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- [00:00]
A
Will The Fed raise rates 25 basis points in June 2026? IBKR prediction markets let you trade the outcome alongside your stocks and options, earn interest, get it right and earn $1 per contract at ibkr.com predictions last trading day June 17. Welcome to Chit Chat Stocks. On this show, hosts Ryan Henderson and Bret Shafer 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. Welcome to Chit Chat Stocks, a podcast to help you find your next great investment. Today we are doing one of our regular portfolio updates where we dissect Ryan's portfolio and discuss how he's thinking about his current stocks. Right now, to spice things up, he is ranking his existing holdings. He's gauging where he currently thinks about and pretty much giving a grade on business quality and valuation. He'll go into the details of how he did this and we like to do these things from time to time because it can help determine hey, do I have a huge position in this stock but I'm kind of losing confidence in it. Okay, maybe I should trim or I have a starter position in something. I'm liking the business momentum. Maybe I'm liking the valuation more. It's time to add things like that, I guess I should say. For anyone new, my name is Brett Schaefer. I'm joined by Ryan Henderson for my portfolio. It is talked about on our newsletter Emerging Moats Stock Research. You can check that out in the show notes so you can look at it there. Before we get started, Ryan, we have a special announcement from our advertiser Fiscal AI your employer what is going on and listeners may have heard because this episode is coming out on May 13th but there is a special sale. Tell them about the new products that are launching whether they should be interested.
- [02:10]
B
Yeah if you are listening listening to this after May 14th the sale might not might no longer apply the 25% off sale that's running but it it's still 15% off with our link but the feature and the reason kind of that I wanted to do this episode will be live. We are introducing brokerage connections so you'll be able to automatically for for the longest time you had to manually put in all of your holdings and update them each time you made a transaction in your brokerage account. Now finally we are going to be able to directly link your brokerage account from over I think it's like over 35 different brokers, so most of them are covered. I looked through the list. There was very few that weren't on there. And it'll automatically give you real time portfolio updates. All the analytics will be real time as well. So it's kind of merging that brokerage portfolio with your research terminal as well.
- [03:08]
A
Huge win, I'd say. Huge engineering problem as well. I think that I can't wait to use it. You've been using the prototype for this episode. I know you could talk forever on all the products of fiscally, but we do have to get going on today's episode. I should say we kind of went over quickly today. As of this release. So May 13th and May 14th, you can still get 25% off any paid plan using our link. If it's after that, you can still get a 15 discount. It is fiscal AI slash chitchat. The link is in the show notes there. Any questions? Reach. Reach out to us and we can help you out. All right, Ryan, take us through how you decided to rank your portfolio and let's get started.
- [03:52]
B
Yeah. So to avoid clouding my judgment, I. I did not want to go through like largest position to smallest position because I would have felt compelled to probably give better grades to the larger position. So took all the companies in my portfolio, gave them to Gemini and said, randomize this list. And I'm going to go through a little bit about the business. Brett knows all these companies exceptionally well too. Yeah, 80%. But there's. We have a ton of overlap, so we're going to be able to discuss them. We can go through any questions. I'll go through some of the valuation work. I didn't do a full DCF for every company here, but at the end, I will give a grade to the business quality and a grade to the valuation. And the grade ranges from A plus to F. You know, typical American education graded system. First company we're going to be talking about is Remitly. This is kind of funny coincidence because I will say this is also the largest holding in my portfolio. So the randomizer ended up making it first anyways.
- [05:00]
A
But so for each one of these, can we maybe include just the percentage of your portfolio as of recording? We're recording this on May 4th, Star Wars Day. Kind of get reminded when I always do. We always do something on May 4, but maybe give that for context for all the. All these holdings.
- [05:16]
B
Let me pull up the portfolio here on fiscal. Just make sure I've got it. We are looking at so Remitly is the largest percentage of my portfolio. It accounts for just under 20% today. So a very sizable stake. Granted, the stock is up, I want to say more than 70% in the last couple of months.
- [05:39]
A
80% year to date. Yep.
- [05:42]
B
Yeah, it was, it was a big position to begin with this year, but it's grown quite a bit on its own as well, so. And, and some of the other companies in my portfolio have shrunk, so it's, it looks much bigger than it previously was. Nonetheless, Remitly, they are a leader in the digital remittance space. One of the digital leaders there, their mobile app helps people transfer money across borders. It's really that simple. You can transfer it into different currencies, send it to people securely, quickly. The most common corridors are US to Mexico, US to India, US to Philippines. So it's really a lot of people that move to America, sending money back home. That's kind of a typical transaction. That's not all of them, but that, that is very, very common. And I guess one of the big differentiators here is that they provide a lot of different ways to receive the money. So instead of like having to have it in a mobile wallet, you can do physical cash pickups. There's a lot of different ways, depending on who you're sending to, to make it very convenient for them. But the, the, I think the value here is that it's incredibly easy to use. It's very intuitive setting up if you, I encourage anyone to go, just make a Remitly account. It's very quick and easy. And the payments are fast. The payments are fast and they're secure. And this is a major upgrade relative to what this cohort of senders has previously dealt with, because for a long time it's been Western Union MoneyGram, these legacy payments remitters, which were extremely costly, so Remitly isn't the lowest cost, but they are significantly cheaper in most corridors than Western Union or a MoneyGram today remitly processes about $75 billion in annual volume. That is up from 12 billion in 2020. I think it's a good business, fine business, and I'd say it's a pretty sticky service. Like, you know, once you've made this a habit, the percentage take is pretty low and it's consistent enough that the switching costs are probably pretty high. You probably don't want to switch once you've built that sending habit between you and whoever the recipient is. And then there's also small businesses that run on this as well. But again that's a smaller percentage of the overall customer base. The only hiccup I would say business model wise is there isn't necessarily any like as we go through this, my list, my portfolio, it's not the whitest smoke. There's no major foundational advantage that someone else can't truly replicate. I might be underestimating some of the complexity in building out these different payment corridors, but it's not massive wide moat. It's not even the low cost provider like say wise is in this industry and we'll talk about them in a sec. But the business is pretty straightforward to run. It should be pretty high margin. They've got 66% gross margins. They spend most of their operating expenses on marketing which if the business continues to grow it should come down as a percentage of revenue. So I believe they can get to. Right now it's at 5% operating margins. I think 15% operating margins is more than reasonable over the next five years.
