since it's pre-installed on their app, Spotify is basically depending on Apple as a toll bridge. And I wanted to talk a bit more about that whenever it comes to risk, because it might be slightly different.

But in short, they're creative for all platforms as opposed to, for example, something that's on iOS or Android. But let me give you an example of not being an audio platform, audio-first platform. So Google have gone back and forth on whether they wanted to display a play button in the browser for whenever you search for a podcast. And you might be thinking, well, you know, Google their own YouTube music, so that's an advantage. But the thing is that audio is just such a low priority for Alphabet or for Google that now they removed it. Like they have so many other priorities that the way that Google, because that's where they make all the money, the way that works together with podcast isn't efficient at all because it's not about audio. And so, you know, whenever you go through also the earnings calls, like for obvious reasons, it's just clear whenever you listen to what Daniel Egg is saying in the transcripts,

that it's driven all by audio. And you don't hear any of that whenever you go through what Alphabet are doing, Apple and Amazon, which, again, it's also Amazon's value proposition is slightly different because it's part of Amazon Prime. So I wanted also to have a section about risk I also wanted to talk to you about. but I also want to start a different place. Do you know the person who's doing a job into you says something ridiculous like the biggest weakness is that he works too hard?

You know, that kind of ridiculous response? So... Care too much. Care too much. Stuff like that. So with that mind and the irony of me saying that, let me go to this point about risk. So I also want to say that there is an opportunity

with the risk that Spotify has because they are competing with Google and they're competing with Apple and you need those devices to access Spotify. Of course, you can also go to your laptop and I don't know, go to Firefox and what, like, you know what I mean. Like, in effect, that's not how you use Spotify today.

I see it as a problem, but I probably also see it as an opportunity in the sense that as anyone with an iPhone knows, they are selling Apple Music hard. And despite that, Spotify is still more twice as big as Apple Music. And also, Apple Music requires for you to use an iPhone. And so what has happened with Spotify is that from the very beginning, they lived on

all platforms, not just smartphones, this is obviously the biggest medium, but they lived on all platforms or mediums because they had to do that. They was just ingrained in them. You can have the same criticism about the whole Android system, ecosystem, if you want. It might sound ironic, but to me, that's not right now what I'm mainly concerned about. Of course, this is in tech. This is like a sexy feel. You have a lot of instruments that want to go into this field, which you just know by definition.

You don't want to enter into a field like that. But I guess that the elephant in the room is not so much the competition from Apple Podcast and from YouTube music. I also, like I mentioned before, I don't, I think Amazon Prime and what they do through Amazon. Amazon music is interesting. They're bought Wondery is one of the better podcasting studios, but they have a different strategy.

It's a strategy of making sure that people stick with Amazon Prime. They're doing a great job. They're doing great things in advertising, but I do not consider them the main competitor. One thing I would like to highlight that sort of like have come in from the field here a few years ago

has been TikTok. We have all of these rumors about how they are going to start signing their own artists and how that's going to disrupt the entire music industry. And they're also the target group. What's the, where do you have the most, the biggest discrepancy between the overall public and what Jin sees like? That's TikTok.

Spotify's number six on that list, by the way. And so to me, that's a big risk that some people, but not a lot of people talk about. It's someone who has, depending on how you measured it, close to no market share, but could get a huge market share very, very soon. And then I have a segment about valuation, but I kind of feel it's been a long pizza rate. So I want to sort of like open up and then perhaps for any questions, any thoughts, and then perhaps we can together walk through evaluation. I think Spotify is an interesting pick because it's the opposite of Harry's pick.

So Harry had the content, you got the pipe. And Spotify, I think, is one of those really interesting business success stories for those reasons that you outlined that they're really in hostile territory on an iPhone where they're pushing iTunes hard. iTunes had a huge lead. They had to overcome that. And they've managed to do that. So, you know, hats off to Danek and whoever else is in there who's responsible for that.

The issue that I see is the one that I sort of articulated in relation to Disney in the sense that it tends to be this drift from value for the pipe to value for the content producer. And the content producer in this part is the musicians and the podcasters. And to Spotify's sought to overcome that issue by getting exclusive access to certain podcasts. Probably the most famous one is Rogan, who they pay him $100 million. But again, Rogan's political and polarizing and that potentially alienate half your audience and also potentially some of your, you know, there was a lot of the musicians asked for their music to be taken off Spotify because they didn't want to be associated with Rogan and so on. The issue that I see is going to be one of valuation naturally because that's who I am.

When I look at it, it's a $29 billion market cap. It's got some debt in there as well. And it's got $12 billion in revenue. Admittedly, revenues growing pretty quickly. None of that revenue is falling through to the bottom line at present because they're spending so much. I just wonder, at what point does it reach scale? Does that competition from iTunes ever go away? When they do, how much of it falls to the bottom line?

