AI Capex, NFLX/WBD Deal, and the FISV/LRN Meltdown

Summary

00:00 Intro 00:50 Berkshire buying $GOOGL: AI revenue 06:35 Mag7 heavy capex 12:30 Circular nature of AI 16:27 Thoughts on …

Transcript

Welcome, welcome, welcome. How's everybody doing? Hope you are doing well. My name is Andrew with Focus Compounding on Air Live with Jeff Ganon. Jeff, how's it going today? >> Going really well, Andrew. How's it going with you? >> It's going great. We hope it's going great with everybody else as well. If this is the first time you're tuning in with us, thank you so much for joining us. Be sure to check all of our content that we push out into the investing universe. The best way to do that is to follow me on X at Focuscompound. uh go to focuscompound.com to get access to uh investment rights from Jeff going all the way back to 2005. And of course, hit that like and subscribe button. Really just a subscribe button wherever you are listening or watching us here today to be notified every time we upload a new podcast. Uh so Jeeoff, so before we get into it and we're going to take some questions from Twitter, talk about some other stuff that's going on in the market. Wanted to get your thoughts. uh since the last time that we recorded Buffett uh his 13F came out and we're we have this poll up on data Roma right now and you could see that somebody at Bergkshire uh likely not Buffett I mean certainly not Buffett bought Google. Uh so wanted to get your your thoughts on this. I mean the stock is up. I mean this was reported price was $243. It's at $320. You know, I kind of look at Google and I'm like, gosh, that was I guess maybe the layup of a century investing in it when he did. Um, we could pull it up on QuickFests and and and flip through it, but wanted to get your thoughts on on Buffett's or I'm sorry, on someone at Bergkshire uh purchase of Google. Yeah, I don't know. Um, yeah, I don't think that's Buffett. My guess is if Buffett did do a major purchase in the recent past, the last one was Chub, and we don't know that he did do Chub, but that's like the last, you know, top 10 type position that he probably was involved with. Um, and they have kind of added to that over time, I think. Um, no, it's I just don't think that he did um Google. >> Um, there have been some small ones like the Amazon one was a purchase and then it never they didn't buy up a lot of it or anything. So, I'm never sure about those. You know, these are very big companies, though. So, they also may be testing to see whether they could buy a big stake in it sometimes. It's it's hard to know, but they each are managing a lot of money right now, right? >> How much are they managing? >> I don't know. It's quite a bit. If we look Let's see. Do you have the um the Yeah. Okay. So if we look here basically um yeah I would say that alphabet is kind of the the um not that there's nothing below it but everything below that is really you know wasn't really uh Buffett started it. I mean, some's left over and stuff, but so the biggest positions in that are $4 billion positions and, you know, um there's, you know, a dozen multi-billion dollar positions in there that I'm pretty sure he had nothing to do with. So, um yeah, that's pretty big. if your if your you know 10th biggest position is like you know I mean if they're if we count them separately maybe your 10th biggest position is 500 million but um together you know it's a billion dollars or something is like um one of your smaller positions so depending on how diversified they are but I think they're not that diversified really um so >> yeah I mean so Google I mean almost $4 trillion market cap 3.8 8 trillion. Enterprise Valley, obviously they have a bunch of cash. Uh they released their new Gemini model, which people have been absolutely raving about. Any sort of AI I've ever used has always been chat GPT. Um so, you know, I guess there's like a sunk cost feeling there to me to like if I was going to go use Gemini, but a lot of people have been raving about it as being just the absolute best. And supposedly from inside reports that open AAI there's you know a code red because of the competition um you know Gemini specifically has set off a bunch of uh alarms there but uh you know you just think about YouTube you think about Google search as well um but you know Gemini and and just the beast that is Google. Um yeah, you know, like for example, are these LLMs going forward, are they going to turn into a huge advertising machine uh for like a company like Google, right? So I mean, at these valuations, you almost need a couple of things. You either need every major corporation to like purchase software from these guys or you need to put a bunch of advertisements on it because the average person is likely not going to pay a bunch of money for this. I mean maybe eventually it'll be like Microsoft Excel right or office or whatever where people will pay a small subscription fee but at these valuations you need something right so whether it's every company in the world buying up their software um or banking on a bunch of individuals um you know subscribing which will happen um you know you got to subsidize you got to make money somewhere so is the eventual outcome going to be advertisements on all this sort of stuff Yeah, I've run some numbers on that with that possibility. So, the assumption has been okay, can AI be bigger than advertising plus all it spending and stuff? And if it is, is that justify it? Um, if it's all, you know, if you get to the kind of advertising level per person that's spent in the US for the whole world, you know, then that's one thing. But right now per capita spending on advertising for us um is a lot higher than like the global population and these things are always like assuming that billions of people are going to use them and everything going you know. So that's a pretty big difference. I mean a poor country is onetenth you know often the uh monetization of like eyeballs uh the value of it as it is in like the United States or something. So um all advertising in the US is about 2% of GDP. Um, so you know, you can run the numbers and stuff that that doesn't really work out. And then it things, you know, could be close to 10% or something. So that gets you a lot closer. Um the yeah I mean the the big things that are different are which we've seen recently are look the the multiples and these are like 10 times sales which there's never you know there's all basically never been companies this big the biggest companies in the world that trade at those kinds of valuations versus sales and then um the other thing is of course and this Nvidia this does not apply to but for all the others like like Alphabet and everything um is that they are significantly like not free cash flow generative now. So the the earnings that they have are not generating um cash that way um because they're reinvesting the cash. >> Yeah. Amazon too is a good example and and Meta. Yeah. And so and especially because there's also the stockbased compensation. So you know cash flow from operations at Meadow is like this um trailing 12 months is like 107 billion there. And then their spending on um capex and stuff is like 62. So you have something there where that's like 40 billion or something on that and then actually 18 billion of that is stockbased compensation. That complicates things for taxes. But putting that aside, you know, you can compare that to things like the actual reported earnings, which if we go to the overview, it could be pretty easy to see what the reported earnings there are. So let's see. Yeah. So like the actual free cash flow was I mean very low versus operating profit. Um what's less than 50% of that. Um and historically the companies have paid pretty low actual tax rates and things. So