- [09:06]
A
It was 9% last quarter. Even the trailing twelve month versus last quarter. They're making a lot of progress to that goal already.
- [09:13]
B
Right, okay. So 15, you could probably even assume higher free cash flow Margins I think are at 18%. They spend a lot on stock based compensation, but again as the business scales, hopefully that will shrink. So even at 15% operating margin of five years, I assume 15% annual revenue growth. And I honestly think that can be very conservative. They've grown like weed over the last five years. The customers I think have grown, I want to say north of 40% annually over the last five years. So maybe you can pull it up in fiscal. But using those two numbers, 15% operating margins, 15% annual revenue growth, you get to about $500 million in annual operating income in year five. My barometer and what I typically look for is a company trading. If it's a growing business, I want it trading at less than 5 years out earn or less than 10 times 5 year out earnings. So in this case it's at a $4.6 billion enterprise value today. 500 million in five year out earnings. I know it's a lot of numbers, but it's just just below 10 times. So I give the business quality grade a B plus and the valuation grade an A minus. I would have given it probably an A plus I think four months ago.
- [10:32]
A
Yeah, yeah. I'll try to move quickly the we can go in depth on every comment, but this is one I may be even more bullish on than you. I'm not as concerned about the wise Risk. I would be curious to know if they had the exact same volumes because remitly does cash payouts, things like that, what the take rates would be across their two businesses. The only thing I'd follow up with and maybe listeners would be interested in your thoughts because it's a hard decision when a stock is running up a lot. You know, it's still below all time highs. But see if it does start running and you know you get into a situation where it turns into just this monster momentum stock, you kind of get forced to make hard decisions on whether to sell trim or not. We're still at a gross Profit multiple just 4.3 times trailing 12 months now. We don't have the Q1 earnings we're recording before that they will be out. So the stocks down are up. You know, we're kind of blind to that. Can't time travel. What maybe earnings Multiple on your 2029 or whatever it is 2030 numbers or gross profit multiple would consider trimming outside of just managing the portfolio Because I kind of look at it and say until this thing gets to maybe 15 times gross profit or maybe 30 times your 2030 earnings estimate, I wouldn't really necessarily think I got to trim this back just because there's a huge Runway for growth. Yeah, I wouldn't be buying at 15 times gross profit or 30 times your 2030 operating earnings. But curious how you're thinking about it, especially because across both our portfolios they are large positions.
- [12:07]
B
Depends what happens with the rest of my portfolio. Obviously if everything else is trading at discount and this is tripled or whatever,
- [12:15]
A
rotate out maybe a little bit.
- [12:17]
B
I'd probably rotate out because at that point it's more than half of my portfolio probably. So I would say just pure valuation wise, all else equal. I would if this. I would not even start looking at selling until this was trading at twice the valuation multiple it is today. And keep in mind this is a growing business, so that's assuming no growth valuation doubles. Maybe I'd consider looking but still I'm usually pretty reluctant to sell winners. I haven't done that that much in my portfolio.
- [12:57]
A
Yes, and of course, listen, when we're talking about this, it's different than maybe trimming down something that's, I don't know, a huge percentage of portfolio. But again we are younger on the investing lens of things, so we have money coming in over time. It's not like if something turns into a 15% position we're taking outside risk because over the next five years we should have More money coming to our accounts. All right, we'll have to move faster. Adobe number two. Ryan, what's the percentage here? I know this is a battleground stock. This is one of those ones that's been a loser in the portfolio. Take us through your quick thoughts here.
- [13:32]
B
Yeah, this is a 6 percentage position. Is that the proper. Yeah, 6% position. It's one of the most hotly debated stocks in the world right now. It seems like the they are the leader in creative design software in terms of revenue globally. They make products like Photoshop, Illustrator, Premiere Pro and the digital media segment. They've diversified over the years, but the digital media segment still accounts for 73% of revenue. So this is still by far the most important part of the business. Their Stock is down 63% from all time highs. This was one that I think for a long time was seen as bulletproof, like a phenomenal business. Great returns on invested capital. I mean if you just look at historical financials, you would think this is a business that deserves a premium multiple. The market certainly doesn't think so anymore. And I think probably for good reason. Here's kind of how I think about it that the bogeyman here in Adobe's case, or the Bear case, Bear thesis is all about AI, obviously generative AI models. So text to image models like Midjourney, Nano, Banana, I think Claude Design is a new one as well. These are now a critical part of the design process. Full disclosure, Fiscal AI recently hired a designer and I've been asking him a whole bunch of questions, probably annoyingly about like, you know what, what do you use to try to get sort of the inside scoop? I would guess that pretty much every professional designer in the world is using some text to image. Maybe not text to video necessarily, but at least a text to image model as a part of, of the design process. But they still seem to be finishing their designs and doing the touching up and building a final product in Photoshop. Now keep in mind, Photoshop is one of whatever 30 products within the Adobe Creative Suite. So when you're an enterprise, if you've bought the Digital Media bundle for Adobe, you might have a video editor or someone that's using the video editor, someone that's using the photo editor or someone that's doing audio editing, whatever it is, maybe you're using the signature software, Adobe sign or the PDFs, whatever. There's a lot of different reasons to have this and there's a lot of different touch points within an organization for the Adobe Creative Suite. So is it as critical to the design arm of a company as it was 10 years ago? No, but I think there's still pretty high switching costs. I think it's still pretty sticky for the creative parts of an enterprise, but I do think maybe there's potentially some pressure on their ability to increase prices in the future. We'll see. So far there hasn't been any issues with that. I think the generative models have been around for about three years. Maybe call it three to four years. I think mid journey was at a long time ago actually. So today EV to ebit. Brett, share in the revenue chart here.
- [16:44]
A
Yeah, I mean digital media revenue chart. So this is the one that you're talking about specifically getting major disruption. Yeah, you can't see the disruption yet but there, you know, clearly a lot of narrative out there. But maybe the only follow up I had maybe go through the valuation then, then I'll discuss it.
- [17:01]
B
Yeah, the EV to ebit, which is typically, typically I say that every company might have certain nuances to this, but EV to EBIT is a multiple I try to use most often. 11.4 operating income has grown at about 15% a year over the last five years. I think high single digit revenue growth and low double digit operating income growth is achievable for Adobe. If you get that and the buyback pace continues, I think there's a pretty clear path to a more than a 15% annual return from here.
