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Citadel's Masterstroke; Apple, Amazon, Meta, and Microsoft Mega Earnings Week; Luxury Stock Round-Up
01:05:42
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- [00:01]
A
Trade, election climate and economic outcomes with IBKR Prediction Markets right alongside your stocks and options. Earn interest on your position and receive $1 per contract if you're right. Learn more at ibkr.com predictions welcome to Chit Chat Stocks, the podcast that helps you find your next great investment. I'm one of your hosts, Ryan Henderson, and I am joined as always by the one and only Brett Schaefer. Today is the biggest day of the quarter, earnings wise, if I'm not mistaken. Probably one of the biggest. Amazon just reported, Apple just reported yesterday, Microsoft and Meta. We are in the heart of earnings season, so we have a lot to discuss. For those that don't know, this is our weekly Investing Power Hour. We do these live every Thursday at 5pm Eastern Time and we talk all things financial markets, any news, any earnings, any headlines, anything we want to discuss. So if you enjoy these shows, please give us a review. If you want to see more of our written work or some of Brett's deep dives and portfolio insights, check out the Emerging Moats Stock Research Service. I'll leave it there. Brett, our slate is completely full today. Where do we want to start?
- [01:13]
B
Well, I want to start with situational awareness because that has been the story of the week on top of these earnings. But we were discussing in the substack chat, not, not me and you, the listeners of the show, and we were saying that potentially we should have in our arsenal the ability to do a mega power hour that's an hour and a half long, depending on the day. Now we might have to pre plan that a little bit more depending on our schedules, but what are your thoughts on that? Because it's this time of the quarter where I think we have so many things to talk about on the show. We could probably go for two hours and, and not reach the end.
- [01:55]
A
Yeah, I mean there's shows where we're struggling to find news and then there's shows like today where there's seemingly an endless stream of new information out there. Situational awareness is. This is quite the story.
- [02:13]
B
Yeah, I'll get into that. Yeah, maybe, maybe a couple times a year, once or twice a year we could pull it out. The mega power hour, that's also very listenable. People would click on that. But yeah, let me get into this story and then maybe I'll toss on the link to the substack chat and the show notes. But I know a lot of people are just listening to the recording. So for those that don't know this is breaking news from a couple of hours ago. I'll read the Wall Street Journal headline but I think first reported by the Financial Times, situational awareness. The once high flying AI focused hedge fund sold the bulk of its stock portfolio to Ken Griffin's investment firm Citadel after suffering deep losses, according to people familiar with the matter. People familiar with the matter, probably Citadel. This is the. Well, the person here is. His name's actually very hard to pronounce. Leopold Archbammer. It's a German name.
- [03:11]
A
Aschenbrenner. I think something like that.
- [03:13]
B
I probably totally botched that. His resume is fantastic. I think he was a valedictorian of Columbia University at 19. He's the wunderkind kid of this age. Mind you, he is younger than both Ryan and I. Makes me feel old saying this and I think with this story the prophecy that all people proclaimed not not by him but others, the next Warren Buffett, it seems to always happen and that prophecy gets fulfilled every single cycle. Situational awareness apparently started with a few hundred million in AUM two years ago. They took on huge levered bets on the AI trade. Some of those popular ones you may know Ryan can maybe pull up the 13F but I think things like Sandisk, Nebius, stocks that have mooned in the past year and have since crashed in recent weeks. They took lever bets as I mentioned and saw 10 bag of gains within I think maybe 12 months or over two years. I saw numbers that they were up 2000% over two years. And given the huge leverage given the corrections here and we're also going to talk about the Korean market and the amount of margin calls there. I think the combination of that along with Citadel. I don't know if you saw this Ryan. Now this feels like. And now you're sharing the screen here. This doesn't matter for most of the people that are listening but the people that are watching there. There has been a bug with the software where if we stop sharing the screen, it has like a blank screen populating it. Ignore that. I know that doesn't really matter too much but we can't do anything about that happening if it happens again. I know it's happened for a few episodes here. Ryan. What. What does he hold? I'm seeing Nebius.
- [04:57]
A
Yeah, I mean it's just basically AI infrastructure type companies. Nebus was the largest holding Bloom Energy, SanDisk, Core Weave. I. I mean the. It's basically every stock that has just ballooned over the last couple of years.
- [05:19]
B
I think it ballooned because he invested in it.
- [05:21]
A
Yeah, yeah, yeah. I should.
- [05:23]
B
His thirsty was more Popular than Berkshire Hathaways.
- [05:27]
A
Yeah, well, it's, it's probably, it's probably more exciting than Berkshire Hathaways, I guess you could say.
- [05:34]
B
Go ahead.
- [05:35]
A
Yeah, this, I'll let you keep going with the story here, but it seems like, and we don't know how he ended up, like we don't know what his total returns ended up being because it's possible that these still ended up being, you know, positive returns for investors. I don't think he would have sold all his public stock in one go if they were positive but, or if he was doing really well. But it seems like Ken Griffin kind of masterminded this a little bit. There was, there's been some accusations maybe that Citadel was influential in driving down the prices of some of these. Now I think some of that's a little far fetched, but seems like it's
- [06:27]
B
a coincidence that the guy running Situational Awareness is getting married this weekend. I don't know if that's coincidence.
- [06:37]
A
You think he just went full risk off because he didn't want to think about it during his wedding?