they used to have really really high if you look um now Meta the actually was the first that this was well Amazon too. Amazon and Meta both since co because Meta has been doing the metaverse stuff and Amazon went really big into like distribution and and also AWS stuff. So those two actually had been investing a lot in capex but there was others like Microsoft and and Alphabet that were really low on that that aren't anymore. Um you can just see it in the PE versus the enterprise value to free cash flow. Enterprise value to free cash flow is now higher for these companies. Um, so it's fascinating that way. And also on things like Oracle, which will be like a high debt. I mean, it'll be like a risky credit and everything, which is interesting. Um, because there's just so much capital that they're going to need to invest some of these, which is totally different from like Nvidia. Nvidia will just be, you know, I'm sure they'll be diluting a lot too, but they will be minting cash, you know, because they just are making something, selling it, and collecting the cash. So they're going to have the kinds of like if you look at these gross margins, operating margins for Meta in the past and then turning that into cash, that's what Nvidia will look like now. So >> well, the good news is if you're a Meta shareholder is I think today they announced that they're going to um curtail the spending on the metaverse, >> uh the capex that was going into that because now they're focusing on this whole other AI thing. You know, the most fascinating part about the metaverse thing, I mean, from like the point of finding product market fit, I think pretty much everyone that I spoke with and both, you know, reading online, Twitter, sort of getting the pulse of everything, most people thought it was a really dumb idea. Um, you know, verse Chat GPT and these LLMs where pretty much straight from the beginning, most people could see like a use case for it and and you know, worked with it and could understand it. you know, there's bugs and it hallucinates, but there's something there over time where it could become better. Um, you know, whereas meta, I think, you know, with the metaverse, everybody, it was like consensus was this is silly and they're spending, you know, I don't even know what it was, tens of billions, probably more, uh, 50 billion, whatever it was, uh, in the metaverse. And it just they didn't have the product market fit. Nobody really wanted a world like that, at least right now. Um, so interesting. You know, I think I think Zuck his when I think about him, I think about him as being a great capital allocator. >> You have Instagram, you have WhatsApp, you have um uh what else? He tried buying Snapchat, which you know, whatever. Um, uh, Palmer Lucky with uh, virtual reality, which, you know, that really hasn't taken off as well. Um, but WhatsApp and Instagram, those have to be one of the greatest acquisitions ever for for a company. Um, so yeah, just a little critique, I guess, which doesn't mean much, but I think if I was a shareholder, I'd be like, great, they've shifted gears from the metaverse to now spending on all these data centers and all this other stuff. >> Yeah. And the actual decade long results and stuff are way better than the other companies that we're talking about. I mean with the exception of Nvidia which is all driven by the last couple years that the you know 100% growth per year and stuff but um they've had higher profitability in cash flows and everything improving at Meta for a long time even with investing in all that stuff. So um but it is similar to what we're talking about with Alphabet. It's like you know an advertiser supported business is like how they actually get all their money. It's not necessarily how they spend all their money but it is kind of where they make all their money still. Mhm. And then Instagram reels, right? That's the biggest everyone likes to in the industry likes to talk about uh Zuckerberg that he likes to copy, right? So you have Tik Tok, now there's Instagram reels and they all kind of have their own version. >> It reminds me a lot of of Microsoft. Meta's always reminded me a lot of Microsoft that way. Yeah. And you know, 40 years >> like Microsoft with Apple. Uh well with Windows and Office and in terms of mic with Bill Gates and Microsoft in terms of their strategy over time and everything um yeah you can afford to have a lot of things fail if you have a couple things that are the dominant things that you have and you try to crush the competition early on to do that. Um yeah what are your thoughts on this circular nature of what's going on in AI? Right. So Nvidia investing capital in Open AI to fund, you know, massive stuff with Oracle, who in turn uses, I guess, these guaranteed contracts to purchase, you know, billions of dollars worth of chips from Nvidia. I mean, uh Elon was up with uh Jensen from Nvidia. They were I don't know if they're you know in front of the Saudis or what and they were asking Elon how much he's going to spend on these you know Nvidia chips or just on AI in general and I think he was like I don't know like 50 100 200 billion whatever the number like he basically he's just so based that it's almost like he knows that all this is silly and Jensen was like stop or whatever like stop that like stop being like that so what what are your thoughts on just the circular nature of what's going on so much capital I mean people I mean there's reports that GDP would be I mean awful right now if we didn't have all this AI spending and I know you you know you could say you could say that about a lot of things that happened throughout history but seems like everyone's just all in right now you know got to got to dance while the music's going that type of moment >> yes it'll be interesting to see just like with the internet um how much of this really happens because what is these are some announced deals and things which may never happen and And raising money doesn't mean that you spend all the money that you raise. You know, um there's it's kind of like, you know, extreme thing of this is like private equity things and some of those funds and things, you know, this that they announce that they'll raise a bunch of money and stuff. They do and then they, you know, can't spend there. You know, we'll raise x amount to invest in distress whatever things and then sometimes you get to spend it all and sometimes you don't. Um and so there's all these steps to it. Uh what's interesting is like when you look at some of the things from like like utilities for instance have been saying there it's not a big like calm down it's there actually we're not going to be supplying that much electricity to projects because there's not really going to be much that's going to happen and need to be done that we get proposals for all sorts of stuff for applications they just everyone wants to get in there that so they have the opportunity to do it and then most of these things don't go forward you know I think the thing that'll be most interesting is the most of these things until we talked about some like the Oracle thing and stuff did not require them actually going out and raising money to do this. And so, you know, I don't know that there is a lot of capital when we're talking about some of these. I mean, it's an totally unrelated thing, but like Netflix saying like what they're going to use as a bridge loan to um buy Warner Brothers is insane. And um it's not big versus the market cap of Netflix and stuff, but it's big versus the ability of Netflix and Warner Brothers to actually serve to like pay down that debt within a reasonable amount of time. So in a world where they're really I mean in a world where it's easy to borrow $70 billion or whatever they want um in