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4 Hot IPO Stocks To Watch In 2025 (Circle Internet Group, CoreWeave, Chime, And eToro Group)
01:06:29
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- [00:00]
Ryan Henderson
Foreign.
- [00:05]
Brett Shafer
Welcome to Chitchat Stocks. On this show, host Ryan Henderson and Brett Shafer analyze businesses and riff on.
- [00:12]
Tyler
The world of investing.
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Brett Shafer
As a quick reminder, Chitchat Stocks is a CCM Media Group podcast. Anything discussed on Chitchat Stocks by Ryan.
- [00:20]
Tyler
Brett or any other podcast guest is.
- [00:22]
Brett Shafer
Not formal advice or recommendation. Now please enjoy this episode.
- [00:33]
Ryan Henderson
Welcome to Chit Chat Stocks. Today we are joined by first time guest Tyler from Misfit Alpha. It's a fantastic substack that writes about IPOs and all sorts of other stocks, but today we are talking about specifically four IPO stocks to watch in 2025. I guess before we get things started, what's the give a little background, Tyler, for you as well as what's the interest in IPO stocks generally?
- [01:06]
Brett Shafer
Sure. Well, I've been doing this for about 12, 13 years now. Various roles of financial writing, financial editing, a lot of financial media work, and started Misfit Alpha as kind of being my own like organic outlet for all of that. I chose to go into IPOs because part of what I'm doing with Misfit Alpha is basically turning over lots of stones, you know, trying not to go, I don't go deep into a lot of like well known companies. I really want to go off into the obscure parts of the financial world. And coverage of IPOs is pretty small. And so a couple of years ago, you know, relative to a lot of other things, especially 2030, 2023, 2024, when we had a really dead IPO market, nobody was really writing about it, but with the market picking back up with IPOs, pretty substantial IPOs in the past couple of months, it's been an opportunity to write about probably a little bit more prominent and newsworthy companies. And I think that's what we want to hit today because over the past couple of months we've seen some pretty big IPOs and stuff that might be a little exciting to a lot of investors.
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Tyler
Yes, I agree on that one. I'm excited, at least from a podcast perspective, maybe not from an investing perspective per se because these can be highly risk.
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Brett Shafer
It's all about content, boys.
- [02:27]
Tyler
Yes, exactly, exactly. It's fun to talk about. And again, we're going to be talking maybe as a tease, Core Weave, Chime Financial, Etoro Group, Circle Internet Group, we're going to get into Core Weave. Let's talk about them first. For anyone that's never heard of this stock ticker is crwv. You can go look them up on fiscal AI, any platform of your choice. Let's just get right to it. What is CoreWeave's business model? Why have. And let me just look at this market cap first, because I think it's quite high. Why do they have a market cap of $77.6 billion when they were only founded a couple of years ago?
- [03:08]
Brett Shafer
Well, I can never describe exactly why the market wants to value something the way it wants to value it. I mean, we could bang our heads on the table for days trying to figure out some valuations in the market. But for coreweave in particular to say it was founded a couple of years, it's fortuitously founded, I guess, if you will, because this was a business that basically their founders had a bunch of Nvidia GPUs, and they're like, oh, man, what can we do with these? And they were. They were basically bitcoin mining and other cryptocurrency mining for a while, and they're like, well, what if we used all this to do AI processing? And that was kind of how Core Weave, as it's currently constructed is today, was. It's now a infrastructure play on AI. I mean, we. Other people would say it's it. I think, like the more general term would be they're a data center company. To use fancy language that you see in a lot of, you know, press releases and IPO prospectuses. It'll say we're a Internet AI infrastructure firm or something like that, hyperscaler, things like that. But it really isn't a heck of a lot different from a, you know, Microsoft Azure. Azure. Amazon Web Services in the sense of they are. It's a very large infrastructure play on data processing. Kind of more or less specific to AI because of the processing capacity that they have and kind of the relationship that they have with Nvidia to secure more of the chips, the processing capacity that, you know, what we call it, like AI companies crave, I guess, if you will, for the market. And so this is, I think, why people are so excited about it is because, you know, in the terms of the growth of the AI revolution, the compute power that is going to be required for all of this is. Is going through the roof. And, you know, to go to competitors like an Amazon, like a Microsoft Azure or somebody like that who is building their own AI tools, you're like, well, I don't know if really working with these guys, Core Weave kind of gives them a little bit more of an independent player in this space relative to some of the other big ones in the cloud space. Space.
- [05:25]
Tyler
That's interesting. Yeah. I hadn't thought about the fact that they might be the big tech players, might be competing directly with some of these AI startups. One thing I noticed with CoreWeave Group, well, first thing you notice is how fast their revenue is growing. I think it's 400% year over year last quarter. But the second thing you notice, which actually might be more, I don't want to say risky per se, but maybe aggressive in their business plan is their capital expenditures guidance for this fiscal year. I think it's around $20 billion. Even though they've only generated, I think they're about going to be about $5 billion in revenue this year. When you take a look at the S1, the IPO, their investor relations page, what did you think about these capex plans? How does it fit in the business model and just is it going to work? Where are they getting this money and how is this all fitting in?
