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- [00:00]
Brett Schaefer
This episode is presented by Interactive Brokers. Interactive Brokers is the best platform for global investors. From their one of a kind market coverage to their best in class pricing, IBKR truly has it all. If you're serious about investing, head on over to ibkr.com.
- [00:20]
Podcast Narrator
Welcome to Chitchat Stocks. On this show, hosts Ryan Henderson and Brett Schaefer analyze businesses and riff on the world of investing. As a quick reminder, Chitchat Stocks is a CCM Media Group podcast. Anything discussed on Chitchat Stocks by Ryan, Brett or any other podcast guest is not formal advice or recommendation. Now please enjoy this episode.
- [00:48]
Brett Schaefer
Welcome into the Chit Chat Stocks podcast, a podcast to help you find your next great investment. My name is Brett Schaefer and I'm joined by my co host Ryan Henderson. And today we are talking artificial intelligence. Not AI in the way you might think, but kind of the opposite of what is talked about on cnbc, Motley fool headlines and the likes. These are as we're titling it. Titling it. Potential AI winners. Hidden AI winners in the stock market that have not been picked up by investors today we'll go through their criteria but as a reminder, if you're listening to the show, give the show a five star review on Spotify or Apple or wherever you listen. Follow the show and sign up for our newsletter at the link in the show notes to join our riveting chat community. The criteria here is that we're each going to pick three stocks, go through about five to seven minute pitch here and we're going to give whether we believe it or not, we're going to maybe explore the idea that the stock, whether we own it, we don't own it, it's on the watch list is a hidden AI winner either through efficiencies, competitive advantage gains or you know, total addressable market opportunities if AI can help them. Or there's an opportunity there for that, for basically to make it a better business. But we can't pick clear AI winners like Nvidia or any of the hyperscalers or any of the energy stocks, any, any of that stuff, any semiconductor stocks, anything that's consistent considered a huge AI winner already. We're not going to talk about. I'm going to kick things out with Ryan. He probably has his own introductory notes here as well. What is your first potential hidden AI winner and what is your pitch?
- [02:33]
Ryan Henderson
Yeah, sort of. My criteria here is basically any company where generally speaking I think AI will benefit them or at least at a minimum it won't. It's not a Huge disruption risk to them. And then B, the stock hasn't exploded over the last year, that is last year or two years I think is essentially my criteria. One of the companies that was sort of on my watch list or shortlist was Deere, John Deere. But I, as I was looking into it, the stock is, is up like 100% over the last year. So it's not going to qualify. My first stock is instead is Netflix. So, and this is I think going to be probably a fairly controversial one. The, I guess a quick preamble here. I, I am a believer in what Jeff Bezos said. It's kind of, he had this interview, must have been maybe three or four months ago, where he, the, the interviewer asked him, is AI going to be this big disruptive thing to jobs? Is it going to replace a lot of human labor? And he called AI a horizontal enabling layer and just basically said it's going to benefit almost all industries. So if you believe that as long as a company is not at huge disruption risk from AI, I think it should benefit the industry leaders. So think like banking, insurance, retail, biotech, pharmaceuticals, stuff like that. The leaders should stay leaders. And AI should largely just be a cost and time saver and a helpful tool I think, when it comes to the inputs for their business. But let's get back to my first stock, Netflix. That's kind of where I think they are. A lot of people have deemed them sort of an AI loser. But I'm going to take the flip side of that coin before I dive into some of the benefits that they are seeing from AI and that I think should persist. We should address the debate around AI in filmmaking. So most people say, and this seems to be true, that AI is driving down the cost of production for films. And that means it's going to make it easier for the little guy to compete with the big budget studios. The perception in that scenario is that Netflix is an AI loser. It creates new competition that Netflix did not previously have. But I think there's something that's probably important to distinguish there. AI is helping the cost of production go down. That does not mean AI can make great movies. So I actually thought Ben Affleck of all people had some good commentary on this when he did an interview, podcast interview, like I think four or five months ago, he says, but I think with what I see is, for example, if you try to get ChatGPT or Claude or Gemini to write you something, it's really shitty. It's shitty because by its nature it goes to the mean to the average and it's not reliable. I just can't stand to see what it writes. I really. What it is, is going to be a tool, just like visual effects. And yeah, it needs to have language around it. If this is a tool that actually helps us, for example, we don't have to go to the North Pole. We can just shoot the scene here in our parkas, whatever it is, but then make it appear very realistically as if we're in the North Pole. It's going to save us a lot of money and a lot of time. We're going to focus on the performances and not be freezing our ass off out there and running back inside. I think that's a good description for what AI can do. It basically can lower the cost of production, it can save time, but at the end of the day, creative storytelling, I don't think AI really disrupts that. Think about how high the bar is now for what you watch. There's so much content out there. If something were just an AI generated story, do you really think you would spend time watching watching it? I doubt it. But what I do think this is going to do is increase content velocity. So there, there's going to be more production. The question still remains, where will that production be consumed? And I think in this world of more content, the current distribution leaders will still win. Netflix is the current distribution leader. They have an annual content budget of more than 17 billion this year. They're going to be able to do even more with that because of the AI cost and time saving improvements. I don't think it really changes the competitive dynamics. If someone creates or writes a really good story and it's someone small, not a big budget production studio, where are they going to distribute that? Where are they going to get eyeballs for it? I think Netflix still owns the audience and that's, that's the biggest thing. If we look at the operating profit expectations for next year or this year, 2026, they're expecting about $16 billion in GAAP operating income. They have a $286 billion enterprise value right now. So it's about 18 times this year's operating earnings. We can talk about competition and we can talk about potentially time being stolen by YouTube and some of the other platforms. But I don't think this is an AI loser. I think at a. I would take the flip side that this is an AI winner. They're going to be able to produce a lot more with their existing budget because of AI and it seems like management's pretty confident in the business right now as well. They last quarter they bought back nearly $5 billion worth of stock. That's more than any quarter in their history. They seem to be getting really aggressive with it. And they actually addressed this on the last conference call. And the CEO basically said, it's really helping our writers. It's really helping lower the cost post production, the editing and all that. But it's not changing the competitive dynamics. And I think I agree with that. I think they can kind of extend their advantage, if anything, with, with AI.