- [17:36]
A
Okay, so I'm seeing here business quality grade B valuation B plus. What are you looking for to indicate the thesis is wrong with the AI disruption like that? That it's real?
- [17:51]
B
I think just climbing the wall of worry. Like I mean I would have said two years ago that if they produced 10 revenue growth annually every quarter for the next eight quarters, the multiple would change. But you know, it hasn't. So at this point it's just buyback
- [18:09]
A
will be more effective.
- [18:10]
B
Yeah, at this point it's consistency with the buyback. I do not want to see them continue to make acquisitions like they did with Semrush at these prices. I would rather see the buyback pace frankly because they can reduce their share count probably by about 7% a year at the current valuation. So yeah, I would actually probably make the business quality grade B minus valuation B plus. But I don't really want to touch this position much from here. I think it's fine as is.
- [18:43]
A
All right, number three, Alphabet slash Google. What's the percentage of the portfolio? And take us through your current stock thoughts on business quality and the valuation of the stock.
- [18:55]
B
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- [20:58]
A
They do. They acquired some electricity. I can't remember exactly what they did, but they did acquire smartly some sort of transmission thing specifically for getting electricity to data centers. So they're very smart and they have, you know, the undersea cables that they just kind of build for people around the world. It's quite nice and I'm showing a chart here. Fiscal AI Google Cloud revenue since December 2017 when it was $4 billion in ARR or just revenue that year. It's grown at a 40% annual rate to 60, let's say 66 and a half billion dollars over the last 12 months. And the margins now are just as good as aws. So really, really strong performance. I mean it's just been fantastic.
- [21:40]
B
Yeah, I think this might be the best business of all time, which is obviously a big statement, but like top five, top seven, between competitive positioning and the opportunity in front of them, I don't know if there's ever been a business that looks this good right now operationally like Google cloud accelerating to 63% revenue growth on a $70 billion ARR base. I mean it's, it's outrageous growth at their scale, the valuation they are, they are knocking on the door. Being the largest company in the world. I think it's possible that they surpassed Nvidia today. I'm not sure. $4.6 trillion enterprise value. Question is, what does operating income look like in five years? Right now it's at $138 billion. It feels kind of weird to say this out loud because the numbers seem so high, But I think $300 billion in operating income is feasible within five years.
- [22:45]
A
Oh, that's high. That's high. Really?
- [22:49]
B
Consensus probably has it right around there.
- [22:51]
A
I don't believe consensus.
- [22:53]
B
I know, but it, I think it's possible. It does seem, maybe it seems high, but you look at Google Cloud, you look at Search, which is still growing almost 20% year over year, they are growing double digits across every division and seen margin growth or margin expansion, let's say just positive scenario, this did happen. $300 billion in operating income in five years. That would mean it's trading at 16 times five year out earnings. So that's not really what I'm looking for. Like a growing business. I want it less than 10 times 5 year out earnings. But I said I think this might be the greatest business ever in terms of competitive position and opportunity. So I don't really want to sell that. I'm not going to make it a massive position. Like I said, it's three and a half percent. But it just feels wrong to sell potentially what I believe is such a great business. So this is quality grade A plus valuation grade. I'm actually going to go audible here. I'm going to go with a C plus for the valuation.
- [24:02]
A
Okay. So this is one where market crash, a boom slash bubble, the bubble is real and it pops. Sometime in the next few years is one you'd want to increase your position on. That's kind of what I'm picking up. All right. Yeah, number Four Wise, the. What do we call the partner to remitly the frenemy. Both benefiting from the digital transition to remittances. Take us through your position sizing and your basic overview of how you see the business today.
- [24:34]
B
This is a six and a half percent position for me. So one of the largest. The valuation's a little tricky for this one because of some of their accounting stuff and not all their interest actually accrues to them. So maybe we can go through some headline numbers here in a bit.
- [24:52]
A
This might be help because I think they are moving the primary listing to the United States. I've seen the rumors. Hopefully we can get those accounting stuff normalized to what we like as a, you know, what do they call cold blooded America? Not full patriot. I don't know what the saying is as, as American patriots we want everyone listing on on Gap and SEC numbers. But take us through how you're looking at it.
- [25:16]
B
Yeah, so WISE is the low cross, low cost cross border payments app and they've built a cross border payments infrastructure that's really one of a kind. There's no one, I don't think that has replicated this and the way they've done this is by instead of going through the conduit banking system or correspondent banking system I think is the terminology which has a bunch of different layers and is taking fees all along the way. They're basically just crediting two accounts. They have a bank account in each country. They credit one, increase the value in the other and send it along to the recipient. The it seems so simple. But getting banking licenses or what is basically their equivalent to banking licenses because they actually in most countries they don't have a true full fledged banking license is really difficult. There's a lot of regulatory approval that has to go in and frankly most companies don't want to give back as much as they can in cost. Whereas Wise, it's kind of their mission to lower fees as much as they can to make money in other ways. So they've got the Wise card, they've got interest held on cash in your accounts, they've got the business to business layer. So that basically white labeling their payments infrastructure to other companies. For example, nubank uses WISE for cross border payments. There are a lot of businesses now operating on WISE that are sending payments across the world.
- [26:59]
A
I think this is one stock's one of them.
- [27:02]
B
Yeah. Probably moving the needle for them for sure. I give the business quality grade an A which might be aggressive but I tend to think this is a higher Quality business than a lot of other people it seems. Valuation grade. Maybe we can go through this live. We've got. What's the market cap today? Brett, can you pull this up on fiscal here?
- [27:32]
A
10 billion. But they have the. That's in British pounds, see. Get off the London exchange. Come on. We are at USD 14 billion. I don't know what do you want? Pounds or dollars?
- [27:47]
B
Let's go pound. Dollars. Dollars is more consistent.
- [27:53]
A
13.7 billion. Now what are we at?
- [27:56]
B
13.7 billion.
- [27:59]
A
Operating profit 730 million in USD last 12 months. So not crazy.
- [28:08]
B
No. What did you say? 730.
- [28:12]
A
730 million.