longerterm financing eventually, it's not a problem. But if they want the money and the government wants to run a huge deficit and these companies all want to spend on this stuff, you know, there'll be higher costs to all this stuff over time, like it's it's not we're not um you're not going to have really low rates and stuff for that. And you saw that with and that's why I mentioned the Oracle thing is that at first it was like how's Oracle going to do this? But the stock shot up and stuff and then over time it came down and there was more people thinking about that about what that would actually look like, how much money you'd be borrowing, how much money you'd be spending and what kind of return you would need on that over time. Um, so it's just a huge shift. We're talking about things that are like had the economics of, you know, some dominant newspaper thing saying we're now going to build railroads. You know what I mean? that that's kind of the shift in the economics of them, which is possible if there's a lot of money to invest in that stuff, but it would have to go to that and not to other things, you know. >> Mhm. Mhm. What are your thoughts on the uh Netflix Warner Bros >> transaction? That's interesting. It'll be very very contested. >> Says the uh is compris by who? administration >> uh the trade associations uh of the theaters will be against it. Um Europe will be against it. Uh the Trump administration will probably be against it. >> They already said that they they're looking at it very skeptically. Basically, I think it was the quote that was on CNBC. >> It's a Delaware corporation. it clearly put itself in play and you know um so they'll have to decide whether they want to sue over things and stuff but um there's really big breakup fees associated with this so like it's it's not like I don't think I don't know what will end up happening if it will go to lawsuits and things but I mean they will be able to argue look if if they fail to get regulatory approval for this and stuff we get paid a ton of money. >> Yeah. Here you go. Netflix. First of all, let me just go over the uh hold on. The transaction is comprised of cash and stock and is valued at $27.75 per WBD share. That puts the equity value of the deal at 72 billion with a total enterprise value of approximately 82.7 billion. And then um let's see, as part of the deal, every Warner Brothers Discovery shareholder will receive $23.25 in cash and $4.50 50 cents in shares of Netflix common stock for each share of WBD common stock outstanding following the close of the deal. But what Jeff is talking about, and this is sort of unusual, you don't see this much. Netflix has agreed to pay a $5.8 billion reverse breakup fee if the deal is not approved. According to a Securities and Exchange Commission filing, Warner Brothers Discovery would pay a $2.8 billion breakup fee if it decides to call off the deal to pursue a different merger. >> Yeah. And that's big. Um that's that's huge versus the amount that's normally done as a breakup fee. Uh actually both of them are are quite large. Um >> so do you do that do you put that that uh >> that breakup fee on Netflix in case somebody comes in over the top for a higher bid? >> No, I believe uh that if they don't if the deal isn't approved, they have to do it. So if it fails, regulatory approval. Yeah. So in the airline case, right? So that did happen right with you had a a couple airlines that were fighting over that when they there was a fight to say that look you should go with the deal that isn't necessarily the best deal because it'll actually get approved and then actually that airline ended up um going into bankruptcy or basically filing twice I think. Um so uh let's see um >> and they says Paramount's final bid was >> uh $30 a share which was received uh all cash too. >> Yes. And that's part of the other thing cuz if you do you have what they say the market value is. So that is 72 billion cuz what did they say the enterprise value is because they're reporting different things. So let's see if you have that at the top we can figure this out. >> So it's billion2 billion. So I believe >> so if we go I believe that means that Netflix has to come up with about 60 billion 59 billion something like that to actually pay the cash portion of this for instance. It's a huge it's a huge amount of cash. Um, so that that's part of the interesting thing because they're using so little stock. Um, and then why use any stock at all? >> Yeah. Yeah. Like >> I mean, if you use any stock at all, it makes it look inferior by a lot to people. They obviously said we have to for some reason use a little bit of stock to do this. Um, and so it's an interesting thing. But what if you go to Netflix right now, I don't know what their situation is. Netflix is also has large commitments to um they have a very complicated uh situation in terms of like cash flow. You can't really evaluate their free cash flow very easily because they have commitments years out to like you know as any like TV station kind of thing does that TV network does because they've committed to buying things in the future. Um so if you look their current situation is that they have well it says they have 9 billion in cash and then they have um let's see they don't really have debt and stuff. I'd say that the total liabilities are long-term lios that are probably associated with you know those sorts of things. So uh future obligations for things. Um, so I would say I mean basically have to borrow all that money to buy it. >> Mhm. >> Yeah. Which is interesting, but you know um >> why go with why go with Netflix offer instead of Paramount? >> Well, that's what they'll fight about. So one is you know what does it mean for management in different ways, right? So like for instance Netflix does Netflix keep management of things and stuff and Paramount doesn't. That's one part of it. Um and then uh the other thing is like whether it's a better combination of things in some ways and in some ways it is a better combination of some things although more likely to upset people and and have a fight over it and stuff for the antitrust things. Um, yeah. I mean, Netflix allegedly, it said that they promised to honor commitments that uh distribution. It said that they would honor distribution agreements through 2029 that are in place. I don't even know what that means exactly because normally in the there's not necessarily contracts in place uh on that. And I don't know that you would have decided what you're going to do with movies for years into the future. So, you know, I think for the next couple years there might be things about that, but not beyond that. Um, so they probably mean distribution and other things would be things that they have contracts for a longer time, but theatrical distribution, I don't know why they would have contracts, any sort of agreement in place for 2029, 2028 and stuff, and they're talking about we'll keep it through then. Um, so historically, the reason it's a big deal for movie theater stuff is that Netflix doesn't release anything in theaters. They release it only to the minimum amount to do that. Whereas Amazon which owns MGM and Apple uh both do theatrical um distribution and have some pretty big movies. Uh for instance F1 was an Apple movie um and got a theatrical release whereas Netflix has had some really movies that would have been pretty big and won't release them in in theaters. So >> yeah, I mean that's the question that the market is currently asking is what's going to happen um to movie theaters, right? like movie theater stock is down. >> They're all selling off. Yeah. 8%. Um >> yeah, >> we could see Marcus I believe is also selling off. IMAX. Um and what is that? I mean is that just being worried about you know the theatrical