And so as an investor, what do you actually end up owning? Because do you see the competition going away at any point? Because I don't see how that happens because it's iTunes and Apple are always going to be there because that's the dominant device that people listen to it on. Although I've downloaded it onto my television, I have Spotify so I can watch the podcasts on Spotify, mostly Rogans, so I can watch on the TV. But I find it, I sort of think this is at two times revs with nothing falling through to the bottom line. at what level of scale?

So, great questions. Let me start with the thing you said about Rogan, not to be political in any kind of way. What was interesting was that the artist came back. Like, there was a huge discussion about all of that, and then Neil Young and a few others, and they said, no, we don't want to do it, and then they came back.

And one of the reasons is just that the tables have turned whenever it comes to the music industry. It used to be so that Spotify needed the labels, now that labels need Spotify, which is interesting in itself. To your question about when do they read scale, I think if you ask Daniel Eck, the CEO and co-founder, he would probably say never. He's a very interesting person. It's very interesting to go through his interviews, and he's clearly been inspired by Jeff Bezos.

And I know this is going to come off as ridiculous when. I'm saying this being a value investor and wanting to have a very conservative valuations, because there is an element of faith in this. Because whenever he talks about, you know, in 2030, the goal is 100, sorry, the goal is 1 billion users. They are at 489 million right now. And he talks about making 100 euros per person or per user. That sounds pretty ridiculous to me.

It sounds highly ambitious. And at that time, he thinks that they will have 4% gross margin. And I think right now it had on 25, 26. And he talks about the operating margin of 20% at that time, which is right now close to non-existing. And so you might be thinking, is that possible? How are you going to see that margin expansion? One of the ways is that more revenue will come through non-music type of revenue.

And they want to set up different type of verticals. So the first one was podcasting, then they have audiobooks that just sent out. Now, last quarter they had 500 million bought audiobooks, which giving in the quarter given that it's just launched. I was quite impressed by. And who knows what the next vertical could be. And we can come back to what those verticals could be afterwards. But just talking about hitting scale, I think it's also important to look at, whenever

you look at, for example, the free cash flow, which has been more than $200 million over the past three years, you have a lot of growth capex in that. And they talk a lot about, it's not about short-term profits. It's about, to use your word, like, Toby's like hit scale, get the users in and then start to monetize them. They also have a net, sorry, a negative networking capital. There were some contracts that were leaked from back in the day. And I can't say if it's, because these contracts are being renegotiated, but they get the

money up front and then it takes 45 days before they have to pay the labels. Again, now we're talking about music. That is traditionally how they made money. And so if we say that they're going to do between 25 and 30 and gross margins, of course, to get to 40, they have to do a lot of other things that are not music, which is where they've shown that they're successful. But I also think it's important whenever you're talking about podcasting, not to be too fixated on the exclusive shows. I think, you know, whenever we hear some of the beta studios and they're exclusive for Spotify, I think you have to consider that the ecosystem that Spotify is built up around. And so we talked with Spotify, just the MS's podcast network, not too long ago, about hosting on their platform instead of another platform.

And they make money based on that. They also make money based on how they sell advertising. So you cannot buy, you can't go to Joe Rogan show now and say, I want to buy ads on your show. What they're doing is they're packaging and saying, okay, mail between 1834, yada, yada, yada, so that's the way that they sell that. So they have very personalized ads for everyone who are hosting on the platform. And they also bought Anchor, which is where new podcast today started. It wasn't in the past, but they bought that.

They have pot sites, charitable. That's how you do attribution. And they have Megaphone. It's the leading hosting platform. We don't use it for different, different reason. But I can see what they do also because it's just a pain to move hosting and all that. But like, they buy the best assets. You can just see how much they understand the podcasting space.

And it's very interesting to see also now how they include audio books in their app and how their competitors are not doing that because they're not audio first. And so I kind of feel like I'm selling them a bit too hard. If you believe in Daniel X projections, which you probably shouldn't, you won't last long in this game. If you think that what management thing is going to happen in seven years, there's 100% probability in that happening. but you will have returned 30 plus percent a year next seven years.

I don't think that's going to be the case, but I end up with a valuation around $200-ish today, and you might be then be thinking, well, like, like you sold it 318, and that was like a huge ovalued before you managed to sell it. Of course, they also kept a gains tax and different things to consider, but also remember, again, that the interest rate was very different back then. So given interest rate that we have now, that's probably where I am.

But again, like we talked about today, all models are great if you have the right inputs. So, Hari, let me throw it over to you. No, I think this is a very interesting stick. And personally, I'm a fan of Spotify. It's almost like the Google for broadcasting, like many people use it.

And it's almost synonymous with broadcasting. Where I see risks are in the long term for this. It's almost like a toll ridge on a toll bridge. Like it's kind of in the Facebook realm, in the sense they're dependent on or at the mercy of Apple and Google. But however, I feel probably they're not as risky as Facebook in that sense that Apple would do something to them.