- [09:01]
Brett Schaefer
So the three criteria I looked at for a stock that may be a hidden AI winner is TAM expansion or addressable market expansion, saving significantly on expenses or being a lot more efficient with expenses or widening the competitive advantage. And you're saying significantly saving on expenses. Essentially, if they have, let's call it a $20 billion annual budget using AI, they can create the same amount of quality globally for or sorry, they can create significantly more quality content globally. Whether that's quality, again, as in the Eye Beholder, there's some people that like, what are those reality shows? Love Island, Love is Blind. Those are very popular. That's quality to some people. Then there's quality movies from niche indie filmmakers that are quality to other people. You can do more of whatever people like on Netflix. And yeah, I, I think I agree where it's not going to be. It doesn't make any of its headwinds. For example, losing that market share to YouTube in the United States, that has been kind of something that people have honed in on on the last few years. It's not going to change anything with that. It doesn't make it worse because again, people's using what, what are they? The video makers say, scramble up some movie about X and it's just a copy of something you already like and it's just extremely average. It's not really funny. You can tell it's AI. You put that on YouTube, maybe you get some views. You're not going to get any ROI on that because of the advertising revenue on YouTube. And if a creator, such as a director, writer, what have you, wants to get a good ROI and increase their brand within the industry, you're not going to go to YouTube, you're going to Netflix because they can pay you 5 million bucks or a million even whether YouTube, you're not going to make that much on a video, even if it goes viral. Same thing putting it on Twitter, other social platforms.
- [11:04]
Ryan Henderson
Yeah, I like your three criteria there. I think the, the criteria it hits the most is what you said, the expense savings, the. I don't know if it necessarily expands their competitive advantage that much, but you think about the savings at their size, at their scale, that's potentially another three, $4 billion that they can put into content production annually. And that is, that does widen the gap between them and the smaller, whatever indie studios or those companies with lower budget productions.
- [11:41]
Brett Schaefer
They're probably better than Paramount, HBO and Disney, right?
- [11:46]
Ryan Henderson
Yeah. I mean, it probably helps on the tech side too. I imagine there's optimizations there that we're not even thinking about. But yeah, my general belief is Netflix is the current leader in streaming. They I don't think AI changes that at all. If anything, it saves them money. And right now the stock is down 50%. That's been cut in half basically from 2025 highs. And it's largely, I think, seen as sort of an AI loser. So, yeah, I'm going to take the flip side of that. Basically 18 times current year earnings, it looks pretty good to me.
