← Chit Chat Stocks
Chit Chat Stocks
6 Future Share Cannibals; Ryan’s New Favorite Small-Cap; Mark Leonard Tribute (Constellation Software)
01:04:57
Loading summary
Transcript133 lines
- [00:01]
A
Welcome to the Chitchat Stocks podcast, the podcast that helps you find your next great investment. I'm your host, Ryan Henderson, and I am joined, as always by the one and only Brett Schaefer. This is our weekly Power Hour episode where we riff on all things financial markets. That's news, headlines, new stocks we're interested in. And today, Brett and I are going to be going head to head drafting our favorite picks for future share cannibals. We'll describe what that is for anyone that's not familiar with the term. A little Charlie Munger term there, but before we get to that, if this is your first time listening to chit chat stocks, please give us a follow wherever you listen. Apple, Spotify, anywhere else. That way you never miss an episode. And if you like us, maybe even if you don't like us, feel free to give us a review because it helps the show grow, getting those numbers up. Preferably give us a good review, but obviously up to you. With that said, Brett, welcome in. Are you prepared for our share cannibal draft?
- [01:06]
B
I am to outline the rules. We are going to be doing future share cannibals. So we're not just going to be looking at, hey, something already down 90%. That's kind of boring. We're going to be looking at stocks that we think can be, you know, 50%, 60%, reduce their share counts by a significant amount over the next decade. I'm curious how you did your own criteria, because I had a few different criteria I was trying to look at when identifying these share cannibals, but I'm sure we'll get into it.
- [01:35]
A
Yeah, it's actually a little. It's a tough exercise because it requires the stock to not have a RE rating in the multiple. But we can talk about that in a bit. Do we want to kick things off with the draft or where do you want to. Where do you want to start?
- [01:51]
B
Oh, I mean, either that it's a fairly slow news week. Luckily, the AI boom, slash, potential bubble. Not sure if we're hitting that crossover territory yet, but there is that sort of news. Maybe Apple and Intel open AI first and then we hit the share cannibal draft. I feel like kicking off with news is always fun, especially one right now where we are seeing from the Altmans, the Sam Altmans of the world, and the Jensen Huangs some ambitious statements, ambitious funding rounds and some ambitious goals with all their data centers.
- [02:26]
A
Yeah, let me read some headlines and then we can choose how long we want to talk about this because I Frankly think it's a bit of a tired topic, but Nvidia is investing in OpenAI and then it's all kind of circular. We'll talk about that in a sec. But on Monday, OpenAI and Nvidia announced a strategic part partnership to deploy 10 gigawatts of Nvidia systems. They said the investment would reach up to a hundred billion dollars paid out as AI supercomputing facilities open in the coming years, with the first one coming online in the second half of 2026. Nvidia agreed to invest over time as OpenAI's data centers get up and running. The initial $10 billion will be available to OpenAI soon and help the company work towards deploying its first gigawatt of capacity. While Nvidia's equity investment could help OpenAI with hiring and other stuff, marketing operations, stuff like that, the biggest single item it will be used for is estimated to be compute, which will be leasing Nvidia chips. So here's the news and there was a bunch of other news too. It seems like Sam Altman is in the news every day just saying a number that just keeps getting higher and higher, including even the trillion dollar figure now. And Brett, maybe you can talk about that in a second, but Nvidia is giving money or investing in OpenAI through like staged out tranches almost. Maybe tranches is the wrong word. But over time as they build out computing facilities and OpenAI is taking that money and buying Nvidia chips. This draws some parallels to the dot com bubble, if we remember back to the.
- [04:22]
B
Are you ready, Ryan? Are you ready? Are you ready to admit that it's we're hitting bubble territory?
- [04:31]
A
Yeah, probably. Do you have. What were some of the other things that Sam Altman was in the news for this week? I think there was like Stargate is. Is hitting $400 billion in committed investments. Committed.
- [04:45]
B
Yeah, that's part of the Oracle deal. It's all kind of confusing, but I think in general what we need to look at is huge amounts of funding commitments and then the potential electricity requirements around that. So here is. It really revolves around both OpenAI and Nvidia a lot of the times because Nvidia is also investing in things like Core Weave. We just had another commitment. Well actually I don't know if they're actually invested in them, but they're committing money to them. Here's for an example with Core Weave. Yeah. So Core Weave said it expanding its previous agreement with OpenAI to supply data center capacity by up to $6.5 billion bring the total value of the contract to $22.4 billion. That's also in relation to Nvidia's investment into Core Weave and Will Power, you know, some Nvidia chips as well. But if we look at Nvidia's, let's see, plan here to invest $100 billion into OpenAI. I'll just read a quote here from the Wall Street Journal. The massive sum committed by to OpenAI will help build as much as 10 gigawatts of computing capacity for the owner of Chat GPT, the popular chat bot. Blah blah blah, still loses money and they plan to lose a lot of money until 2029. I think tens and tens of billions of dol dollars. And if we look at, let's see, I think there, this is a CNBC article that sums it up. Here's another quote. In less than 48 hours, OpenAI has announced commitments to equal 17 nuclear power plants or about nine Hoover dams. The scale is staggering, even for a company that's raised a record amount of private cash and seen its valuations fall to $500 billion. At roughly $50 billion per site, Open AI's projects add up to $850 billion in spending, nearly half of the $2 trillion global AI infrastructure surge that HSBC now forecasts. Well, those forecasts are always. That's just a lot of work on stuff that doesn't really mean much. But the one thing I want to talk or just have the listeners understand is what is going to. You know, before you even think about roi, you need to think about how much electricity is going to be needed here. Because if you look at the total amount of electricity, annual consumption, well, not just, excuse me, annual consumption of. Oh yeah, okay. In terms of total electricity, the United States as a whole, and I believe this is across both consumers, so at homes, you know, lighting, your home powering stuff, electronics and industrial. So both commercial, industrial and residential, the total amount of electricity use is just over 1,000 gigawatts. There's some different estimates, but let's just say a 1,000 gigawatts. Nvidia and OpenAI and some few others here want to add 1, 2 or 3% of that capacity over five years. That is going to take a staggering amount of money, a staggering amount of resources. And I don't even think it's possible for them to pull it off. For example, if you wanted to build a nuclear power plant, you cannot do that in a year. It takes about 10 years if you even get it approved. Now can you Build enough solar panels, maybe highly efficient. You probably need way too many. Could you use natural gas? Possibly. I guess it's probably going to be a lot of fossil fuel lead. It just does not make much sense to me. And that's before we even talk about any sort of roi. Like, I can't wrap my head around these numbers. And it feels like 1999 officially.
