Mastermind Discussion Q3, 2025 | Uber, Merck, Bath & Body Works | Bull & Bear Case (TIP751)

Summary

• Investment Theme: The discussion highlights the potential of Uber as a long-term investment, with a belief that it could reach a trillion-dollar valuation within the next decade, driven by its segments in mobility, delivery, and freight.
• Market Insights: The conversation touches on the competitive landscape for Uber, emphasizing the challenges and opportunities posed by autonomous vehicles (AVs) and the importance of network effects in maintaining its market position.
• Company Discussion: Uber's strategy includes leveraging its data for advertising, which is a high-margin business, and the potential for operational leverage as it scales its logistics capabilities.
• Risks and Opportunities: Key risks for Uber include regulatory challenges, competition from companies like Alphabet and Tesla in the AV space, and the impact of potential price wars on margins.
• Valuation Concerns: The conversation raises concerns about Uber's stock-based compensation and adjusted EBITDA metrics, highlighting the importance of transparency in financial reporting.
• Sector Analysis: The podcast also discusses the pharmaceutical sector, focusing on Merck's challenges with patent cliffs and regulatory pressures, while noting its strong position in oncology and potential for future growth.
• Retail Sector Insight: Bath & Body Works is presented as a value investment opportunity, with strong customer loyalty and a focus on expanding its digital and international presence, despite the challenges faced by the retail sector.
• Key Takeaway: The podcast emphasizes the importance of understanding market dynamics, competitive advantages, and financial metrics when evaluating investment opportunities in diverse sectors like technology, pharmaceuticals, and retail.

Transcript

(00:00) I've been looking at this company, you  know, Alphabet, and not that people didn't know   the company in 2018, but it looked so big, you  know, market cap more than $700 billion dollars,   and it just seemed to have such a long runway  of growth and I bought into it. And since then,   now today, it's a multi-t trillion dollar company. (00:19) It still looks like it can grow at really   high rates for a very long time. And so it's also  with that mindset that I look at Uber and I think,   well, this could probably get to a trillion  dollars within the next decade. [Music] Before   we dive into the video, if you've been enjoying  the show, be sure to click the subscribe   button below so you never miss an episode. (00:44) It's a free and easy way to support us,   and we'd really appreciate it. Thank you so much.  Welcome to the Investors Podcast. I'm your host,   Jake Brodes. Today as always I'm here with Toby  and Hari. How are you today Jens? Hi fellas. Good   to see you. Thanks for having me stick. Yeah, good  to see you all. Thanks for having us. Amazing.  (01:06) And Jens, I um I'm just going to go  straight to the pitch here. Um my pick is Uber.   Certainly a stock I think most in the audience  have heard about before. $190 billion in market   cap. And the first time the stock really came on  my my radar was not as a service, I should say,   but as a stock worth investing in was whenever  I listened to this episode that my co-host   Daniel and Sean on the Intrinsic Value podcast  whenever they did that and took a position.  (01:42) And I feel a little uneasy about pitching  the same stock to you guys, but apparently not so   much that I won't do it because here we go. But  I I invest in so few stocks. I It's more than a   year ago since I last bought a new stock. I  want to be very transparent about everything   that we do and I really want you to save me if I  do something ridiculous, which I probably will.  (02:01) But anyways, I have a blackout period  until September 22nd. And with full disclaimers,   I'm going to say I don't have a position some  here on TAP HAB, but I don't have a position   myself and I can't invest before September  22nd, but I probably would take a position,   a 1% position here at today's price of  $91. I strongly believe that this is a   doubledigit compounder over the next decade. (02:29) Now, whether it's a double digit as   in 10% or as in 20%, time will tell. We're  going to discuss a lot more about that in   the valuation segment. But you might also  be thinking if you really have such a high   conviction that it's anywhere between 10 and  20%. Why only 1% starter position? It's really   because I'm just not smart enough to scale  to a full position of which for me is 10%.  (02:51) I need to first own the stock. I need to I  learn differently whenever I own a stock. I guess   I wish I was smart enough to do it just right out  of the gate just go full position. Every time I   do that, it seems like I just get burned. So, I've  stopped doing it. And then I also feel like I run   this risk of being stuck in this tip echo chamber. (03:11) And so, I really hope that you will tell   me why Uber is a terrible investment. So, the  first interaction I had with Uber was at the   Birkshshire meeting in 2014. And I remember  it vividly. I was in Council Bluffs and we   were doing we were trying to figure out how to  get to Omaha. And I was standing in the lobby   together with my co-founder Preston and he told  me about this amazing new company called Uber   which probably sounds ridiculous whatever  you hear now but I was blown away because   he showed me this app and then you could like (03:42) track where the car was and it was sort   of like a normal thing in 2014 and to me there  was something very special about the meeting   also because I'm just going to mention this  because Harry's here on the call it was from   that meeting when Harry actually sat next to  Preston out of Omaha and conceived the idea   of tip in the first place. (04:04) Anyways, and then and   so it was just a side story. Of course, as  a customer, I've known Uber for a long time,   as I'm sure a lot of listeners here of our show,  and I always had a really hard time investing in   companies that were unprofitable. I remember  that we've talked here on the show about this   company called Amazon many, many years ago. (04:25) even whenever people knew Amazon but   it was they're still burning cash and we were  like how much money are you willing willing   to pay for a company that loses billions and  it's just it's as a I'd like to think I'm a   value investor perhaps I'm not now pitching Uber  but for someone who like being brought up at the   church of Buffett and Monger I feel it's been very  difficult for me to invest in companies that are   unprofitable and Uber has been unprofitable for  the longest time And so one of the things that's   interesting then is that you then have these (04:59) businesses that all of a su I wouldn't   say called all of a sudden but they eventually  turn profitable. And so that just makes it a   little bit easier for me to make the plunge. But  of course the multiples can still look absolutely   ridiculous. Like simplistically if you have a  $1 profit and there's a market cap of a billion   dollars it looks like the multiple is a billion. (05:20) And that's obviously not the case.   But some of the multiples, if you just at a glance  look at Uber, they look absolutely ridiculous. But   what I hope that I can convince you or even better  be told that I'm wrong throughout this discussion   is really to look under the hood and see what's  there. To a large extent, not necessarily because   of the inflection point, but I also find it  difficult to invest in a company at the size   of of Uber, at least with $190 billion market cap. (05:53) And so a part of me is thinking oof like   how long can it like how big can it get?  And I almost had the same feeling as I   had whenever it come to Alphabet which is  another stock I pitched here and I took a   position back in May 2018 just before Burkshire  was have this thing about Burkshire. Anyways,   I was on my way to Berkshire  and I I just I've been looking   at this company Alphabet and not that  people didn't know the company in 2018,   but it looked so big market cap more than $700  billion and it just seemed to have such a long   runway of growth and I bought into it and since (06:28) then now today it's a multi-t trillion   dollar company. still looks like it can grow  at really high rates for a very long time. And   so it's also with that mindset that I look at  Uber and I think well this could probably get   to a trillion dollars within the next let's  just say next decade I think there are good   reasons why it can go a lot faster but if  it will go to trillion dollar in the next   decade we're talking about a kar of 17.5%. (06:53) Everything else equal anyways let's   talk more about the business. So there  are three segments here of Uber. Mobility,   delivery and freight. And it's really the  two form I want to talk about mobility   58% of revenue and 69% adjusted EIDA. So  mobility segment that's what most people   think about probably when they think about Uber. (07:17) So that is delivering people from point   A to point B. Then they have the delivery segment  which is 32% of revenue or 31% of adjusted IBIDA.   I'll get to this point about adjusted eBay  that absolutely drives me crazy. But I'll   get to that later here in this pitch.  That is mainly food. 90% of what's in   the delivery segment is food, but they also  do other things. They have some groceries.  (07:39) They have different things in  that unit. And then the last segment,   it's just your 10% of revenue. They don't  really make any money. They even been chatter   about selling it off. So, let's just disregard  that for the time being. And so it's sometimes   the weirdest things that makes you look closer  at a company. And for whatever reason, it was   really the embedded the advertising business. (08:05) It really drew my attention to Uber.   And sometimes there's just something about a  stock that just clicks. And for whatever reason,   knowing Uber for the longest time, whenever  I heard about this idea of advertising and   how much data they really have for you and  how they can target you with advertising,   that was really really what made click for me. (08:24) And I should say for the record,   we're only talking about like 3% of revenue  whenever it comes to advertising. Obviously,   it's a it's a lot higher margin business than  the current business that they have, but there is   something there. And it really seems like in this  world of AI, they seem to be two types of winners.  (08:42) Like there are the winners who own  this technology such as the big tech companies,   but then you also have the big enablers of those  of big data. And it could be Spotify. That's one   example. It could be company like YouTube. I know  it's owned by Alphabet or a company like like Uber   because they have so much data about the users. (09:02) And as you can imagine, the value of   that data is really valuable for advertisers too.  