- [12:24]
Brett Schaefer
Yep. But then using our friends at fiscal AI, the PE, another metric, still pretty close to that at 21. All right, let's go. Keep moving along here. My first stock and this what inspired me to do this episode because I thought it was potentially hitting all three of my criteria. Expanding the addressable market, saving on expenses and widening the competitive advantage. It is. Airbnb, the travel platform, I think is going to benefit first by layering on AI in guest searches while using it to save a ton of money on customer support on AI search. Let me read this quote from the conference call with Brian Chesky. He's always, you know, this is the founder, he's always long winded, so bear with me. But this is what he had to say about it. Quote. What we have been doing over the last two years is really getting our data warehouse clean because your AI is only as good as your data. We've done that. Of course, as I mentioned in the last earnings call, we hired Ahmad, our cto, who is the leader of the Meta Llama model. We are probably one of the only technology companies in the world, certainly the only in travel, that has an AI native person running the technology stack. We are essentially piloting a variety of different ways to use AI, whether it's in the search box, whether it's once you search, interrupting on the search or in the filter panel after booking a trip, trying a lot of different things. We are really in the exploration and research development mode. I think where the opportunity is is if you've ever Searched on Airbnb. It can be a pain. It takes a lot of time. There's a lot of friction. You, you have all these different unique properties. You go, is this one really good? It has 4.7 stars. This other one has 4.75. They're in the same neighborhood. I don't know what to pick. You end up filtering a ton of different ways before finding a place to stay. I know if I'm going to pick a place to stay, I can take a good amount of time. Probably too much time, honestly. And I think instead in the future I could imagine a conversational AI search working quite well for them. For example, let's say you have a bachelor party group going to Lake Tahoe. You can say, I'm going to a bachelor party weekend in Lake Tahoe. Talking to the Airbnb search. You can say there are eight people. We want a place with eight total beds close to this X location within a five mile radius. We want a hot tub, a barbecue grill and a game room. Give me options. With a rating of 4.85 stars and above, they can probably spit out 10 options for you if they can't find anything. You have to refine your criteria. But it seems like you can keep filtering from there and making it a much better online marketplace because it increases the value for hosts by getting more people to book and increases the value for guests by saving them time finding the right place for them, which should increase ratings, customer satisfaction, all that good stuff, and increase the amount of money spent on the platform, which increases Airbnb's revenue from the cut of that. Now, the second thing that I'll pitch here is last quarter, 12% of revenue was spent on operations and support. Some of this is laws within or kind of the regulatory stuff within various cities, hiring on the lawyers and stuff for that. But a lot of it is customer support, which is a big thing for a global platform like this. I could see the cost of this coming down significantly over the next decade as they keep improving their AI customer support agent right now. So they spent 12% of revenue last quarter on operations and support. Their operating margin as a consolidated business is 20% while gross margins are 80%. So if they can keep taking down that percentage of revenue from customer support, that should lead directly to expanding profit margins. And I think it's a pretty straightforward way to, yeah, just improve, improve the profitability of the business, making them much more efficient, similar to the Netflix era. I also think they can widen their competitive advantage with AI search because. And maybe it's a bit overstated by me when talking about Airbnb, but when comparing the UI or just the way you search on Airbnb versus a booking expeding are really some of the hotel chain apps which are non functional. It's not that important to them. You're just kind of getting the same room from all of them. But I think if they can really layer on the AI chatbot within the Airbnb app, that'll make the customer experience. You know, it's not impossible for someone like Booking or Expedia or someone else to replicate this, but I think it will widen that competitive moat that Airbnb has, making it a delightful experience for users. Now, the thing is, time will tell if they can do this. They seem to be working on it, but they are a company that, well, there's a lot of experiments that don't seem to ever show up into the financial statement, so I'll close out there. Ryan Verdict Could Airbnb be a hidden AI winner and do you think if there's a possibility, will they execute? What is your probability there?
- [17:22]
Ryan Henderson
I think yes would be my short answer. I think AI benefits the business certainly more than it hurts it, if at all, or it benefits their competitive positioning compared to hotels and some of the other peers. I guess Expedia and booking. Maybe there's some development going on there as well on this side, but I think it clearly can improve the product. So that being one of the sort of criteria, it improves that it can definitely be a cost saver on the customer support line. I think they've actually talked about this on conference calls a number of times. How many of their customer support tickets can can now be answered by AI, or at least supported by AI? Maybe there's still an element of review going on there too, but yeah, I think it makes sense as an AI winner. You mentioned that it could be a TAM expander. I might have missed that. How. How do you see AI expanding the TAM just in terms of the search functionality, bringing new people?
- [18:34]
Brett Schaefer
Yes. Yeah, essentially, maybe it's not necessarily the total travel addressable market, but I think it expands the addressable market of people willing to go with alternative lodgings because it'll make them more comfortable, they're going to get a good experience as opposed to a hotel. That makes sense.
- [18:51]
Ryan Henderson
Yeah, I think that does make sense. Unless you have any other thoughts on Airbnb, let's jump to my second stock for the day. The company is Autodesk, so. And it's kind of ironic because software generally as A bucket seems to be one of the most concerned areas for AI disruption. But Autodesk I think kind of is in a sort of a bucket of its own, along with some of the other really mission critical software providers. So Autodesk, Dassault Systems, trying to think of some of the other more advanced, maybe ptc, the ones where they serve a very specific field and there's really no alternative. Autodesk is definitely one of those. For those unfamiliar, they provide software that helps architects, engineers and construction companies plan, design and manage their products or projects. If you are a structural engineer, for example, and someone said we're taking AutoCAD or Revit away tomorrow, I think it would be very difficult for you to work. Frankly, pretty much a lot of their work. Brett is former engineer. I think he can maybe attest to this and speak to how important the design software is at these companies. It would be sort of a shit show without Autodesk. And there's kind of a lot of reasons for that. One, it's the industry standard language. So if you are planning, if you're an architect and you've got a customer that's some government entity or something, and they are used to working with file types that are DWG or dot RVT files, which is specific to Autodesk, for example, it's going to be really hard for them to deal with other file types. I mean, you think about how frustrating it can be from something simple like Microsoft versus Google, it's going to be a lot more difficult when you think about these more advanced designs. So it's the industry standard language. Students learn to work in these software systems the moment they get to college and pick their field. So they take that knowledge with them to the workforce. So retraining would be kind of a nightmare. And then the third one here is there's also just the standard enterprise integration switching costs. So companies spend decades writing custom scripts, plugins, automation tools that are all built directly on top of Autodesk software. So you're so ingrained, it's unlikely that customers are going to try to switch. I believe actually five years ago or something like that. Customers even wrote to Autodesk like, please stop raising prices. You know, there's nothing we can do.