- [08:36]
A
Yeah, there is, there's the financial ROI. But then from a societal perspective, is this really, do we want them using, consuming that much energy? Is that really that big of a net?
- [08:52]
B
Anime, fake videos? Yeah. Great.
- [08:54]
A
Yeah, right. Like, is that where I'm, I'm not against them, obviously consuming energy and advancing, you know, I'm sure their models, hey.
- [09:05]
B
If they get the fund help, they get what they want, they can do what they want. Yeah, they have the money.
- [09:10]
A
I just worry about if we start seeing energy deficiencies elsewhere in society, whether or not this is the best use of it.
- [09:20]
B
The other part, electricity prices go up a ton across the board in some of these states that have had huge AI buildouts and there's been a big backlash from customers. You know, if your energy bill goes up and they say, well, it's just to, for this AI build out, it's important. Well, it's not important to your life. So if this keeps continuing and you see 3, 4, 5x increase in electricity bills, people are not going to be happy. And I think that might happen.
- [09:46]
A
It feels to me like that scene in succession where Logan says, tells Kendall, congrats on saying the biggest number. Every week over and over there's a new headline number. It's like we're spending 100 billion. And then Oracle topped it. Oh, we've got $300 billion in a backlog commitment from OpenAI. Now it's, we're getting $100 billion investment from Nvidia. Cumulatively, it's a trillion dollars. It's like, okay, you do $6 billion in revenue.
- [10:27]
B
Is it 6? Do you have that, do you have that number?
- [10:29]
A
I'm pretty sure it's around 6. They're expecting like 13 for the full.
- [10:31]
B
Year for this year. It's growing pretty quickly. What do you think of the deal? What do you think, think of from Nvidia standpoint and OpenAI standpoint doing this deal? Because I, for one, we just talked about how the total numbers from electricity and maybe just total usage and ROI standpoint might not make sense. But from, for each other, I, I could understand doing the deal.
- [10:58]
A
Yeah, I guess, isn't it sort of like vendor Financing in a way where they're basically just giving money to OpenAI so that they can lease Nvidia chips. That feels a little circular, but I guess if, if you're sort of helping OpenAI build out their business and they're already a huge customer for you, maybe it's helpful. I don't really know. From Nvidia's perspective. Yeah. @ the end of the day, guess like money's coming to them. Money people are going to be buying their GPUs or leasing them. So I, it's such a tired topic and I, I know people ask us to talk about this every week, but I just kind of don't care. Sam Altman can say whatever number he.
- [11:50]
B
Wants to care at this point. It's driving the entire market.
- [11:56]
A
I mean it's driving the S P.
- [12:00]
B
I mean it's not affecting.
- [12:05]
A
Costco, just reported earnings. Is it affecting Costco's earnings?
- [12:09]
B
Yeah, wealth effect, definitely. I mean the amount of wealth effect out there is crazy. We gotta have someone in the comments here saying this is just like two guys in the 17th century looking at all the horses at laughing at the guys nailing steel into the ground for these things called trains. I don't know if you want to look into the history of the train boom because it almost bankrupted the entire country, had the most corruption you've ever seen and was one of the biggest bubbles and boom and bust cycles in stock market history. So yeah, I don't know. That's a gotcha for. I believe in the actual society benefits. Let's not, you know, disclude those. We obviously agree that these are cool things, that hopefully we see benefits for the entire globe and global civilization. From a stock market perspective, that's just agreeing with us to worry about this.
- [13:09]
A
Yeah. And you think about the, to take it one step further, people were talking about the railroads. You can also say the same thing happened with cars. Automobiles. Like yeah, if you would have almost. They all went back Buffett analogy where he says you could, if you could tell someone at the turn of, of 1900s and say in 50 years we're going to have roads spanning the entire country and there's going to be millions of cars driving across the country. Which do you want to invest in the automotive companies? You'd think, yes, but ultimately that's not what happened. All the automotive companies turned out to be horrendous investments. So yeah. So he's. People in the comments are like, we're complaining about the ROI from an investment perspective. That's what you should care about the other side of it, the societal side. I mean, I don't love the idea of my electricity bill going up so that people can make animated videos.
- [14:15]
B
But yeah, I also don't like the idea of it going up to use to mine bitcoin. I think that's even. I mean, both those things are fairly useless, but in my opinion. But I would.
- [14:27]
A
We're talking about the power needs for this. I prefer this over the power needs for crypto mining because yeah, definitely. At least this is improving whatever individual daily workflows for people in tech, I guess.
- [14:48]
B
Yeah, sure. That's. That's awesome. That's. That's totally awesome. Yeah, I think the numbers are big and I would like maybe close out this segment. I want to research some of the old deals from the dot com bubble because I saw some from some seasoned veterans out there, some people that are around at that time saying that this reminds me of the deals getting put out for the telecom infrastructure. Boom. And I like to research how that worked out. I think they're saying that because those deals didn't work out too hot, but be fascinating to look at, see if there's any sort of similar stuff out there, how it worked out, whether it worked, whether there was good roi, stuff like that.
- [15:34]
A
Yeah. And. And to the person in the chat kind of fading our takes. You could be right. Honestly, you. You could be right. Maybe we are cynical of the value being created here and we're just ignoring it. I do think we should talk about companies that'll actually be beneficiaries. Because I was thinking about this last week. We talked about how everyone's trying to nationalize or sort of turn intel into the business that we want it to be, we want it to be Taiwan Semiconductor. And how we're getting comments right now that that are saying, doesn't this all just end up being great for Taiwan Semiconductor? And the answer is probably yes. It probably benefits intel too because now people need intel to be more competitive. But I would take it a step further. This all benefits ASML in a huge way.