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Brett Shafer
Well, thinking about core weave and kind of this AI data center sort of space, you can't really think of it like these traditional asset like companies anymore that you know, can develop software and expense it off and basically have you know, $7 of property, plant and equipment on their balance sheet to you know, make their business work. This is an infrastructure, this is hard physical properties that actually have to get built out and they're expensive to build. You have to bring in multiple, you're doing, you know, buying a ton of Nvidia GPUs to actually get these things going. The H Vac systems alone on these things is worth like 60% of the building. So you're, you're, you're, you're building these hyper, you know, vacuum cleaned buildings that are hermetically sealed almost to a point, the cooling systems that you have to put into them are pretty wild. So when you think about these businesses, you kind of almost have to think about them more as like real estate infrastructure, heavy building factories, again in terms of capital expenditures than you would like your typical software company. It's like well we got software and then we can scale it up and all of a sudden economic scale, before you know it, we got 70% margins. It's just not as reasonable you can expect for something that has to put this much physical hardware into the ground or plugged into to the electrical grid to make this happen. And I think that's where we see this spectacularly large capex sort of build. Again if you're trying to rent out to a lot of people, whether it be, you know, two people who don't want to Work with the big hyperscalers already. OpenAI was a big client of, it was a projected big client of theirs. They've been kind of going back and forth for a while, basically renting space for all of its compute and things like that. And so you have to build before you can grow. You know, you can't really sell processing if you don't have the processing yet. And I think that's where the really, really large capex comes into play. Acquiring all the hardware, getting it all built. We could run ourselves in circles whether or not that's appropriate, right? A business this size, but like you said, it's already way, way bigger in terms of market cap than I think a lot of us would have expected. And if that is the case, gives them a lot of cheap currency to actually fund this stuff with secondary follow ons and things like that and the way that the business is structured. And this was actually, when I wrote about the Core Weave ipo, I was actually more furious about its corporate structure than I was anything else. They've built in some like separate share classes, like there's this class C preferred share class that they could issue to, I don't know, a softbank or somebody like that. They want to make $100 billion, you know, investment in Core Weave or in AI in general. And basically it would allow them to court somebody in that industry to, you know, grow and fund a lot of this massive capex that they want to build.
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Ryan Henderson
So maybe I'm thinking about this wrong, but we had a guest on here a while back who described Nvidia's GPUs as the fastest depreciating assets in human history. Which I guess makes sense given the innovation there. Is it not insanely risky to be kind of banking on like, like if there's say like a two year lapse in demand, does that not crush them if they've laid out all these capex plans?
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Brett Shafer
This has actually been a thing in data center writ large for a long time because it's not just with AI, with process income, power, but if you look at the way that data storage, rental rates for like Equinix or a digital realty trust, this has been one of their biggest problems for a long time is because you know, stor goes down, you know, the amount of space that it takes to actually, you know, store stuff goes down over time but this stuff also depreciates. And so the idea being is like yeah, you have to replace all this equipment, but as you replace that equipment it gets more dense I guess. Is the best word to put it is you can basically stuff more storage or more processing power into your building and that allows you to, you know, basically increase the capacity of these buildings over time. Yes. I'm not a semiconductor expert, but what he's saying kind of tracks because semiconductors, disk storage, flash storage, they tend to be faster depreciating assets and even on an accounting basis, they are a faster depreciating asset. But at the same time, you also have to take into account that coreweave is also going to have this other massive infrastructure build out that it'll have available to it in the form of the buildings that are ready to go to handle all this stuff. And over time, yeah, it might have to swap out some GPUs, but that's kind of the business of data centers in general. And so as, as, as troublesome as that sounds on the surface, that's kind of been the nominal operations for this type of business for the past 15, 20 years.
- [11:42]
Ryan Henderson
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- [12:41]
Tyler
And it might not be the best business model compared to a software provider, but that's just the business model they are in. I want to ask again about competing with the big cloud providers. You have the big three, Google Cloud, Amazon, Microsoft Azure and you also have some other ones like Oracle, I think even IBM. The big risk that I thought of immediately when looking at this business is okay, there's so much demand for AI compute today and it's outmatching supply. So any new supply that can come on the market is going to get purchased at a premium price. That being Core Weave being a good example. And throughout the industry we've seen at least if you look at aws, specifically Google Cloud as well operating margins are inflecting much higher just because I think there's pricing power there. What prevents what, what locks in customers with Core Weave in a downturn as opposed to hey, I'm a Netflix as an example, I have AWS as my prime cloud provider. If demands normalized, I can do everything with aws. Why wouldn't I dubbed Core Weave once the supply demand imbalance eventually evens out?
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Brett Shafer
Well my best guess and this, there wasn't a whole lot of details in the prospectus about this specifically but typically if you're, if I'm using some examples from the this type of business is you, what you'll want to do is you, you'll sign up customers for multiple year contracts. And so it's basically like leasing space in a building but in this case you're leasing processing power. Typically least if we're talking about in data centers, it's based on a gigawatt like how much power are you actually using in the building. And so you do this, you do it on long term leases and yeah it turning it over. If there were a downturn you could see vacancies not too different from like thinking about real estate. I think when it comes to what makes them competitive, what would make the downturn. I think this is really a Rorschach test for how much of a believer in AI everybody is. And I think that's a big thing on the bet of Core Weave is if you are really, really bullish on coreweave. It's kind of this idea that AI compute power is going to be in perpetual demand or at least we're always going to be somewhat undersupplied in the market to actually meet all of our demands. And if, if you are a true believer in that, then the problem of a downturn, the problem of pricing kind of washes away with the demand. If you are someone who thinks like maybe this is a little fast, a little running a little hot, then obviously Core Weave is going to, is going to look less attractive. Because when we start to get to a point where we have a deceleration in demand for compute power or we start to see a flatlining because we do see an overbuilding, then yeah, everyone's going to have to fight for margin, everyone's going to have to fight for pricing and Core Weave without the associated businesses that the other companies have, you know, Amazon with its E Commerce, Microsoft with whatever you want to. We could go in 15 different directions with what these other hyperscalers have in addition to their cloud storage AI Compute power sort of businesses to it. Whereas Core Weave is kind of that pure play example of it. So you could call that the most weakest point of its competitive position is like in a downturn, it doesn't have any as much to, to lean on. But again, if you are, you know, a whole cloth believer in the AI boom, then you know, I don't think that's going to be as much of an issue.
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Ryan Henderson
Okay, I think last question on Core Reeve, before we jump to our second company. You mentioned some of the, I guess, flaws or red flags in the corporate structure. You mentioned the preferred Class C shares. Was there anything else that really stood out to you, red flags wise?