- [21:58]
Brett Schaefer
There was a group of architects. Yes. And what's funny is, and I'm sure there's bulk discounts at the large players too, is the salary and benefits and all the expenses around an architect are probably well within the $200,000 plus range for an average, probably even entry level as well. Again, not that's not just salary, that's the entire expense there. And I think the average annual license is something like $3,000 for Revit or some of the other ones are close to that. So the amount spent by the companies per customer versus the value you get out of the software versus the employee, it's just highly there's still a lot of room to raise prices if they can keep providing more value.
- [22:42]
Ryan Henderson
If you're a regular listener to Chitchat stocks, then you've probably heard us talk about Interactive Brokers. Here are two reasons why we think Interactive Brokers is better than any other brokerage platform. 1. They've got it all. Stocks, bonds, ETFs, options, crypto, you name it. 170 markets, 36 countries, 28 currencies 2. Best in class pricing they have zero commissions on US listed stocks and ETFs and offer margin rates up to 54% lower than the industry. Head on over to ibkr.com rates subject to change Margin evolves Risk restrictions apply Interactive Brokers is a member of sipc. Yeah, you think about some of the other industries, like how critical Bloomberg is to an analyst. They're paying a lot more as a percentage of their salary than an architect is to Revit. But I think pretty much anyone looking at Autodesk can safely say that the company isn't going anywhere. It's going to be just as critical this time next year to their core customers than it is right now. But that does not answer the question of why it's an AI winner. Why it is an AI winner is largely because it improves the product. So they are adding what seem like genuinely helpful AI features on top of their software. Now, granted, I'm not a customer, but I've watched a few videos on some of the generative AI tools that they've added and it seems pretty powerful. Basically, instead of drawing every iteration from hand, an engineer can just describe what they want, at least for the base designs and have it created that they can kind of build off of. I'm sure companies have their own specifications and all that good stuff, but being able to go from 0 to 1 on a design idea with AI will certainly save customers time. I see this off it's similar with designers using AI models. They are using it for inspiration and then editing and improving it, and it allows them to do a lot more work. This time it's just inside of Autodesk and it's got all the additional workflow functionality to edit that specific design, but again, it helps Improve the product. Now Autodesk can obviously charge for this. So either they can build it into their existing product and from what I've seen, that's they're doing sort of two things. They're building AI functionality into their existing product which helps come renewal time. When Autodesk increases the price by 10%, they say look how much AI tokens you've consumed or look how much AI features you're using. We rolled these out. It's an improvement. The product's more valuable now or on the more compute heavy features they can bill the customers on a consumption basis, which they are doing as well. So either way it's going to increase the average contract value. I think the thesis for Autodesk here is actually pretty cut and dry. It's not like Netflix where there's probably some controversy around whether or not AI benefits them. So maybe you're asking why is this a hidden AI winner? It seems like kind of obvious, but Autodesk is also in a pretty sizable drawdown. The stock is now trading near its cheapest earnings multiple in more than a decade. EV to EBIT for the last 12 months stands at around 24 times. So still not the not the cheapest stock in the world compared to some of the other options out there. But they are. I think you can very easily forecast 10% or higher annual revenue growth over the next three years, especially with some of these AI features increasing the average contract value. On top of that management seems to have, and hopefully I'm not speaking too soon, they seem to have found religion around some of the cost savings. They are forecasting pretty sizable margin expansion over the next two to three years. And stock based compensation is not growing, which is a start because that's been a big knock on them for a while. 24 times earnings on a business that I think can probably grow earnings at 15% plus annually on a per share basis. It seems pretty reasonable to me.
