Prof G Markets: Episode Summary – Perplexity’s Fourth Funding Round + Lessons From Boeing in Long-Term Thinking

Release Date: October 28, 2024

In this episode of Prof G Markets, hosts Scott Galloway and Ed Elson delve into significant developments impacting the capital markets, offering insightful analysis on housing trends, corporate earnings, labor strikes, and the evolving landscape of artificial intelligence. This comprehensive summary captures the key discussions, insights, and conclusions from the episode.

1. Market Overview

Timestamp: [04:05]

The episode begins with a rundown of the week's market vitals:

• S&P 500 declined.
• US Existing Home Sales fell by 3.5% year-over-year, marking the lowest level since 2010 and on track for the worst year since 1995.
• Tesla reported a 17% rise in net income for Q3, surpassing analyst expectations.
• McDonald's stock dropped 10% following an E. coli outbreak linked to its Quarter Pounders, resulting in 10 hospitalizations and one death.
• Shein saw a 70% decline in profits for the first half of the year, with revenue growth slowing to 23%.

Ed summarizes the data, highlighting the contrast between Tesla's strong performance and McDonald's and Shein's challenges.

2. Housing Market Dynamics

Timestamp: [05:15]

Scott and Ed discuss the troubling decline in US home sales:

• Scott Galloway observes, “The housing crisis or the housing sales just keep getting worse. I think we need fairly significant government subsidies to put the private sector into action to just start building a ton of houses and also pass regulations that make it increasingly difficult to block housing permits.”
• Ed Mylett adds a historical perspective, comparing current affordability issues to the mid-1980s when mortgage rates were significantly higher. He notes, “Home prices relative to income have never been higher, but when factoring in mortgage rates, housing affordability is around where it was in the mid-1980s.”

The hosts emphasize the need for increased housing supply and government intervention to address affordability.

3. Tesla’s Earnings and Valuation

Timestamp: [10:27]

The discussion shifts to Tesla's recent earnings report:

• Ed Mylett highlights Tesla’s diversified revenue streams, particularly the 52% growth in their energy and storage business and a 29% jump in service revenues like charging. He notes, “This is about the performance of the fundamental business. And the fundamental business is doing pretty well.”
• Scott Galloway critiques Tesla's valuation, stating, “Tesla is still way, way overpriced,” despite the positive earnings, as it trades at 79 times forward earnings, double that of Nvidia.

The conversation underscores the tension between Tesla’s solid performance and its high market valuation.

4. McDonald’s E. Coli Outbreak

Timestamp: [13:35]

Scott and Ed discuss the impact of the E. coli outbreak on McDonald's:

• Scott Galloway comments, “If you price McDonald's to its externality... a Big Mac would be $50,” criticizing the company's pricing strategy in relation to health externalities.
• Ed Mylett contextualizes the outbreak within the fast food industry, mentioning past incidents with companies like Wendy's and Chipotle. He predicts, “Come next week, it won't be an issue,” due to the upcoming presidential election diverting media attention.

The hosts debate the short-term stock impact versus the long-term brand implications for McDonald's.

5. Shein’s Financial Struggles and Ethical Concerns

Timestamp: [17:46]

The focus moves to Shein, a fast-fashion retailer facing financial and ethical challenges:

• Scott Galloway expresses defensiveness over allegations of child labor, noting, “They have been using child labor… they reported it and disclosed it, and they cut ties with those suppliers.”
• Ed Mylett questions the moral viability of Shein, mentioning their reported use of child labor in two cases and the broader implications of ultra-low pricing on ethical practices. He states, “It's on them to address that. And I think that starts with doing a very, very thorough audit of their supply chains.”

The discussion highlights the tension between rapid growth and ethical supply chain management in the fast-fashion industry.

6. Boeing Workers’ Strike and Contract Negotiations

Timestamp: [27:41]

A significant portion of the episode addresses the ongoing Boeing strike and its financial repercussions:

• Joey Bag of Donuts outlines the situation: Boeing workers voted against a proposed contract that included a 35% raise over four years, demanding a 40% increase instead. This decision extended the strike and compounded Boeing's financial woes, including a reported quarterly loss of $6 billion and a continued cash burn into 2025.

• Scott Galloway offers an optimistic take, stating, “They know they have power… I would argue that this is actually a pretty good buy right now,” citing Boeing's substantial backlog of over $500 billion in commercial planes and its position within a duopoly alongside Airbus.

• Joey Bag of Donuts counters by focusing on the core issue: the shift from defined benefit pension plans to defined contribution plans like 401(k)s. He explains, “The main thing is the difference between a traditional pension plan and an individual retirement plan. Workers want a monthly paycheck post-retirement, whereas Boeing prefers investing in employees’ accounts now.”

• Scott Galloway supports the move towards 401(k)s, emphasizing personal financial discipline and the portability of retirement funds. He remarks, “What companies want to avoid… is the notion that if you work it for a certain amount of time, we're just going to keep paying you a certain amount of your salary.”

The hosts conclude that while Boeing faces immediate challenges, the strike reflects broader shifts in employment benefits and retirement planning.

7. Perplexity AI’s Fourth Funding Round and the AI Arms Race

Timestamp: [41:48]

The episode wraps up with an analysis of Perplexity AI's latest funding efforts:

• Joey Bag of Donuts reports that Perplexity AI is seeking to raise $500 million in its fourth funding round of the year, aiming to double its valuation to $8 billion. The AI search engine and chatbot is positioning itself as a competitor to giants like Google.

• Scott Galloway praises Perplexity’s brand positioning but expresses concern over the sustainability of continuous fundraising: “This is proof of what we've been saying for a while. AI is becoming just a flat out arms race… it's about who can outspend the other.”

• Ed Mylett critiques Perplexity’s business model, questioning its competitive edge against established players like Google, which boasts over 270 million active users for its Gemini AI, compared to Perplexity’s 15 million monthly active users.

• Scott Galloway remains cautiously optimistic, suggesting diversification into both OpenAI and Perplexity could be beneficial but acknowledges the high-stakes nature of AI investments.

The discussion underscores the intense competition and significant capital requirements in the AI sector, highlighting the challenges smaller players face against tech behemoths.

8. Predictions and Final Thoughts

Timestamp: [48:51]

In their closing remarks, Scott and Ed share predictions and reflections:

• Scott Galloway forecasts that Boeing, currently trading at $155 per share, will outperform the S&P 500 over the next year due to its strong backlog and strategic position in the global economy.

• Ed Mylett emphasizes the importance of diversified investment and the potential for AI to reshape various industries, while also highlighting the ethical considerations companies must navigate.

Conclusion

This episode of Prof G Markets offers a deep dive into current market trends, corporate strategies, and the evolving dynamics of labor and technology. Scott Galloway and Ed Elson provide nuanced perspectives on the challenges and opportunities within the housing market, automotive industry, fast fashion, labor negotiations, and the burgeoning AI sector. Their analysis underscores the importance of strategic thinking and adaptability in navigating today’s complex economic landscape.

For listeners seeking to enhance their financial literacy and stay informed on market-moving news, this episode delivers valuable insights into the forces shaping the capital markets.