- [16:27]
B
Yeah, that's the next step up. What about Carlos Zeiss, the mirror company? No, just kidding. That's a deep cut for the ASML investors, but I agree because who's going to sell to both intel and tsmc? Asml.
- [16:43]
A
Correct.
- [16:44]
B
Good point.
- [16:44]
A
Okay, let's move to the best future Share Cannibals draft. Let's talk criteria as we get this started. So I guess for reference, anyone that doesn't understand the term Share Cannibal because kind of sounds a little odd if you haven't studied Munger quotes before. It's basically just companies that continuously use their capital to buy back stock, thus the share cannibal. They're kind of eating their own shares and that playing out over a long time period can be super beneficial to earnings per share assuming that they're making those repurchases at good prices. So it's easy to look back and see who have been the good share cannibals in the past. It's very simple, you just screen for it. However, many who has been able to reduce their shares outstanding the most, that's not tough. Finding out the ones for the future is actually going to be a little difficult because it requires some forecasting. So here are the four criteria that I look for. Brett, maybe you can add any thoughts here? A with or one with a. I want a company that obviously is committed to buying back stock. So some companies just don't commit to that. That's not a part of their strategy. They think they're earlier on in their growth curve, whatever, so they don't focus on it. So a obviously buying back stock be a business that will grow. If it doesn't grow earnings revenue, it's not going to have more money to buy back stock in the future. So growth is a component there as well. The third one, and this is where it gets a little tricky, is a high buyback yield, which unfortunately means the stock can't trade at a premium. So if a company just had 1/4 where they bought back a ton of stock opportunistically, that's great and kudos to the management team. But if the stock re rates and it turns into a premium valuation, it's probably not some they're not going to be A share cannibal would be my guess over a decade.
- [18:52]
B
Here's a good analogy. It's someone that continuously climbs the wall of worry every year they keep getting doubted earnings are okay, they buy buck stock cheap valuation but they can reduce a lot more of their shares outstanding.
- [19:06]
A
The fourth component for me is a rational management team. So I think one of the easiest ways to stop a share cannibal is if you get a CEO in there who thinks I'm going to start acquiring companies instead. Or we've got a whole bunch of green grass to invest in for whatever project and they want to invest in new initiatives and they prioritize that over buyback. So if honestly you can't it's hard to find a share cannibal that's in the early stages of its business life cycle because most companies just don't think that way.
- [19:43]
B
Yeah, they're still investing in either marketing or capital expenditures. They believe there's a better ROI outside of the buyback.
- [19:51]
A
You want something more mature okay, Snake Draft alternate.
- [19:59]
B
Let me go through what how I research Mine says we're com for the listeners we are competing here. We're going to do a Snake draft. Maybe we can just alternate since it's 3v3 and then in the comments or in the sub stack chat the listeners can vote I guess with their opinions and see who won. But let me give my criteria. I did use the screener on our friends at Fiscal AI. Use our link get it 15 discount was quite helpful. So I did like you mentioned, want to look at companies that had a history or a near term history of buybacks. So I did this filter you can do where you can basically set like the three year compound annual growth rate for shares outstanding and you can set it at a negative number and I did a range of greater than negative seven and a half percent. So that brought in a bunch of companies. Then the other thing I wanted to believe in, well I didn't know what the company was, but the other thing I wanted to believe in is business durability. Not necessarily growth, but durability. And then like you mentioned, is the stock cheap today and do I think they're going to climb the wall of worry? So sounds like we're fairly similar here. See if we have any overlap. Who wants to go first?
- [21:09]
A
Should we do a second go first? I imagine we actually don't have the same list so probably shouldn't be a concern there. And I will say shout out to Fiscal AI. I use the screener as well for this section. So my number one company is Adobe. So this one's maybe a little controversial because they haven't been like a historical share cannibal. They kind of have been ramping buybacks over the last couple years as the threat from AI has knocked the stock down and and led to multiple compression. Today they I think they have like a 7 or 8% buyback yield but they're with stock based comp. They are reducing total shares outstanding by about five and a half percent annually. For me they are they're obviously committed to buying back the stock. I think the business will continue to grow. That seems to be the controversial statement where people disagree with that. But they literally just produce 10% revenue growth like clockwork seemingly every quarter and it currently trades at a high buyback yield. And my guess is that this could continue to be seen as an AI loser, which would mean that management's able to continue buying back stock. The only concern I would have that would allow them to not fit this list would be if management suddenly turned around and said we're tired of being AI losers. We're going to spend however much we're going to acquire like they try to do with Figma. We're going to acquire companies to become the new AI darling. That's kind of the only risk I see. If you are a regular listener to chit chat stocks, then you've probably heard us talk about Interactive Brokers. Here are four reasons that Interactive Brokers is better than other brokerage platforms. Number one, they've got it all. Stocks, bonds, ETFs, options, crypto, you name it. 160 markets, 36 countries, 28 currencies. They are the absolute best platform for global investors. Number two, best in class pricing. They have zero commissions on US listed stocks and ETFs and they offer margin rates up to 53% lower than the industry. Number three, you can ditch the separate high Yield Cash account. Interactive Brokers offers up to 3.83% interest on cash held in your investment account. And lastly, number four, news. Stay in the know on your portfolio. IBKR offers news and research from over 60 industry leading sources including Reuters, Dow Jones and Morningstar. Head on over to ibkr.com restrictions apply. Interactive Brokers is a member of SIPC.