But where I am really concerned is the two things that we discussed during Disney is one, is they are a pure content aggregator so their cost of content will keep going up for a period of time. The loyalty of the listeners is to the content creator, not to the channel. So if Joe Rogan or Stig,

you decide to move out of Spotify and go on YouTube only, I will listen to you on YouTube. So they can, because the cost of switching is easy. There's not much. I think this makes it risky for me in the longer.

Because we don't know, because they might, the content creators might have more leverage on them than they having leverage over the content creators. You know, I wish that was true, Harry. If you listen to this on Spotify right now, and you'll, you're here, ads that you're probably going to skip. But if you're listening to this on Spotify right now, these are agreements that we made with our sales team made with advertisers that are running from our feet that's hosted on a platform, in our case called Art 19.

Spotify does not make any money of that. Spotify could say to us, we're not going to pick up your feed unless you pay us. That would be really tricky for me to say no to. I would be willing, I hope they're not listening to this, but I'll be willing to pay a good price for us to continue to send that out to all our listeners on Spotify. Because Spotify, what they want is that you host on that platform called Megaphone.

And if you do that, then they can sell the advertising. And if you have exclusive content, you can sell that on Spotify. And they take, I want to say right now it's 15% the first year and then it's 30% afterwards. But anyways, so they have a lot of power right now around the system. So I want to highlight that. And I also want to highlight that being on the app is very powerful because they control the Discover function. So they can say, you'll listen to We Study Billiness.

Great. why don't you'll also listen to startup, like one of the bigger business shows, which is their show. And so one of the things that independent publishers like us are afraid of is that all the different studios have teamed up with different types and they promote their stuff. They're not promoting our stuff. So I hope you're right that content creators have the bargaining power, Harry. I don't think it's as powerful as I would have loved it to be. The other thing is we had Brian Lawrence on the podcast some time ago. And he had this quote, I can't remember which stock he was talking about.

But I remember him saying that he really wanted to invest in companies where Google have tried to compete with them and fail. And I kind of like that way of thinking. Like, look at this company. They're first mover. They're dominant in the field. And they're the biggest by a big margin. And they're competing against Google.

Amazon and Apple. Like there's something there's something they can do. So it sort of depends on how you look at it, of course, with that type of competition. But I'll be the first one to acknowledge Harry also to what I said to you about Disney. It's a tough business to be in. And the barrier of entry that they used to be in the music space are not there anymore. Just the way that the deals are being made with the labels today, it's much easier for new entrants using the Spotify manual, if you want.

want to, to start licensing that music. I think that was a good summary. Thank you, Steve. 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.

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current distribution rate as of 1231, 2025. Carefully consider the investment material before investing, including objectives, risks, charges, and expenses. This and other information can be found in the income fund fund fund's prospectus at fundrise.com slash income. This is a paid advertisement. All right, back to the show. All right, thank you, Harry. Toby. Thanks, Dick. Mine is Amgen. It's an old, old biotech pioneer, started in about 1980.

It's trading today a little bit south of $240. It might be $238 or something like that when I wrote it down. It was $240. Market caps about $130 billion to get to that level. They've got about another, not quite $30 billion in debt. So enterprise value altogether is about $158 billion. net debt of about $29 billion, as I mentioned, and that's generating about $11.5 billion in free cash flow a year. So the free cash flow yield to the enterprise value is in the order of 7 plus percent.

So free cash flow yield on the, or the 10 years at four and a half. So it's very far north of that. The reason it's trading at a little discount that to, well, that's a wide discount to the 10 year is clearly the market expects some material decline in revenue. use over the foreseeable future. Biotex are not something that I would typically, I don't really like to pitch them as individual stocks. I do buy them and I own Amgen in full disclosure. I own it in Zieg and I own it in Zieg rather. And I don't know, you know, when I come to rebalance, it's entirely possible these things get rebalanced in or out. I don't want to make it sound like I'm entering into some sort of blood relationship with all of the other picks that

I've had. I want to make it clear to everybody that my picks are largely quantitative. I like to look in the financial statements. I don't spend a lot of time looking at the business. It's mostly driven by the financial statements because I think that you get management's attitude to various things in the financial statements. And so I have a little bit of trouble often pitching biotex because for the reason that Harry pointed out before,

they've got kind of a limited period of time where they can earn all of the money from these drugs and then they go off patent and the most successful ones get competed with very heavily. Having said that, When I say heavy competitions, you know, Charlie Munger talks about that like white glove gentlemanly kind of competition. And I think that that is really what prevails in biotech land because they never really,

