Google's Monster AI Growth; $TSLA Wobbles; Chipotle's Plunge; $OPEN and The Return of Meme Stocks

Summary

Chit Chat Stocks Podcast Summary

Title: Google's Monster AI Growth; $TSLA Wobbles; Chipotle's Plunge; $OPEN and The Return of Meme Stocks
Hosts: Ryan Henderson and Brett Schafer
Release Date: July 25, 2025

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1. Alphabet (Google) Earnings Report

Timestamp: 03:02 – 18:42

Ryan Henderson and Brett Schafer delve into Alphabet's latest earnings, highlighting its robust performance driven by multiple revenue streams.

• Google Search: Contrary to skeptics predicting a decline due to conversational AI like ChatGPT, Google Search reported a 12% year-over-year revenue growth. Additionally, the number of paid clicks increased by 4% this quarter, accelerating from the previous quarter. Ryan notes, “[Sundar Pichai] said, ‘Overall queries and commercial queries on search continue to grow year over year. We are also seeing that our AI features cause users to search more as they learn that search can meet more of their needs.’” (07:46) This suggests that AI integrations are accretive to Google's search business rather than cannibalizing it.

• YouTube: The platform experienced double-digit growth in ad revenue. Notably, YouTube Shorts now generate as much revenue per watch hour as traditional streaming, bridging the monetization gap rapidly since their launch two years ago. Brett comments, “YouTube’s ad revenue alone is nearly $40 billion annually, making it one of the most durable and flexible digital businesses globally.” (07:46)

• Google Cloud and AI Initiatives: Google Cloud surpassed $50 billion in annual recurring revenue this quarter, with a significant $5.5 billion addition in ARR alone. Brett emphasizes, “Nearly all Gen AI unicorns use Google Cloud,” highlighting Google's pivotal role in the AI infrastructure space. Ryan further elaborates on the expansion, stating, “Backlog grew from $92 billion to $108 billion quarter over quarter,” projecting that Google Cloud could achieve $100 billion in revenue within five years. (11:47)

• Investment Thesis: Both hosts express bullish sentiments on Alphabet's AI strategy. Brett remarks, “If you had to make a bet today on who’s going to win the AI race, I think Alphabet would be a favorite.” (14:35) Despite Google's valuation challenges, they believe Alphabet's comprehensive AI and cloud infrastructure positions it strongly against peers like Microsoft and Apple.

2. Philip Morris Earnings Report

Timestamp: 23:24 – 28:06

The discussion shifts to Philip Morris, where Brett and Ryan analyze the company's recent performance amidst industry challenges.

• Product Performance: Philip Morris saw 7% revenue growth, with 15% operating income growth and 19% EPS growth, surpassing expectations. However, despite these positive figures, Ryan notes, “On a year-over-year basis, it looks really good,” but the absolute numbers didn’t sufficiently impress due to high expectations set by the company's premium valuation. (25:46)

• Zyn and Market Share: The decline in Zyn’s growth raised concerns about Philip Morris’s market position against competitors like Velo and British American Tobacco. Ryan argues, “If you have a company trading at a premium valuation, you need not just good results, but results that surprise to the upside.” (26:12)

• Valuation Insights: Brett highlights Philip Morris’s next 12-month earnings PE of 16, deeming it a fair valuation given the company's stable and predictable business model. Both hosts agree that while Philip Morris remains a solid business, the high valuation requires consistent performance to justify investor expectations.

3. OpenDoor and the Return of Meme Stocks

Timestamp: 29:00 – 36:35

OpenDoor's meteoric rise as a meme stock becomes a focal point of mockery and skepticism.

• Stock Surge: OpenDoor's stock skyrocketed 370% in the last month, transitioning from bankruptcy fears to meme stock hype. Brett attributes this surge to aggressive promotion by a vocal hedge fund manager on platforms like Twitter, comparing it to the revival of Carvana. (29:22)

• Business Model Critique: Both hosts vehemently criticize OpenDoor’s business fundamentals. Ryan states, “The business model here is so bad. It’s impossible,” while Brett adds, “They have an impossible business model.” They discuss the inherent risks, highlighting that OpenDoor has lost approximately $5.2 billion since 2017, underscoring the unsustainable nature of its operations. (35:05)

• Pump and Dump Concerns: The hosts suspect that the stock’s rapid rise is fueled by a pump-and-dump scheme, raising red flags about the sustainability and legality of such practices in the meme stock landscape. Brett warns listeners, “This is pure pump and dump, is it not?” (34:13)

4. Tesla Earnings Report

Timestamp: 37:05 – 46:28

Tesla's recent earnings report reveals concerning financial metrics and strategic pivots.

• Financial Performance: Tesla reported a Q2 free cash flow of $146 million, significantly below the $760 million estimate. Brett remarks on the difficulty of forecasting such metrics, emphasizing the gap between expectations and reality. (38:36)

• AI and Strategic Shift: Tesla announced a transition from solely focusing on electric vehicles and renewable energy to becoming a leader in AI and robotics. Ryan expresses skepticism, particularly about the feasibility of Tesla's Full Self-Driving (FSD) ambitions, noting, “If they don’t get FSD available for their entire fleet, I don’t see how they generate enough cash to warrant the valuation.” (43:16)

• Valuation Concerns: With automotive gross profit down nearly 40% from December 2022, and operating margins at a meager 4.1%, the hosts question the sustainability of Tesla’s high valuation without the anticipated AI-driven growth. Brett discloses a small short position in Tesla, expressing confidence in its overvaluation despite holding a minimal stake. (46:28)

5. Chipotle's Market Decline

Timestamp: 47:01 – 54:31

The hosts examine Chipotle's recent struggles and declining market performance.

• Comp Store Sales: Chipotle reported a 4% decline in comparable store sales year-over-year, marking its worst performance since the pandemic. Ryan points out, “If you have a company trading at a premium valuation, you need results that surprise to the upside,” highlighting the mismatch between expectations and actual performance. (48:45)

• Leadership Changes: The departure of CEO Brian Nickel and CFO was timed amidst declining sales, suggesting internal acknowledgment of the company's troubles. Brett notes, “They had the CFO leave and the CEO leave. That's good timing to sell.” (52:16)

• Valuation and Short Opportunity: Chipotle’s price-to-earnings ratio stands at an exorbitant 25-41, making it an attractive short candidate for the hosts. They express concern over the company’s sustainability, especially in a market where consumer habits are shifting and competitive pressures are mounting. (53:20)

6. Home Builders Sector Analysis

Timestamp: 54:31 – 64:00

Ryan and Brett discuss the current state of the home builders sector, highlighting macroeconomic challenges and company-specific performances.