- [16:59]
Brett Shafer
Well, actually this could be a recurring theme for all four of the companies we're going to mention right now. But I, I do have a tendency to stand on my soapbox in my writing about basically the advocacy of minority shareholders because we as investors, we are minority shareholders. We don't have the same say as you know, a CEO when they have dual class shares and they've get this special class B vote that gets 20 shares per or 20 votes per share. And Core Weave is actually one of those businesses, if you look at it, it has a dual class share already and it's, I believe that its founders have like 80, some 80% plus of the voting power even though they have less than 25% economic interest. So we're kind of, you're kind of betting on whatever they say and go. And they're also co founders. Who knows, maybe they fight one day and things get ugly and things get worse. One of my findings in my writing over time is that corporate governance matters a lot for the really, really long term investment. Like we can talk about valuation, we can talk about business strategy and those are I would say short, shorter term catalysts for a business. But if you're looking for that 15, 20, 30 year business, you can sit on your butt and not have to worry about it. That's when corporate governance really comes into play. And you know, from everything that I read in the corporate governance of Core, we've, it kind of left me feeling wanting and I don't know if I would 100% trust management with my money despite the wonderful business opportunity or the strategy that they might have available in front of them.
- [18:36]
Ryan Henderson
All right, let's shift gears to the second company for today, Chime Financial. This is more. Well, I say this is probably one of the more known consumer facing companies that we're going to discuss today. So people might have heard of this. Can you dive into chime's business model? I will say when I was looking at Chime, I was kind of expecting some complicated banking model. It was a little bit simpler to understand than just that. So, yeah. Any context on the business model be helpful?
- [19:06]
Brett Shafer
Sure. It's almost. You can almost think of him as like a general contractor for a bank without actually being a bank itself. So Chime is. Is basically a credit and debit card issuer. It with the ability for people who sign up through Chime's platform or basically, you know, through their system, can get a savings account, can get a deposit account and all those things through its partner banks. And the reason that Chime doesn't do it themselves, because they don't have an FDIC charter. And like, sure, they could take deposits from people, but if they don't have an fdic, if they don't have a banking charter and you can't get FDIC insurance on your deposit, why would you want to do it? Right. If they go belly up, your money's flying in the wind somewhere. And so they've brought in a couple of partner banks. One of them is the Bangkok. What is it? Yeah, the Bancorp or something. The Bank Bancorp. It's a really, really weird name. It's publicly traded too, though. But this is kind of one of those banks behind a lot of these Fintech platforms like PayPal's deposit accounts are run through them. Chimes are as well. It's kind of this business model where companies that don't have their banking charter can work with the Bancorp to actually do these sort of things. And the benefit for Chime is they don't have to do all of the depository regulatory stuff for the bank itself. They don't have to do any of the marketing. They don't have to do any of the expensive things like getting customers to sign up, doing all of the screening for credit worthiness and things like that. And so it makes it a little bit of a symbiotic relationship certainly early on, as you're trying to get your start in this industry. And so with Chime, we can. Their target is for people who are more or less unbanked or underbanked, people who are, you know, maybe having trouble with things like draft overdraft fees and, you know, living paycheck to paycheck, where banks themselves aren't the best option for them. You know, they'll say like, oh, banks can't handle them. It's like, no, they just don't want to. They're more interested in dealing with businesses and rich people who can pay for wealth management and want to buy fancy derivative trades at a bank instead of somebody who's, you know, collecting overdraft fees and things like that. It's, it's, it's, it's kind of interesting. A lot of this fintech stuff is basically taking a lot of the customers that banks really aren't that interested in. I know we say like, oh, they're better at it. It's like, well, banks just, they don't really want to deal with that sort of stuff when they can go after big fish. And Chime is certainly one of the ones that does that. So the way that Chime makes its money though is because since it doesn't get interest on deposit accounts or anything like that, as the issuer of credit cards and debit cards, it gets all the interchange fees. So part of the transaction that you get with like a Visa back card or something like that, not only does Visa get it swiped, but there's also an interchange fee that typically a bank or somebody like that would do it. But because of the way that Chime is set up, they get all the interchange swipe fees from anybody that uses it. And their goal is to basically, basically be like, we want to be the card that people swipe or tap the first thing that comes out of their wallet before cash, before a check, before anything else. Focusing on, you know, everyday expenditures, non discretionary expenditures to make it worthwhile for people to do that. You know, cash back, things like that. Also for people in this particular demographic maybe have lower credit scores, they've got their debit and credit cards set up in a specific way where you can improve your credit score through using a debit card, which is pretty unheard of. It's a, it's a technical way they do it where it's like instead of it depositing or debiting directly from your account, they put it in a revolving credit facility. So technically you have a credit line versus that is only limited to your deposit account. So kind of some fancy ways of doing things and it works and it has a nice symbiotic relationship for an early bank. That said, there's obviously some things that will make this challenging is because, you know, it also offers some loan products. Some of the things that they do is like they'll front somebody a couple of days before their paycheck comes in because if you sign up with Chime, you do a direct deposit. That's part of the reason why they think they can pull this off. And so they do fronts on paychecks, they do fronts on taxes, they give some nice fancy branded names for them. But, but they're kind of payday loans. And so like yes, we can put, we can put a nice word on it, but it's basically a paid interest free payday loan and it's, it's a, a good way to earn fees and things like that. But it, it also is where like the bank relationship gets a little bit strained because you know, the banks are the ones that are actually, it's partner banks are the ones who are actually like fronting this money to them in forms of, of, in form of collateral and Chime has to post collateral for these. And if any of these particular like loans go bad, Chime is on the hook. And so it's right now it works. It's one of those things where if things go sideways, that's where those, in my opinion, those are the things where it could go sideways is basically offering like interest free loans, taking on you know, all this credit risk without any of the benefits of interest rates or anything like that. And I, I think that's like for me one of the biggest weaknesses for it is it, it wants to be a bank and it does some of the risky things that banks does, but doesn't really get the benefits that banks would with interest rates and things like that or fees that would typically come with these sort of products.