- [27:04]
Brett Schaefer
Yeah, I like the stock here, don't own it, but I've been looking closer at it. I would love it if I liked if I trusted the management team. And for anyone that is not within the engineering space and I haven't been for five years. So I can't act like I know the exact details of what the industry is like right now. But just think of it as the way you use the AI chatbot in your everyday life. For example, for me I have part of my job is coming up with headlines at the Motley Fool. You can query these AI tools and say give me a hundred Headline ideas. Now, most of them are not going to work and you're going to revise most of the options you get. But you can take that as a more complicated level for the design of a structure. You can say, come up with some creative ideas, 10 creative ideas that are different than normal or something like that for this building which has these owner's criterias. And then you can actually go back in later, make sure it's structurally sound, whatever. And if Autodesk can provide a lot of that creativity boost working in conjunction with the human architects, I think it becomes that much more valuable. And I agree with you. Widens the moat.
- [28:14]
Ryan Henderson
Okay, let's shift gears to your second stock for the day. What do you have?
- [28:21]
Brett Schaefer
I have a company that many people probably know. We've talked about them a little bit over the last year so I've covered them a lot on the Emerging Moats newsletter that is Mercado Libre for those that don't know, I know a lot. We don't have many listeners in Latin America. They are a technology giant in the region. They focus on Brazil, Mexico and Argentina with two platforms that kind of work together. But I really look at them as separate businesses today, financial technology and E commerce. I don't think looking at their financial technology business which is merchant acquiring and kind of an online bank, what they built for many of these countries, I don't think they're going to have any sort of special sauce compared to other banking players when it comes to Fintech. Although again with customer support heavy businesses, they're likely to get more efficient because of this because of the AI tools that you can just easily build nowadays. But I want to talk about perhaps is the under appreciated opportunity for these e commerce platforms to expand their lead globally and really widen their competitive advantage because of the efficiencies in automation, AI and robotics. I think most of the following statements I make here can also be applied to Amazon E Commerce. They're probably going to be first at it. You can also look at the Chinese players Coupang in East Asia, probably Sea limited as well though I don't know them, just Jumia in Africa I think. I doubt that. Probably a longer time horizon and they don't seem to be too much of a serious business. But back to MercadoLibre for AI I see three ways they can utilize automations, LLMs, machine learnings, all these tools. You can have better efficiency at the warehouse and delivery level, you know, better search and you get a better advertising for the warehouses. I think you can utilize robotics you can utilize self driving vehicles, you can utilize all that technology together to reduce labor costs, improve safety standards and have a better ROI on your operations, even if that is not shown in the income statement. Today you have consistent automation improvements, but I think it's just a long, long tailwind for them within warehouse sorting, delivery, utilizing self driving tech, all of that things. Again, in these Latin American markets, it's probably going to be a longer time horizon than Amazon, which has highly automated warehouses already. But Mercado Libre is working on this and I think it's inevitable that almost all of these warehouses have robots and self driving cars taking over most of the commercial shipping operations of the business. Now there are also, let's see. I mean it's just simple. There's a lot of people that work in these warehouses and there's a lot of people that drive for MercadoLibre. If MercadoLibre can grow its revenue faster than its delivery in warehouse costs, you're going to see increasing roi. That's either going to show up in decreasing selling costs for customers or increasing margins. I think probably likely both. Now in the consumer experience, I could see the E commerce platforms like Mercado Libre improving significantly with AI search in a similar way to Airbnb because you have what is essentially the user doesn't know any better. There's for them an infinite amount of products on Mercado Libre because you can't scroll through anything, you never get to the end of your search results. The more the website understands you, the more personalized your search results can be. By conversating with a chatbot, I think it should lead to higher conversion rates from the beginning of a search to closing a purchase. Even though I think the name is hilariously chosen, Amazon's Rufus Chatbot is quite helpful on the website. Maybe Ryan can agree or disagree with me. The help you find products, filter results, filter reviews. I would expect Mercado Libre to do the same, but it hasn't already. Here is a quote from a article around AI on Mercado Libre from I think the website's payments for buyers. It launched an AI enhanced search experience in Argentina that personalizes search results based on each buyer's search and transaction history. For example, using this data, it will display the buyer's preferred brands or their choice of of value options or premium options for sellers. The marketplace includes a seller assistant that facilitates onboarding, offers recommendations to improve listing quality, creates short form videos from a single product image, and handles customer service inquiries. Now lastly, I think properly utilized A.I. i don't know. Machine learning, however you want to call it, will help any digital advertising business of which Mercado Libre is won. Their ads revenue grew 63% year over year last quarter quarter similar to what Meta has perfected. I think they are the gold standard here. You can get high intent AI powered advertisements across the Mercado Libre ecosystem that will drive higher click through weights and advertising revenue growing faster than overall revenue will be a tailwind to margins. You have the efficiency gains and I think taken together I see Mercado Libre as a business that will be larger. It's going to have a wider moat and fatter profit margins if it can take advantage of these new AI tools. So Ryan, agree or disagree with me is Mercado Libre again. I should mention too that you've been bringing this up with your stocks. Mercado Libre is down using our friends at Fiscal AI here. I'll use this time as it's loading to talk about our link fiscal AI chitchat. Get 15% off any paid plan. Go check it out. The link will be in the show notes. Let's see drawdown, drawdown, drawdown. They are down 30% from all time highs so they are not really considered an AI winner by the market. Ryan, do you agree or disagree with my take here?