Let's talk a bit about the competitive advantage   in some of the competitors. The networking  effects is just really really strong. And Uber   as our listeners would know is that it's just a  global company. There are certain markets where   it's very difficult for them to compete,  but by and large it's a global company.  (09:23) And the networking effects are strong,  but it's also important to understand that it's   a supply driven networking effect. And it's a  two-sided marketplace. And whenever I say supply   driven, like you really need a critical mass of  drivers before it makes sense. And you need those   first and then it sort of creates the demand. (09:44) I know it sort of like sounds off   because we're taught that, you know, demand  drives everything. I would argue that for a   company like Uber, it's actually supply that's  driving, which is an interesting dynamic in   itself. And so being based in Denmark, it's not  super helpful for me that if there is excess   capacity in Berlin, no, I need it right here. (10:04) And so doing that and generally for   two-sided marketplace like it's just a really  really difficult business to disrupt once you   have scale. You need to burn a lot of cash  to get to that uh spot. I'm inclined to say   that Uber does have a competitive advantage in  the brand even though there's certainly been   a lot of cases where Uber hasn't been coming  off as a wonderful company to say the least.  (10:27) But it is very much so that whenever you  travel in different companies that is a brand that   you would know that is your go-to. And I'm always  inclined to say it's equivalent to a Starbucks or   a McDonald's. Whenever you travel internationally,  they probably don't have the best food or coffee,   but there is a certain minimum standard. (10:45) And there's Wi-Fi. Even more importantly,   this might be a clean toilet. And I know this  it doesn't really translate on onetoone basis   whenever it comes to Uber. But there's certainly  a name recognition to the brand, but I do think   the travel metaphor, even though that most of us  would use Uber domestically, I think it speaks to   some of the competitive advantages with Uber. (11:06) So, if I can use that metaphor here,   where do you get the This is a rhetorical  question. I'm not putting you Jensen on   the spot. Where do you get the worst service  and the worst food in Italy? No, actually,   let me actually ask you just a little bit on  the spot. Where do you get the worst food and   worst service at all in all of Italy? I've never  been to Italy, so I can't answer that question.  (11:30) Yeah, I can tell you worst Italian food  in Silicon Valley. would have known little. All   right. So, I'll say that is a pizza place right  next to the Pontto Diralto. It's absolutely   terrible from an economic lens. Why is the food  and service terrible? It's terrible because they   know you're not going to come back, you know, and  they more or less have monopoly power because it's   there and you you don't want to walk to the  next restaurant and you're about to leave.  (11:59) Anyways, par food service, you're  overcharged. Now, let's talk about Uber.   Uber changed the game from the whole legacy  taxi business. It was just like the food in   Venice. Like, it would be bad and it would  be overpriced. And you rate your Uber driver,   he has incentive to treat you well. And he also  rates you because if you have below a certain   rating, no one driver wants to pick you up. (12:25) And so, it's almost like you have this   two-sided marketplace where you're enforced to  have a decent behavior. And I can't help but make   this to tell the story about Amazon. Jeff Bezos  who I should probably mention just as a he was   he just got married in Venice anyways. But Jeff  Bezos famously an early Amazon backer famously   was frustrated that they didn't delete the bad  reviews on their site and Basos said no no no   the reviews are there to help the customers and I  very much see the same thing happening with Uber.  (12:55) They're there to inform you and to reward  the right behavior. And the bull case for Uber and   I probably should say Airbnb also was original  that you got the upside but without the capex.   So meaning that you get the fleet of cars and the  hotels without all the expenses. And of course   for Uber you can say that's still the case. (13:17) But then you look at their financial   statements you're like oh my god that it looks  like they're so like low margins. Like what's   going on? And really what's happening is that  there are vastly under earning and they have a   lot of operational leverage. So what you're  going to see now is that they don't need a   lot of extra let's call it capex in this case. (13:38) It also depends on how you're defineing   capex I should say for a tech company but margins  are going to widen quite dramatically. And another   competitive advantage I want to talk about is  perhaps we should just start with logistics.   You might think about Uber as a  company that just moves something,   whether it's a person or whether  it's food, from point A to point   B and saying that shouldn't be that hard. (14:05) Well, you know, just before we hit record,   Toby and I were talking about Shopify. They have  famously failed on logistics and now they're using   their biggest competitors of Amazon's for  the logistics. It's incredible difficult to   do logistics. Even though it might seem like a  somewhat random thing to do, a relatively easy   thing to do, but it very much is not the case. (14:25) And I would argue whenever it comes   to Amazon, and I know I'm all over the  place here, but like some would say, oh,   the secret sauce they have is like this wonderful  e-commerce website. It's like really like a   big part of that wonderful wonderful business  called Amazon is logistics. It's just really,   really hard to do globally at scale. (14:46) So I have a long segment here   about risks and valuation but before we get  to that I feel I've been rambling for such   a long time so I want to throw back over  to you Jan for any comments or concerns.   uh interesting uh state uh poor especially as you  said like it's one of those cuttle but investments   where we are all very familiar with the product. (15:14) Yeah, I agree. It's a interesting cuz we   use the product so much but it's the the valuation  is the thing that I'm interested to hear.   Yeah, I had a couple of points about headwinds  that Uber might be facing, but maybe I can   wait till you complete your fridge. All  right, so let's talk about the elephant   in the room and we have to talk about AVs. (15:39) It always comes up whenever you bring   up Uber and for good reason. So I go through a  lot of earnings calls these days and it probably   doesn't there are different cycles there. There  is cycle and everyone talks about terrorists and   then there are cycles and everyone talks about  AI and then there are cycles where everyone talks   about both things I guess but you have so many  CEOs out there and all of them talk about how   AI is actually a tailwind for a business and  not a headwind and Uber is no different and   they're also no different whenever it comes to (16:14) AI and then is not necessarily the same   but has a lot of overlap but I would argue  that AVs are a tailwind. And it probably   sounds a little bit odd. And I'll also be the  first to say I don't neglect that companies   like Alphabet or perhaps even Amazon, which I  may get to later, could be competitors. Less   worried about Tesla, but that's another avenue. (16:42) But you look at a company like Whimo and   you're like Whimo right now is partnering with  Uber in some cities, but they're also competing   with Uber in other cities and they have their  own ride healing app and it's not profitable   right now. I think most people probably expect  eventually AVs will be profitable. It's just not   the technology is not at a price right now where  it is profitable, but certainly they're collecting   a lot of data and there are some concerns about  what happens whenever they would put out their   own fleet. I would probably say that the way (17:14) like one of the advantages of Uber   is that they do a really good job of  utilizing the supply and the supply   is just really important and they have a  very flexible supply. So they can call in   drivers whenever they can make more money  and then they can create that. And as you   can probably imagine with a on the demand side  for ride hailing for example or for Uber Eats,   it's not constant throughout the day. (17:43) And so if you manufacture a lot   of AVs, they're there all the time and  you have to pay for that all the time.   Whereas if you tap into a fleet of cars that you  don't own, it comes at a different cost profile.   And so that's also one of the advantages that Uber  has where because delivering people and delivering   food to some extent is somewhat similar. (18:09) They can increase the like every hour   that the driver put in and maximize the earnings  that way. And that's most certainly a part of it.   And another part of it is that even if you have  manufactured AVs, really the secret sauce is in   the matching technology. And the more you  dive into what goes into that algorithm,   it's just incredible incredible difficult  to match say a driver and then a person   who wants to drive that person like in real time. (18:37) There are so many factors that Yeah. Once   you start digging, okay, but then what if that  person is taken to the suburbs? What's the next   thing it could be? What's the next ride? What  should the cost be? How can we make sure that   once it's taken that it goes out as as quickly  as possible that there is the lowest risk of   cancellation which is the worst experience. (18:58) How do we make sure we prioritize   people who are a member and then who are not a  member? There are so many factors that once you   sort of like open that Pandora's box, it's just  absolutely crazy how much. And so I would argue,   and I'm probably super biased here, but I  would argue that if you have the AV technology,   it makes more sense for you to team up  with Uber rather than compete with them.  (19:22) Perhaps Alphabet doesn't look at  it the same way. And you can also say that   Alphabet does have a cash reserve to create that  two-sided marketplace themselves, or at least in   certain areas. Who knows? But it's it certainly  is something to be concerned about. And I don't   know if I'm too biased from listening to now or  going through years of earning transcript where   they talk about how much AVs are a tailwind. (19:47) All SEOs right now have an incentive   to to say that. I would generally say that  regulation is probably going to be a headwind   or there's certainly a risk that it's going to be  a headwind. I think and it also depends on where   you're based probably what factor into that. I  know that if you're based in the states, the whole   insurance piece get a lot of attention and it is  true if you look at we talked about operational   leverage before like Uber has a lot of operational  leverage but the one thing where they don't do a  (20:19) good job of reducing that is whenever  it comes to insurance and it's regulating by   each states and so they actually have  a provision on the balance sheet where   they self-insure. So if unless I can get the  right rates, they are self-insuring because   it's otherwise it's just too expensive. (20:37) But I would say that outside of   North America, I can see why there are some  regulatory headwinds that is for example and   very anecdotally in Denmark, we used to have  Uber for the longest time or no, a long time   ago and then it got kicked out by the union and  then they came back. And so it's not a discussion   of oh is this a better service for passengers. (21:00) That's not so much. It's more a question   of how does it work with unions and regulation?  