- [25:01]
Ryan Henderson
Interesting. Yeah. In reading through the S1 you kind of get the sense that there's very little credit risk. They're kind of deferring that to the bank. But it sounds like maybe there's a little embedded or hidden credit risk there as well. Who. Yeah, go ahead.
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Brett Shafer
There's always credit risk and I think that's one of the things that we've seen with a lot of these new fintech platforms is you know, going after part of the reason that they've been able to thrive so much is because there is a decent amount of unbanked people and unbanked people either have subprime or non prime, we'll call them like thin credit people, really short credit histories or anything like that, which banks have been a little averse to handle. And you know, fintech platforms think they can come in and figure it out and which is great. And we've had a really good credit cycle for a long time where credit default rates have been low, delinquency rates have been incredibly low, while underwriting standards at the banks have been super high. And it's left this pretty large gap. And this is where the fintech startups have really been attacking this market and it's worked for a long time. And you know, I'm the crank who may be like just kind of shouting at the clouds, but there's always been like, well if we hit a credit event, you know, are these businesses going to be able to, to hand, you know, hold up over time? And so that's, that's kind of been my big like big question for Chimes and the upstarts in the world and stuff like that is when, when the credit market goes sideways, are these big companies going to be able to hold up?
- [26:40]
Tyler
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Brett Shafer
Well, marketing, I mean you can look at Sofi and Chimes Financials and their customer acquisition costs are really high. So I think the answer might be because we're outspending on customer acquisition costs for some of these. But I think the theoretical like demographic thing for them is look, we are going to go for a slightly less credit worthy person. We're going to, and we're going to mitigate those risks by one, we're going to tie their paycheck to a direct deposit so that we know that there's money coming in the door. We're going to try to facilitate and make things that they want, trying to, you know, improve credit scores so maybe they can go get the car that they need or you know, get, make that first down payment on a house and get a mortgage or something like that. It's, it's a, it's a very young demographic, very thin credit scores or very thin credit history, I guess, if you will, that'll be a lot of its market. And they really want to go towards discretionary spending because chime, their whole thing as we said, is interchange fees. They want their, their incentive to basically find people that are going to swipe that card as much as possible. You know, sofi is looking for a little bit different. They're, they're starting to get into things like we're going to give people brokerages, we're going to give people loans. They're a little bit more of a traditional bank. Whereas chime, they basically want people to swipe a card as much as possible. And that's going to be. So they're going to cater to people who are very frequent users of credit cards that may or may not have done it previously because they've been using cash or checks or something like that or you know, really tapping into that. The banks are out to get you, but we're here to help, which is a pretty common message I think through a lot of, a lot of fintech platforms.
- [30:13]
Ryan Henderson
As far as valuing chime, you can look at this a little more, less like a bank, right. So you can kind of look at it on. You can actually use the net or the income statement and look at it as like revenue through operating income and compare that to the looks like market cap of basically $11 billion today. You don't have to look at it on any sort of, or there wouldn't be any benefit, I guess to looking at it on a book value basis.
- [30:42]
Brett Shafer
Probably not because like you said, and part of their pitch, at least early on, is that we're asset light. Right. And that makes sense to a certain degree and certainly from an earnings perspective today, I think the business doesn't necessarily look on a book value basis is as applicable as a bank. But if we're going to be frank, I actually think they're going to buy a bank eventually basically similar to what sofi did a couple of years ago where I think it was Pacific Bancorp or something, they bought a really, really small bank and the whole idea was to get the banking charter and I think will will eventually do the same thing. And the reason I believe that is because a lot of its banking partnerships they're limited by. With a lot of those lending products I was talking about, those banking partners are limited by how much tier one capital they can commit to these sort of lending products. And if Chime grows as fast as they say they're going to, you know, a lot of its partner banks are going to run up on restrictions on tier 1 capital and things like that. And so that leaves time Chime two options. They can run around and try to find partner bank after partner bank after partner bank to make this happen or they go buy a banking charter and just become like a full blown competitor to a SoFi. I think in the long run that seems to make more sense to me. They control their own destiny a little bit more. They don't have to pay out collateral for these loan products that they're getting to their, to their other banking partners. They get to benefit from interest rate spreads and all the other ways that banks can benefit. And to be honest, it, I'm probably, I will be much more interested in Chime the business when they do get that banking charter versus what it is today, at least from an analysis perspective and as an investor perspective.
- [32:40]
Tyler
All right, let's talk about our third one, eToro Group Co. Investors may have heard of before, but it's been thrown around because you could use it in the financial services realm. Brokerage stuff like that really is a comprehensive financial services product. But for anyone that doesn't know and for anyone interested, the ticker is E T O R. What is Etoro's business model? What do they even do?