- [06:41]
B
No, no, no. I think the opposite. The Citadel angle, like he's distracted this week. We can take advantage of him. That would be quite ruthless. But there were public comments made by Citadel, either Ken Griffin or someone with them that said that they thought the Federal Reserve would raise rates this week and they're influential. That caused people to maybe exacerbate the sell off. There also could have been the timing around the Korean stuff that we will talk about, but I think that that circumstantial evidence that I think makes sense. But obviously we don't have proof of the design and the plans here. Let me keep going on the quotes from the article. Situational Awareness had amassed well over $20 billion in assets under management since its founding just around two years ago, making it one of the fastest growing firms in years. Ashton Brenner, hopefully I'm saying that correctly now, who was in his mid-20s, was seen by some as an AI oracle with other investors closely tracking his firm's movements as it placed big leveraged bets. Quote, Situational had brought borrowed money from banks to amplify its big bets on stock. Citadel only purchased the portion of the firm's public stock portfolio that was financed with borrowed money while the firm held onto the remainder that it funded with its client's capital. But people said, I think they also have investments in private stuff such as anthropic. So it's not like they got totally wiped out here. David Faber reported That the nav or net asset value on July 1st was 45 billion dollars. So you go from a couple hundred million and two years later, 45 billion. And your ichor is flying too close to the sun. I also don't think it is coincidence that this guy worked at FTX and OpenAI. This group of investors, tech people, business leaders, are ones that take on insane levels of risk. Sometimes it works, sometimes it doesn't, and sometimes it absolutely blows up in your face. And as an investor, I just avoid this stuff. But, but for society it's. I mean this doesn't create too much value, but things like OpenAI, you can have some nice things, nice value creation, even if you take on massive amounts of risk.
- [09:01]
A
Yeah, it is. I didn't know he worked at FTX and OpenAI, but I think it kind of makes sense. Those firms, I guess FTX doesn't exist anymore, but they, Both of them, OpenAI today and FTX in its heyday, were risk tolerant, might even be generous. They were, I think they, they fly way too close to the sun.
- [09:34]
B
Could you say the words you're trying to say here, Ryan? Is that they lack situational awareness.
- [09:40]
A
Yeah, maybe it's. I think, I think they've been. A lot of these companies are made up of such bright people that maybe they kind of treat it like what's the worst that can happen? Like I'm no matter what, I'm going to land on my feet. Or maybe it builds a lot of confidence if you know, if you've been right for two and a half years. And looking at Aschenbrenner's portfolio, he's done incredibly well. It's hard not to feel like you're a genius. And from everything I've read, it seems he is literally a genius, but
- [10:18]
B
too smart in investing, long term capital management, similar smartest people in the world. This is another lesson for the listeners here. Drank, I'm mentioning Buffett. He says it's actually better. You don't want to be the smartest people in the world as an investor because you get yourself into trouble by being too smart. Kind of want to be in that top percentile, but not the absolute PhD. Smartest.
- [10:42]
A
Yeah, I think we've seen it time and time again in investing where people end up being too smart for their own good. Almost where they end up blowing up. Or maybe it leads to uber confidence or whatever and the market can be kind of quite the humbling mechanism. Now I don't want to dump on Aschenbrenner too hard here because it's possible he still had pretty good returns. But the last week, I think basically week has absolutely destroyed semiconductor infrastructure stocks or this AI build out anything related to it up until basically today that I think anyone that's been investing knows that you can have massive periods like this. Right. Like, especially when, I mean things have been very good for these companies for the last two years. I don't think it should be surprising that you could have a 50% drawdown in some of these stocks in a matter of days. Like.
- [11:53]
B
Yeah. And if you're 5x levered, something like that. I don't know what the exact figures were but if you go down 20%, you're toast.
- [12:01]
A
Yeah. Before I think, before people take too many victory laps. We don't have all the information here.
- [12:10]
B
It's possible. Fine. Yeah.
- [12:12]
A
Yeah. Maybe the anthropic sig stake is, you know, covers all. All losses for investors. I don't know. I don't know how it's structured. The Citadel seems like this was a very experienced move on their part.
- [12:29]
B
They're sharks. Ken Griffin's. He's smart. Maybe he has more situational awareness even though he's PhD level intelligent.
- [12:37]
A
Yeah. Do we know what happens here? So he bought all the securities in one gulp that were on margin.
- [12:44]
B
The margin. The ones that were bought on margin. And I think it's. You just buy it as a basket. It was an overnight trade. So I think they wanted to get the exact prices they were buying it as a group as. And I'm sure the situational awareness had the prime brokers, you know, the investment banks of the world managing them for them. So they can just transfer it over to probably an existing client in Citadel
- [13:10]
A
or potentially liquidate them at higher prices once they've. Once the selling has cooled off.
- [13:17]
B
What's nice is that a lot of these stocks and I know them because they are within my short portfolio. Not a great day for the short portfolio. Such as Nebius are up 27% today. After this came out, I'm sure that people thought all right, the four selling's done. Ken Griffin bought and saved the day. And Citadel can make a wonderful profit on the reorganization here because they have basically the brand value, they have their own form of leverage and they have the monstrous AUM and a highly profitable high frequency trading business.
- [13:55]
A
Yeah. I wonder if this is the last we're going to hear of Ashen Brenner. I got a feeling his story's not quite told yet.
- [14:03]
B
He's associated with everything that's popular at the time ftx, the effect of altruism, people, they're not very effective. Can we say that they tend to lose a lot of money.
- [14:18]
A
Let's talk Amazon earnings. Let's. Let's shift to some
- [14:25]
B
comments.
- [14:25]
A
Actionable news.
- [14:27]
B
Yeah. Amazon to the moon. Meta's dirt cheap. We have a lot of thoughts in the substack chat as well. People talking meta, big tech, people saying meta's dirt cheap. Um, yeah, why don't. We can go Amazon first. They reported an hour ago as of this recording and just go through the highlights of the numbers and they were fantastic. 20% revenue growth, 16% North America retail growth, which is an acceleration, I think 37% AWS growth. AI and chips are already at a $25 billion Runway run rate. And that's not potato chips. Those are semiconductors. Advertising grew 26% year over year. I have a question, Ryan. I know it's very, very hard. We don't have a full Rolodex in our brains here. Is this the greatest quarterly report in the history of capitalism? I think it's a candidate.