window? What what is that? >> Yeah. So Warner Brothers is the biggest distributor this year. It has about 25% of the um market share in the US. That's very unusual. It's really I I put their market share like 15 maybe in a normal year um percent at best. Um they've never had a year where they were 25% and Disney will probably still pass them by the end of the year. Um but they're basically as of now the you know like the theater owners and stuff can say this is the biggest distributor in the United States. It's never the biggest but it is happens to be for this year. Um and it accounts for 25% of the market which is true as of now. So, um, you're taking out something that is, you know, a quarter of the theatrical market and Netflix will try to agree to a bunch of things probably to say that we promise we'll do this, this, and that. Those are tough though because this is, we talked about Meta, Microsoft. Um, there's um there's plenty of cases where companies have kind of said that they would do things and then it's questionable whether they really did them or not, you know. >> Um, so that's always tough. So stocks at $25.78. What do you think the odds are that this goes through? >> Oh, a timely manner. >> Like how long? >> That this particular deal goes through at this price in a timely manner. Not very high. >> But that doesn't necessarily matter because you're betting that you're not betting that this deal will happen this way, but that it'll go even higher or it'll go lower. And if it goes lower, will it fall apart that someone else will be there bidding for it? you know, um I mean like if you want a lot of cash, the only thing that you want is you would prefer that like you know I mean Netflix was able to get banks to give them a loan, you know, I mean as of now they don't have it or anything, I guess, but I mean they obviously made this assuming that they had a group of banks ready to to give them shorter term financing that then they would, you know, have a a bond or something um to replace it with, you know, a few months from now, a year from now, whatever. You don't know if you it it's not easy to borrow $60 billion or something. So, you know, any of these could fail to materialize because it just you need to borrow a lot of money to do them, right? If it's a stock deal, it's a different story. But these are both offers to do a lot of cash. Um and then Warner Brothers itself uh Warner Brothers Discovery also has a bunch of um debt too and is not generating you know it wasn't really generating um cash to service that very well. They were focused on doing that but they were already in a situation like that. So that's the part that's kind of trickier I think is is not like that there won't be an appetite for them to do it. It's just like will someone be able to give them enough cash to actually buy this in all market environments. That's why if you have someone now who you want to close the deal with, that would be better than like you don't want a really really long review. And then, you know, but there's a big breakup fee, you know. Um, you know, it's a really big breakup fee actually, right? So, compared to the deal size, I I don't know. That's I bet that's five times to 10 times what the size of a normal breakup fee. I mean, a lot of times we're confused like one or two% of the deal or something. >> Uh, before we move on, I wanted to get your thoughts on Amazon. Um, because that is, you know, one of the fang stocks that's less talked about nowadays, I feel like. >> Um, so we're currently at 2.5, call it two to 2.4 to 2.5 trillion market cap and enterprise value. Um, QuickFs has a 32 times earnings, uh, three and a half times EV to sales. You look at gross margins. You look at, you know, growth obviously through the pandemic was uh, shadowspheric and it's come down a bit, but why don't I get your thoughts on on Amazon where we are right here because to me, this looks like one of the fang type stocks that uh, obviously hasn't gone up as much as the other ones have. Uh, a lot of reasons for that, but yeah, want to get your thoughts on Amazon. >> I guess it's kind of like Salesforce, right? Is the same kind of issue where people are like, are they going to reacelerate and is this better for them in time or is it cuz all the stuff Amazon's in, they're not growing all that fast compared to their competitors anymore in those things probably like they can't be like gaining sh I can't be, you know, other um in each case they're not going to be the fastest growing. They're not the gonna be the fastest growing online retail operation. They're not the fastest growing streaming of anything. They're not going to be the fastest growing in terms of AWS or anything at this point. They're just the biggest in those things. And the biggest isn't usually the fastest growing. We we've gotten used to that where like, you know, Meta can be already the biggest and then grow for 10 years at being really big. You know, that's unusual. That doesn't normally happen from, you know, um or we talked about YouTube or whatever that, you know, that doesn't normally happen. So, yeah. it. Yeah. And they're firing a bunch of people and stuff, so they obviously know that. >> Have you looked at >> profitability? >> Uh yeah, so these are interesting ones. Um >> every every payment PayPal, uh Block, which was Square. Yeah. >> Uh what's the other one? Uh >> I I will warn though that Fiser has a um added wrinkle here, which is interesting about a couple companies that we looked at. Now, Cine Market does not fall into this at all, but a bunch of ones that we didn't talk about just now, but that I point out before, their stocks are really being crushed, have a credit part to it that they're a bit aggressive on things. And that's the situation here. This company is uh, >> you know, like I was saying kind of about Oracle. Now, Oracle's great business and everything, but it was always more aggressive in terms of its financing than like, you know, Microsoft and those companies. And this is, you know, normally a company like this with these kinds of margins, these operating things, you've seen lots of other core processing things and stuff, they don't have any debt or anything. And they um have, if you look at their 10K and stuff, it's like a really complicated like they do, it's a constant thing that they're always doing to kind of maximize in terms of how they borrow and everything. And so, um, so what do we have? uh we could look at cash flow from operations or something because the operating profit recently has been you know 1 and a half to 3 million. >> Yeah. First I just want to pull up the chart. I'm sure everyone listening is is familiar but we hit a a high of it looks like uh March of 25 so earlier this year of $237 per share and then we were just it was just consistent selling pressure. And I started looking at it when it was going down and I was I mean I I mean we've obviously we followed core processors. We've talked about these companies before. They're generally pretty dominant businesses. So, it's something that was interesting but didn't do anything about it. But was just just watching and I was like, gosh, this company just cannot catch a bid. I mean, and to me, it looked like a very large fund or funds or just just constantly just selling just just getting out. >> Um, so, you know, from like a if you want to pull out put on your Stanley Duck Miller hat of like respecting price action, this was just it, you know, like not picking that bottom. Um and then they reported Q3 earnings um when was it maybe uh October and they announced that so there's a new CEO that's in and that previous management they were very aggressive in their guidance. A lot of the growth that they had came from Argentina inflation which I don't even really