• Sector Performance: Major home builders like Lennar and Dr. Horton reported significant revenue declines (4-7%), with gross margins compressing from 30% to 27% for Pulte Group. Brett comments on the sector's struggles, noting, “These companies could be expensive, they could be cheap,” emphasizing the need to scrutinize earnings and growth prospects. (57:00)

• Market Indicators: The hosts reference macro indicators such as new homes months of supply and inventory levels, pointing out that they are nearing levels seen during past recessions. Ryan shares anecdotal evidence from an Austin housing market visit, illustrating the increased difficulty in selling homes and the resultant rise in inventory. (58:06 – 63:12)

• Company Strategies: Dr. Horton’s strategy of being asset-light, with 75% of land owned by their land bank, presents a mitigating factor. However, Gross margins remain a concern, and Brett discusses the company’s aggressive stock buyback program at 9% of market cap annually, which could support the stock price despite stagnant earnings. (62:21)

• Outlook: Both hosts express caution regarding the home builders sector, citing high inventory levels and potential for further margin compression. They acknowledge that while stock buybacks provide some support, the broader economic indicators signal a challenging environment ahead. (64:00)

7. Closing Remarks and Future Episodes

Timestamp: 64:00 – End

The episode concludes with a brief overview of upcoming topics, including Amazon and other big tech earnings. The hosts remind listeners to subscribe and provide feedback on platforms like YouTube for future discussions.

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Notable Quotes:

• Ryan Henderson: “Overall queries and commercial queries on search continue to grow year over year. We are also seeing that our AI features cause users to search more as they learn that search can meet more of their needs.” (07:46)

• Brett Schaefer: “If you had to make a bet today on who’s going to win the AI race, I think Alphabet would be a favorite.” (14:35)

• Ryan Henderson: “The business model here is so bad. It’s impossible.” (31:16)

• Brett Schaefer: “This is pure pump and dump, is it not?” (34:13)

• Ryan Henderson: “If they don’t get FSD available for their entire fleet, I don’t see how they generate enough cash to warrant the valuation.” (43:16)

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This detailed summary encapsulates the key discussions and insights shared by Ryan Henderson and Brett Schafer, providing listeners with a comprehensive understanding of the episode's critical financial analyses and investment perspectives.

Transcript

[Ryan Henderson]

Welcome to Chit Chat Stocks, the podcast where we help you discover your next great investment. This is our weekly Power hour episode. I'm one of your hosts, Ryan Henderson, and I am joined as always by the one and only Brett Schaefer. We have a number of big topics to get to this week. Google slash Alphabet reported earnings. Tesla reported earnings with an interesting conference call. A lot of forward looking, hopeful statements. I would maybe say Chipotle looks like it could be at the beginning of the end, apparently based on some comp sales figures. So we're going to analyze whether or not that seems to be a dying brand. Philip Morris, the world's largest tobacco company, we're going to be talking about them as well. And then we got a lot of questions on home builders. So we're going to get to all of that and more in a sec. Before we do, I want to do mention a couple quick housekeeping items. If you are a listener to this show, please give us a rating review. It always helps us grow. We do these episodes live on Thursdays at 5pm Eastern Time. So if you want to tune in, ask us some questions, head over to YouTube, look up chit chat stocks at 5 o' clock Eastern Time on Thursdays and you can ask us any questions. I'm sure we'll get some in the chat today, but that's gonna do it for housekeeping items. Where do we want to start, Brett? There's sort of. And meme stocks are back.

[Brett Schaefer]

Ryan, I have a very important question for you. Are you buying? And you, you don't have to answer this because you get in trouble at home. Are you buying American Eagle?

[Ryan Henderson]

Oh boy. Well, I actually have.

[Brett Schaefer]

I'll answer that. I'll answer that for you. I almost, I am not joking. I almost bought some. It would have worked. It would have worked. I tried to stay reasonable, rational, logical with my investments and it turns out if you just had a hunch on a new advertisement, it would have, would have made a 20% gain in one day.

[Ryan Henderson]

Do we? So okay, it's up 20% today.

[Brett Schaefer]

I actually haven't think if you include yesterday. Yeah.

[Ryan Henderson]

Wow. And to give some context to all the listeners out there, American Eagle recently partnered with a notable actress who has been, shall we say, popular as of late, Sydney Sweeney.

[Brett Schaefer]

I think people know what we're. I think people know what we were we're referring to. If not they can look up American Eagle. It'll be the first thing that pops up. Yeah, I, and honestly I just thought in this environment with the meme stocks back. It would have been such an easy investment. But hey, look, we'll just keep in boring old stocks earning nothing.

[Ryan Henderson]

Yeah, there are a couple of other meme stocks which I think we should get to at some point in this episode. But maybe we start with some real topics here. Where do you want to start? Tesla earnings or Alphabet?

[Brett Schaefer]

Let's do Alphabet. It's such an important company. You made some notes on here Cloud doing phenomenally well. The AI threat, the AI potential, I mean, it's just one of these that's turned into such a battleground stock. And as you're going to go through here, the financials have not been affected and have probably been helped by AI so far.

[Ryan Henderson]

Yeah, there's a lot to unpack every time Google reports earnings because there's like four or five huge businesses under the hood there that are like some of the biggest digital businesses in the world. So I guess let's start with search. Google Search. Google search revenue grew double digits. I believe it was 12%. I should probably have that pulled up. But double digits there was just. Since basically the rise of ChatGPT, there has been sort of a simple thesis of conversational AI is taking share. So Google search is dead, which means Google is dead. That, that's kind of been, I guess the skeptics look at it and it's pretty easy to go down that path. Like you use conversational AI for the first time or maybe a couple times, and you start to realize you're replacing some of your own search queries that you would be using Google for with ChatGPT or with a conversational AI. And all of a sudden you think, wow, Google search is squared. We are not seeing that play out in the numbers yet. So far, not only is Google search revenue growing, but the number of paid clicks continues to grow as well. I believe it grew 4% this quarter, which is actually up. It's an acceleration from last quarter. And there's. There was some really interesting commentary. This is the primary battleground area of Google is the search business and it's because it accounts for more than 50% of revenue. Still the. But all the commentary from Sundar Pichai and the management team has been, well, obviously they want it to be really positive, but it's hard. It's hard to read their comments and be too cynical about the business. So here's a quote from the conference call. He said, overall queries and commercial queries on search continue to grow year over year. We are also seeing that our AI features cause users to search more as they learn that search can meet more of their needs. That's especially true for younger users. So they actually, it sounds like, have some internal data that shows that a lot of the people that are using AI are increasing their query volume. So it's, it seems they, they seem to believe that it's like accretive basically to search, that it's not cannibalizing them, it's just adding new search queries. There's probably some level of cannibalization there, but I'm going to leave that for a second. We can hold that discussion. Second big segment for them is YouTube. YouTube ads grew double digits. And interesting quote here as well. It says in the US shorts now earn as much revenue per watch hour as traditional streaming on YouTube, which I guess requires going through a lot more shorts than, than just watching a normal stream. But it's amazing how quickly they close the gap on that because I think they launched shorts, I want to say about two years ago for them to be able to kind of close the monetization gap there. I find that pretty impressive. And then the third segment here, and I'm saving kind of the best for last in this case is subscriptions. This is not the best one. This is, I would say, well, it might be one of the best ones. Subscriptions are also growing double digits on a percentage basis. I believe they were up 20% year over year. And that is being driven primarily by YouTube subscriptions is what they said. And then Google won. So YouTube, I find this, I, I really wish they would break out YouTube subscription revenue because you've got a massive subscription business now. I want to say $50 billion in revenue in Google subscriptions and they're saying it's primarily being driven by YouTube. And then you have another nearly $40 billion in ad revenue on an annual basis from YouTube. I'm curious, I would be so curious to see how much in combined revenue and profits they're generated from YouTube overall, because it just seems to be one of the most durable digital businesses in the world right now and flexible. They've adapted to other not computing platforms, but consumption platforms really well in terms of streaming tv, mobile, desktop, they've really been able to evolve.