- [15:21]
A
It's possible. It is possible to go through. Let me go through some of the segments here. I think you just went through a couple of them. Or you mentioned AWS advertising services, which is almost $100 billion business and a high margin one at that. I think it's about 75 billion in trailing revenue. That's growing 26%. Subscription services up 12. Online stores up 15, which is just. It justifies gravity. This business is already absolutely massive. Third party seller services up 16%. Again, a high margin line item there. The slowest growth business was physical stores at 4% revenue growth, which it's just
- [16:12]
B
Whole Foods and they haven't really perfected the cheap grocery model yet. I don't think they will, but I
- [16:18]
A
think the average grocery store would be maybe okay with 4% revenue growth.
- [16:25]
B
That's about inflation. That's not that great.
- [16:28]
A
No, it's nothing to write home about. But it's an astounding quarter. I want to pull up the Amazon Quarterly report because the first line item is kind of mind blowing. Or the first quote, I guess from Jassy. He says AWS is booming, growing 37% year over year in Q2, our fastest growth in 18 quarters. Our AI and chips businesses each eclipsed run rates of more than $25 billion.
- [17:00]
B
That it's nice.
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A
That is staggering growth.
- [17:02]
B
It's up 10% after hours. There we go. Good reaction.
- [17:08]
A
Yeah, I think it deserves it. The only company that I'd maybe the only other earnings report that I'd put up there is maybe Google's this quarter is compared 1.
- [17:20]
B
What about Nvidia last year? I think they hit that like 100% rate. You could maybe put it in there. Yeah, there's just so many of the kind of the large caps out there that are durable growers like you'd never say oh Visa, which again I'll say 14% revenue growth this quarter. They're just durable compounders. You never see a 50% growth out of them.
- [17:43]
A
But no, you're not going to be
- [17:45]
B
some of these big tech companies. What about maybe there was an apples in 2020 or 2021 when he saw that super cycle from tech hardware. It's hard to tell.
- [17:57]
A
Yeah, the numbers that stand out to me. I went and did a little custom metric work on fiscal so drink. There's my first plug the arrow the what's the term for ARR growth this quarter hit a record for aws, Google, Cloud and Azure. And which of those three do you think added the most ARR this quarter?
- [18:35]
B
World events unfold in real time and now you can trade them with IBKR prediction markets. You can trade election climate and economic outcomes alongside stocks, options and bonds, all all in one integrated platform. These are simple yes or no contracts priced to reflect the market's view of probability. If your prediction is right, you'll receive $1 per contract and earn interest on your position while you're invested. IBKR prediction markets turn market expectations into actionable trades. Prediction contracts are not suitable for all investors. Learn more@ibkr.com predictions well, I think you might be trying to do a trick question. I'm going to say Google, Cloud, Amazon, Microsoft is the rank of the 1, 2, 3.
- [19:22]
A
Yes, that would be correct. They all were actually quite close. Google added $19 billion in cloud ARR, Amazon added 18.6 and Microsoft added 18. So very similar. Combined, those three cloud businesses added $56 billion in ARR this quarter.
- [19:47]
B
And only 80% of it was from OpenAI. No, probably 80% from OpenAI and anthropic. That's the big question.
- [19:55]
A
Yeah, the RR in ARR is the word recurring. Might be doing a lot of work there.
- [20:00]
B
Yeah, go ahead, keep going.
- [20:06]
A
These quarters are incredible. Keep in mind some of this is still compute like chips compute. Generally as long as their customers are growing and the demand from end users is growing, the cloud businesses should grow as well. But if you get a slowdown in spending, there is a very good chance that you get declines in top line. Numbers. We'll see if that actually happens. But at the moment the cash is flowing to these businesses and on top of that they're generating record margins as well. So it's not just on the top line. Operating margins at AWS hit a record high, I think 39% this quarter. And I think Google was around there as well. Yeah, these are, these are incredible businesses right now. Amazon, I wish I sized that position up. It seems like people sour on it, I don't know every few years and just say like they spend too much money. We do that. But at the end.
- [21:19]
B
But you can make up with it for some nice growth businesses. And yeah, the chip business doing well. All right, I'm seeing that for some reason our recording software is leaving the shared screen blank even though we're not sharing anything. I'll fix that on the podcast recording for anyone on YouTube. Apologies. Our faces are I guess, not too important, but they're in the bottom right of the screen here. Maybe we should just share something the entire episode for anyone listening. You don't care about that though. I will mention before we move on to Meta, maybe Microsoft we can talk about as well. 50%. Microsoft's up 15.5% today. Amazon is going to be up maybe the same tomorrow. I don't think Seattle area real estate is ever going to get cheap, Ryan never going to be able to buy.
- [22:05]
A
Yeah, I didn't even think about that.
- [22:09]
B
Well, yeah, and the whole satellite manufacturing business is apparently there too. It's tough. The entire boom slash bubble is going on and making that whole area rich.
- [22:21]
A
Well, you know, these companies are making some investments elsewhere, like different communities I think, if I'm not mistaken. But yeah, the bulk of employees I imagine are still in maybe not Amazon, but Microsoft very much still in the greater Seattle area. I'll share the screen on Microsoft here just so we have something to look at and people don't have to look at a blank screen. But they reported earnings yesterday, another one of the mega cap companies and the numbers are pretty good across the board. So the one gripe I have with Microsoft is that they tend to change up how they report stuff. But I'll just go through kind of some of the big numbers here. Microsoft 365 commercial products. So that's Excel. Microsoft suite for enterprises growing 15% year over year. That is still, I think one of the best businesses in the world. Despite all the so called AI disruption. Server products and cloud services grew 33%. Gaming revenue, which we saw a recent reorganization from Xbox, revenue declined 10% this business is just outright struggling right now and I'm not sure what it's going to take to turn this thing around. I mean they still obviously have.
- [23:53]
B
It's not impossible.
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A
No, I mean they still have I think good brand value with their customers. There's probably still very good lock in for people that have been Xbox users for 10 years. I don't think they're going to be switching.