it's not that bare knuckle competition where they drive margins and profits to zero. They really do compete at a very genteel level. And they all make pretty good returns on invested capital even after they've gone into off patent off patent world. I can mention all of the drugs that these guys have, but there'll be somebody listening out there who knows this stuff really deeply. It's difficult to understand what the universe looks like after all of these things come off patent. The problem for Amgen in particular, they've had this very successful drug, Enbrel, that will gradually, the profit from that will

gradually decline. They've made some acquisitions and they produce things called biosimilars, which is like that's what competes with patents. So they've got this leading, Humira is the number one selling drug in the world. And Humira is just about to come off patent. And they have a buyer similar that's about five months ahead of everybody else. That will be probably the thing that will generate pretty good revenues and cash flow growth in the future. The attraction that I have to Amgen is it's quantitatively cheap and they have this exceptional buyback record. Since about 2018, they've retired about 26% of their shares outstanding, which I like buybacks for a number of reasons, particularly when they're done at undervaluation.

Amgen's been something that I have owned on and off for a very long period of time and various different accounts and funds that I've managed because they've been such a consistently strong repurchaseer of stock because when it gets cheap, they buy back stock and it never really gets too overvalued. They sort of tend to be quite good at buying back. And then for all of the reasons that I articulated before about biotex, they just never get particularly expensive. Although if you look at the chart, you'll see that it ran up to $290 last year.

It's come back to $2.40. So who knows what? Lots of loopy things happened over the last few years. That's just one of them. So they're likely to continue to buy back the stock. In addition to that buyback, they've got a three and a half percent dividend yield, which is, or it's about 3.2 percent as of today. So they've got a very consistent record of paying dividends. They've paid dividends. They've raised the dividend consecutively for the last 11 years. The last five years, the compound annual growth rate in the dividend is about 11 percent a year. In addition to the buybacks, the shareholder, yield is monstrous and it's driven by the fact that they've got a free cash flow yield of over 7%.

So they've got plenty of headroom there. Their payout ratio is about 44%. That's not going away anytime soon. They had a slowdown in revenue last year. They had 2% growth in revenue to the last quarter. That was actually driven by there was a 9% increase in volume, which is pretty healthy. But they had some 4x headwinds that reduced it by sort of 7%. So you can see that that might reverse at some point.

the strong dollar hurts companies like Amgen. I like it because in very simple terms, it's priced as if the revenues will permanently decline from here. And they've been reasonably successful at making acquisitions and so on. And I think it's unlikely that revenues decline. I think it's much more likely that revenues grow, even if they just grow slowly from here, there's an enormous amount of headroom in this valuation.

So they can make plenty of missteps. I still think it's undervatted. You combine that with the fact that they're very good at buying back stock and they've got that great dividend yield. Plus pretty consistent growth. If you have a look at the stock chart, the stock has been a very consistent returner for a very long period of time and it never gets to, it never really falls out of bed

because they're so good at buying back stock. When it goes down, they buy it. I just think this is one of those opportunities where you can buy some reasonably cheaply. I own it. As for an in-depth discussion about that, the competitive dynamics of this market, I can't really help you and I don't think anybody else can either. I think it's a really, really tough industry to know, which is one of the reasons I don't particularly like pitching these names individually. I earn it as part of a basket of 30 stocks,

all of which have characteristics like this. And I expect over my portfolio of stocks that these will generate pretty good returns. But as for any individual stock, I don't really know which one it will be. I pitched this one today because this is a, from my perspective, this is a reasonably frothy market. And I think I've discussed this before on the last podcast that I saw that that 10-3 inversion has historically preceded recessions pretty consistently. It's never had a false positive. We've gone, we've flipped negative now. Cam Harvey, who's the bloke who came up with that idea, has come out and faded it. He says, ignore my, ignore my little indicator because there are all of these other things going on that mean that it's not relevant this time. Cam Harvey said the same

thing in 2008. He said ignore it. It's likely to be a slower growth, not a recession. And as we all know, 2008 was one of the worst ones we've seen. So I think you can discount what he says a little bit, and I think you can pay a little bit more attention to the indicator. But he's by no means the only person who's saying it. There are lots of other people out there who say that the 10-3 is not relevant and it's not going to work this time. I don't have a view one way or the other. I just look at its track record and its track record's pretty good. I wouldn't trade in any way, shape or form. I just think it's worth considering, particularly given that S&P 500 Ford earnings have now gone negative. And it's coincided with this incredible spike in the market since about October. And that's totally common too to every other point in time when you go back and look at every other real nasty bear market has looked the same way, where there was this about a year in, there was this little recovery. I've always said, in 2008, we almost rallied back to all-time highs happened in 2000. Well, almost rallied back

to all-time highs before you really got the pain. I think that 2023 is likely where we see an enormous amount of pain. So I'm trying to pick things through here that I think are financially robust and will survive. We'll do something about the fact that they might get even further undervalued. And, you know, the end consumer of these drugs doesn't really care what the rest of the economy is doing. They're going to pay for this because they need these drugs to feel good and so on. So I think this is a reasonably safe bet with reasonably good to conservative returns regardless of what happens to the global macro picture. And it's Amgen. That's my pick. Thanks, Jens. Interesting pick, Toby. I think when you are talking about their

patent expiring and the revenue falling off, I feel like it's almost like debt ceiling like for this pharma companies, right? Like every now and then investors expect that the revenue will fall off and then somehow they manage to come up with a few more drugs happens to Johnson & Johnson and a lot of other companies that have been following. But I like your basket approach for former though, in the sense you don't have really worry. All the cyclicalities is adjusted and then you can just nicely and safely collect your dividends because as a group they'll be paying always good dividends. So that is definitely interesting.