understand to be completely honest. Um [laughter] and uh they reset guidance and the stock went from call it $126 to as you can see on the screen $65 and we've been hang hanging out right here. So obviously all of the TTM numbers look very um cheap, but again I'm kind of thinking like you know is there more cockroaches here? But, you know, just kind of, you know, taking a step back, I've always been pretty shocked of a lot of these businesses that more competition has not like come at at their their uh you like their merchants and their banking and all all that sort of stuff. I mean, these are very high margin businesses and I've always just been shocked that that competitive position hasn't really eroded as much as I would have thought. So, I don't know if that's like what's come up soon or what, but >> the road starts they had weren't some sort of terrible thing that way. I really don't think that the competitive position of this company or there's others like this that was all that bad. I think that it was originally pretty premiumly priced um the the stock and then you know historically it had always been at a higher multiple cuz we're talking about something that you know like a normal multiple is these things are 12 16 times EBD but now it's like seven. Um and then like we said there was a lot of um debt uh for financial engineering purposes. And then I think what they're kind of saying is that they were raising prices on you know which we've talked about that they were ra basically if you read between the lines they're like we were giving bad customer service and raising prices all the time. um is kind of cuz they said like we're now focused on client success and I mean I don't know if those are the words they said but that kind of thing like we they they kind of made it sound like their customers were mad at them. Um and uh so that that was interesting. Um I also with these things sometimes I think it's guiding. So this this kind of thing where you have this big drop and stuff tends to be very very predictable businesses that were guiding you to something and then they have some sort of problem that happens almost at the exact same time. I don't think it was like the same day. Um Stride which is LRN uh dropped like 50%. >> Yeah, that's another one. >> And that's a very predictable business and it wasn't a big surprise and stuff and it had an IT issue. it would switch platforms that it uses which is what's interesting about that is that's not a like that's quite um thousands and thousands of people would have known about this and stuff like anyone analysts actually covering it and trying to check on how the business is going would have known about this issue. Um but the what's the company supposed to do and now you know they'll be like well they should have told us something really but what I mean you're going to tell you them at the end of the quarter when you tell them every moment as you're having a problem with the switching over to the systems they have but yeah they got all their their customers mad at them and stuff by having a botched >> switch over eventually. Yeah. >> Mhm. before they reported uh Stride, so ticker LRN, the stock price was $151 and then it opened up uh $66 and we're hanging out at 62 right now. >> Yeah. And that like the ownership of that stock and what people were expecting and stuff just reminds me a little bit of what we're talking about buyer and stuff. And it just happened that I think the dates are not that far apart that these happen, you know, because they both reporting the same sort of things. but very predictable clients for a long time and stuff because this company runs like schools. It does the you know online schools for schools um like you know you outsource the school district to them and stuff for for doing online learning and things. Um, so you can see they've done better since um, COVID and everything, but actually long-term predictable kind of thing and and you know, like um, gotten a lot better in terms of profitability and stuff recently scales well. Um, and now looks really cheap, you know, same as this where it's like had a premium multiple to a to a discount multiple. What's interesting about it too though is this, you know, this one, this stock was not dropping ahead of time. This was just there was like no information about this that people had um and it really plunged um >> Mhm. >> something they didn't >> so it's a roll out of power schools um officially I don't think they said that in the press release and stuff but you can figure that out. So uh which is a um thing that uh tons of companies uh use in this area and stuff. though. I mean, [sighs] Phil Fischer talked about like the problems of like a new plant startup and like things going wrong and stuff as being really a good time to invest in something like this. There are cases I can remember things 25 years ago or something where a company that's gone on for done amazingly well after that has been because they tried they had a system that they changed you know that they said we're changing our customer relationship management stuff and things and everything goes badly and then you know after a few quarters it's fine and the business is back to what it was before. Um, but yeah, a and if you look at the results here, like if you look look at the press release or something on the first stride or you could have do the same thing for serve. What's amazing about these are the actual reported results, there's no way that someone who didn't know what expectations were could read that and think um that the stock would drop 50%. or something or whatever it did drop. Um you know if you see so what was there >> strong demand drives growth. Yeah, but no, I mean, but look at the actual um results, >> right? Diluted earnings per share were $140 instead of 94 cents. Adjusted >> income up, everything up. >> Adjusted earnings were up, you know, yeah, of course. So, look, so revenues up 13% from the year before all these things, right? But what were people expecting and what had they been telling them before then? um you know >> so was this really just a reset of expectations type of quarter >> and it's interesting because I don't think that the expectations longterm here will be that much of an issue so it's it's interesting how you evaluate it from the two things my guess here is that this is not a big deal for this company I'm going to say you know just my guess and it is a big deal for Fiserf but it has to do with like the information and how much bad things were happening that they were spinning in a positive way and there's lawsuits here and everything and So, I think that there was probably a lot of that um in the first case and not in this case, but that's a guess, but that's because of what the issue was. And that I think it makes total sense that they would have been blindsided by this and stuff. And also, by the way, like the top management wouldn't have expected this. It's kind of like, you know, at probably at every level, people are kind of hoarding the information of being like this is going really badly, but they're telling their manager a little bit less about that. No, he can still hit that date. No, whatever. You know, all the way up. Whereas I think in the other case there was more um aggressive engineering of things for years. Probably that's that's um the more likely explanation for why that was happening in terms of what they were saying. Um but this is a totally I mean I don't know but this is totally believable of like when you talk about a one-time thing happening to a company this is exactly what it would be like is uh doing something like this. you totally misjudge something like um a roll out of something to do put to switch all of your um customers onto a completely new