- [24:07]
B
Yeah, but it's a small base, small market share. Steam, Nintendo and Sony just kind of which is PlayStation. They just run circles around them.
- [24:17]
A
Yeah. LinkedIn another good quarter. This kind of surprised me. LinkedIn. LinkedIn grew revenue 12% the they have almost 10x revenue since 2017. It's not a dying social media business which I guess is just kind of its own beast of a social media giant. Kind of doesn't compete with the other social platforms really.
- [24:45]
B
There's no short form. They supercharged the AI posts of here's what the war in Iran has taught me about B2B sales for medical devices.
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A
I wonder how much. I wonder how much tie LinkedIn has to like employment numbers.
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B
That's a good point.
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A
Possible, but unemployment would be better, right?
- [25:14]
B
More people searching.
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A
Yeah, yeah, I think so. I guess. Windows declined search and news grew slightly. Consumer products for Microsoft 365 good. I mean at this point the business is. Microsoft is largely dominated by Azure and Microsoft365 for enterprises. Yes, both of those seem to be doing exceptionally well. Microsoft did get kind of cheap this quarter. Satya Nadella had some positive things to say about ROIC for some of these AI investments. The music is still playing. Long story short, the music's still playing right now.
- [26:02]
B
Of course. Yeah, it is. Should we talk about the music slowing or stopping for some people in South Korea before we get to some other earnings? We'll save Meta. I know that's a very, very battleground stock for a lot of people.
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A
Yeah.
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B
Let's toot my own horn though and say we've been right so far on Meta being, you know, temper your expectations on that stock.
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A
But I might remember I might, I might hate invest on Meta. Yeah.
- [26:30]
B
Where it's finally be the time I
- [26:32]
A
think I've got a portfolio, a mental portfolio of companies where I am chronically frustrated by them. But the business is just so darn good that I want to just like. It's almost like hate watching the team you don't like. You can just hate invest. So it's like a emotional hedge in a way.
- [26:53]
B
Sort of. Yeah. The. Yeah. Well we'll save the meta talk. Let's talk Korean margin calls. A lot of listeners wanted to talk about this. There's been some insane moves in that market and it seems like every guy under the age of 30 in that country is a degenerate trader. Now the Korean index has gone through a crazy roller coaster ride. It's still up 41 year to date, but is currently in a 34% drawdown in about a month. Now I'm using the iShares South Korea ETF, but I think the exchange or the index might be slightly different direction correct though. Now we have a listener here. I forgot I didn't put in your name says you have to imagine there are probably some high quality non memory affiliate names getting torn to shreds in this carnage. Probably some opportunity in the wreckage for a savvy investor who's familiar with Korean businesses. Now I'm not a savvy investor associated with Korean businesses, but I think we can use Fiscal AI Screener to maybe help here. For any context, two of the big memory players are from Korea, Samsung and SK Hynix. They have had huge profit gains this year that we've talked about on the podcast and it's been covered throughout the financial media. And this led to a confluence of events along with the kind of the degenerate trading atmosphere to supercharge their share prices and people just want crazy trading things. I mean the Korean traders, I think they even have bars with live day trading events you can do. It's a very, very intense bucket shop mentality, much different than even the Robinhood traders of the meme days. It hit a lot of parts of the market. It actually was part of that. Do you remember the price of silver earlier this year? That was Korean Day Traders and I think we're seeing the same thing happen with the memory stocks and really their entire index. But I wanted to look at specific businesses that have been brought down. Like this listener mentioned. I found two 1. Hanwha Aerospace. I'm really bad at pronouncing things. Today it is an aircraft engines and military contractor, aircraft engine maker stocks in a 40% drawdown. I see a market cap of $28 billion. They got a little debt on the company but they have 2020 billion dollar market cap and $2.2 billion in operating earnings. You're seeing growth from kind of the military preparedness from the South Korean nation and the United States allies and also the demand for aircraft engine parts, not just for aircraft but the infrastructure build out. I think that one's Interesting. Another one is Naver. Naver Internet search portal that is kind of the Google replacement in Korea. Google for what it's worth is not as popular in that country for whatever reason. They also do online shopping and have another marketplace and platform businesses. I'm not sure exactly on what the business is, just know roughly the name. But it's grown revenue at a 13% CAGR for a decade and it's at a PE of 17 and a Ford PE of 15. So I also think that's interesting.
- [30:03]
A
We got a comment here that says I heard degenerate traitors the first time you said it, Brett.
- [30:10]
B
They are traitors. Yeah. No, well in Korea they actually hate short sellers. They're thinking about legally banning short sellers. So maybe I'm not allowed to go to the country anymore. That just shows the culture over there. It's not the people trading on 10x leverage that are the problem, it's the short sellers. Yeah, they got their heads on straight.
- [30:37]
A
This did. This surprised me. The iShares MSCI South Korea ETF which basically tracks the South Korea index. The MSCI version dropped 34% in a month. In a month. That might not sound like much, but think about if The S&P 500 or your American index dropped 35% in a month. People would think the world's collapsing. People think the world's collapsing and it's down 2% off highs right now. The it now it's worth noting that Samsung and SK Hynix account for basically half of the index. So that's the kind of. You're basically buying memory going long memory if you're, if you're long. The index there, the other one I wanted to show the direction. Daily semiconductor bull 3x ETF. This is basically the. The 3x levered. Yeah, tough name. This dropped 69% in a month and the semiconductor ETF was down like what, 20%. I guess that's the extra swings you get how you invest in these products.
- [32:09]
B
If you have high volatility, a 3x ETF is going to send you to zero eventually. It's mainly I think for hedging, although I don't necessarily know what you would be hedging. Yeah, I forgot to do. I wanted to do this. Maybe we can do it next week, honestly, because I don't think the S P is going to crash in a week. But yeah, the S P is down like 3% pretty much at all time highs and there are shares under the hood of many companies that are down 40, 50, 60% and there are people posting online of their entire portfolio getting wiped out? I'm like looking around, I don't see much, much cartage myself. Although the rest of the year hasn't been as fun yet. We have a comment here that says Brett is shorting everything. That is not true. It's a small percentage of the portfolio but highly diversified. And yes, some of the quote unquote AI winners are in there.