- [24:05]
B
Good choice. Not on my list. So no overlap there. And I will say none on my list are ones I own. I guess I'm not in the share cannibal mode. I was thinking of putting Airbnb but I don't know if they are that large and the stock doesn't trade at that cheap of a multiple. Let me give you my first one. I think someone this is one Ryan may or may not have on his list and it is MGM. Resorts International I guess is the true name. Take your mgm, owner of the MGM casinos and some other ones out there. They trade at market cap of $9.4 billion, price to free cash flow 7.3. And if we pull up the shares outstanding on fiscal AI here quickly, we can see significant shares outstanding reduction in the last 10 years. If we go from. Let me just go kind of at the peak of when they started buying back in 2016. Okay, if we go there from 2016-20 to the last 12 months, they've reduced their shares outstanding at an 8.4% annual rate for a cumulative reduction of 52.5%. That is significantly down. And the stock is still cheap today. Again, I said seven times price to free cash flow. People are worried about Las Vegas spending, they are worried about casino spending, especially with the rise of online sports betting, stuff like that. But I believe this brand and I haven't looked at the balance sheet, so I don't own this one. I know some smart people out there like Travis Hoyam has followed this one company closely. Check out his portfolio on asymmetric investing. He's been on the show before. I think he might have talked about this one, if I'm not mistaken, or we did our own research report on them. Either way, I think the brand is strong. I think with their core casinos in Las Vegas, that is going to be durable over the long haul. And I think they have some premier assets coming up in Japan that'll do well as well. What do you think, Ryan, about this choice?
- [26:00]
A
I think that's a good pick. The. Yeah, I mean they have reduced shares their share. They have cut their share count in half in eight years, nine years. So very impressive buyback rate. The other thing I like about mgm, and this isn't really something I thought of until I went to Vegas, I like the hybrid model of having physical casinos, IRL casinos in real life, as well as supplementing it with a clean user interface mobile experience. Because people like kind of I think both. And you see it in Vegas like they are advertising galore. The mobile app MGM is specifically. And you can kind of pair that. You can get rewards, you can get better hotel stays if you're on the mobile app and you're a member and you're spending. And there's kind of some in real life benefits to choosing them as the mobile app. So I think they would be in a good spot even as some gambling does Transition to digital. First.
- [27:17]
B
Okay, what is your second pick?
- [27:20]
A
Okay, my second pick. I'm gonna go with Dr. Horton. The I think they're the technically the largest home builder in America by homes delivered every year or homes closed with. I think it's around 90,000 homes a year. They are basically sort of a manufacturing business essentially. You can kind of think of them that way. They've gotten really good at sort of copycat. When you think about those huge home complexes in Texas or whatever where it's thousand homes and they all feel kind of similar, they're able to roll those out at. I know it seems a little dystopian, but they're able to roll those out at a much lower cost than other home builders. And given the interest rate and housing environment broadly over the last three years, it hasn't been any surprise that they've traded at a much cheaper multiple than historically. And I think also just homebuilders in general don't tend to have. They rarely get sort of a huge premium multiple because there's some cyclicality. But 8% buyback yield right now they spend pretty much all their free cash flow on buybacks and it's a pretty land light strategy. So people think of home builders and they think whereas the cash flow it all just shows up back in the houses. But they. Or the inventory and new lots, stuff like that. But with their leasing model as opposed to the owning model, there's less inventory risk for them and they've weathered the last three years really well. Like if I told you that interest rates are going to accelerate faster than they ever have, like mortgage rates are going to near triple in a few years, what would you think that would do to the biggest home builder? My guess would be it's going to crush demand. But that hasn't really been the case. And sort of the inverse you could take here is well, what if rates come down? And I would argue and the idea there is rates come down all of a sudden there's an inventory unlock and everyone is feeling like they can move again. I would argue that that's still going to stimulate buyer demand and they will probably close on more homes if mortgage rates come down than if mortgage rates stay where they are. So I think they're in a good spot. They're pretty committed to the buyback. Like I said 8% buyback yield at the moment. And I'd be surprised if there was a huge multiple RE rating although I do own the stock. So I, I'd be fine if it did happen. But yeah, I'll take Dr. Horton at the two.
- [30:08]
B
Okay. My second one. It's going to be an old flame of ours. I think Ryan's thinking about it right now. Don't say it the way you're going to hate it is why it is a potential share cannibal as we should talk about maybe as an example. Autozone has been hated for 20 years. People think the business is dying and that's why they've reduced shares outstanding by 90%. It is Dropbox shares outstanding from December 2020 to the last 12 months have dropped at a 8.7% annual rate. Revenue itself has not grown that much, although it hasn't really declined. Earnings are growing Higher, not earnings. You know, earnings per share are growing faster. Free cash flow is solid. Active users are okay. But this is a business that keeps getting doubted. It's apparently dead. The. They keep bumping out revenue, they keep bumping out money. The market cap is just $8.5 billion. They traded a sub 10% price to free cash flow and they're going to keep reducing that shares outstanding. If we look at the three year revenue CAGR, it's just 4%. Five year, 7%. But they're diluted earnings per share. CAGR over the last three years. 20%.
- [31:33]
A
Tyler says. Oh, thank goodness. I thought he was going to say Match. I thought you were going to say Match Group as well, which I would have been much less of a fan of.
- [31:43]
B
My only question, a little bit. The durability is a little bit. There's still, there's certainty on but uncertainty on both. But maybe Match has maybe a larger wall of worry to climb. So who knows? They could do well. But that's one I wouldn't choose.
- [32:00]
A
Yeah. My only pushback here would be I question their ability to continue to grow the top line. And Drew Houston doesn't matter. I know that's what he would say. I think he'd probably tell you, that's okay, we can run this. We can have AI run the company. Because he seems, it seems like 2020. All of a sudden he realized like he's not a, he's not a tech bro. Like his company is not the next big thing. It's not big tech. And he has been doing layoffs seemingly ever since.
- [32:35]
B
Yeah, let me see if I can pull up operating expenses and see the changes there. But I don't have it in front of me.
- [32:42]
A
Yeah, you could be right. But if you're drawing the analogy to Autozone and O'Reilly, those guys have had just basically a perpetual small tailwind at their back for 50 years or however long they've been operating. I question whether or not Dropbox would have that. I could be wrong. I've been wrong so far on that.
- [33:04]
B
Pricing power. Pricing power.
- [33:06]
A
Do they.
- [33:07]
B
They've raised prices. They have.
- [33:10]
A
I know, but it's sticky software.
- [33:13]
B
Sticky.
- [33:14]
A
So switching is so there are so many alternatives. All right, anyways, look there.