- [28:14]
B
So a little under probably 20 times. But again, Wise has some tricky stuff with how they account for interest. Again, I would really appreciate if they primary listed on the New York Stock Exchange.
- [28:27]
A
It's a hard one to talk about on a podcast, that's for sure.
- [28:30]
B
Yeah, it feels like every time a company has tried to consistently lower prices, maybe I've only studied the winners, so I'm biased in this. But when you consistently lower prices for your customers voluntarily, it feels like a great model. It's one I like. Amazon's done it. Walmart is the iconic one. I'm not switching off of WISE for a long time until I'm given some sort of better alternative. And it feels like it becomes harder and harder for anyone to compete in terms of cost on cross border payments with wise.
- [29:11]
A
All right, so what did you give the valuation grade as?
- [29:14]
B
I'll go with the be.
- [29:16]
A
All right. One thing I will slightly push back on is and maybe this makes remitly in my mind a little more bullish is I don't think remitly is that far off from Wise for pure digital payments for high cr. How do you describe it? Wealthier people, Euro to USD, stuff like that. Some of the data they recently gave at their investor day, they are tr. You know, they're not as far along as Wise, but they're pretty darn close replicating the direct banking licenses. So maybe just own both. Yeah, that's, that's, that's what I would say.
- [29:55]
B
Yeah. I think part of it probably is the lower average transaction value and having certain disbursement. Yeah, cash dispersement.
- [30:03]
A
Wise is my take is that they would be pretty close to the same if Wise intermittently only did digital payments to very liquid markets. Which is what Wise is the core and along with business customers. I mean. Yeah, that's, that's all I'll say. But I think both can be good, good long term contractors. For example, for example, the business opportunity is estimated by both companies about $20 trillion. Now Remitley does about zero in business transactions. Maybe around here, maybe, Maybe it's like 5 billion, 10 billion, something like that wise over 50 billion. So they're well ahead of that. But if they both $500 billion over the next decade in business transactions globally, they will be combined less than 5% market share, especially if you consider that there's going to be growth and inflation. So just across the board, both businesses, huge growth opportunity.
- [31:01]
B
That's one too that I think cross border business payments, people hiring people abroad is going to be a tailwind for both of these businesses for decades to come.
- [31:13]
A
100%. All right. And that was the position sizing here.
- [31:16]
B
That was six and a half.
- [31:18]
A
Six and a half. So pretty sizable. So you have a very, if we're going basket approach, largest bet, digital remittances. Yeah, all right.
- [31:26]
B
Yes, definitely. And we'll have one later that's more, not really remittances, but digital payments, I guess.
- [31:33]
A
All right, let's keep chugging along. Airbnb number five.
- [31:37]
B
Airbnb is my third largest holding 10% position. Granted, it's gotten there a little bit on its own in recent months with the stock performing well and other stocks performing not quite as well. I think most people know Airbnb. They're the leader in alternative accommodations in North America. And more importantly, they have unique supply relative to competitors like booking. So more than 50% of their listings in North America are exclusive on Airbnb, which I think sometimes people seem to believe that these businesses are a commodity, the online travel agencies. But that could not be further from the truth. In North America, my travel search starts on Airbnb. For the most part. I'm not alone in that. The international growth opportunity here, I think is enormous. I think think we're in this early stages of this network effect where people are building entire businesses off being hosts on Airbnb. Guests obviously want to go where the most hosts are because that lowers the price because it's more competitive. More guests means more volume for hosts. Obviously self reinforcing cycle there. It's not one that's going to move super fast. You're not going to have network, you're not going to have growth like, I don't know, meta virus.
- [33:05]
A
Yeah, it takes a while to convince someone to say, hey, you have a condo, it's rented out. Might take a few months to get the ball rolling or even convince them. I take a year to convince them in the first place.
- [33:15]
B
Yeah. Or even like getting people building businesses around it. Right. Like literally buying properties solely to list them on Airbnb, which I think is more common than people might expect. It's a slower moving market, but I can see 10% top line, 10% plus grow top line growth for a long time. So it's one where maybe the growth isn't 40, 50% this year, but 10 years from now they could be generating top top line growth above 10% because there's massive industry wide tailwinds. The network effect continues to drive more and more adoption. There's a lot of room to grow internationally and there's a lot of value added services that they can provide as well. Today, $74 billion enterprise value, about two and a half billion dollars in last 12 month operating income. So high 20s in terms of an EBIT multiple. But they've been investing a lot. They also have a big working capital advantage, which I think goes under the radar. So you'll see massive discrepancy between free cash flow and operating income. Bulk of that is going to be holding payments for hosts.
- [34:32]
A
Helps with interest income and which after operating income, you know, they can get more from that and helps with the buyback. They, I think are on a good pace to maybe 2 to 3% per year, reduce that share count. So that can help as well. And for context for the listeners, they say 70%. Maybe it's a little lower now, but 60 to 70% of gross booking volume is in English speaking markets. So us, uk, Canada, Australia, I think that's it. Plus France, I guess. France, also huge as well. Paris, I think is a ginormous market for Airbnbs. So there's still only 30. The rest of the world is only 30%. And there's ginormous markets. Japan, Brazil, Spain, Italy. Just places where tourism booms. Yeah, there's. There's still a large opportunity to head.
- [35:23]
B
Yeah, it's. Maybe I have a little consumer bias here because I enjoy my experiences on Airbnb. Airbnb. I know there's a lot of people that seem to hate the stock because they had a bad Airbnb experience. But if you look at the volumes, you look at the gross profits of Airbnb versus the three largest hotel chains in America, they were smaller than all three of them, than any one of those three, like seven years ago. I think 2017 is the earliest numbers we have. They were smaller than all of them. And I think the three are Marriott, Hilton, Hyatt.
- [35:57]
A
Sure.
- [35:58]
B
So smaller than all three of them on a gross profit basis. Today they are pretty much as large as all three of them combined on a gross profit basis. They have literally eaten the hotel market in America and I think probably have room to grow especially as they add more boutique hotels to the. To the platform.
- [36:19]
A
All right, quality grade, valuation grade. And what is the position sizing again?
- [36:26]
B
10% position size. Again, it's run a little bit. So valuation grade for me is a B today. The business quality grade. Maybe we'll disagree here. I don't know. I'm giving it an A minus. I think this would have been an A.