[Brett Schaefer]

I think the revenue, I've said this before, but I think the revenue would impress people and the earnings would disappoint margins. There's a lot of revenue that gets paid out to the creators. The YouTube TV stuff, that's extremely low margin. So that's about my take, but still good business. And what's weird though is you look at this $50 billion in revenue, give or take for YouTube, maybe a little bit more. Now it's pretty irrelevant to the stock, especially if you think that the margins are going to be much lower than Google Search. And as you're about to get into Google Cloud as it's gaining scale.

[Ryan Henderson]

Yeah, this was by far the standout part of the quarter for me and it's becoming an increasingly important piece of the sort of Google puzzle. So maybe a month ago, I think it was about a month ago, someone asked me, it might have been you, if I am more or less optimistic about Google than when I started my position. So I started a Google position, I want to say like six months ago. I've added a little bit here and there, but it's not a huge piece of my portfolio. But I mentioned how a lot of the developers were reacting positively to Gemini, Gemini 2.5 and that seemed like maybe not the biggest deal at the time, but now it's really starting to show up in the financials. So this earnings report gave us a lot of clarity on just how much of an AI winner Google is. On the development side. A month ago at some conference, I think it was their Google IO conference, Google reported that 7 million developers were building on top of Gemini's API. That was up from 5x from the year prior. So I'm assuming that's basically A year ago 1 to 2 million developers were. And then this quarter, a month after their IO conference they said 9 million developers are. So they've gone from 1 to 2 million developers building on top of Gemini to 9 million in a little over a year. And when we look at Google Clouds, it's not just the revenue growth, but if you and shout out to fiscal AI for this because it they made it really easy. Google Cloud surpassed $50 billion in annual recurring revenue this quarter. And the quarterly ARR growth was well above any quarter in their history. They added $5.5 billion in annual recurring revenue for Google Cloud this quarter alone. And let me actually pull up the backlog figures because this is. This kind of blew my mind and they're actually not that far off, I don't believe from AWS's backlog figure at least. Basically, I think backlog's a little closer to AWS than the revenue is. Anyway, I'm going through a lot of numbers here. They went from $92 billion in Google Cloud's backlog to $108 billion quarter over quarter. So sequentially they added $16 billion roughly in backlog There are so many businesses truly building on top of Gemini now that I just, I think this can become a really big business for Google. So here's a quote from sundarpichai. We operate the leading global network of AI optimized data centers and cloud regions. We also offer the industry's widest range of TPUs and GPUs along with storage and software built on top. That's why nearly all gen AI unicorns use Google Cloud. I honestly, I think within five years $100 billion in Google Cloud revenue is achievable.

[Brett Schaefer]

Definitely 100%. What are we at? Close to. We're at 50 now. Right. So double in five years. Easy. Honestly, much more. I'd say you have the other numbers here. I'll let you take a breath. $85 billion in capex increase $10 billion from last report. I think people are a little bit worried about that. But honestly with Alphabet compared to someone like Meta or Microsoft, I guess can can make money off it pretty easily but especially with Alphabet because they have both the consumer side and the infrastructure side. I would be bullish. It would be bullish to see more capex, at least for me because not only do you have this cloud revenue that can and now they're making money, 20% operating margin on it. Now you have this cloud revenue that can, you know, you get a good return, get a good ROI and all this CapEx coming in. You have the Gemini consumer app and I'm not sure if they calculate the monthly active users with the people that use the API or the development tools as part of their monthly active user account, but according to the conference call they have the Gemini App now has 450 million monthly active users. That is catching up to OpenAI and ChatGPT. ChatGPT still bigger but pretty impressive coming from a standing start just a couple of years ago. And fumbling at the start when they had all these name changes, the stuff didn't work very well. They were putting all the pieces together. Unlike when who would it be? Zuckerberg claiming that Meta AI has a billion users. I actually believe this number because it's not accidentally clicking it on WhatsApp or Instagram. And the fact that you have these $20 subscriptions that you pay for. I pay for it. I think it's quite valuable. You have the bundle with Google One Gemini. Not only. Sorry, with AI, Google Cloud will not only, you know, as you mentioned, probably get a hundred billion dollars in revenue, if not much more within the next decade. They are going to see through Advertising on Google Search with you mentioned the AI overviews and then the subscription revenue with Gemini probably eventually adds on the free tier there. There are so many ways they can monetize that compared to anyone else. They're just separating themselves from the pack within this AI race. And I, I don't want to call it. It's not over because there could be some innovations and something could come out of the blue and disruptions and all that good stuff. It's pretty unpredictable. But if you had to make a bet today, if they were going to say who's going to win the AI race and Vegas put out odds, I think now Alphabet would be a favorite like mine.

[Ryan Henderson]

Yeah. Which is shocking given the valuation relative to the other tech narratives. Yeah, the narrative.

[Brett Schaefer]

Yeah. Well, so when Google Search dies, let me know. It hasn't yet.

[Ryan Henderson]

Right. To put some numbers on this, here's the. I'm going to pull up a chart here that really stands out to me. So this is quarterly growth in cloud ARR versus quarterly growth in capex. Maybe I can stack this here so it's easier. They this basically what I'm trying to say here is they are increasing capex because they're booking it in revenue. It's not like this hopeful thing where I think with Meta and well, maybe not so much Microsoft, but really definitely Meta, you see a lot of this CapEx spend or this CapEx estimates, I guess as not like a clear direction like okay, they're going to produce llama 4. How accretive is that going to be to revenue now?

[Brett Schaefer]

How are they going to monetize that? Yeah, Meta is the only other one that's vertically integrated. But so for example, what I mean by that is OpenAI has to spend money on some other cloud service in order to get revenue. It just makes it way, way harder to be profitable and generate positive cash flow. Medic does have this vertical integration where they're both building the infrastructure and trying to monetize it themselves. But I don't know and I think you're about to mention that the path to monetization is so much less clear than Alphabet. Right.