- [33:03]
A
I Speaking of margin calls, I thought this was kind of an interesting stat from Q2 earnings, the big public American based brokerage platforms. I guess Interactive Brokers is not just US based, but I think it's Charles Schwab, Robinhood and ibkr. Those are the big three. Fidelity is big, but they're not publicly traded.
- [33:32]
B
Okay.
- [33:34]
A
So they all report margin loan balances as a metric. Margin loan balances hit a record high for all three of them. The across all three combined they're at 283 billion in margin loan balances. I believe that's almost double last year's margin loan balance. Yeah, Brett's sharing the chart here. Schwab's is growing by almost 100%. Interactive brokers and it's again this is not, not maybe an issue for the brokers per se, but it's to show, to show the risk, the risk appetite that that's out there right now. The I can't imagine this kind of thing happens at the bottom.
- [34:33]
B
You have the left side of the chart here is 2021, correct?
- [34:36]
A
Yeah.
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B
Look at that growth versus 2020, 2021. I think that says the picture says a thousand words.
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A
It's extreme risk appetite right now. And to go with it, I guess these two, it's not surprising they go hand in hand. But we talked about this last week. Schwab clients have their lowest dry powder, lowest cash on the sidelines that they've had I think in like a decade. So there is a lot of toppy indicators. Robinhood reported earnings this week. So I do I want to pull this quote from the conference call and get your thoughts from CEO Vlad Tenev. So for those that don't know, Robinhood recently started offering prediction markets to their clients. All sorts of prediction contracts. I will add their prediction markets revenue which they don't break it out explicitly but it makes up the majority of their transaction based revenue was up more than 300% year over year. Here is the quote. When asked about one of the analysts asked do you think the prediction revenue is sustainable after we're exiting the World Cup? And Vlad said I think the great thing about prediction markets is there's events all the time. I guess that's true. You mentioned football season that's coming up. There's also the midterms, which I think are extremely important. They're going to be a topic of discussion. Of course customers are going to want to trade them and hedge their portfolios. My question to you, Brett. Do you think betting on football games is a good hedging practice for Robinhood traders?
- [36:26]
B
Yeah, that'll hedge my position in core weave disclosure. I'm short of that. I'm short core weave.
- [36:34]
A
I don't know.
- [36:35]
B
He's did a spew and stuff. They want all assets tradable on the platform and they want to incentivize people to make transactions. That's about it. They can say whatever they want on the conference call. That's kind of their only North Star. All assets crypto was hot. They were hyping up crypto a couple years ago. That's all they were hyping up. Now it's prediction markets. They want just as all the supply possible and they want to incentivize as much trading as possible. That is against most people's interest in actually building wealth.
- [37:05]
A
Yeah, it is. Like, I'm sure it has to be hard to explain on conference calls, like, because Tenev cannot just go out there and say, oh, I don't, you know, I don't care what they do with them. We're just collecting cash when they make these bets. But that's kind of it. They want to, like Brett said, they want to offer everything. They're indifferent to what people trade. They just want to get their, you know, collect their fee and go. But yeah, there is. I don't know if ethical concerns is the word I would use, but I wonder if this is potentially short sighted in establishing credibility as like a brokerage platform long term.
- [37:54]
B
I agree. Yeah, that could be the downside of this. You're kind of taking advantage of your customers. They lose all their money. They don't have much Aum left.
- [38:04]
A
If I'm new to investing potentially, and I'm like, I want to start putting some money aside and saving and I'm looking at my options and one of them is saying, you can bet on the Seahawks game and buy crypto and any put options you want. And there's another one that's like Schwab or Interactive Brokers and it's promoting the different securities that they offer and maybe some of the benefits of investing, let alone Vanguard. Yeah, I would think I would skew maybe this is just my personal bias. I would skew towards a more risk averse feeling platform. Like I just don't know if there's long term benefits to them offering this on the platform.
- [38:54]
B
I agree, I agree. Yeah it kind of leads you to oh, I have 90, 95% of my wealth tied up in these safe accounts. Maybe I'll have some play money at Robinhood. Is that more profitable for Robinhood to be that degenerate trading platform? Maybe, but I'm not sure. Yeah they could probably play both sides and be the quote unquote professional like an interactive brokers also have the trading
- [39:21]
A
stuff and and I, I maybe want to distinguish something because we advertise IBKR's prediction markets so it feels kind of not fraudy but wrong to to be sitting here bashing Robinhood for it. The con. I actually think there is a practical use case for using predictions in a portfolio if done right like you I'm trying to think, you know maybe you have a prediction on the economy like
- [39:58]
B
fed fund rate, things like that. Yeah, yes, it's a little bit different but it's less degenerate trading in sports and concert choices and what a the president says at a conference call. But yeah, I guess disclosure. They are an advertising partner with us. Let's see we have a comment here that says wish you guys share the screen. It took up the entire screen. Still hard to see when your faces are on the screen. Yeah, I can look in the settings. Maybe this will inspire me to look in the settings on our software but it's quite limiting and yeah there's this major bug right now is basically turning into an audio only platform. All right, let's see. Someone wants to talk Meta. I'm interested in. Meta would be one of those stocks that you short. Probably not. I'd say 99% no, it's hard to bet against a founder with a track record like that. But Ryan, they reported stock is down. Trying to lead you in here. Stock is down 8% today. What was the report and then maybe we can talk about our thoughts.
- [41:05]
A
Yeah, the report was basically that they're spending a lot of money and placing big bets and revenue is not growing quite as quick as spending is sort of the gist. But advertising revenue is growing I believe advertising revenue grew I think around 27% compared to this time last year.
- [41:29]
B
That's FoA family of apps.