- [36:39]
A
But I.
- [36:40]
B
As a part of the valuation you have to capital allocation or. Sorry, as a part of the business you have capital allocations. I guess a part of that. I don't love the new ventures. I don't necessarily love the push into experiences and services. But again, waiting to be proven wrong
- [36:57]
A
there a binas isn't the. I don't think that's terrible. I'd maybe inch towards A. I don't think I would give A plus for business quality, but I do think a lot of people out there will give B or C on business quality. I just don't. I really have high conviction. That's not. That's not the truth. All right, number six, Grupo Aeroportario del Centro Norte or the northern central airports in Mexico. We aren't going to have terrible Spanish accents on this episode. Ryan, take us through the position sizing here and the basic thoughts. We've talked about this one plus some other airports and why we like the general business model. But maybe a reminder for the listeners.
- [37:37]
B
Yeah, so this is about a 7% position for me. Again, this one got here partly on its own because it's done well while the rest of the portfolio has not. This is the largest. Well, their largest airport is Monterey. It's one of the three biggest. I think it's three big Mexican airport operators. And the thesis here is pretty clear. We've talked about this on this show a number of times. I'm generally bullish. The Mexican economy, I think they've got a good population pyramid. A lot of people are kind of hitting that peak earning years for them. They have increasing GDP per capita because there's sort of a better trade relations with America as some of the overseas trade relations are kind of falling apart. So nearshoring is kind of being a common theme there. I think traffic to Mexico will continue to grow and I think traffic within Mexico will continue to grow as well as GDP per capita rises. And airports are phenomenal businesses. They are basically literal toll roads for the air. So you get aeronautical revenue every time a passenger flies, they're collecting a percentage of that tick. Then you get non aeronautical revenue through the commercial businesses at the airports. So as long as traffic to Mexico continues to grow, in particular to Monterey, which is one of the key business hubs in Mexico, I suspect Centro Norte will do pretty well. And it trades at an ebit multiple of 11 times, which is very reasonable. You don't have to have very aggressive assumptions to make that work. And then the last thing I'll say, massive barriers to entry. Right. Like starting a new airport is not very easy. It's not like starting a new website. It, you know, it requires a lot of capital, a lot of regulatory approval and most of the time you can't get it. So yeah, business quality grade for me here is an A. I think most airports I'd probably give an A to in terms of business quality valuation grade. I'll go A. It's not as cheap as it has been in the past, but still 11 times EBIT, very reasonable.
- [39:48]
A
Yeah, not bad. And they'll also benefit again Monterey, of the larger cities, I believe it is the wealthiest on a per capita basis, although Mexico City is the largest by far on total population. And they just had their conference call, I remember reading this in the conference call they just added a direct flight from Monterey to Paris. So there is money growing and wealth growing within the Mexican economy. You know, it's not as rich as other areas, not original New York City or Los Angeles or Miami, but it's more about the change and you know, the trajectory over the next five to 10 years. So there should be hopefully, you know, more, more of that to come. Now you already have it, a large position. But see, you know, we're in a 20% drawdown here kind of with this jet fuel crisis. Feels, feels like a good time to maybe add. But again, I understand it's already a fairly large position for you.
- [40:43]
B
Yeah, fifth largest position. But of my top five positions, I think this would be the first one I would add to. But I also have some others a little lower down the list here that I think are more exciting. But yes, I would say this is potentially ad territory.
- [41:02]
A
All right, let's keep moving. Number seven, Wicks, the stock that trades like a trading sardine sometimes. But interesting. Interesting to say the least.
- [41:16]
B
Yeah, they keep things exciting for sure. They love volatility, I guess it seems WIX is a website building and hosting platform. They got their start because they were the best drag and Drop platform at a time when you basically had to know how to write code in order to build a website. So they weren't the only one out there. I think Squarespace was around at the same time, but they were just better, honestly. And today AI has democratized the website building process a little bit and there's concerns from investors that no one's going to need a drag and drop website builder when you can just tell Claude what you want. I fundamentally disagree with that. I think for a lot of businesses, if you operate a restaurant, there's a lot of value added services that WIX has on there that make it very easy to run your restaurant. And if you're grossing $2 million a year in sales at a restaurant, 1 to 2 million, whatever it is, is it really worth ripping out that online infrastructure or that, that website and trying to build it all from scratch yourself when that's not really your expertise? I think it's very unlikely. So I think they're going to have, I think they're going to be stickier than most people expect. I will say the world of software content management systems is really competitive. Squarespace is kind of a direct one. There's more domain specific ones like Shopify for E commerce, Substack for blogs, but WIX is still the largest in terms of registered users. I don't grade this business quality that highly because I think it is competitive and it's not as high of quality as it was five, 10 years ago. I mean AI, there is certainly some dentist that could be put in it by AI, but and I also don't love the management team, candidly I think they've done some bizarre transactions is maybe the word, maybe a generous word I would use for the recent investment that they got. I can't remember what the company is that invested, but good for them. They basically got free options from, from this sweetheart deal that WIX gave them and their justification was they needed stable, a stable investor. But I, I don't understand that. Wouldn't they want the price to be lower if they're also talking about buying back stock? So kind of perplexing is maybe the way I'd put it, $4.4 billion market cap today, just under $600 million in annual free cash flow. So current price to free cash flow is roughly seven times they. Plus they own base 44, which is one of the most promising AI application builders out there. That would probably be worth $5 billion on its own. If it were in private markets it
- [44:08]
A
would trade at $5 billion on its own in private markets. Are these comps worth that much? I would say hell no. But people, you know, it will get marked there, that's for sure.
- [44:22]
B
Yeah, the economics are questionable, I think, but it's a call option or maybe a hedge. If you think the business is going to get crushed by AI, well then they've got one of the leading application builders. So this really is far too cheap any way you slice it. Even if you don't like the business, you can look at this and say you can see how it makes good returns from here. And they just bought 33, roughly 30% of their shares outstanding in a single transaction with a Dutch auction tender offers. So it's going to be levered up a little bit. Most of their debt is convertible, if I'm not mistaken, at pretty low interest
- [45:02]
A
rates and you're probably like 1% or zero. So yeah, pretty good debt.
- [45:08]
B
Yeah.
- [45:09]
A
Yeah.