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Brett Shafer
Well, they're, I mean I don't want to say they're 100% like Robinhood, but they're not too different. They're a discount brokerage firm. And I think a lot of the reasons why people haven't may have not heard it, at least in the US is because its primary customer base is in Europe, Asia Pacific and outside the United states. I think 87% of their entire client base is based in Europe and places outside the United States. It's an Israeli based company started in 2007, actually started before Robinhood and, and kind of on principle does a lot of the similar things. Zero commissions for stock trades. Trying to facilitate a lot of this stuff. Maybe A little gamification of investing that we'll see today, you know, versus stodgy people like me who have fidelities and Charles Schwab's and I don't know, want to stuff money under a mattress kind of people. But it is something that has worked. Obviously the, the base of people that are going to in Europe and Asia Pacific aren't quite as prolific in terms of going into the markets as, as American consumers are, but it's enough to be relatively profitable. And if you look at, you know, where they make their money, it's very, very similar to what you see with Robinhood. Maybe not as much on the order flow business, but even though you get free stock trading, they make all their money on fees, on things like futures contracts, commodities currencies, crypto, we'll call them the big Cs of brokerage, the three Cs of brokerages these days because those are the real money makers. And any sort of. They also make margin loans. And a lot of money for these companies is making the interest on the margin loans for trading in these products. And if you look at Etoro's business and their financials, it pretty much a very large portion of what they do is either in surprisingly high in commodities, which as me, somebody who has lived outside the United States for a long time has and you know, lived in Europe, lived in Africa and other places around the world. We as Americans don't think about investing in commodities and currencies nearly as much as other countries do. And so it's a little surprising to see like, like you know, in the Etoro as the, like kind of their fee structure or like the revenue sources, they get quite a bit more from commodities currencies than we would see at a Robinhood. And you know, obviously their, their, their fees that they get for crypto are pretty high too and at which allows them to basically be profitable. If you look at their. They tried to go public I think in like 2021, which were, you know, was real booming time for crypto assets and things like that. And so their financials looked great. Then we went through, I guess you could call it the crypto winter 2022, 2023, when there wasn't a lot of crypto trading and the revenue kind of stunk. But hey, 2024 was up again in terms of crypto trading. So what a better time to go public?
- [36:17]
Tyler
Exactly. Yeah. It can make you, it can make, hey, you know, I don't fault them. They want to get the best deal they can possibly get. From the public markets.
- [36:25]
Brett Shafer
And that's the thing with IPOs. There's always a little bit of glow up that happens before a company goes public. Whether it's like the quarter before. Let's, you know, maybe we skimp on our R and D costs a little bit or we pull back a little bit of cost here so we can show improving margins, profitability. Like as we go public and people get excited and then it's like, well then we go right back to going to spending. So every, every company gets glow up in some way before it goes public.
- [36:52]
Tyler
Before we move on, I want to talk about Blue Chippers Club. Blue Chippers Club is a tight knit community of stock focused investors. Inside this community, everyone gets to share and break down their portfolios, pitch stocks, receive feedback and participate in weekly calls. I recently shared my reports on the real brokerage, Mexican airports and Airbnb on the forum this year. Tired of the spam and chaos on Twitter? Then you'll love the like minded stock focused community on Blue Chippers. When I first got into investing, a role model of mine recommended that I build a network or community of friends to bounce ideas off of. And Blue Chippers Club does just that. If you're interested in joining, head on over tobluechippers club.com and hit apply. The link is in the description cryptocurrency. I can see that as being sort of a risk here. Right. It's, you know, if trading dries up, okay, the revenue is going to go down. One thing that I thought was promising looking at them at least compared to the United States, is the fact that they're so centered on Europe and that market's been kind of depressed. But we've seen a lot of in at least 20, 25 prices picking up. Returns are outmatching the United States. They're catching up from the big trailing they've had versus the S&P 500 and the NASDAQ 150, basically the entire US market over the last 15 to 20 years. And as we know, all three of us, when prices go up, people want to buy more, even though they should have been wanting to invest before that. That's just how the market works. So it seems like there's an opportunity there to acquire a lot more European customers. And I think there's maybe 750 million people in Europe. Maybe a billion, something like that. I don't know the exact figure.
- [38:40]
Brett Shafer
And they have closer to 400 million.
- [38:42]
Tyler
Okay, all right. That's a little lower than, it's bit.
- [38:44]
Brett Shafer
Larger than the United States, but not a whole lot.
- [38:47]
Tyler
Okay. All right. Either way, hundreds of millions, a little lower than I thought, but they have. And correct me if I'm wrong, I think 3 to 4 million active customers, something like that seems to me like there's a huge Runway to grow in Europe. And who would take that share instead?
- [39:07]
Brett Shafer
Well, Robinhood just announced that they're going to go into the UK market. And in terms of active investing, the UK market is one of the more active relative to the rest of Europe. Clientele just in general are not as much active trading, active investing that we would see relative to what you would see in the United States. So not saying that it doesn't exist, it's just a little bit smaller. And yeah, they have about 3.2 million funding accounts as of right now. I, I think there's a lot of opportunities. It's it in addition to like the way that a lot of these companies to attract people into their universe. It's not just crypto trading. It's not just brokerage and stuff like that. They start doing E Money accounts for transfers. Not too similar to dissimilar from like a Cash App or something like that, which actually for like, for example, I can't really use Cash App. I live overseas and Cash app is a little bit hard to use. So somebody like an Etoro would make something like that available. Just more products, services that are going to bring people into the fold that may not have been traditional investors or people who would want to have brokerage accounts. And let's be honest, the crypto trading aspect of this business has brought a lot of people who haven't been traditional investors, stock traders and something into the, for into the fray. And if we were going to see a significant surge in customer accounts, I think it's probably going to come from more, more people getting into cryptocurrencies. And I think that's where it works here. It's obviously going to compete with a Robinhood on the low end of, you know, smaller account numbers, things like that. Some, some of the bigger fish that it's competing against in this market is actually going to be like Interactive Brokers. Interactive Brokers is one of the larger brokerage firms for large money accounts, institutional investors in Europe and Asia and things like that. So those are what I would say are its two primary. And I'm sure there are others. I can't think of them right now, but that's where it's going. But in terms of like threats, one of the wonderful parts of these businesses is they're pretty resilient, right? Like if you think of brokerage firms, commodity trading, things like that, they're all about volume, not just in terms of like total customers and, and, but aum, total transaction volume, things like that. It can wax and wane with time but it tends to be pretty high margin business that, you know, can be pretty resilient through the cycle. One thing that is surprising is this doesn't necessarily mean that it's up or down. It's just how much people are trading. And trading volume is going to be a huge thing. You look at a company like, for example CME group, they don't really care if the prices of their commodities go up or down that much as long as people are trading them in high volumes. And I think for companies like Etoro, that's really what's going to matter.
- [42:12]
Tyler
What do you think of the valuation here?