And so there is generally a tendency in most   countries to favor local champions. A few  examples come to mind whenever it comes   to e-commerce. You you look at China, India,  Japan, you might say why is Amazon not bigger   in those countries? those three countries have  local champions and it's not too different for   example whenever Uber tried to compete in  Southeast Asia Uber had to give up like they   exited eight countries in Southeast Asia in 2018 (21:35) and then they they sold the operation   then they got chas in in Grap that has later  been diluted but it's difficult as a foreign   company to compete with the incumbents  even if your product is better for all   intents and purposes that is not necessarily how  regulators think about it, especially if they're   politicians who wants to be elected or reelected. (21:57) You employ a lot of people and you employ   a lot of people who likes to get minimum wages,  perks, different type of protection and it's not   always wellreceived that a foreign company  comes in and hire local workers in the gig   economy. Those are just some of the risks  I wanted to highlight. I I don't know if   that was what you were getting at Hari. (22:21) No, I think you touched upon what   I wanted to highlight Stig, but what but a very  interesting pick Stig and it's very hard because   not just Uber but any company right now it's  very hard to be certain because the platform   is changing and that is the interesting times  we are in. It's very similar to the internet   era when lot of incumbents got  disrupted and some thrive like   Microsoft but with lot of trouble in between. (22:55) Now it's very hard to know where Uber   will land in this because Uber is now one of  the incumbents. They have a current business   model which is capital light. I think that's  what propelled their success that they were   capital light unlike other companies where if  you want to expand you have to invest in plants   and equipments or vehicles they didn't have to. (23:24) They could just expand by expanding their   network city by city and they have conquered city  by city and established their near monopoly in   most cities. So that's their strength. But  with AI, that model itself might come to a   question. I don't know if you have taken a ride  in Whimo. Have you guys tried Whimo? No. Yeah,   I tried to catch it twice, but there's only  four seats and I've got a family of five,   so I couldn't catch it in San Francisco. (23:57) And then I'm outside the boundary   in Los Angeles, so I haven't actually managed  to, but I would like to. I haven't. How is it   Hari? It is really really seamless experience. I  really liked it. I have tried it in San Francisco.   It even provides stepby-step direction of  where you are, where the car is parked.  (24:23) Once you're in, it recognizes you. It even  turns on a music that's your favorite if you have   a past history. So, it feels like you're in the  future. And for the first time when I tried that   I felt okay San Francisco is coming back because  it felt like the city of the future and the ride   is really seamless. They're expanding now to other  cities and that is where the risk lies for Uber.  (24:50) If Tesla also tries this I think they're  violating in Austin and if they're successful the   latest FSD in Tesla is really good. I tried it.  It can even park itself. So that was amazing.   When these companies are coming in, they have  the resources to build that brand presence as   well. That becomes a challenge for Uber because  now Uber is reliant on multiple small vendors or   suppliers like according to Ford forces like you  know if you have distributed suppliers you have   the strength you have the advantage over them. (25:29) And I when I talk to Uber drivers,   I always strike a conversation with Uber  drivers to see how they're feeling. Many of   them are hurting. Actually, it's a sad thing  to see because one of them was asking me,   "How much are you paying for this ride when  I was going to San Francisco from my home and   I was shocked to know he was barely getting any  money to his account and Uber was charging quite   a bit of all the search charge and everything. (25:58) it was keeping for itself. So that power   Uber has now because there are so many small  suppliers to Uber and these are these drivers.   But imagine a company like Tesla or Google  who have a fleet of robot taxi can operate   at much lower cost than having a driver.  Even if they work with Uber, they have more   leverage over Uber than the small drivers. (26:27) That's the other risk. The third   one is switching cost like how I did. I just  downloaded a Whimo app and I just took Whimo.   It's not a big switching cost for me personally.  Uber has a big presence in enterprise. But even   there I think it's not easy for somebody.  It's not difficult sorry for somebody like   Google who has this ambition of getting  into enterprise market with their Google   cloud whatnot offering this another service  along with their Google enterprise services.  (26:56) for companies. So those things and then  finally with robo taxi of course safety is of a   less concern. You don't have a drivers you don't  have to worry about rating the driver. So I see   these patterns where lot of businesses  they build a lot of these technologies   that are really their competitive advantages  like reviews of drivers and all that stuff   and it's all gone in the era of robot access. (27:25) There is no reviews required anymore. So   it might catch Uber management off guard because  why would Google or Tesla be subservient to Uber?   Wayo is already launched. They have their own app.  Tesla has such a big brand presence all they can   easily command a big market. And more importantly,  I think Uber is not like Facebook where the   network effect transcends geographical locations. (27:59) They have to win city by city. The network   effects is only within the city. The demand and  supply that entire ecosystem and that's well   documented in many books and analysis of Uber.  that would go and win city by city and even now   in many cities like in India for example Ola is  very popular in many cities Uber couldn't win   those cities because Ola had a Ola is an Indian  brand very similar to Uber but they had a lot of   um head start over Uber and for various reason  they could understand certain cities better   than Uber of course Uber is also there in (28:33) many cities but it's not like once   you win in one area that also helps in other  area because most of the time when we are   taking Uber it's for local commute not inter  city so it doesn't matter to me I will just   go with lift or Uber or anything else and if  whimo is there if Tesla is there that is the   other risk that I see and how Uber will navigate  this I'm not saying they'll not be able to but   I'm saying there are headwinds Yeah, I think  you bring up some really great points, Hari,   and that is certainly are risks and so how would I (29:17) respond to that? I mean, whenever I try to   do the math and obviously all of these are crazy  assumptions because we don't know what the cost   is going to be right now. It's not financially  feasible for Tesla or Whimo to do that. It's   just too expensive. But there's a question of time  before the technology would be so cheap that they   are going to considering eating Uber's lunch. (29:42) And so what I'm thinking about is can   they do it as cheaply as Uber? Are margins just  going to be driven down? Is it going to be a   price war? And if you ask who's going to win  that? And it's a it's a tricky question. I'm   inclined to say Uber. And the reason why I am  is that they can tap into the human workforce.   Whereas if Whimo has to make sure that you can get  a car any point in time of the day, think about   how many cars they need to deliver everywhere. (30:15) Whereas it's a lot more flexible for   Uber. But another thing I've been thinking  about is would people like to get their own   AV? And if the answer is yes, what does that  do to the supply side for a company like Uber?   I think that there are some studies done in  the US where it's like a car is idle if it's   private 95% of the time, something like that. (30:42) What if I can see a lot of people don't   want to be Uber driver, but what if it's an  AV? Would they be okay? As long as you can   probably tap into Uber system, they will going  to be there at 4 or 6 or whatever you needed.   So they're going to have people and providers  bid for the lowest possible price. One of the   interesting thing is that after Uber has lost the  game, let's say in the Middle East to Kareem or   to Grab in Southeast Asia, they got XG in those  companies and they're selling that or recycling   as they're calling it selling that equity (31:13) right now to make let's call it   vertical integration with some brands.  So smaller brands like Lucid and a few   others. I think they sold their a part of the  their original AV which is sunk around three   billion into was Aurora which is primarily now  in AV trucks but they're trying to see if they   can verbally integrate with some of the smaller  players not taking controlling stakes but for   some of the smaller players that are not Tesla or  Whimo might be a win because they do get access   to that massing technology. I am worried about (31:46) Alphabet and I'm worried partly because   it probably have the best tech but also because  there is a huge advertising opportunity and if   anyone understands advertising it's  Alphabet. I'm shocked by how well the   advertising business is doing for Uber. And I'm  going to give you some random numbers here but   the click-through rate is 3% and the CPM is $45. (32:10) And for anyone who is in advertising and   we are funded mainly by advertising like those  rates are just amazing. So why is that? Well,   you know they sort of like know if you're going to  this I don't know this restaurant they can target   you to go to the comedy club afterwards next  door. Typically you're skewing a bit younger   wealthier people who are very open to new brands. (32:29) It's a very interesting demographic to   have. But certainly all your concerns are noted  and it might very well be so that they can't   compete with well alphabet and the Teslas  of the world. There's this joke that fusion   energy is 30 years out and it always will be. I  I kind of feel like if you're listening to some   people in the AV space, they're always like  next year the world is going to be on it.  (32:56) It's probably not going to happen  next year. One of the interesting things   about Uber is that and they talked about  this in the latest earnings call that came   out here last week was they see themselves as  a platform for the gig economy. So whenever we   think about Uber we might be thinking oh you  know it's like it's like a taxi just nicer.  (33:20) how they think about themselves is that  no, that's not the case. Like we we are catering   to a new generation. I remember I'm at an at an  age where whenever a Sunday night 8:00 we huddle   in front of the TV cuz that was whenever  whatever kind of thing was on. Otherwise,   you had to catch the reruns at Tuesday  10:00 a.m. or whatever. That was how it was.  (33:41) Now you have a new generation and  they're used to everything on demand whether   it's food or rice or whatever it might be.  And so that matching technology isn't just   the case for mobility or delivery. Like think  about delivery for anything you need locally   within 30 minutes. And that's interesting stuff. (34:03) And actually what they talked about in   the last earnings call was that some of their  drivers because they're very much thinking about   how much money is their driver making per hour  which is why there's as opposed to lift they   both have mobility and they also have delivery  but they're also now in certain areas offering   drivers to do AI labeling for big tech companies. (34:23) So if you're sitting waiting for your   next assignment you can actually sit on your  phone do AI work. It's not that well paid,   but it's very much I think you're seeing a macro  trend of gig economy being more prevalent in lots   of parts of the world that didn't used to have  that. They also talk about how 70% of the drivers   came to the platform because of inflation. (34:48) There the certain demographic that   were that were going to that line of work and  it's very supply driven. And then another trend   and we've go back to ride hailing. There's  also a new generation who where a lot of   people don't have driver's license. I  do have driver's license. I never own   a car. And it's interesting because I  whenever I speak with someone who's 50,   they would always tell me I have a car. (35:07) It gives me a lot of freedom. And   I remember when I was younger, I was I or  today I always felt it quite interesting.   I know 90% of listeners would probably agree  with that statement. You have a car and it   really gives you freedom. I felt the way  that the landscape is here where I live. I   have so much freedom because I don't have a car. (35:23) like it's terrible to to park and parking   spots are like it's incredible expense and there's  so much freedom in not having car at least where   I'm based and I can always get an Uber within  3 minutes and they can drive me whatever. Oh,   and that's a trend that you see more and more.  And I know that's a macro tailwind, too, perhaps.  (35:42) But again, I I do understand that point of  view because I've lived in San Francisco where a   car is just a hassle cuz it's so hard to park  and this the density of public transport and   things like it was pre Uber, but taxis and  zip cars and things like that. The only time   you really need one is when you live in the  suburbs or you've got kids in car seats and   you it's such a pain to get the car seat into a  taxi that it's just easier to get particularly   if you got a number of kids in car seats. (36:09) But that's a pretty limited use case.   So I can easily see a world where everybody  or everybody has maybe one small car and then   you have an AV for everything else. One of  the interesting things when I was in China   and we were meeting with some of the VCs and the  things that VCs are focused on AI, robotics and   autonomous driving and their view was that Tesla  was the furthest ahead in autonomous driving or   most likely to be successful because they spend so  much less on their cars because the nature of the   sensing system doesn't require the all the extra (36:46) cameras that the Whimo cars   Even though the way mode cars have a  little bit of a head start now. So the   final state of this is some sort of network  attached to probably a car that's operating   a system like Tesla because it's cheaper  20 or $30,000 cheaper without all of the   things on it. So you make more money out of it. (37:07) So you have people who will provide the   cars. Like I think that's Tesla's vision, right?  that individuals will put up the capital for the   car, then put it on the network, and then they'll  share the revenue out of the network. So, you have   someone who's just basically a passive capital  provider and someone who operates the network.  (37:24) And that seems like probably the likely  outcome to me. The question is whether Uber can   get enough Tesla type cars on its network before  Tesla can get an Uber type network built out.   And I think that's the challenge. Uber's at  least 50% of this fight, right? It's halfway   there. They've just got to figure out the other  whether they partner with an autonomous vehicle   provider and they're probably there enough  around that they can find one and then maybe   Tesla buys Lyft or something like that. (37:58) I don't know, but I would be I   like to bet I'm interested to hear how you  feel about the valuation those things. Yeah,   I have one more point to make. I think  great point to brought up about Tesla   versus Whimo. I think there is a fundamental  um technical decision that was made by way   more and Tesla that are like completely different. (38:18) So Whimo went for the LAR technology that   is Google way more expensive and not scalable  but their hypothesis was that's the only way we   can go to level five AV which means no drivers at  all. Whereas Tesla took this approach of saying   hey why go that route because we can't really  make it scalable every car should be autonomous   that was their vision so they went with cameras  with the point of view that Elon had that if I   am seeing through my eyes cameras shouldn't  be sufficed I think they have eight or nine   cameras now and that should help and I think your (39:01) assessment Doby based on the conversations   you had with the VCs is absolutely Right. I think  the latest version of FSD and Tesla is leaps and   bounds better. Actually, it's very close to  level five. It's not completely there yet,   but Whimo is already at level from what I see  because they are able to operate without a driver.  (39:23) They have that license now to operate  without a driver, whereas Tesla doesn't really   have it yet. So because the driver has to  be in the seat but it's eventually if Tesla   is able to figure out how to get to level  five and get those regulations figured out   and that's the risk that others have stick that  can work in favor of Uber is if there is a huge   backlash in terms of employment and public  sentiment governments might limit the AVs.  (39:56) If that happens that is in favor  of Huber because Huber is an incumbent in   incumbent but if that doesn't and if AV as  a technology takes hold and I agree to your   point that it's almost like nuclear fusion for  past 15 years I've been talking about AV coming   in but this time it feels real because I have  ridden in Whimo in San Francisco I have sat in   Teslas the with the latest FSDs is it's there. (40:29) It's no longer a lab project. It's just   productizing it. And way more is already ahead  with that. They're already have productized,   but now they have to scale. So I think it's a  regulation that can if regulation is against a   it's in favor of Hoover. That's a very bad spot  to be in in my opinion because now you're hoping   somebody will stop you from getting disrupted. (40:54) And if you remember when Travis was there,   Uber actually had a active division working  on autonomous car. They met with the there   was an accident during their test drives.  Travis left, the company got fooled and   they completely shut down the top. So now  they don't have that part, the autonomous   part. And as Toby was saying, Hoover has  figured out the distribution that's the 50%.  (41:22) but hasn't figured out the autonomous  that the other 50%. Tesla has the other 50%,   Whimo has the other 50%. Now they need to figure  out the distribution and Whimo is at it actually   they're going city by city but stick your point is  also valid like how will scale if there is a surge   in traffic they can't just suddenly add more  cars whereas in case of Tesla's model will be   as ki was saying every car owner of Tesla will be  like live will be a passive capital provider when   the car is parked it just goes and I can just  turn on in my Tesla app saying I'm available  (41:57) now. So, it goes and I can even set  a schedule saying between 10:00 a.m. to 2   p.m. do whatever you want, but come back  to this party. So, um but then will Elon   give it to Hoover or have Tesla app for all  Tesla drivers and make it like a Tesla cloud   and these are all unanswered question stick. (42:28) So it's very hard to say this is how   it will play out actually. So that's why it's  very hard to make a case against your pitch as   well. One other argument for Whimo is if you  go to somewhere like San Francisco or to Santa   Monica here. Last time I went to Santa Monica,  the first four cars that I saw were Whimos.   There are lots and lots of Whimos on the car. (42:46) There are lots and lots of Whimos around   San Francisco. Like they really are rolling  out the fleet. And that fleet just gets I   as far as I'm concerned like they've proven  the concept. They've launched the business.   They're just now they're just growing  the business and in the next few years   it becomes a problem for for Uber. That's not to  say that Uber can't compete because I think the   network is a hard part of that problem to solve. (43:09) But Tesla and Google are certainly two   companies that can compete. But I still like Uber  as a I think Uber's got to be part of somebody's   plan or they've got to they'll be able to have  access to their own AVs. And to your point,   we don't know how far out that is. But people do  seem to have a preference for the for the AVs.  (43:29) I've read some of the people who travel in  them like the fact that there's no driver. Yeah,   it makes complete sense. And I I think people  right now, there was this study in in Austin,   like they're willing to pay more money for not  to have a driver. Do you think that's a do you   think that's novelty? I would pay a little  bit more money to have my first ride on it,   but after a while, I'm going to be  just going with the cheapest one.  (43:51) I think price probably matters a  lot to most people. I do think there's a   certain segment who would be willing to  pay more for there not to be a driver.   And it speaks really well about Uber also like how  much of consumer surplus they're they capture like   they have all of these different offerings. (44:12) If you're willing to share a ride,   if you want a nicer car, if your company is  paying, then you also charge something else.   