- [33:51]
Ryan Henderson
Yeah, I think they're an AI beneficiary with all of the companies we've talked about today. I try to think about it as what is their competitive advantage to begin with. And in MercadoLibre's case I would say logistics, delivery, the fulfillment side of things is probably their largest competitive advantage. And then there's the network effect as well because you get more buyers and sellers on the marketplace, you get better price realization, better assortment, better options for customers. So I don't think. I don't see any world in which AI hurts their delivery network or hurts their network effect on the marketplace. If anything it makes it better and I agree it should lead to higher conversion rates, hopefully better automation and efficiency. On the fulfillment side of things, the more utilization that you can get out of your fixed assets on the delivery network, the more profitable you're going to be for E commerce business like this. We've seen it with Coupang who gets really good utilization given the population density in South Korea. So I think again there's a lot of ways they can benefit. The stat that I often see that I want to mention here and it seems like every MercadoLibre fan probably mentions this, but there's only one company in the world that has grown revenue by more than 30% year over year for 25 plus quarters. And it's MercadoLibre. They're the only one in the public markets that have been able to keep up that strong of revenue growth. I think the TAM is massive. Yeah. I should only extend their competitive advantages.
- [35:39]
Brett Schaefer
All right, I'll disclose. I do hold shares at Mercado Libre right now as of this recording. Ryan, I think we're on your third company to round things out here. What is your final hidden AI winner? And I will say this one was a surprise. I didn't think about it, but it is quite the interesting pitch.
- [36:01]
Ryan Henderson
Yeah. And it's not a company that I even follow that closely, but I just, I wanted to look at industries where they are not, not perceived as tech first. And so maybe there's less AI disruption. So. So non AI or non tech focused industries. One of the ones that came to mind for me was insurance. Ironically, the company I'm about to talk about has been a winner because of their tech advantage. But we can get into that in a second. The company is Progressive. They are actually now the largest auto insurance company in the United States. I think they surpassed State Farm last year, although State Farm's private, so you don't have exact numbers, but they're able to claim that title as the largest, largely thanks to their efforts in telematics and dynamic pricing. So they have been an absolute market share taker across the insurance industry broadly, but also specifically the automotive industry. So I've got a chart here. Maybe Brett's able to share it, but it's comparing the net premiums earned or the net premiums written for geico, Progressive and Allstate. And Progressive was the smallest in terms of premiums written in 2012. Today they are the largest by quite a wide margin. So they've just been a massive market share taker. And you know, there's kind of an old saying that if, if you're willing to write a bad insurance policy in the middle of the ocean, someone will find it. So there's always the chance that you can just write more business but not do it profitably. That's not the case for Progressive. They have the lowest combined ratio of their peers as well. So since 2012, Progressive has averaged a combined ratio, which is the key metric for an insurance company. You want it to be below 100. As far below 100 is the, basically the profit margin for them. Their combined ratio has averaged 92.4%. Allstate has averaged 94.6%, Travelers 93.7. So they have not only increased premiums at twice the pace of their competitors, but they've also done so more profitably as well. And the reason they've been able to do that is because they were a pioneer in telematics. So for those unfamiliar with this, you may remember these commercials, but Snapshot by Progressive was this small plug in device that monitored driver behavior so it could record driving habits like hard braking, acceleration, total mileage, time of the day, whether or not you are driving distracted, and it assesses how safe of a driver you are. With more precise measurement, they were able to offer much better prices for the safer drivers than other insurers were. So they stole a bunch of customers doing that. Competitors have sort of caught up. At least they offer telematics now. And part of it is because you can just do it through the mobile app. You don't need that to buy that little plug in device anymore. But Progressive still has a massive data advantage. They have, I think, 100 billion miles driven and data on that. So they're able to do a lot more with that data and interpret events sort of differently. So I'm trying to think of a good example here. Like let's say they have more data on what happens when you accelerate in a certain region in Austin on this road or whatever they might have, they might have a different tell or a different result of how often that leads to an accident or a collision or something like that than an allstate who is maybe behind in terms of miles driven. So there's, there's the data advantage here and then there's kind of a machine learning element there where you can use AI to kind of extract more value out of that data. Like going back to that quote you had, I think it was Brian Chesky said, your AI is only as good as your data. Again, Progressive's probably a good example of that here. There's also benefits across other sides of the business. So one would be on the claims automation side. They can use modern image detection and natural language processing to help adjusters by inspecting accident photos, estimating repair costs, and accelerating settlement times. So again, those are kind of the general AI benefits that a lot of the insurance companies will receive. But Progressive being the leader, it should once again extend their advantage. My thinking here is that Progressive is already able to price more effectively than competitors thanks to all the data that they've got. So when you layer on AI capabilities, it should amplify that advantage. Maybe I'm wrong, maybe it doesn't make them that much better, that much more effectively priced. If that's the case, well then at a minimum it's a time and a cost saver for their adjusters or the claim. So that would not be the end of the world either. The stock is I think flat over the last three years. Thereabouts. But yeah, it certainly hasn't been. The only reason I would call it hidden is because the stock hasn't absolutely ballooned because of AI. So that's why I'd call it a hidden AI winner. Thoughts?