And also I think you're positioning it as a safe haven in a turbulent market when we expect that there can be further sell off. That is also valid. The only concern I would have is at P20, is it a safe haven? Because are they, it's almost like price like a growth stock at this point. Yeah, I ignore the, you know, my my favorite metrics are EB-EV and I like, I look at return and invested capital, even though I think that, as I've sort of written about in the past, that's a highly mean reverting series and you have to find some strong reason why that won't mean revert. I think the best metric, aside from EV EBIT, is EVE free cash flow.

Free cash flow is a little bit more, there's a little bit more management discretion in free cash flow than there is in EBIT. I know that everybody says, Buffett's got this quote out there where he says, you know, EBITDA or Manga, EBITDA is like liar learnings. That's true, but you have to understand the perspective. understand why they say that. They say that in relation to management teams telling you what the EBITDA adjusted EBITDA numbers are, or that was in the context of a leverage buyout boom where people were using EBITDA multiples for acquisitions, and EBITDA doesn't help you

pay down debt. Free cash flow helps you pay down debt. I do these calculations myself. I don't care what management's estimate for adjusted EBIT is. I couldn't tell you what it is for any of the companies that I look at. I don't even, I don't care. I just don't look at it. This is my own calculation. I calculate. I actually calculate it's called operating earnings. I calculate it from the top of the income statement down rather than reconstructing EBIT from the bottom of the income statement up because it's a little bit more. It's hard to lie about revenues, although people do lie about revenues because there's net revenue and so on. There are ways to lie about it, but for the most part, revenues are real. Everything else that falls under that has a little bit of discretion

in it. I calculate it from the top down. It's not management's calculation is the point that I make say I like EBIT. I also like free cash flow, but there's much more management discretion. in what free cash flow is, they can make decisions about, you know, there's lots of different ways that you can play with free cash flow. Having said that, buybacks and dividends, you cannot lie about those. Those things actually happen. You can declare a buyback and not do it. That's a lots of them do that. That's why I don't look at management. What management says, again, I'm looking at what management has done in relation to buybacks, and their track record here is very, very good. So that 7% free cash flow yield is real, 3.5% dividend yield is real, and the 26% of the outstanding

stock that they've bought back is real. So all of those things together, that tells me that the free cash flow is likely real because they're actually employing that. So buybacks, again, it's a reasonably controversial topic. It has, most management teams aren't very good at buying back stock or they're using it to mop up share insurance on the other side. There's a lot of share-based compensation, they buy back enough stock, the stock price doesn't move. Sorry, the shares out doesn't move. So this is an instance where shares out has come down materially. And so that's a real buyback. And for me, that counts. So I agree with you that the PE might be sort of optically high, but there are lots of decisions that by the time you get to the bottom of the income statement,

there are lots of decisions that go into how much they report. And when they get to this size, they've got an office of the chief financial officer. There's a lot of engineering in that, which is why I try to sort of ignore some of those metrics because it's, you know, Jack, Jack Wells used to say to, you know, he had these things called acquisition reserves and they just, he'd say, I need another penny because I'm going to hit that number. I need $20 million out of that acquisition reserve and they'd financially engineer it and they'd give it to him. So I don't necessarily look at the bottom line. I'm trying to look a little bit further up the income statement. I'm trying to look at the cash flow statement and I'm trying to look at

shares out and actually making sure that what they are sort of representing as happening is actually happening in the financial statements, which is why I'm more quantitative than which is a big distinction between me and say Buffett and other guys like who are actual real investors who know how to analyze businesses and do that sort of stuff. So Spotify for me is a difficult one because it's not mature enough for me to really do any financial analysis on. Amgen has been around for so long. It's a mature business. The risk is the decline. That's a real risk, but I think it's ameliorated by the fact that they've got plenty of money to play with.