system. And this is something about like in terms of what this company does administratively and stuff. We're talking about schools they have are thousands and thousands of of kids in each school and they have lots and lots of schools and stuff. So it would be, you know, as if the government decided, oh, we're going to do we're changing how we're going to send out um social security checks this week or something, you know. Um you could imagine how badly things could go, right? Um, so look, this kind of stuff happens all the time. Like, you know, and I mean some other things people don't get all that worked up about it, but we've seen major websites go down and whatever things, you know, because they all use the same, you know, cloud thing or they all used whatever it might be. Um, and people understand that are like, okay, it'll be okay later today. It'll be restored, you know. Um and uh you know but in this case um I don't know how my honest answer with this is I don't think that anyone like covers the stock or understands it or anything and that there's no constituency or owning it long term and that probably what's the share turnover and stuff. That's the other thing. I think it's very like I don't I just don't think it's uh yeah well of course that's calculating based off of that day. >> Mhm. Mhm. >> But yeah, um I just think it trades a lot and stuff and that people are just looking at the numbers and not really trying to learn about the business or something probably >> like it pro it probably, you know what I mean? Kind of looking at it on like the um factors and stuff. You know what I mean? Just like as a thing that's made up of numbers and stuff and not what is the business and what really happened here. >> I'm like looking at it I was like is is this like a pod shop hotel and they just punted it? They got caught off sides or Yeah. I mean that's just uh to be down that >> sounds like the kind of thing that you go on CNBC and be like I'm really like that you know since co and stuff this is changing and and you know there's going to this is there's not a lot of like um what do you want to call it remote learning like pure play stock type things like that this is what you would do and um it had got it used to be a pretty small company actually but as you saw like the cuz 10 years ago was only making like 105 million right so um it got into that category of being a couple billion dollars where now people can own and everything. Um, but the other thing is like in terms of its finances and stuff, it's not aggressive the way that Fiser is either and stuff. And I don't know, I think they're two very different situations that way. That doesn't mean that they're not both good or something. I I don't know. They could both be. But I just think this is like the kind of thing where if the market is inefficient in some way in this is this kind of thing because I think this is stuff that every day we get five different things about every little rumor about anything happening in any company about AI stuff, right? Oh, this model is a little bit better than this one according to this person, whatever, you know, like they whisper about it and there's nothing about that with this company. It just surprises them, you know? >> I just think that's that's kind of what we're talking about. Well, Ferve was uh the top 10 buy last quarter in Q3 for hedge funds that follow 13Fs as you see on the screen. Um so that'll be an interesting one to to follow. >> Yeah, I'm trying to remember how they started buying United Health and stuff too ever since the that happened. And I think at first at least that definitely did well at bet. Yeah. Um yeah, these super predictable kinds of companies that way. Um but like you said, there has been a thing like pay payment type things much broader than that that we've noticed, right? Like there were a lot of them until now the 50% drop is something totally different, but during the year that was something that's noticeable for a lot of them. Yeah. >> Okay. So we have a few questions that we could go through on uh the podcast. Uh, follow me on Twitter or X uh to be on the lookout for next one. Let's see. Uh, we can only go through. We don't We don't have a lot. I actually I haven't been tweeting a lot and I've noticed my engagement has gone way down. [laughter] Uh, so I guess I got to get back to tweeting a lot. Uh, has Jeff looked at HGTY? What does he think of MKL's plans are since they converted all their shares to common? Keep acquiring more. Mark. So I guess we two questions there. Have you looked at HGTY? >> No. Let's look up HGTY and see what they're talking about here. >> Hagerty Inc. Insurance. >> No. >> Company engages in the underwriting, selling >> and servicing collective cars. >> No. >> Anything from a high level overview or anything like that? >> No. I know nothing about um about insurance for like collectible things and stuff, but I mean Markel does special insurance for all sorts of things like that. So that's it's not weird that they would do that. I just don't know the situation. >> Markeel, do you have any thoughts on Markeel? >> Um no, but it'd be interesting more broadly for insurance. Oh, insurance more broadly and stuff. Um, yeah, it's not I mean for the more general things is it's uh not a good year for insurance things. It's a good year to be a needing to get insurance. Not a good year to be an insurer right now, but it was a great year. It we had a couple great years to be an insurer um in the last few years. So premium growth not going to be high, you know. >> Yeah, basically everyone I know has complained about their insurance going up over the past few years. So, >> well, they don't have to worry about that right now. The the shoes is on the other foot or however you want to say it. rates are not strong right now. Yeah. >> Why is that? >> Um so a few factors, right? So like one is an inflation factor, right? Which tends to lag that insurers don't raise their premiums fast enough. Two, in some extreme cases, insurers in intentionally gradually increase pricing so that they don't lose all their their um clients and stuff. So like, you know, this isn't thought of so much as a insurance company, but Front Door is a good example of that where they have like they want to retain like 90% of these people for these warranties on like um you know, if you need uh repairs done in your house and stuff, right? So if that goes up so that a repair visit costs like 30% more in 2021, 2022, they want to raise it like 10% a year for like four or five years in a row to get there. not they they have tables that tell them if we jack up 25% in one bill we're going to get people that we lose and it costs a lot of money to reacquire them right like on advertising and on doing all these things to get them. >> So that's an issue and then honestly a little bit of it is just investment income. So when rates are nothing then you you know um uh that's different than when than when you are making a bunch of money off of your investment income. you become, you know, you prefer to be able to, you now start thinking about, you know, as people always talk about insurance stuff is like, oh, well, we don't actually have to make a profit because we can make a profit on the investment side. We don't need to make any underwriting side. >> Let's see. Jeff's take on the current housing market in historical context would be interesting. how home builders are valued today compared to previous booms and busts and how he sees the current situation perhaps a bit on the now seemingly trend to be more asset light with using third party land banks some of the builders not all so we could pull up some builders green brick partners we've written about talked about a lot >> on uh the podcast you know I kind of