- [41:32]
A
That's just advertising revenue. But yeah, family of apps would be similar 28% I guess it's strong across both ad impressions and average revenue per Ad, which is a nice sign. Usually those two kind of flip flop actually, historically, if you look at the growth rates of, okay, worldwide ad impressions versus worldwide price per ad, it's going to be sort of like an oscillating chart. Yeah, there you go. Now you've got 14% growth in impressions, 12% growth in pricing per ad. From everything I've seen, it looks like AI investments are helping the advertising business. But Meta's ambitions are bigger
- [42:30]
B
also. Still spending on the Metaverse?
- [42:32]
A
Yes.
- [42:33]
B
Going negative.
- [42:34]
A
Reality Labs is still a line item on the business. I saw a snippet from an expert transcript and it was basically, it was someone from Meta and they were like, no one can dissuade Zuckerberg out of making these investments. No one has the power to do that. And when he gets latched onto these ideas, he, like, he's completely married to them. Whether that's Reality Labs, whether that's AR glasses, whether it's becoming the premier AI lab with Llama or whatever, I think it's just Meta AI now.
- [43:21]
B
Super, super intelligence. Isn't it something. Meta Superintelligence Lab, something, something weird. It's hard to spend tens of billions on, on salaries.
- [43:31]
A
But he, he basically said like, historically, Zuckerberg has really had a hard time identifying great consumer products. Like, like being ahead of the time with that. It's. He's not Jobs esque.
- [43:49]
B
I agree.
- [43:50]
A
And I don't think that's a hot take. The issue is no one can persuade him out of it. And then apparently after every time it goes wrong and there is confirming evidence that it was a bad decision, he goes, I would have been upset if I didn't take the risk and invest in it. I would have like, I'm glad I
- [44:09]
B
know now that's coping.
- [44:12]
A
That is coping. And he, he just has missed when it comes to consumer products a lot. And some of this stuff I would think is pretty straightforward. Like people did not want VR glasses. Like people did not. I don't think they want AR glasses, personally. I don't think society wants other people wearing AR glasses.
- [44:40]
B
Yeah, most people don't want other people to wear AR glasses. Yeah, it, I believe, and listeners, correct me if I'm wrong here, I believe their AI chatbots have zero percent market share. And you contrast that to Gemini from Alphabet, big tech company, people trying to disrupt them. Gemini has 20 maybe. So that difference there of getting users in something that's not a social media platform or WhatsApp is stark. But at the same time I'm looking at this Night chart from Fiscal AI, our advertising partner. Use our link Fiscal AI Chitchat. Get 15% off any paid plan. Tons of good stuff here. Ryan has a chart here as well, but I'll share mine first or use mine first. The EV to EBIT is down to 16 so I think it probably works pretty well from here. I've been psychologically short this whole year. I think I would flip that too long now. I think it's a. I like probably does fine going forward. Yeah, I'm not right now.
- [45:47]
A
I mean I, I think Zuckerberg goes through waves of okay, we need investor buy in again. It's not good for us to trade at mid teens earnings when everyone else is trading at 20 times earnings or 25 times earnings. It's not good to have bad short term returns because it affects maybe employee morale or whatever. So and I think you can maybe see that in the operating profit chart. So my guess is there will come a period of rationalization on some of the excess spending. Or maybe I'm wrong and the returns on that AI spending is worth it. It's very possible that it is and I'm just looking at it shortsighted. But ultimately advertising revenue is going to grow. It's still going to be a high margin business and I could see a world where they're generating twice as much operating income in five, five to seven years as they are today. So yeah, if that's the case, I think this works out from here.
- [47:00]
B
Okay, I want to talk. Maybe we can talk Apple some other earnings. We got to get through the last 15 minutes here as long as well as some bubble watch. But 10 seconds here we have a comment that says taking prediction ad money is a bad call. We're not okay. Interactive Brokers we both use is a fantastic stock trading platform. I'd recommend it to anyone. Part of the product now is prediction markets for economic trading. And if I use the product I will advertise however they want it. You know it's not like we're. This is some random prediction markets platform that is our advertiser. But we wouldn't even use the product. Why? I've used Interactive Brokers for years so that's all I have to say about that. If we're being misleading on that, I
- [47:46]
A
will add if like maybe there are certain people that listen to this podcast where there is a genuine like hedging part of their portfolio where they're using prediction markets to do it. If they were asking us to promote sports betting. Yeah, we don't do that. I would ask for, you know, different things. Yeah, yeah, you're right. They don't do that. So, yes, I understand the pushback, but I think it's something we're okay doing
- [48:20]
B
for the time being. We're customers of the product. I only like generally being an advertiser something or advertising something. I also use. All right, Apple earnings. Maybe I'll hit this quick. 16% revenue growth. I believe that's a nice acceleration. And it's all coming, Ryan, from really the iPhone. Plus a little services bump, iPad wearables not doing much here. Does the whole acceleration in revenue growth simply come down to that orange phone? I think every woman wants that phone. They literally get fake cases to make it seem like they have that phone.
- [49:00]
A
I don't even know what phone you're talking about.
- [49:02]
B
The orange one. The Hermes orange.
- [49:05]
A
Oh, they added. They made it.
- [49:06]
B
You're out of the dating game, Ryan. The. The. They love this phone. The Hermes iPhone is huge in China too. It's like the orange one. They advertise it a lot.
- [49:21]
A
I mean, I want. I keep thinking there's no. What are we paying for with Apple? Why are you paying 30, 40 times earnings? But every time I think that iPhone revenue growth accelerates. 22% revenue growth for the iPhone.
- [49:42]
B
Yeah, that's nice. It can't be features. I think only the fact that they have this orange phone because the price increases are coming through now.
- [49:54]
A
I can't think. So when my iPhone, wherever it is, putters out and stops functioning the way I want, or the software downloads take up too much of the storage that I have to get a new one, I will not care what the features are like. There's. There's no feature. Like it doesn't make a difference. I already know what I'm going to use it for.