- [42:16]
Brett Shafer
That one's where it gets really challenging because I think the valuation at least, least is predicated on pretty significant growth not only from total customer base, total aum, but also a significant jump up in crypto trading especially which look, let's be real, I think a lot of people who are investing in a lot of the companies that we're mentioning today and we're going to get into Circle in a minute here, Crypto is going to be a big component of why some of these things are successful and tends to have some pretty exorbitant expectations built into that.
- [42:53]
Ryan Henderson
Okay, you mentioned Circle. Circle Internet Group I believe is the full name that is probably the best performing stock since IPO of the batch we're talking about today. I could be wrong. Maybe Core Weave is up there as well. And of this list, I will admit this is probably the one I knew the least about going into it business model wise. So. So can you take us through Circle's business model overall? This is, I'm guessing listeners aren't too familiar with this one. So what are the sort of the basics of the business model?
- [43:28]
Brett Shafer
So I mean calling it crypto is a little disingenuous. Circle Internet Group is basically or Circle Internet, one of those weird names. It's not necessarily reflective of what they do. But Circle is a issuer and minter of stablecoins. So they are the one that mint the USD coin as well as a Euro coin. And the whole market for this is they want to be a payments coin which kind of replaces a lot of transactions and things like that that we do either from interbanks or from credit cards and things like that. And Just doing wallet to wallet payments, using stablecoins, looking to be faster, more efficient, lower cost. To be honest, I have been a little bit, I'm one of the more. Crypto skeptic is probably the right term, but also just unknowledgeable about crypto. Like if you've ever seen those as seen on TV commercials of that guy at the beginning who's stumbling around, that's always me when it comes to crypto. But when I started looking into stable coins and Circle specifically, one of the things that really reverberated with me was things like remittances. We were talking about the show, kind of a little bit of a nomadic traveler in life and spent parts living in parts of the world where remittances and people, you know, who live in Europe or the United States are sending money home via like Western Union or something like that and getting their eyes gouged out with prices. Something like a stablecoin wallet to wallet transfer could be monumental for a lot of these people in terms of, you know, bringing more of their money back in a quicker, safer, more efficient way. And you know, I know that's probably for them a more limited use, but at least for me that was something that really brought me into the fray. I was like, okay, this, this is how crypto, this is how stable coins can really play a prominent role in moving money globally. And so that's to me what made this, I wanted to actually get into this versus my normal thing where it's like oh, crypto, I'm going to go, you know, go look at waste companies or industrial manufacturers which is normally my, my, my, my treading grounds. The business itself, like I said, issues stablecoins and issuing stablecoins, you know, they compete with tether and a couple other ones as well. I think they're about 23% of the stablecoin market. And the whole, basically the whole business model is people want to trust you with their money money. They want to trust that when they give you one dollar of fiat currency you get one stable coin. And when you go to redeem that stable coin you're precisely going to get $1 back. And so their whole business is tied around the idea of having, maintaining that peg, I guess, if you will, one to one for the dollar. And to do that basically they have to hold mountains upon mountains of cash on their balance sheet to do this because they can't really spend that cash in any particular way. It has to be redeemable at any given moment. They had one like we'll call it like a technical glitch. Back in like 2020, I think it was 2023 where they're, that they, they lost their, their peg to the dollar because they, they couldn't pay out. And when this stuff happens the, the value of these things can drop precipitously very fast because it's, it's all about trust in this business. And so for them, basically what they're going to have to do is sit on this just mountainous hordes of cash and short term investments to make sure that when, I don't know, the equivalent of a bank run happens, they have all the money possible to pay it out at a given moment on a one to one basis. And I think that's its strength and part of its calling card. Like we hold a ton of cash, we're very regulated, we're very open, transparent with like our financials. So everyone can see that we've got the cash to do it. But I think in some ways that kind of restrains their profitability over the long term because their revenue model is we're going to take all that cash, we're going to park it in a money in market account and right now we get about 4.5% and 4.5% on $60 billion is a lot of money. But it also makes you a little sensitive to interest rates.
- [48:02]
Ryan Henderson
Okay, so the primary business there is just interest income on the cash they hold. I guess I was going to say I'm looking at the valuation today and maybe I'm misunderstanding this but the Circle has a market cap of roughly $50 billion. USDC, which is the coin they mint, has a market cap of $60 billion. Am I thinking about this wrong or does that like is that way, shouldn't that be a much bigger delta in.
- [48:37]
Brett Shafer
Terms of like the difference between the market cap and how much they have in issued coin? Yeah, in my opinion, yes. And again we're getting talk talking about valuation and what the market values can, can always be a mystery, especially in if I were to try to explain the very, very ambitious market cap for Circle. It's basically that stablecoins are going to eat the world and people want to get in early and the total amount of stable coins in circulation is going to be much, much higher than $60 billion or sorry, USDC coin specifically versus competitor like tether or something like that is going to be monumental and so that they can have higher interest income. I don't, to be honest, people who are very crypto enthusiasts who are looking at Circle may Not necessarily be looking at the revenue model for Circle and perhaps that's why. But if I were to look at this, yeah, the, you know, right now they get about 4, 4.5% interest on their, on that $60 billion that they sit on, which you know, for $60 billion is not a huge return on investment. 4%. Most banks can get that. And again, it also makes it sensitive to interest rates because one of the things that, like I was saying, that trust that has to be available at any given moment, they can't really take like risk with that amount of money, right? They can't have duration risk where they buy long term Treasuries or they can't have credit risk where they're buying maybe higher yielding bonds that are municipals or personal loans or things like that. I wouldn't say it's mandated, but for right now it's like we have to hold this stuff in all short term Treasuries. And so if we were to see interest rate cuts, it would definitely bring down its profitability. We actually even saw that in the most recent quarter where in the prior, the one prior they had about 15% EBITDA margins based on know how everything kind of shook out. But in the most recent quarter it was down to 11% because we did see a little bit of a decline in that money market account rate that they were getting. And so there are ways for them to make money elsewhere. They have some fees on very, very large mints and very, very large redemptions. They've also got some developer services fees. They're you know, on the, on the margins. There's some other places where they can make money money. And I think in theory if USD coin were to, you know, become a, you know, Instead of an 8 figure in circulation it becomes 9 or something like that, all of a sudden maybe you can start to take a little bit of duration and credit risk with that pile of cash that you're sitting on because you know, a 90% drawdown, all of a sudden you still have 10, $15 billion left over and allows you to take a little bit more risk with that. But I think we're getting a little ahead of ourselves here. I think that's to me why that delta, like you were saying, doesn't make a lot of sense based on the current business model. Again, if stable coins all of a sudden eat the world, then yeah, it makes sense. But it also is predicated on interest rates staying up, up. And I don't necessarily know if that's the case either because Even if say, let's just use a theoretical example here we go from interest rates or they get basically like a money market rate of about 4.2%. If that goes down to like let's say 2.1%, that means that their total amount of stablecoin or in circulation has to double for them to earn the same amount of in net income today. Today.