And so like they're very good at targeting people  with the right offer at the right time which is   what and then we see that with companies  like Spotify and so many others who have   a lot of data about how you are as a user. (44:34) So we mainly talked about Whimo and   we talked about Tesla and I do agree those  are the two main competitors. I can't help   but think that it's going to be all driven down  to the cost of capital. Even whenever you would   say they would need $10 billion random number  generic here to secure that fleet, I think it's   going to be come in in in the form of a read. (44:56) It's not too difficult to think about   a business model. It's either a fixed payment  per ride or revenue share something like you   can model that relatively easy and figure  out what kind of dividend coupon can you   get. And so whenever I'm thinking about how many  players you have in the AV space, thinking about   subsidized Chinese companies and like are  way more Tesla really going to be cheapers.  (45:21) Are drivers of Tesla more likely  to allow other people into the cars versus   others? I don't. It seems to me that Uber has  a pretty good case for getting to the lowest   cost of capital and being able to capture those  who would be willing to pay more if there is a   driver or even less if there's a driver. (45:43) So, who knows? As you can tell,   I'm pretty bullish on Uber, even  though you certainly gave me pause,   both of you gent. And I need to think more about  this this threat from from Whimo and Tesla.   Do you have some thoughts on the valuation  stick? What like what are the Can you walk   us through where you see the Yeah, if I can skip  to the end, I'm looking at something like 15%.  (46:03) In the internal rate of return  over the next 5 years, but again,   it comes with so many so many Fs whenever you  would do that. So, what are the key metrics   to look at? You would probably looking at the  gross bookings and I would expect it would be   15 to 20% here for the foreseeable future. (46:23) You've also seen take rates go up   across the board. It's a little bit different  what kind of take rate you have whenever it   comes to to mobility or whenever it comes  to delivery. The typical a little lower   in delivery around five to 7 percentage points  globally and I would also say it really depends   on the maturity of the market you're looking at. (46:43) So globally take rates for for mobility   which is basically right hailing is around  30%. They used to be significantly lower.   The way Uber does is that they subsidize new  cities and then both for both whenever it   comes to drivers so they guarantee different  kind of pay but also for passengers. So then   they reach critical mass and then they start  increasing the take rates especially whenever   they're search they take higher take rates. (47:07) So it it's like a dynamic thing but   it's roughly 30% again depending on maturity  of the market. And so one of the things that   frustrates me a bit is stockbased compensation.  And I know this is sort of like this is a thing   you have to think about for all big tech  companies and if we don't do it we can't   attract the right talents and so on and so forth. (47:28) It seems to be the name of the game. But   you are seeing a delusion of 3 to 4% over the  past few years. And then they have started to   ramp up share buybacks to offset that. And  that drives me a little nuts because the way   that the talk about it is that oh we issue  these shares but because we buy them back   it's not really a concern for shareholders. (47:50) And you're like they just authorized   the $20 billion package which was on top of  the 3 billion that was already authorized.   But those 23 billion doesn't come out of thin air.  Those are real dollars. And you also talk about   how many growth opportunities that you have and  those $23 billion are not invested into growth.  (48:07) So like you're still diluting  shareholders, whatever you you like.   So that drives me a little bit crazy. I'm also  not a big fan of the adjusted IBIDA number. No,   every time a company is talking to you about  adjusted IBIDA, you have to go on a treasure hunt   to figure out how they came up with that number. (48:25) during their investor day that talked   about how the next three years it would be  just David that would 90% of that would be   free cash flows. I'm really curious to see  if that is actually going to materialize. If   that is going to be the case, it's a little  bit easier to look at some of those numbers.   But not saying the share based compensation is  not an expense just drives me a little nuts.  (48:46) Anyways, I'm really happy that a few  years ago they changed the incentive structure for   management. So now it's not just restricted stock  units which is basically slang for saying as long   as you have a pulse you just get free shi now they  actually need to perform but what really upsets   me about that is so you can go in in the proxy and  you can be like oh for the 20 for example what I'm   looking at here is the bonus structure here for  2024 and they they talk about adjusted aid at 20%   and then they have another 20% of which is adjust (49:16) less stock based compensation and then   20% on gross bookings and and have some  other things that are non-financial.   But then they don't define for you how to  reach those targets. They're just saying,   "Oh, it's about the growth." Yes, but how  much growth is it 1%? Is it 20? Anyways,   I like transparency whenever it comes  to sector compensation, especially also   because you have what I would call a weak board. (49:41) Whenever I I look, and that is the case   with a lot of nonfuned companies. If they're in  the S&P 500, major company, they hire an outsider   to be the CEO. I'm not saying that he's not a  competent CEO. Like he typically doesn't have a   large ownership stake perhaps per his net worth. (49:58) It's a lot of money to him, but you have   the usual suspects on the board, your Black Rocks,  Vanguard, Stage Street, so on and so forth. And   you get this vanilla type compensation package,  which is just a bit annoying. Like you don't have   that wonderful alignment you want to see as an  investor. And you generally don't want to be like   for a company that's probably going to grow like  15 20% over the next few years every single year   you do start 3 or 4% in the whole every year  and yes again that has been offset by share   buybacks but that money could also be used to (50:30) grow the company and I would argue   that with a company as mature as Uber you wouldn't  need to structure that way. I can see why it makes   sense for a VC backed whatever, but like they  already the IPO is a long time ago and they're   already at a stage where you can probably turn  some of that down, but then you look at all the   big tech companies and it's like even worse and  then you're like what is a child monger? Um, if   you mix raisins and turrets, they're still turds. (51:04) So I I don't know if it's useful for me   that other companies are doing it even worse.  But anyways, if you put me on the spot,   I'm looking at something like a 15% return here  over the next 5 years. That's what I thought out.   All right, Jens, any concluding remarks?  Sorry that I went so long here on Uber.  (51:22) Any concluding remarks before you  throw it to either Hari or you Toby? No,   I think this is a great big stick because this is  the sign of time. It's a poster child for lot of   tech businesses who are navigating disruption.  So there are some disruptors but many within   the tech industry who are trying to manage  this disruption or trying to take advantage   of this disruption and Uber is one of those. (51:51) So it's a great pick to summarize the   time we are in right now. So interesting and it'll  be great to follow through and see an year or two   where Uber will be. Jim Ran once said that you're  the average of the five people you spend the most   time with. And I really could not agree with him  more. And one of my favorite things about being   a host of this show is having the opportunity  to connect with highquality like-minded people   in the value investing community. (52:19) Each year, we host live   in-person events in Omaha and New York  City for our tip mastermind community,   giving our members that exact opportunity.  Back in May during the Bergkshire weekend,   we gathered for a couple of dinners and  social hours and also hosted a bus tour   to give our members the full Omaha experience. (52:41) And in the second weekend of October 2025,   we'll be getting together in New York City for  two dinners and socials, as well as exploring   the city and gathering at the Vanderbilt 1  Observatory. Our mastermind community has   around 120 members. And we're capping the group at  150. And many of these members are entrepreneurs,   private investors, or investment professionals. (53:03) And like myself, they're eager to   connect with kindered spirits. It's an excellent  opportunity to connect with like-minded people   on a deeper level. So, if you'd like to check  out what the community has to offer and meet   with around 30 or 40 of us in New York City in  October, be sure to head to the investorspodcast.  (53:23) com/mastermind to apply  to join the community. That's the   investorspodcast.com/mastermind or simply  click the link in the description below.   If you enjoy excellent breakdowns on  individual stocks, then you need to   check out the intrinsic value podcast hosted by  Shaun Ali and Daniel Mona. Each week, Shawn and   Daniel do in-depth analysis on a company's  business model and competitive advantages.  (53:49) And in real time, they build out the  intrinsic value portfolio for you to follow along   as they search for value in the market. So far,  they've done analysis on great businesses like   John Deere, Ulta Beauty, AutoZone, and Airbnb. And  I recommend starting with the episode on Nintendo,   the global powerhouse in gaming. (54:09) It's rare to find a show that   consistently publishes highquality, comprehensive  deep dives that cover all the aspects of a   business from an investment perspective. Go  follow the Intrinsic Value podcast on your   favorite podcasting app and discover the next  stock to add to your portfolio or watch list.   Wonderful. Yeah, I agree. Good pick. Good pick. (54:31) It's I've been looking at it for a long   time. I think it's very interesting. It's just  because there's so much going on in that space   with big wellunded competitors but who don't  have the network and we're going to see which   is the more important part. I'm guessing that  Lyft gets taken out. I'm surprised that Lyft   hasn't been taken out yet by somebody else  cuz it's they got part of the problem solved,   but maybe it's cheaper just to build fresh. (54:53) I don't know. It's going to be   interesting. All right. Thank you so much,  Jans, for your feedback. Ari, you're up.   