- [33:19]
B
Okay, so they're SGA in 2018, $723 million. Last 12 months, $658 million. And at the same time, revenue in 2018, 1.4 billion. Revenue last 12 months, 2.5 billion. There you go. There are your profits.
- [33:37]
A
Okay, my third pick here. I'm actually kind of torn here. I was thinking about going with just O'Reilly and Autozone, like keeping that going because they've been the best, but they still get hated. Especially with the. The world seeming to transition to electric vehicles. There seems to be this concern that ICE vehicles will disappear and the business, it'll happen anytime now will dissipate O'Reilly and Autozone, but that doesn't seem to be the case. But instead I'm gonna go with Airbnb. I don't know if that was on your list, but it is in my.
- [34:17]
B
Portfolio, but I didn't put it on the list. Let's see your pitch. Because I think they will drop shares outstanding, but not as an aggressive rate as some of these other players.
- [34:27]
A
Yeah, I think I might be reaching here a bit, honestly. But my thought is, can they be, can they replicate booking holdings? Like this is a company that has phenomenal cash flow dynamics. Booking holdings has been an awesome share cannibal over the last decade.
- [34:43]
B
Both booking and Expedia showed up on my screener.
- [34:46]
A
Yeah, the core business model for Airbnb is it's going to grow naturally would be my guess. Like they don't have to pour a whole lot of money into it for supply to grow at this point. The network effect sort of takes care of itself, especially in the developed market. So if as long as Brian Chesky doesn't spend a bajillion dollars trying to build out these other initiatives like experiences and services and all that stuff, I could see them continuing to buy back stock. They have been buying back stock a bit lately, but they also spend a lot on stock based compensation relative to their online travel agency peers. So let me just pull up current buyback yield. Current buyback yield is five and a half percent. How much have they actually reduced the shares outstanding? Come on, Fiscal AI do me a solid here.
- [35:48]
B
Probably a little less given spc, but I think that's a good number.
- [35:53]
A
Yeah. Since December of 2023, share count has dropped by 5%. So basically 4% annually. A little under 4% annually.
- [36:09]
B
I future though, should be more, more aggressive in a drawdown.
- [36:16]
A
Yeah, I think they should be able to plow a lot of money into it, assuming that they don't get a big multiple rewriting, which is possible. I, I imagine if they have success with any of these new initiatives or big international growth, they could see a multiple RE rating. But as long as they kind of continue to have this, I don't want to say discount because it's still, I think like 25 times EBITDA. But I see no reason why they can't continue to eat up shares.
- [36:48]
B
I agree and I think it should. Yeah, it should get bigger over time. And they have that good cash flow dynamics that should help them be able to reduce shares outstanding in a faster clip than actually their actual underlying earnings are growing. Let me get my last one. It's one. You know, Ryan, I was worried this one might get put on your list, but it's not necessarily a household name or one that you follow closely like Dr. Horton, although it's related to that space. It is builders first source shares outstanding have declined since December 2021 at a 13% annual rate. Now, a bunch of that was in 2021, or maybe it was 2022. But they are a supplier for the home building space, right? I honestly can't remember exactly what they do. Yeah, building materials, manufactured components and subscription construction services. Excuse me, for professional home builders, some contractors, remodelers, remodelers, et cetera. They are trading at about 10 times earnings now. They're in a cyclical market. Their earnings aren't as smooth as an Adobe, but I think given the fact that they have been extremely smart buying back stock during downturns for their business and when they have that cash flow coming and when people are discounting the market, that has helped them produce a. Let's just pull it up here. Their max total return. And even from the bottom of the GFC it'd be even better. In the last five years they produced 31 compound annual growth rate for their total return. Quite good. And I think this is the dominant player in their space. They use their capital allocation wisely and it could be a solid share cannibal over the long term now.
- [38:34]
A
Yeah, I like it.
- [38:35]
B
Who were Your honorable mentions?
- [38:39]
A
PayPal was an honorable mention for me. That's probably one that I would guess listeners might have expected us to say they are buying back a ton of stock. I worry about the top line moving forward personally and that putting pressure on the amount of money they can actually deploy into buybacks. It seems like they have been going nowhere. The stock specifically. It feels like it's been going nowhere for quite a while and not much has changed in the narrative. Like the narrative seems to be that it's destroyed by Apple Pay, Google Pay, kind of getting hit from all sides. The remittances, digital remittance providers are disrupting their international transfer business. Branded checkout is kind of struggling, which is their big cash cow. But there are probably people that just use they just use PayPal products and maybe the brain tree can grow volume and become something much bigger.
- [39:41]
B
Yeah. What's interesting is they keep producing shares outstanding, they keep growing their revenue, they keep growing their earnings, but the narrative stays the same that if you believe in the durability of this business, that's the optimal recipe for a share cannibal. And PayPal seems like a good candidate there. Let me give. Well, did you give your honorable mentions? I'll read mine. Zoominfo, Expedia, and General Motors. I think those are three General Motors. Oh, no, that's.
- [40:14]
A
That's why.
- [40:16]
B
That's what you need for sure.
- [40:17]
A
Exactly. That's why Share Cannibals become share Cannibals is because people make that face when you say them. They wince when you pitch that stock. That is what makes a great share cannibal. As long as the CFO actually knows that.
- [40:31]
B
All right, folks, before we move on, we need to tell you where we get our financial data. Fiscal AI. Fiscal AI is the complete stock research platform for fundamental investors. I use the platform pretty much every single day. You'll see the charts on our podcast and you'll see it in our newsletter. This is our one stop shop for stock research. They've got up to 20 years of financial data on all companies globally, including company specific segment and KPI data. That means Amazon AWS revenue, SoFi's total members, Google's paid clicks, growth, and literally millions of more data points. They've also got earnings call transcripts, ownership data, company specific research reports, and much more. If you want complete financial data at your fingertips, then you need to check out free fiscal AI. And if you use our link, fiscal AI chitchat, you will get 15% off any paid plan. Again, that is fiscal AI chitchat. The link will be in the show notes.
- [41:31]
A
Let's shift gears a bit. Got a couple more topics to hit. We have a comment here that says thoughts and prayers to Mark Leonard of Constellation Software. Yeah, he didn't talk about this.