- [52:30]
Ryan Henderson
All right folks, if you are a regular listener to chitchat stocks then you know that we use Fiscal AI formerly known as Fin Chat daily. Fiscal AI is our complete stock research terminal. It's where we have our investment dashboards, it's where we create financial charts. It's where I read all the transcripts for conference calls, sell side events, shareholder meetings and it has morning stars high quality reports on more than 1700 companies. It really is the complete research platform for stock focused investors. If you use our link Fiscal AI Chit chat you will automatically get two weeks of Fiscal Pro for free. And if you find that it's worth upgrading, which I think you will, you'll get 15 off any paid plans with our link. Again, that is Fiscal AI chitchat. The link will be in the show notes.
- [53:19]
Tyler
Yeah, seems like a large risk to the business. One question I have and you know I understand their goal. They want to improve on the banking system, they want to improve on the money transfer business, the US dollar, all that stuff. My big question is what are the improvements? Why is this model and maybe what they're arguing versus what you understand, you know, as a financials analyst, why is it better than the banking system and why is it better than the US dollar and the existing money transfer business?
- [53:55]
Brett Shafer
Okay, well I'll just use some examples from my, my life as somebody who lives overseas with banking assets in the United States, backing banking overseas. If I want to do a wire transfer from my American bank account to my bank account overseas, I'm going to chart, I'm going to get paid, I have to pay a fee commission which I think is, is, you know, 50 or $100 depending on how much I move and it takes four to five days because of the intermediary of your banks that we have to do it. Stablecoin issuance. I put this into a digital wallet. I deposit it in my digital wallet in the United States. I can pretty much almost instantaneously pull it out of my digital wallet overseas. So things can move a lot faster. They can typically move a little bit more efficiently as we said, you know, things, think examples of remittances and things like that. Where you know, somebody like a Western Union is taking a gigantic cut, it makes it much more efficient. And so there, there are ways, especially in cross border payments, international payments, where something like stablecoins makes a lot of sense and is more efficient than the current banking system. I think, you know, the, the skeptic sort of view would be like, yeah, it's a great way to facilitate crime too, right? Like interstate transmissions that you barely know what's happening. But I think that's part of what Circle has been very adamant about in the way that they've built their business is like, you know, you're trying to follow like know your customer laws with banking and things like that to tamp down on that. Because there's nothing that is going to, you know, bring something like stable coins to a screeching halt until they find out that it's like a $20 billion money laundering operation.
- [55:41]
Ryan Henderson
Right. Is there any cost involved for that transaction? You just explained where you buy or mint USDC and then in one wallet, pull it out in the other. Is there any cost involved there?
- [55:56]
Brett Shafer
There are some, I mean it's, it's lower cost than the current banking, but there are costs associated. And that's kind of going back to its revenue model. It does need like, like in my opinion it needs like a certain interest rate above, above a certain threshold for them to make money. So if we go back to I think it was like 2021, 2022, they tried to go public I think like during the SPAC boom. And if you looked at, at it then it was losing money and mostly in large part because the, the amount of money that it was making on its deposit base was, was minuscule because we had really, really low interest rates. I haven't quite pinned down like precisely like the level of interest rate that it needs to be profitable. I think it's probably a little bit higher than 2% based on just kind of reading the tea leaves of its financials and some of the prospectuses that it's put out over the past couple of years trying to go public. So yeah, there's some fees involved, there's some costs involved, whether it be paying your staff, whether it be processing fees not too dissimilar from any other processing fee that's going to have. It takes up electricity, it takes up compute power, all those things. So there are some costs. It's not huge, but it's enough. Especially when we're talking about very, very large billions upon billions of dollars being transferred on any given given day. Those costs are going to pile up. And that's why, like I was saying, that interest rate amount or that spread that they get has to be at a certain threshold or they're kind of an unprofitable company.
- [57:39]
Ryan Henderson
Okay, we've now covered Core Weave, Chime, Etoro Group and Circle. I want you, and we can all do this exercise here, but I want you to rank your interest in these businesses, exclude the valuation, just the businesses purely. Which ones would you be most interested in potentially becoming a shareholder one day?
- [58:02]
Brett Shafer
Well, going back to the corporate governance thing, I think actually all of them have atrocious corporate governance. So I can't say I'm hyper excited to own a lot of these business long term. I think I am a little bit more of like kind of holding my nose and betting on the business model. I actually, actually based on what is available and where they are in their cycle and what could happen to them over the long term. Actually it's going to sound kind of weird, but I think I would go with Etoro. I think that brokerages, once you get an AUM built up, it's a pretty resilient business model that is going to generate some level of profitability in good times and bad because again, it's all about transaction volume and that can be, that can happen in bear markets and in bull markets. So I think that to me is a little bit more of an interesting one after that. I, as much as I've really hammered on Core Weaves, corporate governance, I would probably actually go with them next just because again, it's a known entity, data centers, things like that. I kind of understand that business model. I think Chime is, I think a lot of things are going to have to happen at Chime for them to mature into a full business. Like I was saying, I think they're going to have to probably buy a banking charter in some way or acquire one. And then with Circle, like I said, if, if we were to go through a rate cut cycle, which it seems like everyone seems to think we're going to go through, and I think we're probably closer to one now than we have been in a while, their profitability is going to be pretty strained. And you're basically betting on more and more crypto enthusiasts betting this thing up into an absurd valuation.