Okay, so my pick today is Merc and there are a  couple of reasons why I picked Merc and that is   because the obviously the tariffs and trade  tension caught my attention because pharma   is also in the crosswinds of that and on top of  that Merc also has some kind of know short-term   headwinds that are coming towards set because  of some patent cliffs on some of its key drugs.  (55:35) So before I get there, that's the reason  I started looking into Merca industry in general   and in that I picked Merc because it's one of the  cheapest now among all the farmers. To give you a   background on Merc, Merc is one of the top five  pharma companies with 60 plus billion dollars   in revenue. They are by far the most dominant  leader in the oncology segment within pharma.  (56:02) In fact, they're one of their top drug.  Katruda is the most dominant platform in oncology   with bringing in around $29.5 billion in revenue  in the latest year. And the oncology in general,   and it's a sad thing to say, but it's  projected to be a TAM of around 500 billion   or more by 2032, which is a kagger of 11.3%. (56:35) This is one growth rate that you don't   want to see, but it's sad, but I think that plays  into this story. And Merc also has a history of   bringing in these kind of really blockbuster  drugs and has that ability to innovate in   internally and then develop. In fact, if you  look at Kituda, it started with zero revenue.  (57:05) Then it accomplished to 1 billion and  then it kept going. And you can see last 10   years and you you can see that from 0 to 1  billion to 29.5 billion how they have grown   this business and without Katruda if you  look at their revenue it will be stagnant   at around 34 $35 billion today without Kruda. (57:29) So Kuda is a very important aspect and   there in lies the current headwind. So why are  they cheap? because Kitura's patent is scheduled   to expire in 2028 and that means other bioimilar  drugs can come in with much cheaper alternatives.   So that's one of the headwinds they are facing.  The other headwind they're facing which is again   recently the current administration made a  executive decision on NMF pricing that is or   MNF pricing most favor MFN sorry most favor  nations pricing what it means is the price   of a drug in a similar developed market (58:21) will be used as a reference for   pricing it in US and that might impact Merc and  other farmers. It's just not for Merc other far   out of their pricing power. For example, Kruda  per dose can cost you anywhere between $10,000   to $12,000. And for a patient undergoing  treatment, it might result in an annual   expense of anywhere between 150 to 180K. (58:55) And that's a big concern for many   of the voters within US obviously and citizens.  So it's a big concern. The push back Merk has   is that out of that 10,000 to 12,000 half of  it goes to middlemen and that's a inherent   inefficiency in our medical system in US.  It's not like Merc is making all the money.  (59:19) 50 cents is going to the middleman. But  however, it does pose a risk for Merc if the   prices are brought down for similar medications.  So these are the two headwinds that are staring   at Merc and that's the reason the stock is  now at a CE of 12 and a forward fee of 11.   I believe compared to all other fears if you  look at Johnson and Johnson or Fiser they're   all trading in the range of 18 and above so  their value is much lower in terms of investors   sentiments however the reason I'm pitching is that  this is a pretty much a feature in pharma industry  (1:00:08) not a bug in the sense All these  pharma companies goes through these cycles   of patent cliffs, revenue decline, then  they develop their new drugs. In fact,   I'll talk soon about the latest stage drugs that  they have in the pipeline and then basically they   again increase their revenue. It's never smooth. (1:00:33) Fizer experienced it with Lipur in   2011. That's when the stock hit. Same with AB.  So many other companies have faced it in the   past. Merc however is already taking steps to  mitigating this. Number one is they're coming   up with their subcutinous version of the kituda.  It today if I'm a cancer patient it takes 60 to   90 minutes or 30 to 90 minutes for me to get the  drug through IV. So it's a very painful process.  (1:01:04) because you have to go to a  clinic, wait in the line, then again   spend another hour for the IV, then come back.  It's a painful process. So, this new version,   new way of delivering the medicine is like a  shot. You don't even have to go to clinic. Can   be delivered anywhere or in your doctor's office. (1:01:24) It takes only few minutes. That extends   the patient life because the delivery mechanism  has changed. It does have some challenges from   some other companies but I think Merc is  already working towards it. The second   thing is they also acquired Verona through that  they got a single PD based medicine. It was a   $10 billion acquisition their wind reve which  is a pulmonary hypertension drug has a huge   potential according to them in the future. (1:01:57) It's few hundred million dollars   now but that's how Kituda started too. So  and then they're curating other drugs that   are in the later stage of the pipeline. So by  2032 they might have compensated for most of   the loss from Kituda. The other thing is unlike  the molecular drugs in case of this bio similar   drugs it's more like a hill not a cliff in the  sense we will not see keta kind of revenue go   down to zero come 2028 it'll be like a 3 to 5%  decline every year in in Kuruda's revenue and   then gradually others are picking it up (1:02:44) but there will definitely be   pockets where the decline rate versus the  revenue growth rate we it's very hard to   predict as Mer says right like business is  never predictable but stock investors always   expect predictability and the key difference  between a risk of the business versus risk   of volatility are two different things so that's  how I see the business revenue might be slightly   volatile but the lead they have the expertise  they have in oncology and the growing tamos   oncology sector positions them really well for the (1:03:27) future and it's a long-term investment   and while we are waiting for all this headwinds to  subside we get a 4 plus% dividend paid to us and   especially in this market which I feel to sing you  might agree market is richly priced today already.   There are very few stocks that we can find where  it's a good business, has a good mode, well-known   company, it's not going to go away tomorrow, but  selling at a reasonable fee and I will I think   you guys are more experts in the valuation,  but that's my at least my analysis and I  (1:04:08) feel like holding the stock for the  next 5 years will help us earn the dividend.   So 4% it's better than what I would get anywhere  else and then there is an upside too with limited   downside. But of course the risk is they're  not able to come up with any drug nothing   pans out their acquisitions don't work out. (1:04:33) Those are some of the tail risks   which I believe are minimal. So that's the reason  I am bringing this up. I open to your feedback.   Um, I think healthcare I've seen a few statistics  that say that healthcare is as cheap as it's been   against the market in 25 years or something  like that. It's a similar scenario to the   late 1990s where healthcare got really cheap  relative to the market for whatever reason.  (1:04:58) And then healthcare is a high  margin, high earning, very consistent   business and they tend to do well over the long  term. And the fact that these guys are buying,   they bought back stock pretty aggressively over  the last few years indicates that they think   that they're cheap as well. So I think it's very  interesting and good dividend yield as you say.  (1:05:18) So you you you're carried for  the period of time that you're waiting and   I think it's a good time. There's a lot  of negativity around healthcare from the   administration and I think people have got some  co hangovers as well. A little bit avoidant of   healthcare. So I think this is one of those good  contrarian good undervalued contrarian pigs that   probably works out over a 3 to 5 year period. (1:05:39) Probably in 3 to 5 years we'll be   talking about how it's alltime highs and looking  expensive. Actually that's a very good point Gobi   you brought up. One is it is selling at 40%  discount to its alltime high. So it's down   40% from its all-time high. That's number one.  Number two, their operating margin today is 31%,   31.5% which is the highest in the pharma industry. (1:06:07) The rest are all in the 17 to 18%   operating margin except AB which is around 30  plus% as well. But AB is selling at a really   premium valuation. So I think that way I think  that's a good point you brought up high margin   business and also the stock is significantly  down from its all time. You know Hari,   if you would allow me to to come out I  would just said oh it's in the too hot pile.  (1:06:34) I'm going probably going to say that  but I'm going to make a lot longer and then say   it's in the too hard pile. Um so pharmaceuticals  are just it's just really challenging. It reminds   me of the time that Toby pitched Gilead here on  the show and I was like, "Oh, the numbers look   great. I just don't know what I'm interesting in. (1:06:54) " But which pick was the stick? I think   it was a Gillian Sciences. It's 5 years ago. Yeah.  Yeah. Gilead. That's a while ago now. Yeah. Yeah.   It's a while. Yeah. And I think it also has a bit  to do with how you invest. Like whenever I for   example would say, "Oh, I invest one 1% in Uber. (1:07:12) " like I don't invest in any stocks   unless I want to take it to a 10% position. That's  typically because I don't understand well enough   or the prices that it's not a full position. But  my intention is always to take a full position.   So whenever I'm looking at a stock like Merc, I'm  like thinking I don't think I would ever get the   conviction to take it to a 10% position. (1:07:31) But then and I know for example   like Toby's strategy is different. he's  a lot more cognitive than than I am and   he holds more like in a basket approach.  