think it's only a matter of time before they declare housing a national emergency and all these stocks just like just take off like crazy. I mean, there it's obviously front of mind for them because home affordability, I'm sure you've seen the numbers, first-time home buyer, 40 years old in America. Um, so that's gone up significantly. So, um, yeah, something that a lot of people are talking about recently. It's very um I don't know if you want to call it bipartisan, but yeah, definitely something that is on a lot of people's minds. But yeah, so do you have a general thoughts on uh >> Well, I moved from an area in Texas to an area in Florida and uh >> house prices are probably >> going to be down in the area I left and down in the area I went to a and rents definitely in the area that I'm in now. um just because you can tell in terms of inventory building up and like trying to there's so much effort to try to entice people with something other than a price cut and things are sitting on the market for a really long time. That was the case where I was leaving and it's the case where I am now. So, but those are places that went up so much in the boom, right? because they're they're you know um more expensive city places and like uh um with basically um in the south with you know like good weather and stuff right that people move to. So that's not the situation that's going to be everywhere else. Um but I mean recently there seems to be some things but I I don't you know I think I don't think you're going to see house prices and and rents going up that much from like right now on for a while. um they definitely seem to be kind of turning over and that's just probably just momentum and like financial conditions that it just eventually that happens right um so but I have no idea in terms of like builders and stuff see that gets complicated because it depends on what their what their business model is where they are and then also like you talked about how much of a difference does it really make in terms of the actual amount of supply that actually gets built or anything like that, right? It they their business is not just like they're not making some bet on owning a bunch of uh houses that have to go up in in value or else they can't make money or something. You know what I mean? That's not what their business is. Um but I wouldn't you expect like the value of homes or the value or the um value of multif family, you know, properties and stuff to like go up in the near term. That's something that, you know, happened recently, but it's not going to go up at the same pace in the future just because you can just see that stuff is going to have to cut price to move in some cases right now. At least where I can see it. >> You have any thoughts on the capital like nature of some of these homebuilders? So, obviously people talk about NVR as being the, >> you know, golden goose of of that strategy. >> Yeah, it's good. It's good business. Yeah. Have >> you ever invested in a home builder? >> No. No. Uh interested in or what? >> Not technically not true. I have invested in home builders, but not really because they're home builders. They did other things and they were cheap and stuff, but no, I haven't invested in something like MBR. Uh I I don't like the I mean I don't think that I can predict things better than uh to me it's the same issue of like oil things and stuff, right? Like um it's just I just think a lot of people are paying attention to it all the time and their predictions are likely to be better than mine and stuff, you know. >> Yeah. I always say you don't want to be in a an industry or a commodity or whatever where you know Glen Core these guys you're competing with they they know what you're learning today and they they've known about it for you know two months but it's just coming across your desk right those guys have such a such an edge over uh over you I I feel like it's better to focus on these second tier things a little bit more off the bean path like if Goldman Sachs has a trading desk of whatever you're focusing on >> good luck right >> and they are all not all but a lot of them of course are more local and stuff and I guess if you understand that local thing then that's something that you could do well in but then of course you don't have a lot of choices right so same thing with what I was just saying that what I was just saying might apply nothing to if you're looking at something in Pennsylvania or Michigan or something I don't see why the dynamics would be anywhere the same as like Texas and um and Florida and stuff but um yeah I people seem to I mean look the pricing seems was really optimistic here, which is interesting. Um, but it's always hard to tell because right before the housing um crisis, they had like super low multiples and stuff. So, in a sense, people knew that those were really high and unusual times and stuff. So, just because they it's kind of like the Peter Lynch thing because the multiples seem kind of high and stuff might actually be a good time to buy and vice versa, you know. Um, >> interesting. >> Let's see. Capital Cycles from Marathon Asset Management. They recently took a position in Millcom, ticker Tigo. Telecoms seem to be in an interesting position cycle-wise. Would be interesting to hear your thoughts on telecoms uh with with the capital cycle and especially Tigo if it piques your interest. So, we could look at Tigo. So, Marathon Asset Management, if memory serves right, they're the ones that wrote or someone there wrote the book um Capital Cycle, I believe, was the book, right? Um >> uh I did read the book Capital Cycles. Um >> I believe there's an affiliation there. Believe that's true. >> Um so, do you have any general thoughts on that approach to investing? >> I mean, we're kind of talk we're kind of talking about that right now with with real estate, right? like you had this boom and then there was this supply was trying to keep up and um you know here >> that's the only way to make m not the only way but that's how you make money in kind of bad businesses and stuff is that you have to be right on the price and the cyclicality of it for the most part there's occasionally even if you have really smart people running and stuff that's usually a big issue because you kind of can't there's not it's not very easy to even if you're really good at it it's it's kind of hard to to outrun that fact And if you're right about the cycle part of it, you don't even have to be very good about picking the right company. You know what I mean? If you pick a home builder that's cheap, going to survive, and things are going to get better, uh, or you pick an oil company that's cheap, going to survive, and, you know, um, at the right point in the cycle, then you're probably going to make a lot of money. Um, but we're picking a topic here that I probably uh am even would be even less likely to give an opinion on than than housing stuff. Um because at least with housing stuff then I don't also have to worry about technology things and stuff. >> Um telecom has always baffled me that way. Um >> why is that? It's sort of been a value investor fan favorite. >> Yeah. >> Telecom. >> Oh yeah, for sure. Is that because of Gabell? I mean what is that? >> Okay. But like so you know I read the book by uh the the the John Malone book recently, right? And I can understand it at that time, right? because if you're someone who's focused on now I mean super leverage so like very risky right but um in terms of the economics of creating a lot of value I can totally understand that kind of thing um but when we get to the point where uh I'm worried about like the technology and stuff um you know technological change and everything um then where it's not a growth thing then then that does worry me