- [41:38]
Brett Schaefer
I understand that thesis. What about the self driving headwind? No more accidents, what do we think?
- [41:48]
Ryan Henderson
So is that a negative necessarily?
- [41:50]
Brett Schaefer
Because then, yeah, it lowers your tam.
- [41:55]
Ryan Henderson
Okay. If self driving reduces drivers on the road, yes. Less accidents though would mean more profitable insurance.
- [42:05]
Brett Schaefer
Yeah, but they're going to price lower. So I think your profit pool goes down. You're not going to price 300 bucks when there's no claims.
- [42:15]
Ryan Henderson
But you look at the combined ratios for pretty much all the heavy auto insurance companies, Allstate, Progressive and Travelers. Geico, I don't think discloses theirs. They're all recording record operating or record margins, profit margins, basically the record combined ratios. So I would think lower accidents, lower collisions. I mean I don't think it necessarily changes the competitive dynamic that much and would probably, if anything, help the profit margins.
- [42:53]
Brett Schaefer
Yeah, I guess that's the only, what do we call it, Devil's advocate.
- [42:57]
Ryan Henderson
It could be a premium headwind. It could be a. Yeah, I see what you're saying.
- [43:02]
Brett Schaefer
So essentially it can make the leader in the space, is what you're pitching here, much more efficient, especially with the lead they have with the technology side of things as opposed to a geico. Yeah.
- [43:14]
Ryan Henderson
And it seems like if you look at the premiums earned over the last five years, they've just taken off like Progressive has outpaced their competition in a huge way. And you would have thought, well, Geico, they got into telematics, whatever, seven, ten years ago, maybe, maybe more. All state copied the same playbook. You would think it would even out. But I, I think it's a testament to all the data that Progressive has compiled because they've been able to accelerate their advantage over the last 5 years despite competition. Parody in theory.
- [43:54]
Brett Schaefer
Yeah. AI can't replace flow or the parent, the guy, the, the adults turning into your parents guy. Right.
- [44:04]
Ryan Henderson
Maybe there's some marketing benefits on the AI side. They do a good job.
- [44:09]
Brett Schaefer
Yeah, we can't discount what that has contributed to the market share gains. All right. I'm going to close things out with my final one. It's another insurer insurance company in a different sector. It is Oscar Health disclosure. I own this one as well. They are a health insurance company that targets the individual marketplace. You might think health insurance isn't really going to be disrupted by AI. You're just underwriting claims. You might argue a couple similar things to what Ryan was mentioning there, but you'd probably think even less because you're not as a direct player. You have the healthcare providers that are going to be using all these new AI tools. Right? But I think the key is going to be and there is a much larger hurdle here than in car insurance which seems to be a much better run industry. There's utilizing AI for claim sufficiency, connecting health data together, customer support again we don't need to harp on that one. But also more personalized plans which are not really available today in health insurance as opposed to as Ryan was talking about within car insurance where everyone, I think a lot of people are priced pretty as you mentioned with the telematics there you can get fairly personal. Isn't it like they have the advertisements personal price plan with health insurance you have nothing with that today. So in the healthcare sector, the majority of what is happening out there is really as the insurer analyzing data and determining what you should do to improve patient outcomes and price your insurance correctly. Everything else is just administrative work from the insurer's perspective, it is really the glue and in some cases some very annoying and sticky glue connecting every stakeholder together. And right now the vast majority of insured patients in the United States have to jump through a ton of inefficient hoops in order to get the care they want or need. You may have to deal with multiple administrative people, multiple customer support reps, spend a bunch of time on websites that don't work in the process of finding the healthcare services you want, processing claims and things of that nature. There is a ton of opportunity for Oscar Health. They are again a technology forward health insurance player in the individual space which is like the Obamacare or Affordable Care act marketplace. For example, they just built an AI chatbot called Oswell that's powered by OpenAI. Said Oswell is its first of its kind and he's tailored to you. A bit personal with this. He can help you with everything from symptom management to medicine refills, even provides your doctors with data to improve your care. Oswald's friendly, smart and ready to chat. You might argue that this gets the competitor here might Be the chatbots themselves, the broad ones, because they have a lot of healthcare use cases that people seem to be using them for a ton. But I think this is a good first step for an Oscar Health. It's trained using OpenAI's LLM. It'll make it very useful for Oscar Health members and it's supposedly going to learn more about patients over time which lead to better outcomes for them and hopefully stickier customers that won't switch to different insurance providers. There's the telehealth aspect which is free for all Oscar Health members or included within all plans. And I think there is a massive opportunity here to utilize AI and just automation, all that stuff for claims processing, customer support and the telehealth piece. As the most technology forward