[Ryan Henderson]

Yeah. Okay, so Alphabet increased their capex by $5.2 billion this quarter. And all the big tech companies are increasing their capex really quickly on a quarter over quarter basis. But they're doing this. They increased CAPEX 5.2, they increased Cloud ARR by 5.5. So like you're already seeing a revenue jump directly from it and they are increasing it because there is demand for AI compute services Gemini's products and their capacity constraint and they keep talking about that the very capacity constraint. There's a huge lock in when you're running on running various services on foundation models. So when Gemini is core to what you do and you have various processes throughout the company that are using Gemini's reasoning or detection models you don't want to really rip and replace that that frequently. So this is the ARR growth but there's really high lifetime value to locking in some of these businesses and they talked about signing some huge more than billion dollar contracts for Google Cloud alone with with single customers this quarter. It just seems like you hear all this talk about them being an AI loser and under the hood they're powering most of these gen AI businesses. Like yep they are a winner under the hood but just no one seems to be giving them Credit. I just 17 times forward EBIT. I really think this is like a two foot hurdle here.

[Brett Schaefer]

I saw one of the large customers could have been ServiceNow. I think I saw that. Not sure if that's confirmed or not. Not sure if they're switching from another provider because I assume they were with someone else before that but they signed a billion dollar deal with ServiceNow. Stock is only up 1% today Ryan. Are you buying more? Are you shocked that it's not up more?

[Ryan Henderson]

Yeah, on the numbers I'm pretty surprised that the stock didn't jump more than it did. I think the, the the one thing that demonstrates where they are at in the AI stack like if you want to compare all the companies how and where they're at in terms of like AI capabilities. OpenAI just became a huge customer for Google Cloud using I assume some sort of Gemini product.

[Brett Schaefer]

Microsoft is seems to be in a. Just ruined its starting position with their relationship with OpenAI and that's really all they had within AI and now it's maybe going away entirely. I wouldn't want to be Microsoft, Ryan. Well not you're not going to actually do this but gun to your head long long Alphabet short Microsoft and Apple. Would you do it as a paratrade? Do you think that works?

[Ryan Henderson]

I have a hard time shorting Microsoft.

[Brett Schaefer]

No, I'm saying just the difference. You take the shorting money like so it just has to. Google just has to or Alphabet just has to outperform Microsoft and Apple by a good amount. Right?

[Ryan Henderson]

Yeah. Yeah I would take that Apple for sure.

[Brett Schaefer]

Why do you think and I guess you're as perplexed as me why do you think Apple and Microsoft keep trading at Higher multiples.

[Ryan Henderson]

I honestly do not know. I would say like some sort of indexing thing, but that doesn't, you know, Google's in the index just as much as they are, so it's not like passive flows are dominating for Apple.

[Brett Schaefer]

Yeah.

[Ryan Henderson]

Doesn'T make a lot of sense to me. Maybe there's just a sense that Google is in a more fragile position. I, I think that's kind of the general sense with like people that aren't really looking at Google that closely where they feel that, okay, Google search is in a little bit of a fragile spot. The moat's not as wide as owning the, the iPhone or owning the, the operating system. But then you look what all these services are really running on under the hood and, and Google's the back end. So maybe it's just like they just think the mode is wider, but I would probably disagree.

[Brett Schaefer]

Yeah, I disagree as well. I, I should have bought in April on the dip. Was thinking about it. It's been on the watch list. Wish I was a shareholder. But to Ryan and all the other listeners that are likely shareholders, congrats on the solid returns and I think it's going to be another strong year. Unless of course, they're tied to consumer spending. So if consumer spending collapses. Hey, replay this clip. Stock is probably going to be down. Anything else before we move on? We got a lot of other topics.

[Ryan Henderson]

No, the only other, the big risk that I see here is that advertising spend slows like across the board. And people see it as Google search decreasing specifically because like Google search could decline just purely because the advertising cycle turns. But people would be like, well, this is the beginning of the end. Like, look, see the search revenue is down. But really it could just be an ad advertising cyclicality.

[Brett Schaefer]

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[Ryan Henderson]

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[Brett Schaefer]

Want to talk Philip Morris? This is one that we cover a lot you trimmed, I believe, but still own some.

[Ryan Henderson]

I cut my position by about 60%.

[Brett Schaefer]

Nice. Good timing on that.

[Ryan Henderson]

Not well. Now I'm wishing I sold all of it.

[Brett Schaefer]

Yeah, I guess I got. Well, we're back to. Let's see, what was the stock finish at 161. Hey, we're back to about the price I sold on Liberation Day. So hasn't worked out bad or well for me. What happened here, Ryan? You made the notes. Seems like people were simply looking at a slowdown in Zinn growth. Nicotine pouches growth and forecasting that to the future of what them losing market share to Velo British American Tobacco and it's not going to be a winner takes all space.

[Ryan Henderson]

Yeah, that really seems to be the focus is like Zinn versus competitors but Zinn still is not that big of a big of a piece of the business. Iqos is bigger which is their other smoke free product. Heat not burn technology and then cigarettes is still the largest portion of the business and both those segments are doing really well. Zyn had its first sequential volume decline and I want to say like three or four years, which to be clear, there are supply chain related issues with that and maybe, maybe there's some seasonality to Zinn consumption. I wouldn't really think so, but could be. So on a year over year basis it looks really good. I think that Zinn volumes grew like 41% year over year, but they did decline significantly compared to last quarter. Here's my thing. So I guess let me go through some of the numbers and let me forget that it's Philip Morris. Just imagine this is a consumer packaged goods company 7% revenue growth, 15% operating income growth, 19% earnings per share growth. They raise their full year guidance and those were all above expectations. That sounds pretty good for a consumer packaged goods company.

[Brett Schaefer]

Let me give you next 12 months earnings PE 2021 EBITDA. EBITDA 16. That feels fair value for a company like that. If you understood that they have an enterprise value of $300 billion. So I feel like we're back to kind of a fair price. Stocks up 67% this year. It's not like shareholders are dying.

[Ryan Henderson]

No, it just goes to show that if you have a company trading at a premium valuation, you not only need good results, but you need such good results that they surprise to the upside. So not just beating estimates, but kind of reassessing estimates altogether. And you didn't really get that this quarter. You did get that last quarter because there was that huge initially there was a big supply supply chain like back Back up essentially. Like they weren't able to fill all the orders they wanted for Zen. And then they did it all last quarter there was a huge jump in volumes and now we've seen it kind of turn back. The rest of the business is doing really well. Combustibles is growing. Revenue slightly. Volumes I think are down like 1% year over year.

[Brett Schaefer]

But yeah, they forecast global declines because they're ex us. So us is growing or declining much faster. About 2% volume declines. In a normal environment you can monetize that pretty consistently with price increases. They should see currency adjusted single digit revenue growth from that business. It's very, very predictable. I think it just comes down to expectations. Investing expectations got a bit out of hand. Flight to safety maybe especially because they're diversified from the dollar and some of the stuff that's been impacting portfolios so far in 2025 and expectations got too high, but it's still a good business. Now what price would you add to your position? Because I was trying to think about this during this drawdown. I kind of think the 130, 140 range is where I feel like forward returns look, especially if they turn on the buyback really strong again.

[Ryan Henderson]

Yeah, I'd say if they can get, if it gets to a low teens like 1312 to 13 times forward EV to EBIT, which is just sort of. That's usually the metric I use for most of my valuations unless there's some deep flaw in the, the IT in there which is interest and taxes. But usually that's encapsulated in the enterprise.