They will be generating money for a long time into the future. I think it's reasonably safe, about as safe as it gets. But as I say, I don't particularly like biotechs as part of a basket. I think they're fine. The first thing I thought of whenever I saw it was, didn't we just do Colgate? Oh, wait, this is the engine. Oh, this is different stock. No, sorry, for people out there, like, why is TikTok?

about Colgate. It was Toby's pick last time. It's a very toby type of pick. You know, you look at the 10-year financials here and you just see slow and steady wins the race. Revenue go up. You see dividends are hiked every year. You see shares are being bought back. All the, like, it's just, it's a to be a type of pick. And remember the old fable, right? Like, slow and steady wins the race. And so I think it is important also to understand, like, who is pitching with stock and why I'm doing that. So Toby has a basket approach. I want to say 30-ish.

Please correct me if I'm wrong. 30 in my large cap, 100 in my small cap, yeah. And you have a huge part of your own net worth in your funds, which a thing is admirable and the way to do it. Whenever I talk about a pick like Spotify, I also talked about, I think last time was process I talked about. They are, in Toby's words, last time he said, racist stocks.

So I've got to use that expression. I don't know processes so racy. I think processes, process is much more sort of special situation. If you understand, I can get there on process. Spotify is a different question, but I don't have, I'm not, I'm not anti-Spotify. I'm just, you know, I have my own biases when it comes to these things. Yeah.

And also to your point, and what we talked about before, about where this coming from, I own five stocks. I'm not as smart as Toby to own a lot of stocks. So I guess you can also say that my part. I own two stocks to be fair. I own Zigg and Deep and they own. Right. But the only things that I ever mention on the show are things that I do own in the funds. And having said that, there's always a possibility that I sell out in the next quarterly rebalance. So I should make that clear as well. The decision is sort of largely out of my hands. I look at the entire universe, what looks cheap, what's what looks expensive. So things, I've pitched a few things that I have then, you know, have had a little run and I've rolled out of pretty

quickly. Sometimes I feel like I should just make that clear to people that this could be rebalanced out of at the next rebalance date, which would be, which is the sort of quarter end in March. I really like this pick. And I'm reading this book right now. It's called Competition Demystified. It's written by Bruce Greenwald. I would highly recommend that book. So what is typically taught at business goals is something called Potters Five Forces. And he's talking about the competitive situation and how you should look at it as a business person, but you can also say as an investor, and even Buffett has talked about Portals Five Forces in one of the shareholders meeting. Actually, well, to be fair, someone quoted Portals Five Forces, then ran through it,

and Buffett was like, yeah, I think I do, I think I'm doing that. I just didn't know it was called that. But apparently it's been somewhat ordained by Buffett. And so those five forces, that's threat of substitutes, power customers, power of suppliers, competition in the industry, and barriers of entry. And what Bruce Greenwald is saying, and for those of you who don't know Bruce Greenwald, so he's teaching, I don't know if he's anymore,

but he's retired, right. Yeah, but he used to teach Graham's old course at Columbia University and quite an icon in the needs of value investing. And so he's saying, no, polar five forces, that's way too complicated, it's only one.

And the one thing to think about, that's barriers of entry. And he has these, amazing case studies about barriers of entry. And so one of the things you're saying is that you can typically see that through stable market share and then a high, consistent return on investor capital. And to your point before, Tobin, you talked about how people in biotech and in pharmaceuticals, how they don't compete too much with each other.

And they do that for good reason. I'm going to give you the very short version. You can read the 387 whatever page version in competition demystified. But it's really about it's painful whenever you start competing on price and like everyone loses. Well, the customer wins, but you can sort of like do different things in terms of signal to competitors that you don't want to go into a price war. And which is if you pick up the phone and call your competitor, it's illegal. But if you signal it different ways, it's not illegal, but you can still make a lot of money

with just irony at all. But you can do different things. And so what's interesting in this industry, you have high barriers of entry. And you can typically also see that because you have high fixed cost. It's extremely expensive to be in this space, but also very low marginal costs. And so what these major companies do is that they have different drugs, and they don't want to step too much in each other's toes because then they know that the competitor will start stepping on your toes.

And remember, a price competition is really painful if you're the bigger player. You might be thinking, I need to loan my prices because I'm the bigger player and I want to keep the instrument out. But thinking about it, if you have 90% of the market and you're lowering the price, you are the one who are getting hurt the most. I can say from a competition standpoint, whenever you look at the numbers, they're absolutely beautiful with high barriers of entry. And then if you can just, and this is just on a really note, it's just because at the time of recording, like all the rates is about this new chat bot and what Google is doing and

they're barred and all of that. So I just want to, I just want to, now we're talking about barriers of entry. I just want to pull up a quote here from Charlie Munger from 2009. Google has a huge new mode. In fact, I probably never seen such a white mode. I just kind of feel how interesting that is in the discussion and what we're seeing right now when we talk about barriers of entry and look what's happening right now.