um yeah I I mean if yeah I mean a value thing I would I at least like that I don't see how housing's going to change and stuff right so I have some more confidence in like uh cheapness versus tangible assets and even cash flows and things like that. Um >> yeah I mean um and to your point about the cycle I mean anytime you're looking at a company where the price that it follows the industry whatever the commodity that that company follows is is the price of that is below the cost of production for industry operators I'm instantly interested because that's when you reach the point where maybe supply is going to shut in. You'll get prices to rebound or whatever. you could be closer to the bottom of the cycle than than the top. So that's that's generally a cue or when people start talking about that, you should drop everything and kind of take a look. >> Yeah. And I I wouldn't buy into building thing or something, but I don't think that's going to change in 10 years or something, right? But like we only have to go back 20 years ago probably um people actually thought there was a lot of value in like uh satellite TV operators and things like that, right? And then 10 years later they were those you would be amazed how much that number would be down. And then we take something like satellite radio or something 10 years ago you know look at what Sirius would have been versus today or something what valuation they put on it. And that's because of changes in you know technology and also changes in in consumption and stuff. Um okay so back to Netflix and Warner Bros. merger says what are your thoughts on it? Do you believe it'll be completed? How will this merger affect theaters and the entire entertainment industry? And then someone else commented on that saying more like with distribution breaking down as the barrier to entry for media evidenced by the coming destruction of the HBO Max brand. Is there any reason at all to assume these companies won't be fodder for unions and finance years while shareholders are left holding script? Um well I mean if the deals if the deals closes then no shareholders will be getting a lot of cash. I mean these are cash offers so I think shareholders will be getting a lot of cash probably. Um uh so they'll they'll kind of not have the risk from that based on the deals that we're seeing and those were the only things that I think I mean there was I don't know details of the Comcast one and stuff but everything that we've heard is that it was a lot of offers to pay a lot of cash to shareholders right now. So if they if that goes through any of the other ones do then that's not the case for the shareholders. Yeah. I mean they'll they'll get it. um in terms of uh what it will do for let's see affect theaters in the entire entertainment industry. Well, it's things a little differently. the you know I mean one thing that you can talk about is the look the really big thing here and why Netflix would be interested in this is that this would combine you know Netflix and and HBO Max basically which worldwide that is really really big for streaming things for you know um so for paying to actually watch stuff streaming you know movies TV all that whatever um that u that's a really big part of it. Um, and it's not hard to predict kind of that part of it. Um, and that's the core business that Netflix is in. The theater one, that's the hard one and that's where they'll be the opposition probably. You know, maybe not. But I mean, I just think that the opposite like, you know, okay, there's Disney Plus and Hulu is owned by the same company. Do they really care if Netflix and HBO Max are owned by the same company? And what does that mean to people? And, you know, okay, are the prices really going to be that different? and how is the streaming I don't think people are going to get real worked about that at least in the United States um but the theater things will all um talk about it and stuff and then I also think in this case Paramount will complain that the deal wasn't the process wasn't fair and stuff like that you know >> yeah it'll be fun to cover uh let's see just take on lots of movie theaters questions obviously because of uh you know movie theaters questions because of what's going on today uh let's see take on NCMI and JJ JSF also movie theater related. You can look at JJSF. >> Oh, I see what you mean about also movie theater related. Okay. Yeah. >> J&J Sack food. >> Mhm. Yeah. They do things like Super Pretzel and stuff like that. They sell things that are at the that you'll see sold at um you know, they're away from home things. It shows you all the brands there. Some of them are sold in supermarkets, but these brands are mainly things that are consumed at like stadiums and movie theaters and things like that. Any thoughts? We got a $1.8 billion market cap, $ 1.7 billion enterprise value, >> 27 times earnings, 1.1 times EB to sales, 20 times free cash flow. Um, stable grow actually maybe not so much. I mean, it's it's >> well that co most of these companies, right? >> Um, yeah. So I mean it's kind of pays a dividend. Return of capital has gone down even you know post 2020 shot up and it's gone down now the boom that you just spoke about. >> Uh yeah what are your thoughts? >> I mean when I own the company so we're going back you know 20ome years. um it was you know the 10-year growth rate would have been like I don't know uh actually for EPS or something probably would have been 11% or something like that in that range and revenue would have been similar and the PE would have been you know >> in 12 13 times or something you know so obviously that's changed dramatically it's just basically matured and stuff you know what I mean at that time was able to acquire different things this actually looks a lot like other food companies that actually sell through supermarkets and things now you know So, but the price to free cash and everything isn't crazy. And it's true that lots of food companies, even ones with absolutely no growth and everything do trade, you know, they tend to trade at these kinds of multiples. And, you know, it's, you know, obviously very safe financially and very predictable, but it's making the same amount of money that it was 10 years ago basically. You know what I mean? So, so yes, if you have a free cash flow yield of 5% or something and no leverage or whatever, that's great, but how is that much better than having a bond that, you know, yields 5% or something? >> Yeah. >> Um, now CO won't happen again, you know? So, I don't know that the next 10 years will be as bad as the the past 10 years and everything, but it's just like no matter how high quality business is and how predictable, you do want it to grow to pay any sort of premium price. But to be honest, versus the market, I guess this isn't really a premium price. This is actually kind of just a price. I mean, 27P and stuff doesn't seem low or whatever, but that's kind of, you know, that's not a peak. Let's see. They they were earning $4 or something before. So 20 mid20s or lower PE with no debt and everything. That's kind of like actually probably just the price for the market. >> Mhm. Yeah, definitely. Cool. Well, I want to thank everybody so much for tuning in with you both of us on the Focus Compounding Podcast. This is the first time you're joining us, be sure to check out all of our content that we distribute through YouTube and uh whatever podcast app that you use. Um, if this is the first time you're joining us and you want to learn more about our money management services, even if it's not the first time you're joining us, go to focuscompounding.com or reach out to me at andrew@focuscompounding.com. I want to thank everybody so much for all the support and we will see you in the next podcast. Take care.