[Brett Schaefer]

Value.

[Ryan Henderson]

13 times, I'd probably add. I think they're probably at what, like you said, 17, 18.

[Brett Schaefer]

Yeah. EBITDA was 16 next 12 months. So yeah, I'd assume it's in between the PE and the EV to EBIT. Yeah. So decent drop from here, but definitely doable. And it's still, I still think, a great business. What do we want to talk about now?

[Ryan Henderson]

It's a bummer. I wish I had sold more.

[Brett Schaefer]

But hey, a couple weeks ago I was kicking myself for selling it all. So things can happen quickly in financial markets.

[Ryan Henderson]

True.

[Brett Schaefer]

What about dealer's choice, Ryan? Open Door or Tesla?

[Ryan Henderson]

Let's talk open door.

[Brett Schaefer]

Okay. I had not thought of this stock for about two years. I honestly thought it was headed for bankruptcy. It looks like investors believe that too. It was trading at just 50 cents a share about a month ago or sometime in July. And yet it's up 370% in the last month because it seems to be a specific target for meme stock hype. Without saying who this person is. There's a hedge fund manager on Twitter who has been on CNBC and Bloomberg. So they don't care if someone is talking about what they're doing. They're doing this all publicly. So it's not like I just don't want to give them any publicity by sharing their actual name. They this investor has gotten increasingly vocal about the stock saying it is the next Carvana. And remember Carvana came back from the dead and than I think 100 baggers since the lows at the start of 2023. And this investor is calling for the Stock to hit $82 a share open door stock by this year I think. So that would be a hundred bagger from the lows. And this is full sarcasm for the listeners. Nick. This is definitely fundamentals, right? And not because there's a massive short interest in opendoor stock and trying to drive all of the traders on Wall street and trying to do a whole roaring kitty thing. Here are some quotes from tweets just this morning. If open shareholders focus all our energy on buying and holding our stock and calls, if that's your lane, the reflexivity kicks in. The rewritten will be violent. We're talking Cisco.com levels of upside as the turnaround clicks. Strap in believers and haters. $82 is coming. Ryan, are you a believer or are you a hater in Open Door?

[Ryan Henderson]

I am a hater. One side, I'm a hater this. Okay.

[Brett Schaefer]

It's a bad business, isn't it? It's Just a bad business.

[Ryan Henderson]

So look, I'm not. If you want to buy it because it's a meme stock, whatever, that's fine.

[Brett Schaefer]

We want everyone to make money, but we also don't want people to lose money.

[Ryan Henderson]

I am still a believer that you should look at stocks for the businesses that are behind them. And I just think Open Door is a horrendous business model like you. Okay, maybe there's some, maybe this is a cigar, but maybe it was doomed for bankruptcy and there was some value there. Like that's how I think meme stocks tend to start. Like Gamestop was that they had like a 20 dividend yield and looked like they were going to cover. It starts as a value play and all of a sudden it turns into a meme stock. The. But the business model here is so bad. It's so bad.

[Brett Schaefer]

Yeah, way, way worse. It's not necessarily. Yeah, it's like the industry's dying. It's not like residential real estate purchases are dead. This is a really bad business model. It's like you invented a business model that was worse than individual home flippers because you can't lock in 30 year and fixed rate mortgages, you're taking bad loans out, you're loading up your balance sheet with residential real estate inventory and then you're trying to flip it for a higher cost. It is so tough and it's such a bad business model, it's actually laughable.

[Ryan Henderson]

Think about, think about, think about this from your own personal view, listeners. If you have a house, think about the stuff with your house that might be a little wrong, that there's something wrong with it. Maybe there's like issues with the foundation, there's some repairs that, you know, need to be done, whatever. Would you. The whole game here is margin of safety. So they're offering like they're spraying and praying with low ball offers. If you have a good house, you're not going to take the low ball offer. Like you're. And most people are not like, I got to get out of this yesterday. Like I'm going to take whatever offer I can get when it comes to a huge, like a home. So the people that are accepting the offers, I don't think that's the supply that Opendoor really wants. And my guess is they have drastically, on a recurring basis, drastically underestimated the spend that's needed to improve some of these homes. Now I saw a whole bunch of things on forums, Reddit forums, like, oh, I got unbelievable. I, I've never expected to get an Offer this high open Go is the only one that gave me this offer like that. You cannot imagine worse commentary for your business model. The fact that everyone got out of this so quick. Zillow, I think Redfin got into it too. Got out pretty quick. Just goes to show that they probably saw the cracks in this business model and it's not like, oh, this business is more resilient because they stuck around. It's like they didn't have any alternative.

[Brett Schaefer]

Ryan, ignore all this. Imagine if all the force of retail and institutional took the energy of Wall street bets and focused it on buying and holding all possible shares and opt of one stock with a genuine, genuine turnaround story. Opendoor. That is another quote from this hedge fund manager. I think the odds on Kalshi or what is called Polymarket about an SEC investigation into this Twitter account, whoever actually owns it, is high. It's high. Those odds are rising because this type of stuff, it I guess was made legal for crypto. For whatever reason. You can pump and dump, but this is pure pump and dump, is it not? Am I seeing this in. In wide open just in front of everyone's faces now?

[Ryan Henderson]

Speaking of pump and dump, there's no legend better time to buy Google. We should the. It's. Yeah. I mix. Of course there's. It's unethical. I'm not sure on the rules. I assume that's against the law.

[Brett Schaefer]

Pumping up supposed to be illegal crypto. It was made legal for God knows why. But I guess you have to technically like lie. Pop it up and then we don't know if he's done the dumping part. Do you know? Well, you see my notes in front of me. The listeners maybe try to guess in your head how much and I just use the fiscal AI for this was quite helpful. Just pull up the chart, add everything together. How much in cumulative cash flow has opendoor lost since 2017? Drum roll. $5.2 billion market cap today. Wait, let me pull it up because it could be. It could be trading wildly. 1.7 billion. It is lost so much money. It's. I mean the business model just got worse and worse as it got bigger. It's had to shrink. There's no way that it's. It's. It's the. It's an impossible business model. I can't hear words to describe it. There's no proper way to say how bad this business model is.

[Ryan Henderson]

I hear when you say 5.2 billion in cash lost, all I hear is deferred tax assets.

[Brett Schaefer]

That is true. Yeah. Yeah, yeah. They might have some good net loss carry forwards that someone would want to acquire. That's fair. That is fair. Maybe that's the bold thesis. Close your eyes. Exhale. Feel your body relax and let go of whatever you're carrying today. Well, I'm letting go of the worry that I wouldn't get my new contacts.

[Ryan Henderson]

In time for this class.

[Brett Schaefer]

I got them delivered free from 1-800-contacts. Oh, my gosh, they're so fast.

[Ryan Henderson]

And breathe. Oh, sorry. I almost couldn't breathe when I saw.

[Brett Schaefer]

The discount they gave me on my first order. Oh, sorry. Namaste. Visit 1-800-contacts.com today to save on your first order.