- [59:43]
Tyler
I'm going to copy you be boring. I'm going to go Etoro first. I think brokerages are a rock solid business. I'm someone that owns Interactive Brokers and studying that business, it's clear that it's tough to acquire brokerage customers. But there is so much friction and switching. Just like a bank. I think they'll put number two Chime, even though, as you mentioned and talked about throughout this episode, there's things they need to work out and maybe get that bank charter and some other. It's a pretty competitive market, and they're kind of a minnow today, I guess. I'm not interested in Core Weaver Circle. I don't know. I could put them three or four interchangeably. I'm not a big crypto guy or stablecoin fan, and I think Core Weave is. If there's an AI bubble and it pops, they may go bankrupt. And that's just not something I'm interested in whatsoever.
- [60:38]
Ryan Henderson
All right. My opinion isn't too different here. I think looking over the business models that we described or that you described here today, Etoro seems the least prone to like, one big hit hit kind of thing. Like, obviously, if interest rates plummeted, Circle would be hurting if there was any sort of AI Labs. Core Weave would be hurting if there was kind of like what we saw with Upstart back in the day where the banking partners pulled back on what they were willing to buy from Upstart. If that were to happen to Chime, that would be detrimental to them as well. Yeah, Etoro just seems the most resilient of those. But on the flip side, there's obviously, if we're talking, if we're doing TAM talk, there's a large addressable market and upside for some of these other ones.
- [61:29]
Tyler
Yeah, that's fair.
- [61:31]
Brett Shafer
I think the best argument you can make too, is Etoro seems to be the most in control of its own destiny relative to the other ones.
- [61:38]
Tyler
That's a great way to put it. Okay, let's wrap things up here. We have a final question then. I'll let you talk about Misfit Alpha. You've covered, you've written about at the Motley fool, other places with your own stuff about IPO companies, new companies coming to public markets. For any beginning investor, what is one lesson investors should take from looking at IPO stocks? How to not make mistakes, how to look at them correctly, and what to do with them in their portfolios.
- [62:07]
Brett Shafer
Well, a couple things. Number one, be very skeptical. I think you can easily be lured into a great story. And like I said, a lot of IPOs go through a glow up. So before they go public. So always keep in mind that things might not necessarily be qu. Be quite as good as they're saying in a public disclosure and Another thing I really like to look at is when a company is going public, what are they using their money for? I think the use of proceeds something section of a practice is something if you're typically valuing a stock and for like a secondary market, you don't care because they've already, they probably issued, got their proceeds like years ago and they've already used it. Used it. But are they using those proceeds to actually invest in the business or are they doing it to like pay off previous, you know, cashing out previous investors or like paying a special dividend to a founder who's still sticking around or something like that? Paying attention to where that money is going I think also says a lot to what the company's going to do in the future. Because if you see a bunch of people cashing out, you know, maybe this isn't the most, the best thing possible out there. But if you know, we have a big raise and it's like we're going to put this all into general corporate purposes and we're going to scale this business up, it's a little bit more promising. And so things like that, cleaning up balance sheets. I think use of proceeds is something that as a typical investor of publicly traded stocks, something you don't think about. But if you're looking specifically at IPOs, that's one of those unique wrinkles to pay them a little bit more attention to to.
- [63:45]
Tyler
Okay, before we get out of here, tell the listeners what you cover at Misfit Alpha and we will have a link in the show notes so anyone can go click over there and get there directly.
- [63:55]
Brett Shafer
Sure. So like, like I said, it's a very much a turning over stones sort of approach. You could call me a big fan of the, the Peter lynch sort of way. It's just look at lots of stuff and what really jumps off the page is kind of the, those, the, the ones that you want to talk about. And in addition to iPodOS, the, the origin of Misfit Alpha was like probably 2022 time a lot of everything was talking about Amazon. Everyone was talking about Tesla. There was like five companies that the financial media talked about. And I was like there is this incredible island of misfit stocks, I guess if you will, that have done incredibly over the years and stuff that nobody ever talks about. Companies that make septic tanks, companies that are own pawn shops. There is this wide, wide range of amazing companies that have absolutely walloped the, the S&P 500 total return over really long periods. And I really wanted to highlight these to people who want to get investing but maybe don't want aren't super excited about investing in Amazon or Meta or something like that because you can own, I don't know, O'Reilly Automotive, an auto parts retailer who has, you know, run laps around The S&P 500 businesses like that and trying to show why these companies work, connecting the dots on numerous industries and what are some of the things that they have in common and hopefully learning not just how seeing great companies, but kind of helping to learn, identify and analyze those companies.
- [65:30]
Tyler
Well, sounds like listeners. I think Ryan is going to mention he's an O'Reilly, a shareholder as well. So he's with you on that boat. Listeners to this podcast will love that as well because we try to find undiscovered stocks, stuff they're not talking about on cnbc, stuff they don't want want me to write about at the Molly Pool because no one's going to read about it. That might actually be a good thing because that means there's some undiscovered alpha out there. But thank you again, Tyler. Let's hit the disclosure and get out of here. We are not financial advisors. Anything we say on the show is not formal advice or recommendations. Ryan, I, or any podcast guest may hold securities discussed in this podcast, may have held them in the past and may buy, sell, or hold them in the future. Thank you everyone for tuning into this episode. I hope you learned a lot and we'll see you next time.