I don't know. Hari knows a lot more about that and whether that's truly, you know, if Google still have the same barrier of entry, but it's just even the best barrier of entries, they are eventually they'll be broken down when we're the other. I don't know if it's going to happen this time around

with this chat, but I don't know if it's going to happen for Amgen, but it will eventually happen. I guess that's what I'm trying to say here. Let me throw it back over to you, Harrier or Toby. It happens quite a lot in biotech because the patent runs out. That's my main objection to it. You know, you would never, I think it would be highly unlikely to see Buffett buying something like this.

Buffett doesn't buy biotech, he doesn't really buy pharma. So I always feel very uncomfortable when I buy this if the guy who really understands competition won't touch this stuff, what am I doing in it? And the way that I justify it is it's a little bit of a basket, and it has quantitative features that attract me. But if I had one bullet, I wouldn't spend it on this thing. Yeah, I think you've got a good point about Munger saying that Google has the deepest moat.

Well, he also bought into Alibaba. So I think, and that is also having its own trouble. And that goes to say that, you know, we all should be humble when somebody like Munger can get it wrong. Regarding chat GPD though, I think it's phenomenal. If you haven't used it, I highly recommend. Bing recently integrated chat GPD into Bing. And this goes to tell the staying power that Microsoft has. I think they have been at search.

I was back working at Yahoo when they acquired the search division of Yahoo. And they have that capacity to suffer almost for decades. And the other thing I was looking at was, like if you look at decade after decades, among the top 10 companies from tech, many came and go, Microsoft has always been there. So I would say we have to be careful betting against Microsoft. And yeah, and also the culture, like, you know, Microsoft culture has transformed. I think that's Satya Nadal.

I think bomber was kind of driving it to the ground in a way. But Satya really rescued it. But I think Google is looking more like the old player here and not, you know, almost being forced to innovate in this case. So the optics is bad, and even when they did come out with that demo, I don't know, who is their marketing team suggesting the names like Bard? Like, you know, and also like, you know, the demo had some glitches in it, and it just shows that, you know, they were not prepared.

The thing is that the question is sometimes not who has the better technology. It's, you know, Buffett's analysis is often at the consumer, at the person who actually consumes this product. how will they consume it? And I think about it too. Like, I have heard that Bing delivers better search results than Google. And now with this integration of GDP, GPD, I was using it a little bit because I kind of, I think it's fun to chat to it. And people have come up with some great questions that you can really test the limits of it. But I went to use it this morning and it was over capacity and it wouldn't let me in. When I go to search something, I just type it into the Chrome bar,

and I don't even think about it. Like, I would have to add an extra step of going to Bing. I am trying to do it because I like having a second competitor in there. I'm one of the guys who uses Lyft rather than Uber because I want the competitor for Uber. But it's a kind of a hassle. And like if I'm being honest, still most of my searches are going to be into the ones that I don't even think about are going to go into the Chrome search bar. And I'm going to type that in and use that. It's hard to change behavior. It's really, really hard to change behavior.

And I have Gmail powers the back end of my business email. It's my private email. I use YouTube. I pay for YouTube. You know, Google has, Google has one of the great modes that sits a little bit below the line of site, which I think is one of the best kind of moats to have that people don't even know that it's there. There are lots of companies out there like that. You've never heard of them. They just do all of the back end of something. And they basically just put their price up a little bit every year and you pay it because it's a key part of some bigger thing and you don't even know that you're paying it. Those are the good businesses to have. everybody else knows about them too, so they're never cheap. That's a very good point, Toby. In fact, the power is in the distribution, not just in the technology. And in fact, it's almost like the role it was reverse. You go back to 2000 or 98, 99, Microsoft was in the position of Google. And that's how they kill Netscape, Navigator, right?

Because they could, Microsoft operating system was like Google Chrome, basically, today. that you would just use whatever the operating system gave you, but over a period of time, they lost the share of their distribution channel, basically. And that was what made Microsoft weak at that point of time that they had this really bad phase in the late, like, you know, late 90s, early 2000, like late 2000, sorry. So the bomber years, basically.

I think Google is at that cusp right now. They control the distribution channel. As you said, I think I totally agree with you. That I would, it would take me a lot of effort to go to Bing and search, whereas here I'm just typing into the Chrome browser. As long as they own the browser, they get my search. However, what has happened over a period of time is the searches that are really valuable, high returns in terms of pay per click are the ones that I'm searching for products

or something like that. Nowadays, I directly go to Amazon to do that. So what is happening is a lot of different competitors are taking away the mind share of entry point of the distribution channel away from Google. And I think Microsoft is definitely understands this. So they came up with this new edge browser, which has chat GPT integrated. And I have to still try it, but I heard that it can even write a letter for you right from the browser.