I don't think there's anything wrong with   saying let me allocate I don't know 8% of  my portfolio into pharmaceuticals and then   I have 15 companies or whatever like into that. (1:07:52) I can definitely see why it would make   sense. It is incredible difficult for me to look  at a company like Merc and not that it would be   easier for me to do in the 90s for a bunch of  different reasons but there was almost like   an afflection point around where you have your  own R&D there was internal networks you develop   and you can say this is what we do and we have a  certain culture about how we do things here and of   course then you run the risk of some of your best  scientists being posed by other companies but you   have a lot of that insight and now you go out (1:08:21) and you acquire   different R&D and so the you can of course say  isn't that the same you have to have people who   get also get posed and you have to figure it  out if we they have the right culture the right   process to go out and find the right projects  kit just been one of the examples like they   didn't develop that themselves there was something  that they acquired and then it just became a lot   more successful than they originally thought  and so um I I don't know it's super it's very   tricky I don't like the lack of insider owners (1:08:52) partership. I don't like the the big   unknown whenever it comes to regulation and  then the then some listeners are tuning in   are like but stick you just pitched Uber. Talk  about poor inside ownership and regulation going   against you. Yes, you're absolutely right. Let's  just pretend that didn't happen. But there are   some things there about Mer I'm concerned about. (1:09:14) And then you can of course say it's all   priced in. And I think you're absolutely right. It  is all priced in. In terms of Toby's point about   share buybacks, I would look very carefully at the  the proxy. I'm not questioning what Toby is saying   is the right thing. I've seen a lot of management  buyback stock at the wrong time or because it   really very much had an incentive to do that. (1:09:37) So that that's definitely something   I would I would look into. Share buyback really  only works if the company's getting better. At   least that's a framework you can put into  it. Otherwise, you might want to get it   as dividend even if you have to pay taxes of  it. Whether or not Merc is getting better is   is very tricky for me to determine. (1:09:54) Cool. Awesome. Thank you,   ST. I think it's definitely a one that  can fall in a two heart pile, but I just   couldn't resist the PE, so I had to pitch it.  I love it. Um, all right, Hari. Uh, thank you   very much for the Merk pick. Toby, you're in the  hot seat. Thanks, D. I have a pick. It's called   Bath and Body Works. The ticket is BBWI. (1:10:22) It's not Bed Bath and Beyond,   which went bankrupt a few years ago. This is a  spin out from LB Brands. It's a different value   proposition to Bed Bath and Beyond, but it's  the same kind, it might occupy the same kind   of space if you're not familiar particularly  with these things, which I was not. I did do a   channel check at the Delmo Mall over the weekend  with my son and there were people in this store   and the rest of the mall was pretty quiet. (1:10:49) So I was a little bit surprised   by that cuz it's not something that I pay  attention to as I walk around necessarily   or not that I go to malls very much either.  What they sell is fragrance. That's a very   broad kind of idea to be selling but that's  how they sell it. That's how they market it.  (1:11:06) And so what that means is that they have  personal fragrances and house fragrances. And if   you read some of the research on it, the people  who work in the store believe that they sell   candles that burn longer and smell better than  everybody else. They have other stuff in there,   but they're very proud of the candle.  So that's a value proposition they have.  (1:11:28) Customers really like Bath &  Body Works. they're they're quite loyal   to this brand and in it it amazes me but it has  continued to grow through this sort of period of   retail weakness particularly because they're  mostly store-based but until very recently   they're almost exclusively storebased they've had  this digital strategy only more recently the the   company spun out of as I said the company spun  out of L brands and went public in about 20 21   2020 near the end of 2020 out of they listed at  20 bucks out of the gate they were very popular  (1:12:09) and they ran up to $80 in that  sort of meme stock craziness through 21 at   22 and I and they probably over earning when  people were home and spending a lot of money   on stuff for the house and so they've had  to work off that stock price overvaluation   And it looks like they've had the earnings haven't  been great for a period of that time because some   of that over earning has had to come off. (1:12:39) But I think from a valuation   perspective, it's a very sort of compelling  opportunity. So the stock price is   $28ish today. Market capitalization level is  about $5.9 billion. Enterprise value is 10.4,   four, which means that they're carrying about  $5 billion, $4.5 billion of debt, which I don't   usually love, but I think they can carry it. (1:13:07) They've got free cash flow of $750   million this year, which on the market cap is a  10 to 12%, more like a 12% yield, free cash flow   yield, which is gigantic. um they cover their  debt many times over. The PE at this level is   7 and a half. EV EBIT is 7.7. Price to cash flow  6.3. So very very cheap on those kind of metrics.  (1:13:37) They've been buying back stock  pretty consistently since the top. So they   just after they listed they had 200 nearly 280  million shares out. They've currently got 212   million shares out. So, they bought back quite  aggressively over the last few years, which I   like seeing cuz the stock's been been down. I  think the analysts who follow this stock have   got this they like the stock around 41 to $45. (1:14:05) So, at $28, it's a very big discount   to that. It's way off its alltime high. And I  think it looks I think it looks pretty cheap   here. They've continued to beat which I think  is impressive given what the retail backdrop   which has been pretty weak for most of the things  that I follow. They've changed CEOs. I don't know   how much impact these people have and I don't  pretend to know these people particularly well,   but they've got a guy who's a Nike executive. (1:14:36) He's going to help them with their   international expansion and their digital  strategy, which are the two areas where they've   been a little bit weaker, but he comes from a  background where they've done very well. So,   they're very hopeful that he can he can  do well in this position. I think the   riskreward scenario I think is pretty good here. (1:14:55) I think your downside is limited because   it's really trading at cross valuations.  It's as cheap as it's been. It's very cash   flow generative. They're buying back stock  at this level. So it says to me that there's   a four around here somewhere. And then I think  a 12% free cash flow yield is probably silly.  (1:15:15) You could easily see that being  their long run their long run average. It's   it's only 5 years worth. They've been more  like eight times price to cash flow. So it's   6.3 times. They've got a fair just to get  back to average there's 20 or 30% embedded   in the stock. And then I think with the buyback  and a little bit of continued growth, I think   there's quite a lot of upside in this stock. (1:15:40) I think it's like a 50 to 60% upside.   But the risks are that it's a retailer.  It's got a very sort of niche approach   and I I'm not the target demographic and so  I don't fully understand the desire for it.   But in my portfolio, which is this  is my midl large cap value portfolio,   it's one of 30 names has all the things  that I like. Lots of free cash flow,   buying back stock, trough valuation, and I  think it's a reasonable bet if you timeline   is like 2 to 3 to 5 years. That's my pick. (1:16:14) BBWI is the ticker. Great pick, Toby.   The reason it's very interesting to me is I have  had similar observation and I never thought about   it from an investing perspective. So that is the  difference between you and me is like I always saw   this store always had more people than the rest  of the stores in the mall. So that's number one.  (1:16:39) Number two, the staff was always very  friendly, offering samples and inviting people   into the store. It had a different vibe than  the rest of the mall. Especially in the last   few years, I'm seeing the malls are becoming less  and less inviting. It almost feels like a rundown   town because a lot of things have moved online. (1:17:03) This store usually has a different   vibe. They are into candles. are all also into  body spray especially for women and a lot of   them really are loyal to that and in fact when  the one that was closed near our home I know we   had to search for another one somewhere else so  definitely I think they they have some kind of   a customer loyalty that they have figured out  it's not something that you can get somewhere   else they they make their own they sell so  that's their unique mode the other thing   is the stores are all very small so their cap (1:17:38) opex might be much smaller than say big   retailer so that's the other advantage they have  and the other thing I feel is this is one business   where it's kind of AI proof you can say can't  be disrupted by AI but we'll have to see whether   recession impacts them are they cyclical that was  my question to you Toby like because if there is   recession this is one of the thing candles and  other things that people will you know try avoid   or easy to avoid at that point of time it's a  nice to have so I think those are some of the  (1:18:14) risks I see for them but otherwise  as you said like for a 3 to 5 year term it's   probably getting at one of the lowest  price points compared to the past yeah   I think that's I think it's an interesting point  I think that there has been some recession for a   lot of the market since 22 I think that Most  people are feeling a drop off in their wages   and an increase in the amount that they spend. (1:18:44) And I think that's reflected in lots   of different data series. One of them is that  people aren't making payments on their student   loans. People aren't making payments on their  car loans. People aren't making payments on their   credit cards. There's a lot of delinquency out  there. And so I think that is already reflected   in the numbers for many of these businesses. (1:19:05) So I think that they have been suffering   through a little recession and even through that  period they've managed to continue to grow despite   this sort of revenue headwinds. They're exceeding  guidance maintaining profitability. There was   a little revenue decline. They said due to  calendar shift effects too many not enough   Saturdays in the month or something like that. (1:19:28) They're still forecasting growth for   the next year 1 to 3% like that might be under  inflation. And that might be all cost pressure   and not reflected in unit but I still think  that any sort of growth through this period is   a positive. So I think if they're still growing  that indicates that possibly they are going to   struggle through avoid the recession. (1:19:48) And so I think it's I still   think this is a good time to be put in  this position. I'd certainly rather a   position like this at this point in the  cycle than when it was roaring in 2021.   So, um, Toby, it was interesting that you would  mention this is not Beth Bath Beyond. I actually   pitched it once. I don't know if you remember,  and I say proudly since now gone bankrupt.  (1:20:13) Heck, it's it's all screaming back.  Actually, my wife walked by here the other day   whenever you sent the email that you're going  to pitch Bath and Body Works. And she was like,   "What? What? What are you looking at? Why  are you looking at Bath & Body Works?"   