- [41:41]
B
Yeah, that. Just for anyone. That's like, what, Did Mark Leonard pass away? No, but I do have a tribute to the man that just retired. Here's a quote from. I think it's the Wall Street Journal. Constellation Software founder and president Mark Leonard has resigned for what the Canadian tech company said were unspecified health reasons. Hope he's doing okay and I hope his family's okay. Current COO Mark Miller appointed president. And earlier this week, Mark Leonard had a call with investors talking about AI Quote, news of Leonard's decision to step down came days after he early in the week held a call with investors to discuss the effect of artificial intelligence intelligence on Constellation's business following a request from one of the company's shareholders. Leonard struck a cautious tone on the technology during the call, describing AI as still in its infancy and just as likely to empower clients as it is to boost Constellation's business. I'd say to celebrate Mark Leonard, the founder of this Constellation software, let's look at some of their historical figures to see how they have become one of the best stocks of the 21st century. Since 2006 they had a total return, annual total return. They had a small dividend, so gotta include that of 33.6% versus the S&P 500 at 9.8%. Since 2005, revenue has compounded at a 23.9% annual rate. We have some charts here from fiscal AI that you can pull up yourself. It's a good way to use that long charting tool for these really long historical periods. Can really visualize what's going on. And since 2005, here, free cash flow per share, which any long term Constellation knowers understand that there's not really much difference between the free cash flow growth and the per share growth. But I wanted to include it just because that is the key metric for any company over the long term. But they've had really flat shares outstanding. Their free cash flow per share has compounded at an astounding 27% annual rate. Meaning since 2005 it's gone from $1 to $112. I think that might be a projection for 2025, but 100 in 2024, meaning free cash flow per share has gone up 100x in 20 years. An impressive run and one of the best capital allocators of the 21st century and we can say of modern history.
- [44:10]
A
Yeah, this guy is one of the best. I mean he is one of the few people that has built generational wealth for a ton of Canadians and investors all over the place. $10,000 invested during in the 2006 IPO is worth $2.8 million today. So 200 comes out to what? 280 bagger for him and that's over less than 20 years. One of that's probably one of the highest compound annual growth rates of any stock over the last 20 years. It's the other part for me is he helped people build generational wealth and he did it in a manner that was sustainable where people wouldn't sell. I think a lot of the time you look at the hundred baggers. You look at the best investments of all time and it's like, yeah, but who actually held them for 20 years through all the ups and downs? I believe Constellation Software's largest drawdown, they did not have more than a 25% drawdown since their IPO.
- [45:21]
B
Let's check. Ryan. We can check right now.
- [45:25]
A
The way he communicated with shareholders, his pragmatic approach to everything made it so easy to own his shares for a long time. And, well, everyone has reaped the benefits that seem to be Constellation shareholders.
- [45:43]
B
So in 2018. Yeah, in 2018, 24 drawdown, I think. But right now they are in one of, I think maybe the second largest ever. A 22% drawdown on this news. I have no idea whether it's a buy on that. Don't really want to talk about whether it's buy because someone has to retire for health reasons. But you know that the fact that that's a 20% drawdown is one of the largest there. It shows how he constructed the narrative, built a culture, did what he said he was going to do, and established a team to just build a consistent engine of growth in vertical market software.
- [46:26]
A
I think it also goes to show that limited but well thought out communications with shareholders, I think is better than constant communications. Going to conferences every week, giving them something to worry about. It just, I think of all the companies that have actually done well and of all the other investors I know this is the only like 100 bagger that they've actually held because he made it so easy to hold shares. So kudos to all the investors and kudos to Mark Leonard for generational run. Let's shift gears a bit. Do we want to do our small cap of the week? I'm actually excited about this one.
- [47:10]
B
Let's do it, Ryan.
- [47:12]
A
Okay. The company is Yelp. This actually shocked me, but Yelp, did you know this? A, did you know they were public? But B, did you know that they have grown revenue at a 26% CAGR since 2010?
- [47:27]
B
I knew that they were public, but before looking at her notes, that number did surprise me. Impressive growth.
- [47:34]
A
Yeah, let's. So it's kind of. I don't know if I'd actually call this a small cap. I don't know what the typical classifications are for small cap companies, but $1.98 billion market cap. So just under 2 billion. Let's call it. Let's let it be my small cap of the week. And for those unfamiliar with the business model, Yelp is a Business directory and review platform. They reportedly attract more than 100 million people to their platform every month. I will say I use Yelp passively, like just restaurant reviews looking for restaurants. I always end up going to Yelp for a little bit.
- [48:14]
B
I'm a Google Maps man. Can't say I'm helping the cause.
- [48:18]
A
You gotta, you wanna diversify. I don't know if I can trust the Google Maps reviews.
- [48:24]
B
Why?
- [48:25]
A
I don't know. Yelp, Yelp reviews, I just trust more for some reason also there it's always like the businesses don't always upload their pictures. It's sometimes like customer pictures on Google. Anyway, I'll get away from this, but I think people might know what I mean when I say that there is also a bit of a network effect as well. So the more businesses that are on there, the more consumers come to the platform, the more reviews they create, the more reviews attract more users and so on. And the primary way that Yelp makes money is through basically sponsored listings. So local businesses will bid to show up for users in certain areas. Pretty similar to Google keyword ads, kind of. And following their results actually might. This might be something if you own Portillo's or you own restaurant stocks, this is maybe something you should look at because in the latest conference call they said the operating environment for businesses in our restaurant, retail and other categories remain challenging. And RRNO, which is restaurants, retail and other revenue declined by 5% year over year. If restaurants are bidding, bidding less on keywords on a platform like this, I imagine that means there's some demand headwinds for them. So. And we're seeing that actually out of a lot of the restaurants that are reporting difficult comps other than seemingly Chili's and Texas Roadhouse, I guess they've somehow.
- [49:53]
B
I mean it matches up what they're saying matches up with the current industry environment.