[Ryan Henderson]

1-800-Contacts.

[Brett Schaefer]

Race the rudders. Raise the sails. Raise the sails. Captain, an unidentified ship is approaching, Over. Roger.

[Ryan Henderson]

Wait, is that an enterprise sales solution?

[Brett Schaefer]

Reach sales professionals, not professional sailors. With LinkedIn ads, you can target the right people by industry, job title, and more. We'll even give you a $100 credit on your next campaign. Get started today at LinkedIn.com results, terms and conditions apply. What about Tesla?

[Ryan Henderson]

To it. I saw a hilarious tweet that wasn't meant to be a hilarious tweet from. What's his name, the Bloomberg character on Twitter. Walter Bloomberg.

[Brett Schaefer]

Oh, yeah, yeah.

[Ryan Henderson]

Let me pull it up. This wasn't. It was. My favorite thing is that he tweets everything so matter of factly. Like he doesn't have any Headline aggregation from Bloomberg. Yeah, just headline aggregation. Now let me pull up. Oh, wow. I can't pull it up. Okay. I'm not sure what's happening here. Twitter down.

[Brett Schaefer]

Twitter down on you.

[Ryan Henderson]

No. Okay, I got it. Wait. Tesla reports Q2 free cash flow of $146 million. Estimate $760 million.

[Brett Schaefer]

Yeah, that's tough.

[Ryan Henderson]

That can't.

[Brett Schaefer]

I don't even know how you'd estimate that.

[Ryan Henderson]

Yeah, it's got to be a tough thing to estimate, but it's just a hilarious headline. So why don't you go through some of the numbers? There was some. Maybe it was slightly better than some people expected. I'll. I'll raise my hand and say I was expecting a little bit worse, honestly, but go through some of the headline numbers.

[Brett Schaefer]

Yeah. And maybe before any of the listeners say yes, you know, we are forgetting the Tesla diner in Los Angeles. Part of the growth story. I know. When they open one in Austin, I expect Ryan to go.

[Ryan Henderson]

Have you updated your dcf?

[Brett Schaefer]

Yeah, I will update the dcf. Honestly, that is a decent business idea, especially with the charging kind of problems. It's it's just kind of funny the way they brand it. All right, here's a quote from from this is the first line of the press release. Q2 2025 was a seminal point in Tesla's history. The beginning of our transition from leading the electric vehicle and renewable energy industries to also become a leader in AI, robotics and related services. The related services diners. But I'm curious to know why they're leading in AI. But XAI is getting all the funding to for GROK and all of Musk's endeavors. That's kind of a different story. But I think this narrative that they're building is very key for investors to look at because they are telling you that they are pivoting away from the traditional car business and renewable energy. Because while these businesses are either stalled out or collapsing, auto revenue is down 16% year over year. Energy generation revenue down 7%. Even if those supposed to be a major growth engine for this business. Operating margin in the quarter of just 4.1% heading into a period where tax credits on EVs are going to expire. So that's going to get even worse. I think in 2024 they had $2.4 billion in tax EV credits. Cumulatively since I think 2016, they've had $11 billion. That makes up a huge portion of their net earnings. Free cash flow, as Ryan mentioned, was pretty flat and they do have $37 billion in cash. I will. This might seem like a dumb question, but if with the EV credits gone, the, the fact that they're unit figures around the globe and basically any forward looking indicator for the automotive business looks like it's going to start burning a lot of cash quickly with no new models coming online and the cybertruck being a total flop. They have $37 billion in cash. Is, is that going to be enough? I, I'm serious, it's. This could turn ugly really fast. Especially if they're quote unquote investing in AI. What do you think?

[Ryan Henderson]

I'm sharing this total automotive gross profit chart here and it's down. Well, let's just check from its high in December 2022. So in December 2022 they were generating $20 billion in annual gross profit from their auto business.

[Brett Schaefer]

These are 12 month figures.

[Ryan Henderson]

Yeah.

[Brett Schaefer]

Okay.

[Ryan Henderson]

Today they're generating 12 and a half billion in automotive gross profit. So gross profits for their car business, which you can call auto a car or sorry, you can call Tesla car company or not. It's up to you how you want to categorize it. But Currently the lion's share of their financial, of their revenue and income comes from selling cars. It's down almost 40% from the highs and they're going to be losing one of their most, one of their highest margin assets. I guess you will in the EV or sorry in the tax credits regulatory credit.

[Brett Schaefer]

One and a half billion of that 12 billion is about to get wiped out.

[Ryan Henderson]

So it's hard to imagine this, this part, the auto business not seeing more pressure, more pressure on the gross profit side. Now there was a lot of talk in the conference call about.

[Brett Schaefer]

You actually listened. You took the time for that. Ryan, that's a sacrifice.

[Ryan Henderson]

I will say I hesitated. I, I was thinking about whether or not to read it. I started. It was a little tough to read.

[Brett Schaefer]

You're sacrificing for the listeners and I appreciate it.

[Ryan Henderson]

Yes, honestly that's exactly what I did. I did not want to read it. I have no interest in a company long or short and I knew we were going to talk about it on the conference or on today's podcast. So I read, I tried to read the conference call. If you are skeptical about some of the accounting and the hopeful statements that come out during these, they are very hard to read. It's very frustrating. This call was no exception. There's a lot of talk about full self driving and the value unlocked there. But what I don't understand, first off, for a long time full self driving was the call option on the business. That was the, the hidden upside. It was like this could be the biggest value unlock as soon as all these cars can drive themselves and people have to pay for it. It's like just 100% profitable to deliver this software now it's the only thing holding this up. Like if they don't get full self driving available for their entire fleet, I don't see how they generate enough cash to warrant the valuation. So it's not become a nice thing anymore. Now it's a necessity. And all it's all they talked about on the call yet. What I don't understand is for them to roll this out, they have to do it the way WHMO did they have to do. Yes. Which they got to build custom cars for this with LiDAR technology on them. It's not like they're just going to license it out to their existing fleet. That's not what's going to happen. So maybe I'm wrong, maybe that's still somehow possible, but that doesn't seem to be the case in terms like if you look at what they're doing in Austin. That's not the case. It's not like they have some guys, some random guys, Tesla going around doing these FSD rides. It's a custom built car for this. That is expensive to build out. That takes time. You need regulatory approval. And he said he, this was the most outrageous part to me. He believes they will be serving half the popular, half the U.S. population by the end of the year.

[Brett Schaefer]

Wait, wait, what? No, that's not happening. That's not happening.

[Ryan Henderson]

Yeah, he said the full self driving rides will be serving half the population, half the US population by the end of the year. And then he did his classic. Assuming we can get regulatory approval. He said it's up to the regulators.

[Brett Schaefer]

Yeah, of course you get the whole, if you get the whole population. It wasn't up to the regulators.

[Ryan Henderson]

Yeah, it just, it's what's. It's Groundhog Day like we heard so many times. End of the year, it's gonna come. I would, that would, that might be one of his most outrageous claims so far is somehow, somehow turning this to half the population in six months. Seems unlikely.