- [45:10]
B
I think even if this business doesn't grow that much, which I guess is possible, but that's not the case at the moment, you can still get good returns. So business quality grade, I give them a C plus valuation grade is an A. I'd agree.
- [45:27]
A
And this is maybe one you kind of look at. The business quality versus valuation score is maybe 1 where for the listeners, if you like it, size it up a little smaller. That's probably the best rule of thumb I have for stuff that's lower quality but extremely cheap. All right, number eight, Amazon, maybe the opposite. Wide boat business. What are your thoughts here and I guess what's the position sizing first up,
- [45:56]
B
not a big position for me. It's 4% and it's run up quite a little bit or quite a bit in the last, I guess, couple months. So this has worked out. But again, small position, everyone knows Amazon, it has a massive logistics and infrastructure advantage that I think would literally take five years for anyone to replicate in terms of the E commerce side of things. But I think the important part here is that the higher margin offerings. So third party seller services, advertising, subscription business and AWS now account for more than 60% of revenue and they've been able to grow these business lines without really compromising the brand in the process. Maybe some people would disagree with that because there's a little less quality consistency from third party sellers than from the first party products.
- [46:55]
A
But again, the same sellers from TEMU aren't high quality like Procter and Gamble. Come on, Ryan, these are good, these are good listings.
- [47:02]
B
Yeah, I agree. Ultimately it's, that's a competitive, it's A competitive marketplace literally on Amazon. So like there's plenty of reviews for you to check out and you can go find the products you want the most. So I think the brand hasn't been that tarnished. But basically these high margin offerings are allowing them to generate record profit margins. They generated 13% I think operating margins last quarter. I believe 15 to 20% is more than reasonable. And people used to think we were crazy for saying that. A couple years ago I think you said 15% operating margin seems achievable. And at the time everyone was like, no, they're going to keep it at below 5 or whatever. But it's a fundamentally different business today than it was 15 years ago. Advertising and AWS are high margin businesses and they account for a lot of the gross profit dollars at the company.
- [48:06]
A
Yeah, we're almost at 12% margin. So a couple years, two, three years we could, we could be at 15, maybe next year, maybe 2027.
- [48:14]
B
Yeah, there's still the cloud leader as well. And this cloud revenue re acceleration that's been spurred on by AI has been beneficial to them I think. 10% annual revenue growth, 15% operating margins in five years are both very safe assumptions. That gets you to $180 billion in operating income five years from now. That's basically 16 times five year out earnings. You could be more aggressive if you wanted to, but at a $3 trillion valuation, I'm not that excited to buy right now. So I gave the valuation grade A B minus. I gave the business quality grade an A. It would be an A plus if it weren't for all the wasted money on dumb ideas, frankly.
- [49:00]
A
Zooks, Zoox, Luna, Alexa. Yeah, I mean that's, that's people long time listeners know. I'm in agreement on that one. Yeah, this one I've never owned, but I'd like to own. The thing is, when the market crashes or something like that, a 2022 period, I always see better opportunities. Maybe that's just trying to get too artisanal with the portfolio. But Amazon and Alphabet. Yeah, there's. The two ones are, I think high quality as well. Would love to own them at lower prices. Okay, we may not get through all 16 as we are at the 48 minute mark of our recording. Let's move on to number nine here. Coupang one that I like as well. Ryan, what's the position, size and current thoughts on the business? Because like kind of wicks, this has been a very, very volatile stock the last year.
- [49:49]
B
Yeah, 14% position for me. Coupang Falls Squarely into the emerging moat category. For me this is one one of those where it operates internationally so it doesn't get as much attention as like an Amazon but it has a very impressive business in Korea. They are the leading e commerce provider over there. They are vertically integrated. The fulfillment network is phenomenal. They have unbelievable delivery times with their. What do they call it, their overnight delivery service. I can't remember the exact terminology but you can literally buy something before midnight and get it shipped to your door before 7am it's pretty astounding. And part of that is the population population density in South Korea as well. However, I'm going to give this a business quality grade of a B plus in Korea. If we're just looking at the e commerce business, I'd probably give it an A. But Coupang Eats is basically break even. Farfetch'd is apparently breakeven. We've gotten that commentary from the conference calls. Not too much color on that. And then their Taiwan operations are largely unproven. So growth and consumer traction seems to be good in Taiwan but there's going to be a cash drain there for some time. And I honestly don't know what the end state margins look like for any of those businesses. Their Taiwan business, Coupang Eats or Farfetch. So it just kind of puts some, I guess a question mark on some of my financial assumptions for the business. I think 10% EBIT margins is possible in the long run but again they really tend to sacrifice the short term P and L in favor of long term investments. So any predictions that people have for coupons numbers could be wildly off. My base assumption is they could have $60 billion in revenue in five years. It's a little under a double from here. 10% EBIT margins would mean $6 billion roughly in operating income. Enterprise value today is $35 billion. So this completely passes my valuation threshold. It's I want to say roughly six times five year out earnings valuation grade. For me it's an A minus business quality grade B plus I think.
- [52:10]
A
I agree. I like it a lot too. It's also one of my largest positions. It's run up a little bit I believe. I actually haven't looked too closely on the returns. Very interested in what the numbers will be in Q1. We are recording this before the Q1 earnings so they're terrible. Change everything and what we said. But I'm pretty confident in the business trajectory. They got through the what I thought was overhyped. What was it? The data leak scandal in South Korea that Turned into a whole politicized thing. I'm pretty sure they're through that. But yes, as an investor, one of the biggest things is you can't kind of get that vibe on the street, you know, Are people actually still liking Coupang or is it a true boycott? Something like that. So that is one of the only things that makes me nervous. But I love this founder. I think he's a Bezos clone. And it's one where.
- [53:05]
B
Which is a great compliment, to be clear.
- [53:07]
A
For us. Yeah, for us. For any listeners. I know Bezos for some is a controversial figure, but in the business world, not a bigger compliment, I would say. Yeah, I mean, I feel like there's a long Runway to grow for this business. Despite the. My favorite bear case is the demographic decline in South Korea. The population might be down 20% in 20 years. And that's going to kill this business. Sure. I'd rather have a population period pyramid. That's more normal, but. Yeah, but it's not going to kill them.
- [53:39]
B
If memory chip cycle continues, they're going to be the richest country around, so.