- [50:21]
B
This is. You could say you could talk about this for 10 years. It's all on the upgrade cycle. The reason the revenue jumped in 2021 is because they had a nice acceleration in the upgrade cycle. And I think the era. The orange phone did that. That's it. That's that. That is entirely what happened here. I will say the stock is down 8% after hours. Maybe guidance was weak, but going into the quarter expectations were quite high because the PE was training is at 41. Highest PE of big tech, I think, outside of Tesla and the slowest grower.
- [50:56]
A
Yeah. Gotta be up there.
- [50:58]
B
Doesn't make much sense.
- [50:59]
A
No. Okay, where do. What do we want to talk about? We've got a ton of bubble watch.
- [51:07]
B
What about what about the CEO perks story? This is short, but let's do it.
- [51:12]
A
Wait. One quick thing.
- [51:13]
B
Okay.
- [51:14]
A
Starbucks is back. I don't know if you saw this. Best comp sales in three years. Brian Nickel appear. He appears to be the man when it comes to.
- [51:21]
B
I have a hot take. He is underpaid. Let him take his private jets if he's getting paid. All right. How many people work for Starbucks? Tens of thousands. Most of them hundreds. Most of them thrive if more people visit the store and the stock does well. If Nickel gets paid like a professional athlete, he's probably still underpaid. Like, think about it. In this sense, Andy Jassy gets paid the same as some professional American football, soccer, basketball player. He is way more important than a single player. It's more important than messy LeBron James, what have you. Like, they're underpaid. Brian Nicholas way severely underpaid. If he sucks, what's his.
- [52:08]
A
I mean, is there. I would assume there's some sort of escalators, some. Some compensation that when he hits certain hurdles, he gets a big payday. Right.
- [52:17]
B
He earned $30 million in total compensation last year, according to a random article from the Independent. Could be. And it's a $96 million total pay package, which I assume is the options. That's underpaid. There are many professional athletes getting paid more and they provide way less value.
- [52:36]
A
I don't know if comping to professional athletes. Is a lot of money.
- [52:44]
B
There's a.
- [52:45]
A
There's a big executive team.
- [52:47]
B
You know, I mean, they should get paid well, too.
- [52:52]
A
The. I think kind of the irony there, or the. Or the pushback is if he gets paid as much as would be comparable to the LeBron James of Starbucks, he's potentially carving into some of those earnings metrics. He's trying to hurt or trying to hit.
- [53:12]
B
Yeah, that's fair. If you were actually going to get hit or get paid on what value he brought to the business. I agree. Yeah, he's great. Stop with his salary stuff. Do you want like 20% of your company laid off? No.
- [53:30]
A
Phenomenal timing on his part. Chipotle has struggled since he left.
- [53:33]
B
Maybe, you know, I think they. Yeah, they. They maybe turn it around this quarter.
- [53:38]
A
He's the restaurant guru.
- [53:40]
B
Yeah. The Chipotle. Yeah, they. They've been weak. I think they actually had a decent quarter. I'll maybe look at it right now.
- [53:46]
A
It was okay. Comps. Comps improved a little bit.
- [53:49]
B
Low expectations. Okay. Yeah, the stock's been down. All right. CEO perks kind of leads into It. That's what inspired. I was looking at the Starbucks numbers and this article. This is the Wall Street Journal headlines. See the $600 million world of executive perks highlights for me. And it's a nice. Maybe I can send a gift article to the substack chat for people to read if they don't have subscription. The EchoStar CEO, which is pretty much just a synthetic SpaceX long, is taking $3.4 million worth of private flights in a single year. It's like 4x the amount as Tim Cook. Alex Karp, founder of Palantir, $160,000 in health benefits. What kind of. What a pharmaceutical is this guy taking? That's a joke. Don't sue me.
- [54:38]
A
Palantir, before we keep going. It's not the fact that they are doing this. Like, you know, if. If Alex Karp wants to spend 160 grand on his health, whatever, but he's doing it with company money. Like, these guys are paid well. They could. They could pay for this themselves.
- [54:57]
B
Yeah, I know. I think I just try to take it as kind of funny. Yeah. The private flights, though, that one can get annoying. These two were the funniest. The Kemet, is it Kemed, the Roto Rooter Company. The CEO got $120,000 worth of Cincinnati Bengals tickets in a single year. That's a lot of Bangles tickets.
- [55:17]
A
That's an investment right there. He can then bring clients with him to these games.
- [55:26]
B
Yeah. What do they do? Cleaning?
- [55:31]
A
Yeah, I think so.
- [55:32]
B
Carpet cleaners. They love the Bengals. And this is my favorite, the CEO of Constellation Brands, owner of the Mexican beers and some wine stuff. Got $20,000 worth of free booze in a single year.
- [55:47]
A
Brett, product testing.
- [55:49]
B
That's quite a bit of testing of Pacificos. How many Modelo.
- [55:53]
A
This is the guy you were running the beer. This is.
- [55:56]
B
Yeah, I like this one. He's hosting people with Modelo, and hopefully it's all Constellation brand products. Yeah, that's better than private jets. 20,000. That's not. That's. That's nothing.
- [56:09]
A
Yeah, it's whatever. I don't think that much of it. The. The private jets is frustrating. I think for me, probably the most frustrating. The health. Well, actually, I think that Alex Carp one is dumb because it's something he could pay for himself easily.
- [56:27]
B
Yeah, that's.
- [56:28]
A
I don't know why he needs to do it there.
- [56:29]
B
It's like the country club memberships they pay for. There's one of those that was like $130,000. Yeah, it's the principle. Were there any other, any others?
- [56:41]
A
No, I didn't, I didn't see this article.