[Brett Schaefer]

I 100 agree. Stock was down 8% today, down 20 this year, but up 40 in the last year. I will disclose full disclosure, I'm sure to hold 2, 2 shares. So just to get that out of the way, I don't want anyone to not know that that's listening. I am biased. I think the stock is vastly overvalued but it is a minuscule part of my portfolio.

[Ryan Henderson]

What companies are you short?

[Brett Schaefer]

Palantir, Tesla and this again this makes up less like less than 10% of say net. So it's a small, small part overall. You know most of the times people have much larger short books. The nuclear, I don't want to call, use a swear word. The nuclear pure plays that are pre revenue. The electric air taxis and quantum stocks. I kind of have some of those revenue ones. Yeah.

[Ryan Henderson]

Didn't know you'd been expanding your short book so much.

[Brett Schaefer]

Well, but remember this is. These are minute, like the sizing is tiny. I don't want to get caught up in making one short position like a Tesla or something like that. 10 of my book. It's tiny. I want to be very diversified. That seems to be the way that works out best for most people. I don't have to worry about something even if it goes up 300%, crushing my returns. That actually happened to one of the nuclear stocks and you barely even notice.

[Ryan Henderson]

So yeah, yeah. When having a huge short position just seems like Stressful.

[Brett Schaefer]

Stressful. Yeah.

[Ryan Henderson]

Okay. Chipotle. Is Chipotle a dying brand?

[Brett Schaefer]

Ryan? Can I. Can I pat myself on the back? I've been early on this last five years, but I would have been wrong so far. I was about 200 ago on the stock.

[Ryan Henderson]

Yeah. Early. It may have been a little too early, but now your gripes came from quality food.

[Brett Schaefer]

Yeah, I think that's. That could be impacting. That could be impacting the numbers foreign.

[Ryan Henderson]

Let's go through some of these numbers. Gonna pull up fiscal AI real quick. The number that popped out to me more than anything else and probably is the one everyone needs to pay attention to. Comp store sales declined 4%. This compared to last year. That is the worst comp store sales growth they have seen since the pandemic. And if you strip out at June 2020 so you strip out the pandemic impact, that's the worst they've seen, I assume since the E. Coli crisis. Now the.

[Brett Schaefer]

Do they have any excuses for this? I don't have time to read the call.

[Ryan Henderson]

Let me give it a peek here. Let's. Let's read. Let's read the press release, shall we? Shall we? We are seeing momentum build as we rolled out our summer marketing initiatives. As our comparisons ease, our talented restaurant teams.

[Brett Schaefer]

Sorry. It's so funny.

[Ryan Henderson]

Yeah, I love. This is one of my favorite things in corporate speak is when people talk about how the forward growth is going to be better because we had bad results recently. Like we're having bad results now. So it's going to be easier to surpass them in the future. Yeah, that's the bull thesis. No, it says our talented restaurant teams remain focused on delivering handcrafted meals. Let's see if he actually gives anything useful. I am optimistic that our positive momentum will continue as we further. Nope, not useful. Not useful at all.

[Brett Schaefer]

This is negative momentum.

[Ryan Henderson]

Yeah, they're just Comp sales decreased 4% margin down.

[Brett Schaefer]

I remember seeing that.

[Ryan Henderson]

Yeah. I mean margins have to come down if you're right.

[Brett Schaefer]

Especially. Yeah, especially with inflation. I pulled up the call actually was able. There's another free advertisement for fiscal AI. The was able to pull up the call and search through it for comparable sales. And they said considering the ongoing volatility in our trends in the consumer environment and we now anticipate comparable sales to be about 50% flat for the full year and then blah, blah, blah, we have a small strong plan. So comp sales flat for the year is their guide. I don't know if I can have a full take on Chipotle yet. I want to see how they compare to other restaurants. If every restaurant is doing terribly, then hey, maybe Chipotle is okay. But last quarter they saw a huge decel. They have a further detail this quarter and some other brands were doing just fine. I can't remember what Domino's posted it, but I think Domino's was, was just fine. So I, I think this might be a Chipotle level issue.

[Ryan Henderson]

Domino's comps are positive. So the, the, really the thing here is props to Brian Nickel, former CEO of Chipotle. He left Chipotle at absolutely the right time. And also he's now like might be one of the top fast casual restaurant food CEOs in the world because his timing was impeccable. And he also sold, I believe all of his shares after he left Chipotle. So he started unloading pretty quickly.

[Brett Schaefer]

They had a stock, they had the CFO leave and the CEO leave. That's good timing. If you're ever gonna get out of a, get out of a company, it would have been good timing to sell.

[Ryan Henderson]

And he joined Starbucks, which I, I personally think could be turning the corner to growth again. And it just good for him, honestly, good for him. When he felt like the valuation on Chipotle and maybe the concept was getting towards saturation. To move to something that's I would argue is stickier in terms of customer attention. Coffee, it's, it's stickier. Less competitive and more advantaged. Maybe I've given some brand advantage.

[Brett Schaefer]

We're ending the age of Chipotle. We're entering the, the age of Kava. Could be true. Could be true. Do they have those in Austin?

[Ryan Henderson]

Kava? Yeah, probably.

[Brett Schaefer]

Probably they don't have them in Seattle. Do you want to guess what Chipotle's price to earnings ratio is? 2541.

[Ryan Henderson]

Really?

[Brett Schaefer]

Yeah. What a great short opportunity. When the, the CEO left, it was the PE was like 60.

[Ryan Henderson]

It. I mean restaurants are tough. Honestly, minimal operating leverage. Well, yeah, I mean running a restaurant's tough, but it just, I don't know. When you hit saturation, it feels like it's almost like retail a bit where consumer habits can change. Unless you have like a really big advantage in being like a low cost provider. Like Domino's, I think is the low, low price provider. And it's sort of a self reinforcing competitive advantage there.

[Brett Schaefer]

And their input cost bread, tomatoes, cheese, a lot better than meat. For, for cost wise.

[Ryan Henderson]

It, yeah, it's got to be a difficult, it's got to be difficult to be the one that steps into the CEO suite. There's replaces Brian Nickel at an all time high valuation. Do we want to talk home builders? We got some questions.