- [53:44]
A
That's right. That's right. It's going to flow through. It's going to flow through those stock options. Okay, number 10 Autodesk. This is one that you held maybe one of your longest holdings, a permanent starter position. What's the position sizing here and how are you thinking about it?
- [53:58]
B
Yeah, this was one that I owned a long time ago. I just put it into my Roth and I had heard from engineers that the switching costs were extremely high and the valuation always traded at kind of premium multiples. And I was like, I'm tired of missing out. I'm just going to buy it. Small position. It is still a very small position. About 2% of my portfolio. For a long time it traded at basically 40 times free cash flow. I think from 2019 to 2024, it was like 40 to 50 times free cash flow. Today it trades at 22 times the business quality. Super high switching costs. Engineers get hooked on this. I mean, Brett, you're an engineer. Maybe you can attest to this. You get hooked on a software like this, good luck trying to get them to switch. It's true.
- [54:48]
A
I will say I was an engineer, not practicing anymore. But yes, you practice on this stuff at university. It's quite the moat.
- [54:56]
B
Yeah. I think they could probably get 10% per share earnings growth purely from price increases if they wanted to. But they also have more people subscribed to their products each year and probably some margin improvement that could come along and maybe some buybacks as well. The issue for me is I don't love management. I think they're not very shareholder friendly and I think you get 10% per share earnings growth. I kind of think you could potentially get that with Adobe and you're paying twice the price to do it. So it's not the highest on my watch list. I'd give a B plus to the business quality, which includes the. Basically it's management that's frustrating me. That knocks it down a peg. And then valuation grades B minus. So not super attractive.
- [55:44]
A
Yeah, they've made some layoffs which again we never celebrate. But some businesses, Autodesk have probably too many employees versus their business size. They are potentially moving in the right direction, but a lot to keep proven. All right, number 11, one of the best businesses in the world. Well, I don't want to steal your thunder here, but I think a lot of people would agree. Taiwan Semiconductor or tsmc.
- [56:11]
B
Yeah, this is the only. There are two companies in my portfolio that got an A plus on business quality. It's this and Google. And really as I've been looking at the AI value chain over the last couple years, this stands alone. Taiwan semiconductor does because LLMs, it's competitive. There's Gemini, there's Claude, there's ChatGPT, you name it. Chip designs, fairly competitive. Right. Google TPUs are proven to be pretty useful in training models. Amazon, Trainium, Nvidia obviously is kind of the preeminent player there. Memory chips, very competitive data centers and sort of the ancillary businesses, they're very competitive. But as you keep working further downstream, the biggest bottleneck is chip manufacturing for the most advanced nodes. And Taiwan Semiconductor is that entire bottleneck, it seems. So they are way ahead on the most advanced nodes from everything I've read. And the operating income growth expectations are astounding. Like they, I think they're at, I want to say like 60. Maybe you can double check me on what the last 12 month operating income is. But they've said they expect basically 40% growth in revenue for their most advanced nodes over the next five years annually. Do you have the number up, Brett, in terms of operating income last 12 months?
- [57:38]
A
Last 12 month Operating profit $68.5 billion
- [57:43]
B
US $68.5 billion Operating income last 12 months Analysts Currently, and take this with a grain of salt, analysts currently expect 141 billion in three years. So they expect more than a double in three years.
- [57:57]
A
I'm a little skeptical of that.
- [58:00]
B
I would be too, but I Think this is maybe one of the easier ones to telegraph because they have big long order books and the production expansion. But yeah there's a possibility that some of those orders could get cut off
- [58:12]
A
and if there's production expansion is only good if you are meeting demand, if demand is lower than supply their margins are going to get cut in half.
- [58:23]
B
Yeah, it's I guess it depends where you stand on the AI cycle or not debate but that's basically my biggest hold up on the valuation grade is $2 trillion enterprise value. It's still going to be less or a little over 10 times 5 year out earnings today. So it's not as cheap as it was. I think shares are up like 76% over the last year or so. Business quality gray though a plus.
- [58:51]
A
Yeah can't deny or disagree. Fantastic business valuations, tricky. It's a cyclical so it's just really, really hard to value. It's not like some subscription business. All right, number 12, one that you own, I haven't owned. I'm actually going to be covering them at some point soon on Emerging Mode stock research and I should say one of our recurring guests, Ian Bizek from Ian's Insider Corner which is a premium substack has also covered them extensively in the past. He's the first person that brought this stock to our attention. Corporacion America airports originally just the airports in Argentina but is recently expanded and actually Ryan, you are an owner, a part owner of the airport in Baghdad, Iraq. How do you feel about that?
- [59:40]
B
That is news to me honestly had no idea. I won't spend too long on this one because the thesis is pretty similar to the Mexican airports. I love airports. I think they're phenomenal business models. Pretty pretty straightforward and this one trades at 8.4 times EV to EBIT. So single digit EBIT multiple. They own a bunch of the South American airports throughout Argentina. Brazil. Argentina is really their biggest market still but they take again same characteristics basically a toll road on air travel which air Travel has outpaced GDP growth over the last 20, 30 years. I think that will probably continue and then they actually take their cash flow and primarily delever or look to bid on new airports as well. So more of a I guess an aggressive growth strategy compared to some of the other airport operators but business quality I'm going to go with it. A minus, maybe a B plus. I love airports but there's sort of some travel uncertainty in the markets they operate in and with the recent cost increases for airline tickets and then valuation grade it's hard not to be optimistic at a single digit EBIT multiple. So I'll go with an A. Yeah, I mean we.
- [61:00]
A
Well, I won't speak for Ryan, but I like our guy Javier Malay turning around the economy of Argentina. But that is a tricky market and there's no telling when some sort of hyperinflationary period or something could happen again. It seems to happen all the time. There's. That would definitely be a headwind for their business, although they are pretty hedged with I think US Dollar contracts. All right, we'll do one last one here. I think listeners, we don't. Yeah, we don't need to go too long over an hour, but this is one given the drawdown, Lizards might be interested in Ad Yen. I think the proper one you say the D more soft. So hopefully in what is it? Dutch, I think Adyen, something like that. Hopefully you're pronouncing it correctly. I'm an owner of this as well. What's the position size here, Ryan? Take us through how you're thinking about the business today.