all that stuff. So they're definitely trying hard. I can see that. That Satya and Microsoft team are definitely trying hard. And they're focused on it too. They've said that the search margins are huge and they're going to have a shot at them anyway. Yeah. Whether they will succeed or not, I think time will tell. But I guess the days of Google being complacent or over is what I would say. And that has been going on for a couple of years now. This is chat. GPD is one other blow at the moat. But I think Amazon actually, it's not visible, but actually Amazon is the one who is taking away lion's share of Google sponsored search ad share because a lot of valuable search is now going to Amazon, not Google. The other point worth making is that the way that these moats get crossed

is not sort of a direct competitor. It's something that comes out of the blue in the same way that the browser sort of overcame Microsoft's desktop dominance. The next level is probably something, I don't know if it's the metaverse, but that idea is the kind of idea that it will be. It'll be something where, you know, somebody, I saw it was circulating around on Twitter yesterday. Somebody wrote this long. It came out in 1979. It's very old. And they said, you know, and that was back when people were having to talk to computers and you had to be a program in order to talk to a computer. We've clearly come a long way where you don't have to be a program anymore to get us to do a lot of stuff.

But it's going to get to that point where it's just a conversation. And at that point, you're sort of in the metaverse where you say, this is what I need you to do. And the AI and the computer goes and does that. That would have sounded crazy five years ago. It doesn't sound so crazy now. Even though I think that's an incredibly difficult computer, that's a processing logistical nightmare now.

It's not anytime soon. But at some point in the future, you will just have a little wristwatch and say it to the ether and it'll go away and do it and it'll know what you're talking about. And at that point, is it Chrome that seems unlikely, right? I don't know who it is. Maybe it's Facebook. It's meta. It's the metaverse.

It's crazy. Who know what's going to happen? I tried playing around with the chat robot, GPT. And to me, it was more like just like playing around, just for fun. And I was looking at it, probably because I'm super biased. I invested in an alphabet a long time ago, knowing that, of course, no one could break down this mode like manga talked about, right? So I wasn't too impressed other than it was fun to play around.

And then speak to our YouTube post, Ronakan, she says, yeah, whenever we talk about a new topic, I just ask the chatbot to write it for me and then I just edit and like do my own thing. So it's mine, but you know, that's where I start. And I was like, wow. Like I did not see that one coming at all. So I guess the jury is still out what's going to happen. I just say it's quite useful for programming. Harry, you might know better.

But people can ask it like, how would you get this thing to? do this and its answers are instantaneous and exactly right with the little bit of code that you need. That is incredibly powerful. Yeah, I played around with it. I was fascinated. Like it could just generate code. You'd tell it the problem and then let's say you say write a programming Python or Java to scrape the web and search for this content and it will actually give you the code. Or you say, write a story based on the following characters or like animals, it will write you the story. But I think going to the risk that Google has is just not about market share. What is not visible to most of us is these are really 10x engineers, really Uber engineers

who are working on this. And there are only few of them if you think about it. And the risk for Google is losing those to open AI. because in the valley today open AI is the Google of 2000 that is the cool new kid on the block and Google is

this old company which is bureaucratic and big right so think about from an engineering talent perspective as well where would the top talent flow and the recent layout of Google did might actually be a impetus or a opportunity

for open eye to steal more engineers from and Microsoft is bankrolling open AI. So it's like they are on offensive. So it is going to be very interesting how this will play out. And I don't think the story is over yet in the sense I would not write off Google at this point of time. They have the kind of round one they have lost it is how I see it, but there are more rounds to go. Yeah, early, early days. Let's end on that note, Jans. As always, thank you so much for making time to come on the show and talk about.

about chatbots, biotech, Disney and whatnot. It's always a pleasure, speaking to you to agents. As always, I would like to give you an opportunity to tell the audience where they can learn more about you. Toby? I manage a firm called Acquirous Funds. We have two ETSs, ZIG, the Acquirers Fund, which is more, I'm sorry, mid-cap, large-cap, deep value in the US, and I have a small and microfund called Deep. I have a website, Acquireasmultable.com, where you can get free stock picks that are similar to the one that I did. They're quantitatively generated. And I've written some books. Most recent one was Acquireas Multiple, which came out in 2017. I'm working on a new one right now. Chat GPT's writing it for me. Thanks for having me. I always love coming on. Good seeing you

too, Harry. Yeah. Same here, Toby and Steg. Anyone can find me on my blog, bitsbusiness.com. I hang out in Twitter. Hari Rama is my handle. H-A-R-I-R-A-R-A-R-A-M-A. Look forward to the conversations there as well. But this was fun and you got with you guys. Thank you. It was fun, guys.

And I hope that the audience are going to want to hang out with us. I think we all plan on going to Omaha here in May. So if all starts the line, we're going to put a link in the show notes. We're going to have some events there and people can come and talk about stock investing, whatever they want to talk about. So that should be good fun.

Jens, thank you again so much for your time. I look forward to seeing you in Omaha soon. Thank you. Thank you for listening to TIP. Make sure to subscribe to millennial investing by the Investors Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts or courses, go to theinvestorspodcast.com.

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