[Brett Schaefer]

We did, yeah. We wanted to cover this, I guess. Yeah. This is kind of shout out to the not. I guess we don't talk with them that much but we've met them before. Friends at Value after hours that do their veggies every week. This is kind of a veggie segment. We went through the fun stuff and now this is some. I wouldn't call it dense. I think it's interesting macroeconomic topics. So we got a few questions on home builders for when we asked what we should talk about this week. The big home builders are all at least in a 20 drawdown right now. Lennar is actually in close to a 40 drawdown. But in the last month there's been a recovery. Stocks like pulte group up 10% in the last month. Yes, that is the Pulte Pulte that you're thinking of. It's the same name grandson of the founder. Yeah. Is the one whatever job fh, whatever Federal Housing Administration that tweets constantly. Almost as much as the open door guy. Home sales revenue was down 4% for Pulte Group last quarter. They reported this week or late last week. Gross margin was down to 27% versus 30% a year ago. And backlog is steadily falling. Dr. Horton Homes revenue is down 7%. So we're seeing compressing margins. A little bit of decrease in home sales volume for them. Stocks all traded a PE ratios of around 10. It's kind of a. These, these companies could be expensive, they could be cheap. You know, you got to ask our earnings depressed, will growth resume if mortgage rates fall? I kind of think and I can share some of these charts from the Calculated risk blog that. Well, it might be hard for you to see. I can just describe them that the macro, the macro indicators out there, they look to me a little bit bleak. You had rising inventories. So we have this chart here that shows new homes month of supply. So essentially what this shows is the amount of new homes on the market that compared to how many are getting sold each month. So if you have currently we're at close to nine months of supply on the market. The higher, the worse it is for home builders because you have more, you know, supply out there. The other times that new home months of supply hit these levels would be the Great Recession and other recessions going back to I think the 1960s. So it's kind of an indicator that things could be looking bad for the housing market. And then there's also another one I think is quite interesting, which is new home inventory. So this is a little bit different. It's another way. It's more of a specific way to measure inventory. And the amount completed isn't that high, at least compared to the great financial crisis. But the amount of new homes under construction are at the highest levels, excluding the great financial crisis, and are getting there quite quickly, going all the way back to 1973. So I think for me, these are ones I don't want to touch. They were fantastic buys. What was it when the mortgage rate spiked in. Was that 20, 22, something like that? Yeah, but I think. Yeah, Yeah. I mean, Dr. Horton stole a double from there. But I think today I'd be very. I'm very, very nervous about these companies if some things go wrong. There's a lot of inventory that could be out there and if existing home sales pick back up again, that's some more supply hitting the market.

[Ryan Henderson]

I'm a Dr. Horton shareholder. I was a little surprised by the stock's reaction to this quarter. I read through the conference call and it's just going to be a period. It strike. Strikes me as it. It's probably going to be a period of just them not earning as much as they used to. It I don't think it's going to be cataclysmic or detrimental to the business model, especially since they've really kind of pivoted to being so asset light and they don't really. They don't own their land for the most part. 75% of it's owned by their land bank. And then their turnover time or their inventory turns continues to come down. So they're building them quicker and selling them quicker. But the issue here is that there's just some compression on the gross margins. So this is probably going to happen across the board with all home builders. They the reason that. What are you pulling up here? Yeah, they are buying back a ton of stock. There's an interesting quote on the conference call. Maybe you can p. Pull up the conference call, Brett, for context. Brett's pull it up fiscal AI here and keyword in valuation. Okay, so before I get to this quote, basically gross margins were a little better than expected this quarter because they stopped pulling so much of this or offering as much incentives. From what I could tell. Basically there's different levers they can pull to increase the attractiveness or encourage people to buy homes today like they can do mortgage rate buy downs, they can lower the price. There's just different things that they can do. They can offer different stuff with the mortgage side, especially since they're lend. Most of their home buyers use them for home loans as well. But they said incentives might kick up here in the summer and into the fall because they are still seeing a hard time. It's less affordable essentially. People are having a hard time affording homes still because rates are higher now. With that said, the valuation has come down a lot. People are soured on this. People are worried that interest rates are going to cause a crisis. I think frankly for homebuilders. And here's what Bill Wheat, the CFO said. He said, obviously with where our share price has been, we feel like the valuation is attractive and so we're taking advantage of that during this time. They are buying back 9% of their market cap in cash annually. Right now I believe the buyback yields at 9% assuming that earnings have plateaued like earnings. It's not like they're at pink or peak earnings anymore. They were at 30% gross margins. Now they're at like 23%, 24%. So we've already seen earnings collapse a little bit. If earnings can stay flat or even grow over the next five years and they're buying back 9% of their stock, you honestly don't even need earnings growth for the shares to do well.

[Brett Schaefer]

Yeah, I can understand that thesis. Good that they're buying back a lot of stock. I think management seems smart. I look at the gross margin and we're still not back to pre pandemic levels from a gross margin perspective. So I do think there's still risk of margin compression going forward. But I can understand the thesis. What are they at PE like? It's like 10, right. So you still, even if you get a compression and they start buying back and they look, you know, if the downside stuff materializes, it's not like the. I don't think the stock's going to collapse or anything. But the housing market, it looks like from all the Ford indicators is flipping from a seller's market to a buyer's market. And we're just on the start of.

[Ryan Henderson]

That little anecdotal evidence here for the week. I checked out a house in the Austin area, which is always nice to go from growing up in Seattle to like checking out houses in Austin market.

[Brett Schaefer]

For buyers in the country.

[Ryan Henderson]

Austin feels like just so nice, like you can just get a lot more anyways. But the realtor was like honestly just Just offer whatever price, just throw out a price. And I like not to her but like offer it to the company, to the home builder and see if they might bite because it sounded like they were having a hard time getting rid of their inventory. Now that wasn't Dr. Horton. I checked because I was a little concerned.

[Brett Schaefer]

You're making sure. Yeah. But this could be a tough period. Still, some of these are good businesses. MBR, Dr. Horton, my anecdotal evidence and I guess we're going over time here is that there are a lot more for sale signs going up. Used to be totally empty for existing home sales and I think some people are trying to sell but there's this whole mismatch between what they think they their home is worth for you know what Zillow tells them, what they want to sell for for these existing homes versus what you know, someone like Ryan or Isa's age, first time home buyer can purchase. And that's going to slowly match up either I think this is unlikely. Either our salary is going to go up 50% or home prices are going to come down. I think home prices will likely come down instead. Ryan, anything else before we wrap up?

[Ryan Henderson]

No, I think that's about it. Next week we got more earnings. Amazon, I believe should be out. Big tech I believe reports kind of next week as well. So we're gonna have a lot to discuss next week I, I'll be on, we'll have a replacement, we'll have a sub. Brett will be out. So we're gonna have a listener favorite. John Rotanti will be joining the show.

[Brett Schaefer]

Yeah, make sure to tune into that. Hopefully record viewership when I'm gone. That'll, that'll make me feel, that'll make me feel great. But no, everyone should listen to John and he always comes with great insights. Perfect timing with big tech earnings and I'm excited to listen to that one. Okay, let's get out of here. Full disclosure, we are not financial advisors. Anything we say on the show is not formal advice or recommendation. Ryan I or any podcast guests may hold securities discussed in this podcast, may have held them in the past and may buy, sell or hold them in the future. Thank you everyone for tuning into these live episodes. They go 5pm Eastern time on Thursdays, give or take. It could change sometimes, but you can listen to the replays on YouTube, Spotify, Apple Podcasts that come out Friday morning. Give us any suggestions for what to talk about on Twitter, Substack, what have you. Let us know what you'd like us to talk about. If you enjoy these episodes, give us a review on Apple Podcast or Spotify and we'll see you next time.