- [61:54]
B
The position size is small. It's around 2%. Before I think this will be the last company we talk about. I'll just mention the other three companies are Monday.com, again really small position. Mercadolibre small but potentially exploring an increase there and then Nelnet, which is a large position but it's been a set it and forget it. We have done individual episodes on all those businesses if you want to go check them out. So we won't be able to get to all of them today. But I recommend going and listening if you're interested in any of those. I'll also just say business quality wise, Monday.com would have had the lowest score on my portfolio. Would have received A D but 60%
- [62:34]
A
of the market cap in cash.
- [62:35]
B
Right.
- [62:36]
A
That's not bad.
- [62:37]
B
Valuation would have been probably a higher score. But let's talk Adyen. Adyen is an end to end payments processor primarily for large global enterprises. And one of the big distinctions here between them and other payments processors is they have not grown through acquisitions, which is super common in the payment space, especially payments processors. You look at like a shift 4. You look at Pfizer. These are complete, well I shouldn't say complete messes. FISERV is they are hodgepodges of assets that are getting combined into one under one umbrella and it becomes kind of unwieldy to manage. I think is basically what you end up seeing playing out for them. It's easier to Manage. It's a single code base which allows merchants to manage online, in app and in store payments globally through a single integration. It doesn't require a bunch of different separate plugins. They apparently have among the highest authorization rates of any payments processor. I believe it's them and Stripe that are kind of neck and neck for the highest authorization rates, which is. That is the metric that matters if you're a merchant, is which of these who is authorizing the most payments. Accurately, they've grown their process volume. So total payments process volume from $32 billion in 2015 to $1.3 trillion over the last 10 years. Extremely profitable. I think 47% operating margins over the last 12 months. You're looking today at $23 billion enterprise value, $1.3 billion in operating income.
- [64:26]
A
So EV to eBay, pulling the enterprise value from fiscal. Yes, that's incorrect. So I'd use the market cap, maybe subtract a little bit because the EV is not going to include the cash that's held for customers or sorry, it will include on all the aggregators just because that's. It's an automated calculation. But the true EV is going to be higher.
- [64:46]
B
Okay, I wasn't sure. I looked on the as reported and I don't think they split out what is held for customers, but either way you're basically looking at around 20 times operating income, maybe slightly higher. I got to double check on how much is held for customers and the cash balance. But I think there's a chance you get 20% plus revenue growth here, which is annual revenue growth for over the next five years with similar earnings growth, maybe even some margin expansion. Again, I give the business quality grade an A minus here just because I have some uncertainty about the payments processing landscape and maybe I don't understand the competitive positioning as well as I think I do. And the valuation grade, I'll probably go with a B plus, but this would be the company in my portfolio I'm the most likely to add to at the moment.
- [65:43]
A
All right, interesting to know. And I'm an owner of this as well. What's funny is that they made their first acquisition ever, not directly for payments volume, but they acquired a company called Talon one. Or maybe it's not the first acquisition, but it's one that's kind of sizable. 750 million euro. It's a loyalty and incentives platform for global merchants. So maybe, you know, given their market share with large enterprises that are global digital businesses, this could help with them. But it was a little bit concerning to See. Oh, has the culture changed a little bit? Are we getting a little bit greedy to try to acquire growth? But I'm interested to see what they say about that and how the acquisition performs. It's not a huge one. It's not probably as the same as, you know, the fiservs of the world, but something that maybe concerns me a little bit going forward.
- [66:34]
B
Was there one company from my portfolio that stood out the most to you? What would be. What would you have? Great. What would you have graded the highest in terms of complete opportunity? So combine the business and the valuation.
- [66:51]
A
Okay, let's scroll through quickly. Remitly close. Adobe? No. Google? No. Wise. Pretty close as well. I think the northern airports in Mexico combination, both. I give two A's as well. You know. No A plus is you have some political risk on business quality. But yeah, like you look at that, they have government mandated price increases I think for something in the 30 to 40% range over the next five to six years, trading at EBITDA of 11 times. You should see more economies of scale. You should see more commercial revenue and passenger traffic I would think should grow in the low single digits long term, maybe even a little higher. If things work out well, what's not to like? They're going to pay you a lot of dividends. Yeah, I feel like that one to me at this moment. Stock's in a drawdown. Yeah. This year might be tough if we have an airline crisis, but on the other side, more airlines will come out of bankruptcy and the flights will, will remain.
- [67:52]
B
I will say there was not any one company in the portfolio that was an A plus on both business quality and valuation at the moment. But if you think I got any wrong, reach out or if you have any that are not in my portfolio that you think are an A plus on both, feel free to send them my way. Maybe there's a possibility that Mercado Libre could have been there, but I haven't done enough work on the valuation yet. All right.
- [68:18]
A
Yeah, and that's one of the other ones that we didn't discuss in full. And if you have, if any listeners, you want to talk about these type of stocks, you want to talk about your business quality, valuation grades, all that. Join the substack chat. The link is going to be in the show Notes to subscribe to the free tier of emerging moat stock research, join the free chat on substack and we, you know, each week I try to talk about various things within the financial world and people can ask us questions about the show all that. Good stuff. All right, Ryan, anything else before we get out of here? I will just remind everyone, take advantage of the fiscal AI spring sale, 25% off any paid plan. And check out that new feature on brokerage tracking.
- [69:01]
B
I think that's it. I think that's going to do it. We want to remind listeners, and this is probably especially a good episode to remind listeners that Brett and I are not financial advisors. Anything we say or discuss here on Chitchat Stocks is not formal advice or a recommendation. I may buy, sell or hold. And I do hold all the companies discussed in this episode. So please do your own work. That's going to do it. Thank you all for tuning in and we will see you all next time.
- [69:33]
A
Welcome to Chitchat Stocks. On this show, hosts Ryan Henderson and Brett Shafer 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 guests is not formal advice or recommendation. Now please enjoy this episode.
- [70:00]
B
I finally had a light bulb moment about a stock we've all heard about growing at 18% a year and a 15 pe. I shared this insight in a special Deep Dive report to subscribers of my research service Value Spotlight. The report is called a generational moment, reigniting human connections through a tangible network of intangible assets. Chit chat listeners can get a discount to my research@stockwriteup.com that's stock W R I T E U P dot com.