- [49:59]
A
They. Although when I think Yelp, I think restaurants, apparently they have actually strayed away from the restaurant and retail category bit. So services based businesses think like plumbers, electricians, accountants, lawyers, that kind of stuff actually account for 64% of advertising revenue. There has been. Let me, let me give some stats to you, Brett, maybe you can share this chart. Operating profit has gone from negative 40 million five years ago to positive 183 million. They trade an EV to EBIT of nine times and have a buyback yield of 12%. Maybe this should be on my future share cannibals list there. This is pretty impressive, honestly. Like a complete turnaround, clear operating leverage. Obviously 20, 20 is a tough comp because they were probably restaurant dependent at the time and so many restaurants were impacted. But they've increased margins and transitioned their business to something that I think is very sustainable in both the services side as well as the restaurant and retail category. Have any interest?
- [51:17]
B
I do. I mean, look at those numbers. It seemed more durable than people are giving it credit for. I think a lot of people go, people don't use Yelp anymore. Seems like that's wrong. The numbers back that up. Operating earnings keep growing. They seem to be getting fit financially and it trades at a cheap price and they're returning cash to shareholders. That's a great combination. Could be one to do a stock research report on.
- [51:45]
A
Once again, I'll give a shout out to the fiscal screener. It took me a while of sorting through some absolute garbage which if you do any sort of a small cap screener. My personal recommendation if you want to find any sort of quality is to move from the 0 to 500 million category to go 500 to 2 billion. Because you find a lot of garbage businesses below that 500 million dollar threshold. There's probably some gems.
- [52:16]
B
That's where the. That's where the mega, mega gems are, Ryan. You just got to keep digging like Buffett.
- [52:22]
A
I think there's such a high likelihood that I'm wrong about the quality of a business below $500 million that I worry it might not be worth the fishing pond of yes, there's gonna be a hidden gem, but I think I'm probably gonna be misled on what I think are hidden gems. More than I'll actually find them.
- [52:46]
B
Yeah, maybe. If you believe it though, you're gonna. It's not gonna. Yeah, gotta believe in yourself first. Let's talk real estate. This flew under the radar this week, but I think is being underrated as a huge potential change for the real estate market affecting companies like Zillow and Opendoor and the real estate brokers real estate agents. It is Compass, a cloud real estate broker focuses on wealthier markets. I think it's a bit more of a business model than that. But they are acquiring and merging with a bunch of legacy brokers. They are acquiring anywhere real estate in a definitive merger agreement that combines them in an all stock transaction. The company combined is expected to have an enterprise value of approximately $10 billion including the assumption of debt. They will now have 340,000 real estate professionals, aka agents working for them. 200,000 in the United States and some international company will be fairly leveraged out on this deal. But first, the rationale in here is to bring all these brokerages under Compass's software umbrella. That makes sense, you know, merging on there, make them cloud based real estate, modern solutions. These are companies like Coldwell banker, 21st century, I think some other ones just household names from the legacy broker space, fairly large ones. I think this anywhere real estate might have been a roll up that was kind of struggling. And the second rationale though is much more important, I think for the entire residential real estate market because it is using these assets to help promote private listings on the Compass real estate platform. So going to Compass first as opposed to what they call the MLS system and disrupting this entire space. Quote, the firm encourages many sellers to make their listings available to its agents and their clients first rather than immediately sharing the listing with the broader market as many other brokerage firms do. Compass says that listing privately gives sellers more options and enables them to test the market before advertising more widely. Sellers worried about privacy have also opted to use this private listing. You know, this could greatly impact if it gets more traction, someone like Zillow, someone like Opendoor who might be trying the same strategy, someone like Redfin who just got acquired by I think rocket companies, Rocket Mortgage, they're making moves in this space. Zillow is the go to place with hopefully all of the. They want as much inventory on there as possible and if inventory starts getting taken off, they might feel threatened. And I think it could inspire some of these companies to start wanting to vertically integrate. And it did make me think of the company I own, the real brokerage or other brokerages out there where there might be acquisition targets for a Zillow or an open door. It's a fascinating development here. Bold move by Compass. And I think we're finally about to see real changes in this residential real estate market after that lawsuit took away kind of the cartel mentality.
- [55:54]
A
Tuesday on NBC, Jimmy Fallon and Bozma St. John host the highly anticipated new competition show.
- [56:01]
B
I hire 10 creatives from all walks of life. They will be battling it out to see who can impress the world's biggest brands. This is a huge opportunity.
- [56:09]
A
This is the battle for the next big idea. This is not play play.
- [56:13]
B
We're spending millions, billions of dollars. I'm so excited to embark on this adventure with all of you.
- [56:18]
A
May the best idea win on Brand with Jimmy Fallon. Series premiere Tuesday on NBC. I'm Christian McCaffrey, pro running back and Abercrombie is an official fashion partner of the NFL. I'm not kidding when I say NFL by Abercrombie broke the Internet last year and I think this season's lineup is even cooler and so does my wife who keeps stealing all my hoodies. Stay fit for the season and Abercrombie's newest arrival Shop NFL by Abercrombie in the app online and in store I two different things there. I think this makes sense from Compass's perspective and this yeah I would see this as a threat if I'm Zillow. The flip side of that I don't know if we've seen much of an impact yet to the on on the fallout of that deal that reduced the what was the title where agents you don't have to go through agents now you can self represent.
- [57:28]
B
It just set the so the old ways was it the fees were 3% and it was fixed you couldn't negotiate or something like that. Now there's flexibility to set the commission fee however you want. It hasn't impacted it too much lately but you could see some of these companies making these moves to potentially try to gain scale and get cost lower.
- [57:52]
A
Okay. I assumed it meant that you could kind of self represent as opposed to having to go through an agent.
- [57:58]
B
But the I don't know if you're allowed to. You might be able to but that could be dangerous. I I still don't know of anyone to recommend doing that.
- [58:08]
A
Yeah most people I know that have bought homes recently just kind of did it the old fashioned way. But if you've got Compass agents that are like undercutting on cost potentially or agents anywhere that are undercutting cost it.
- [58:23]
B
Would look like the old fashioned way. And I mean Compass it would look pretty similar. It would look like the old fashioned way.
- [58:29]
A
I mean anecdotally it looks the same I look out the door I see tons of Compass signs actually and it's just like any other agent sign this Homes for sale contact this Compass agent.