health insurer, I think Oscar will be the one that takes the most advantage of AI to improve its platform compared to the rest of the insurance world. The software and stuff out there is just way so far behind the times. And that is where you have someone like Oscar that just has an easy leg to gain market share. It might even help with the growth of the individual payer market because you can get more personalized insurance, you can get better plans as opposed to the employer driven model. If you can make things more personalized, you can. Again with the employer plans, you might have a large employer and you have three options for every employee. This limited flexibility versus what you could build with more personalized plans using kind of AI efficiencies to make sure your administrative costs stay low could be a way to expand a competitive advantage. Now this is more speculative than an Airbnb or Mercado Libre. It's kind of hard to see the vision here, especially because health insurance is such an opaque space and opaque sector. I think Oscar can go in a lot of directions here. I'm not sure they have the right to win. Kind of as the leader in the space, they're not, they're not a leader in health insurance yet. However, I think they should be successful in at least some of the areas that I talked about above. And with the individual marketplace, with the ACA marketplace in the United States, you have a maximum medical loss ratio, which is basically your cost of premium revenue of 80%. This means an insurer needs to be as efficient as possible. Target that 80% loss ratio and try to maximize the gap, the 20% gap between your quote, gross profit and your bottom line net income. And I think AI should be very, very helpful in operating leverage for Oscar Health over the long term. Today Oscar Health has A flat operating margin over the last 12 months. It should increase slightly this year. And I have a nice chart here that people can make on fiscal AI themselves. It is the gap between the gross profit margin and operating margin and it's slowly converged over time. So I think we're seeing consistent operating leverage as they get to much greater scale. And really it comes down to a profit gain for this company because in health insurance the margins are so slim that if you just get this nice tiny boost, you can just see a huge increase in profitability. For example, if they get to a 7% operating margin on $30 billion in revenue, which premium revenue feels well within sight of the next few years, that's $2.1 billion in earnings before any net interest income. The current market cap is $9 billion. So if, if they can take advantage of these AI tools and just make a much more efficient online operating expense line for the health insurance company or aspect as they scale the business from a premium revenue perspective and you see nice margin expansion, there could be a boom in profitability for a company that's historically been close to break even.
- [50:38]
Ryan Henderson
Yeah, I think the pitch makes sense. It to me you can see how it benefits the business. The how does it extend their competitive advantage part is maybe harder to answer, but I think it goes to the current tech advantage that they have. It seems like frankly a lot of the health insurance companies, if you've ever gone to marketplace.gov tried out any of these websites, seem to lack development talent,
- [51:08]
Brett Schaefer
low bar to beat them.
- [51:10]
Ryan Henderson
Yeah, it going back to that Bezos interview from earlier. He also mentions that it's not going to replace people, it's going to help the people that know how to use it. Like the people that know how to use AI are going to benefit the most. I think Oscar has done a good job demonstrating that they're one of the more tech forward health insurance providers and I can't imagine AI hurting them in any way. Usually those tech forward companies are the best adopters of the new solutions or the new tools and I think AI would be a great example of that. So yeah, I can see how this is a benefit to Oscar Health and I do, I, I like the idea that as they can create more personalized pricing plans on the health care side, there's the possibility that it does expand the individual signups on the marketplace. Even if you have a group insurance plan through your employer, maybe you want to double insure, maybe the plan doesn't fit you, maybe you can find the right additional or supplemental plan. Through Oscar if they've got the right price for you based on your data. So I do think there is that potential TAM expansion, but at a minimum, yeah, I think it benefits the business. On the other side, it's like the claims efficiency and stuff like that. I think that's going to do it. That's all six stocks for today. Let's go through them one more time. We've got the first one was Netflix, second was Airbnb, third Autodesk, fourth, Mercado Libre, fifth Progressive, and sixth, Oscar Health. Which of those do you currently own, Brett?
- [52:56]
Brett Schaefer
Mercado Libre and Oscar Health. Airbnb I have owned in the past, but I don't. I've also owned Autodesk, been up for a long time. What about you? Do you own any of these?
- [53:07]
Ryan Henderson
I own Autodesk, I own Airbnb, and I own Mercado Libre.
- [53:12]
Brett Schaefer
All right. All right. Well, my battery's about to die, so I think it's a good timing to get out of here. As a disclosure, we are not financial advisors. Anything we say on the show is not formal advice or recommendation. Ryan I or any podcast guests may hold securities discussed in this podcast, may have held them in the past and made buy, sell, or hold them in the future. Thank you, everyone for tuning in. Thank you to our sponsors, interactive brokers and fiscal AI, and we'll see everyone next time.