- [56:44]
B
Yeah, you can scroll through if you find any. I have some more bubble watch maybe. Well actually briefly before we get to the fun stuff. Hermes, LVMH and Ferrari earnings. Let's just go through the quick ones here. Hermes, 7% constant currency revenue growth. China and Middle east still struggling. Trailing PE is down to 36. I think it's actually a little bit misleading. According to something I was reading from a recurring guest, Leandro from Best Anchor Stocks. It might be on a forward basis a little lower. Ferrari a nice 11% constant currency revenue growth. Total shipments were actually down pretty much flat, which is nice, indicating their pricing power. And apparently they hit their 2026 sales goals for the Luce in two months. So maybe people like the modern looking vehicle more than we thought. PE now is at 37 after the stock went up today. LVMH 3% revenue growth. Leather goods only growing 1% which is severely trailing Hermes. And the PE is 21 and a half. Quick take. Which one interests you the most of the luxury giants at this price?
- [57:48]
A
Hermes. But there it's still not cheap. Cheap. I mean I think it's basically 20 low 20s EBIT multiple. I think that works out to pretty good returns from here. But there's just stuff, other stuff I like a little better right now with, with Hermes the you're probably going to get more stability in a downturn because that, I mean Ferrari too I guess caters towards billionaires but they just maybe had too much Asia exposure. The Hermes obviously true luxury. The people have heard the stories of the Birkin bags. I don't think you're going to get big surprise quarters necessarily of 30% revenue growth or anything like that. But you'll get more stability in the downturns, more consumer spending stability in the downturns. So yeah, I like Hermes here. I think you probably get decent returns with all of them. But Ferrari, the shipments on the one hand, it's like you don't want them having 20,000 shipments a year because it's almost dilutes the brand. So it's kind of this weird balance that they have to toy with. But yeah, I, I just something about all three of these is not doing it for me right now when I feel like there's other businesses that could grow faster trading at cheaper multiples. They might not have the same stability. But yeah, not exciting me.
- [59:39]
B
Yeah, they, they seem solid but definitely wants to keep watching. Yeah, Hermes is getting much, much more Interesting. Now I have two bubble watch topics to end here. One that's actually could be actionable. Ryan, you may own one of these companies and this is a bipartisan insider trading. What do we call the DC insiders? I guess people tracking that we have from the famous Nancy Pelosi stock trader account. Both sides of the aisle, including Pelosi and the President are buying Uber. And Pelosi herself bought a million dollars in Uber call options expiring March 2027. At the same time, Ryan, Uber has spent a million dollars lobbering lobbying Congress in Q2 and they are trying to get this new rule passed that, that all ride sharing platforms must offer human drivers. And we're going to put the connect the dots together here. Do you invest in the corruption? Ryan, what do you think?
- [60:49]
A
If this rule passes, it will benefit Uber like there's no doubt regulatory capture.
- [60:56]
B
That's right.
- [60:57]
A
There's also another rule that I believe passed the Senate still has to go to the House around banning congressional stock trades.
- [61:07]
B
That's fine. This is one last ride for us.
- [61:09]
A
One last ride. I will say the okay, stock trades is one thing. I'm all for banning Congress stock trades, frankly. Of course option trades is ridiculous. That's unfortunate. That is so dumb.
- [61:27]
B
They know what the legislation's coming down.
- [61:30]
A
They've got the timing, they've got.
- [61:32]
B
It's.
- [61:33]
A
It's such a load of crap. But yeah, I mean that does honestly get me pretty interested in Uber. I like Uber. Anyways, I think as a consumer it sometimes frustrates me. But they've got a great network and if this rule passes, they're going to be locked in for a long time.
- [61:53]
B
I agree. I guess this is another serious one. Kind of our patty's dollar economy. Did you see Nvidia's commitment potential commitment to OpenAI? I'll maybe read the headline here.
- [62:05]
A
Yes, I did.
- [62:06]
B
Nvidia is in talks to provide a roughly $250 billion backstop for OpenAI as part of a massive data center project. The guarantees from Nvidia would help the ChatGPT maker lease a 10 gigawatt project that SoftBank is developing in southern Ohio. Love that SoftBank's always in the mix here. Video's backing would allow the data center developer to raise debt at more favorable terms since OpenAI has no investment credit rating as an unprofitable private company. Oh, you don't say. You don't say they have any credit rating. Yeah, they. All they've done is lost more money than I think they've ever earned in revenue for each successive year. It's the, the, the patty's $1. We're making the circular economy. It's over and over again. And is value being created.
- [62:50]
A
We'll see vendor financing.
- [62:54]
B
That's got steroids.
- [62:55]
A
Another top sign. What is your favorite top indicator? What do you actually put some weight into for your own personal portfolio?
- [63:13]
B
Honestly, for certain subsectors, it almost always goes down or it almost always finishes with the blow off top. This year, the memory stuff in Korea, it just goes vertical at the end. Silver vertical. In February. We go back the cannabis bubble. Right when we were starting investing vertical. The meme stock, obviously that was really vertical. Really quickly. You just kind of see, just look at the chart. I know that sounds kind of. It's hard to know you're astrological.
- [63:49]
A
It's hard to know you're in the blow off top when you're still in it. I would say IPOs for me, big landmark IPOs.
- [63:58]
B
That's a good one. Yeah.
- [64:02]
A
Have there ever been years where in the last, call it 30 years. Have there ever been times when you were getting many big IPOs simultaneously and it didn't mark a short term top?
- [64:17]
B
Yeah. Especially for subsectors because it, it doesn't always have to be a general market bubble. And right now you can even argue it's not a general market bubble. It's kind of AI, semiconductors stuff of that nature. Yeah. It might not even be a bubble. Who knows?
- [64:33]
A
True. All right, I think that is going to do it. Appreciate everyone for the comments in the chat. Thank you all for tuning in. We want to remind listeners that Brett and I are not financial advisors. Anything we say or discuss here on Chit Chat stocks is not formal advice or recommendation. We may buy, sell, or hold any of the securities discussed in this POD podcast. So please do your own work. Thank you all again for tuning in. We'll see you next time.