- [58:43]
B
Was more the back end and how the businesses are going to play into this. I think again I own this company. Go listen to the research board. I did that So I am talking my book the real brokerage has a market cap under a billion dollars. Who I could see some companies out there bidding for this this asset it's growing quickly has a bunker broker brokers under it open door Zillow or not Redfin anymore but the combined company Rocket Mortgage why not why not want this.
- [59:14]
A
Under your umbrella and if there's any company that will shell out money for an acquisition and then do nothing with it Zillow's might be number one up there.
- [59:23]
B
They let's make it happen.
- [59:25]
A
If you go through, I want to, maybe I'll do this right now. Zillow acquisition history and we'll see how much of these are actually relevant to tr.
- [59:37]
B
Yeah, a lot. There's a lot on there.
- [59:39]
A
Trulia three and a half billion dollars Street Easy Postlets, hot pads, Rent juice Showing time dot loop. Unless I'm missing something, I don't think any of these have been very transformative to the business. Talk about a company that has had a head start in its market and just gone absolutely nowhere. This could be, you know, maybe this is the one that gets him over the hump. Do we want to ask or follow some of the questions that we got from listeners this week?
- [60:13]
B
Sure. Yeah. And I had notes on Intel Apple. We'll see what actually happens there. Nothing has happened. It was just rumors that Apple's going to pull Nvidia and invest in there. My prediction may be coming true. Maybe, you know, things are starting to happen.
- [60:28]
A
The only thing I'll say on intel because we don't have time to get to it today. I find it hilarious that every single article I read about companies investing in intel, say struggling chip maker Intel. That's how they introduce the company every time.
- [60:42]
B
Yep. All right, here's a couple of listener questions from the substack chat. Go join. You can ask us questions there. We're not as active on the Twitter machine anymore. Okay. Referring back to the portfolio breakdown episode, I'm curious if Yalls investing portfolio excludes your retirement assets. Mine does. My risk appetite for my retirement assets is very different than my risk appetite for my investing portfolio. It is not for me. Those what you see on Portsido or any sort of sharing we do of portfolio assets. That's. That's all my savings outside of the emergency fund and a high yield savings account.
- [61:23]
A
Yeah, I mean those are my. All my equity holdings are in my either brokerage or Roth ira. So that's, I mean I have money for like personal life plans that I set aside and just put into a high yield savings, which maybe you could kind of deem that like separate portfolio. But no, the vast majority of my money at any moment is invested in the portfolios that I post and the equities we talk about on the show because I'm 26 years old and life's.
- [62:01]
B
Too short to index.
- [62:02]
A
No, I'm also not planning for retirement anytime soon.
- [62:06]
B
Yeah, we don't have 401k. I don't have 401k. So I don't. Yeah. All right, next one. How about investing in Nike in the lead up to the LA games in 2028? I think this one will be short.
- [62:19]
A
Nope.
- [62:20]
B
Never invest in apparel.
- [62:24]
A
Yeah, I'm not, I'm not interested. And I don't know what the LA Games are actually.
- [62:30]
B
Is that the Olympics?
- [62:33]
A
Oh, okay. Sorry. I don't follow the Olympics very much anymore. I don't see that being a huge catalyst for growth honestly would be my take.
- [62:43]
B
Okay, I'm curious what would need to change in your conviction for one of your top five watch list stocks to become a buy? For instance? Instance I purchased Grab after listening to your podcast. It's on Ryan watch list but I don't think he has purchased yet. Ryan, you go first.
- [63:01]
A
The price to drop, the valuation to kind of get in the range I like. And it's there are times where I take a flyer on something kind of regardless evaluation as just sort of a starter position. But Grab I added to the watch list and I had sort of a concrete valuation of where I wanted it. I wanted it below I think 25 times EBITDA forward and it hasn't gotten there yet unless I'm getting some of these numbers off. But I'm pretty sure forwardy bits above that. And it's up since I spoke about the company. But typically if we go through a research episode and I've actually this has been a mistake for me where people have liked the research episodes and ended up buying the stock and I haven't and they do better for it even when I like the stock. So maybe if I, if I say yes at the end of the episode, I like this. Maybe I'll just start taking tracker positions and following it a little more closely.
- [64:08]
B
What's funny is usually stuff that I say ah gut says bye, keep it on the watch list. Don't like it for now. A lot of that stuff ends up doing well for me. Hims and hers. Celsius, maybe Lululemon. Now it has started to run since I called it a psychological long but I'd say in general 95% of the time when I have something on the watch list it's because I think it's a good business. But I wanted a cheaper price. We're not going to put something on the watch list we think is a bad business.
- [64:38]
A
Yeah, no, I don't put value plays like dirt net nets on the watch list. That's time sensitive so I don't do it. And I'm getting dunked on in the chat here for not knowing what the LA Games were. I'm sorry, I don't watch the Olympics. I do follow SP sports, but I don't watch the Olympics.
- [64:55]
B
Most people know where the Olympics are even if they don't like sports.
- [64:59]
A
I know, but I. I didn't know it. I guess I could have assumed based on the name, but still, I don't think. Has that historically been a big catalyst for growth for night?
- [65:10]
B
No, it's going to be priced in. Doesn't matter. Doesn't matter.
- [65:14]
A
I think that's going to do it. We're running up on time, so. Thank you everyone for tuning in. Thank you everyone in the chat for the comments and thank you for listening today. Want to remind everyone that we are not financial advisors. Anything Brett or I says on this podcast is not formal advice or a recommendation. Thank you once again for tuning in. We may buy, sell or hold any securities discussed on this podcast. Sorry, I had to get that last one there. Thank you and we'll see you next time. And Doug, here we have the Limu Emu in its natural habitat, helping people customize their car insurance and save hundreds with Liberty Mutual. Fascinating. It's accompanied by his natural ally, Doug. Limu is that guy with the binoculars watching us. Cut the camera. They see us. Only pay for what you need@libertymutual.com Liberty Liberty Liberty Liberty Savings. Very underwritten by Liberty Mutual Insurance Company and affiliates. Excludes Massachusetts.