was like, "No, Toby sent me an email. (1:20:32) He wants to talk about it and   so I need to figure out what it is." And she  looked at me and she was like, "You don't know   what it is? They're everywhere. We've we've been  to one together. You don't remember?" I have no   recollection at all about going there like you.  I guess I'm just not the target group. But I like   the numbers. I'll be the first to say that. (1:20:52) I tried comparing it to Bet Bath   Beyond because I had this is it like not just  because of the the similarities with the name,   but there were just some of the numbers that  was just like I need to double check. Is this a   value trap in the making? And of course, we don't  know that, but there are a lot of things that are   much much better with Bath and and Body Works. (1:21:12) So, gross margins different certainly   higher level of loyalty. 80% of their sales  are from members. I feel like they're probably   slightly over delivered even though it's  probably manageable whereas for Beth Bath   beyond it was just getting ridiculous at the end  and they were just boring and then buying back   sh and but anyways I was I find the multiples  very compelling. I'll be first to say that.  (1:21:36) And so I was trying to go through  the most recent presentation and I looked at   the debt maturities and the first thing I thought  was, "Oh, it doesn't look too bad." And whenever   it's being refinanced and the interest rate  that they're paying and then I thought to   myself, you're looking at debt majorities. (1:21:52) Isn't that a bad thing in the first   place? And so it depends on what kind of glasses  you that that you have on and also depends on how   big you're going to swing. I agree. Just before we  move on, I agree. I had a look at their debt. $5.5   billion on a 5.5 billion or $4.5 billion on a 5. (1:22:11) I'm at like a $6 billion market cap   always gives me pause too and I don't like seeing  that. And I looked at their debt maturities too   and it looked to me like it was turned out pretty  well. I think they were doing like $500 million   chunks on a yearly basis was my recollection. Is  that right? Yeah, that sounds about right. which   I thought was like that was pretty reasonable. (1:22:34) I think like they're going to be   they're working all the time to do that.  But it's not doing a 5.5. It's not doing   $4.5 billion in one go. It's 500 million  at a time, which I think is achievable,   but they're probably paying higher rates as they  roll. Almost certainly. Yeah. Yeah. And whenever   you think about how much money they return to  the shareholders through buyback and dividends,   it's there's just a part of me who would probably  prefer they just pay out some of that debt.  (1:23:02) Even though they would be the first to  say that I think the first maturity they would   hear is 284 million in 2027, like 6.7% and then  have 444 maturing 2028 5.3%. So it's like you can   probably in Excel sheet say that they shouldn't  work off that debt. It's probably just more from   a principles of being a bit more conservative. (1:23:25) I certainly I like the stuff. I don't   by any means consider myself an expert in what  they do. I do think it was interesting. So,   correct me if I'm wrong. You're being an expert  at fragrances or hopefully more than me. Toby,   what is there a case to be made  where Bath and Body Works dominate,   let's call it more emotional  categories like fragrance,   body care, whereas The Bath Beyond or just more  bit more commoditized your towels and sheets   and I don't know, I might be overthinking this. (1:23:58) Is there something to be said about that   80% coming from members? And I should probably  just do a very quick peer comparison here. So,   you know, Ulta Beauty, which is one of the  picks we talked about before, Toby, again,   speaking right to our core competence. When we  talk about cosmetics, they had 95% from members,   but that's also like top of the class. (1:24:19) You have something like Sephora   in North America also 80%, Starbucks is like 53.  I know that's a very different type of product,   but like how should I look at that 80% loyalty  from members? And yeah, sorry. I think it's a   very very positive thing. And I think when you  look at they ask people to rank the I'm just   struggling to find it at the moment, but they ask  them to rank the brands that they like and it it   ranks there's a handful of brands above it and I  forget what they are, but it's like Starbucks and   very well-known brands. And then Bath & Body (1:24:49) Works is right up there. It's one   of it's higher than Target. It's it's a very  well-known brand in this group. And they have   people seem to be very loyal. they get the good  feelings when they go into the stores. I think   that stuff's a little bit voodoo, that sort of  psychology. I don't know how persistent that is   and I don't know what happens if you lose that. (1:25:13) I don't I'm mistrustful of that stuff.   I tend to be more of a quantitative.  I look at the numbers more and I think   that their performance is borne out in  their numbers and borne out in that 80%   figure that you quote that most of the  sales come from members. People seem   to be very loyal once they go to the store. (1:25:30) They like going back to the store.   They like visiting regular. I was surprised  like I said when I was walking around the   mall was very empty and this store was a little  bit out of the way. And I was walking towards it   following three people and all of them went into  the store. So I was I just stuck my head in at   the entrance and it was like there were a dozen  people in there and not a huge stall whereas   there were a dozen people in the entire mall. (1:25:52) So I thought I was surprised that   they were doing as well as they were. Not that  I would ever I don't you that's not part of my   investment process. I just wanted to see like  why is the stock down so much and it's not lack   of foot traffic. It's not a lack of traffic.  It may just be that they're working off their   2021 hangover and there is a little consumer  recession going on and the debt looks scary   against a market cap of six or billion dollars. (1:26:20) But there's an argument to be made with   $750 million of free cash flow that it's  probably about half price. And so with a   market cap closer to 12 billion that the debt  looks less frightening at that kind of level   of EV of 17 or something like that, you could  probably support this sort of free cash flow.  (1:26:39) Plus with the buybacks and probably the  continued growth, those numbers will be higher and   more impressive next year. I think it's a the  kind of stock that I like. I think it's quite   asymmetric. I think it's got limited downside  and pretty good upside for the risk that you're   taking and it's just a little undiscovered stock. (1:26:58) Not necessarily an undiscovered brand,   just an undiscovered stock. Yeah, certainly  when you look at the numbers and you think   about that it's retail, it looks very good.  80% of products are manufactured in the US.   So you can look at it as they're very dependent  on North America. You can also say that there are   some terrorist and shock minimization there. (1:27:21) Now 57% is off malls and they want   to have 75%. They have this declared  goal. They don't want to be as much in   malls anymore. We all know what's happening  with malls across the country. There's also   an element that is a little bit easier for buy  online, pick up and store which very much speaks   to this experience that they want to create. (1:27:39) So they want to for that reason also   make it a little bit easier to visit the store.  I found it it's always interesting because if I   said oh it's 30% buy online pick up and store is  that high or low you mentioned target before there   are 35 to 40 I also know that depends on how much  like where they're located there it's just not as   simple as that gap old navy for example is like  15 to 20 so it's like interesting to see and again   very very different businesses but it is something  and we also saw that but also beauty the way that   they have more and more data about you the way (1:28:07) they upsell in the app like I is the   company big enough to have that critical mass of  data to hit you with the right advertising. Um,   probably one thing that they do is they have very  short lead times for new products. So in co they   were able to get out a hand sanitizer by March  2020. They have this five or six week turnaround.  (1:28:30) So they if something's working, they  lean into it. If something's not working, they cut   it off really quickly. So that's been they're good  retailers from that perspective. like they're good   datadriven retailers. So, I think that they're  pretty well optimized for what they're seeking to   achieve. I think they're doing a good job there. (1:28:49) All right, that was an absolutely   wonderful pick, Toby. Thank you so much. Where  can the audience learn more about you? I'm on   Twitter at greenbacked greb a c. I have acquirers  multiple.com where I have a whole lot of low value   good value picks and I run two ETFs. Zigg which  is a midcap deep valued domestic US lots of small   companies very similar to Bath and Body Works  where they're generating good cash flow buying   back stock very undervalued and deep which is a  small and micro fund. Deep and Zigg will track  (1:29:30) factors like value, quality,  and small size. And those factors have   been very beaten down for an extended period of  time, really starting since 2011. There was a   little reprieve from 20 21 to 2022, but we're  at the widest valuation discount to the growth   year end of the market going back to 1999. (1:29:54) Last time we saw these sort of   discounts, the following 5 or 10 years were  very good. So I'm very optimistic for small   value right now. Even though the historical  record doesn't look great, this is the kind   of investor that I am, the contrarian that  I am, you want to put these positions on   when you look when it looks ugly like this. (1:30:13) And so I think this is a very good   time to be a small value investor. Thanks for  having me, Ste. It's always good seeing you.   That was absolutely wonderful. Hari, where  can the audience know more about you? Hey,   it's fun as ever talking to you both.  Everyone can find me on Twitter. Our ex now,   Hari Rama is my handle and looking  forward to all the conversations,   feedback about today's pitch as well. (1:30:38) It's always good seeing you   Toby Hari. Thank you as always for your  time and we'll see each other again next   quarter and for the listeners next week. I  missed the boat on so many of the big tech   companies because the multiples just seemed  outrageous and I was always thinking there's   no way they can continue to grow at that pace. (1:31:00) Now whenever I'm looking at the past   decade for Microsoft highest bio cap company  in the world we talked about 16% ker in   operating income it's amazing we're dealing with  a company who want 20% return on capital employed