Prof G Markets: Third Quarter 2024 Review ft. Aswath Damodaran

Release Date: October 31, 2024

Overview

In the latest episode of Prof G Markets, hosted by Scott Galloway and Ed Elson from the Vox Media Podcast Network, the duo delves into the significant events shaping the capital markets in the third quarter of 2024. Featuring an insightful conversation with Professor Aswath Damodaran, renowned for his expertise in corporate finance and valuation, the episode offers a comprehensive analysis of market-moving news, fallen market icons, and strategic investment perspectives.

1. Opening Banter

The episode kicks off with Scott and Ed sharing a light-hearted conversation about Halloween spending, reflecting on a personal anecdote where Scott attended a Halloween party dressed as a chicken and met a girl dressed as an egg. This playful exchange sets a relaxed tone before transitioning into the core financial discussions.

2. Market Headlines and Initial Discussion

Scott and Ed tackle several key financial headlines affecting the market:

• California's Tax Incentives for Movie Production

  • News: Governor Gavin Newsom proposes to more than double California’s tax incentives for movie production to $750 million per year, effective summer 2025.

  • Scott's Insight ([05:07]): Scott supports the move, highlighting that states like Canada, Ireland, and Vancouver offer similar incentives. He notes that for every dollar in tax credits, California gains $1.08 in tax revenue, deeming it net neutral. Furthermore, he emphasizes the positive economic impact—each dollar in tax credits generates $8 in wages and $24 in economic activity. Scott appreciates leveraging California's deep talent pool in the entertainment industry to stimulate economic growth.

    Scott ([05:07]): "I think the incentives in California are so caught up in this industry and they don't even need to exceed the tax credits of other municipalities, they just need to match them because the talent pool around Hollywood is so deep."

  • Ed's Perspective ([07:09]): Initially skeptical, Ed expresses concern that subsidizing the Hollywood industry might not be strategic if the sector is on a decline. He questions the long-term viability of investing public funds into what he perceives as a potentially dying industry.

    Ed ([07:09]): "This to me was sort of all of the worst criticisms of the Democratic Party come true."

  • Conclusion: Scott convinces Ed of the tactic's immediate benefits, underscoring the strategic advantage for Los Angeles in maintaining its dominant position in entertainment.

• Boeing's $21 Billion Share Sale

  • News: Boeing raised $21 billion by issuing common stock and convertible shares to boost liquidity and prevent a credit rating downgrade to junk status.

  • Ed's Analysis ([08:05]): Ed criticizes Boeing’s forced share sale, viewing it as a nightmare for shareholders. He highlights that Boeing is selling shares not out of strategic intent but necessity to appease credit rating agencies, potentially diluting shareholder value.

    Ed ([08:05]): "They're selling shares because they have to...from a shareholder perspective, I look at this and this is just a nightmare."

  • Scott's Counterpoint ([10:21]): Scott explains that Boeing’s financial strain, exacerbated by production strikes, necessitated the share sale to maintain debt ratings. He views it as the best of bad choices, allowing Boeing to strengthen its cash position and avert immediate financial crises.

    Scott ([10:21]): "They decided it was worth for shareholders to take the dilution to shore up their liquidity."

• Robinhood's Betting Contracts on Elections

  • News: Robinhood launches betting contracts for the presidential election, allowing U.S. citizens to trade contracts predicting the outcome (e.g., Trump vs. Harris). Following the announcement, Robinhood’s stock surged by 3%, and Donald Trump's media company experienced a 21% rise.

  • Scott's Commentary ([12:16]): Scott likens Robinhood to gambling platforms like FanDuel and DraftKings, suggesting it reinforces Robinhood’s role as a gambling site rather than an investment platform. He raises concerns about the potential lack of seriousness in the betting market's predictions.

    Scott ([12:16]): "Robinhood is not where you go to invest, it's not where you go to learn, it's where you go to gamble."

  • Ed's Insight ([13:15]): Ed references Professor Damodaran’s interview with Kalshi's CEO, indicating a shift in perspective on betting markets. He highlights that 90% of Kalshi’s users are men, potentially skewing betting outcomes towards Trump.

    Ed ([13:15]): "You think about how seriously people have taken these betting markets and you know, Trump's up 60%. ... 90% of the users on the platform are men."

  • Scott's Final Thoughts ([14:20]): Scott anticipates extreme volatility in Donald Trump’s media company stock, comparing its unpredictability to Vegas gambling. He expresses skepticism about the company's long-term viability regardless of election outcomes.

    Scott ([14:20]): "This thing is hilarious. It's now worth more than Twitter."

3. Interview with Professor Aswath Damodaran

Professor Damodaran provides a deep dive into several "fallen angels" in the market—once-iconic companies struggling in the current economic landscape.

a. Nike's Stagnation and Brand Dependency

• Nike’s Current Position ([20:22]): Damodaran discusses Nike’s challenges under new CEO Elliot Hill, emphasizing that while Nike retains a strong brand, it may no longer achieve double-digit growth. He notes that iconic brand names require continuous nurturing to maintain their competitive edge.

  Professor Damodaran ([20:22]): "I don't think you're going to see double digit growth from Nike for the next decade. But it still has the most recognizable brand name in this business."

• Brand as a Moat ([23:34]): Ed presents a thesis questioning the efficacy of brand strength as a sustainable competitive advantage. Damodaran counters by explaining that brand names need active maintenance and can diminish if the target market evolves or if the brand fails to adapt.

  Professor Damodaran ([23:34]): "Brand names, even though they're long term competitive advantages, need nurturing, need being taken care of."

b. Intel’s Struggles and Potential Recovery

• Intel’s Overreach ([26:41]): Damodaran criticizes Intel for overextending in attempting to compete with TSMC and Nvidia, leading to financial strain. However, he sees potential for recovery, especially leveraging the Inflation Reduction Act, which supports domestic chip manufacturing.

  Professor Damodaran ([26:41]): "I think... there's a pathway back to middle age for Intel. And at less than $20 per share, I thought it was a pretty good bargain as an investment."

c. Boeing’s Deep-Seated Issues

• Boeing’s Credibility Crisis ([26:41]): Unlike Intel, Damodaran views Boeing as in severe trouble due to a tarnished reputation and operational missteps. He expresses skepticism about Boeing’s ability to regain trust, suggesting that the company may even consider selling off its space division.

  Professor Damodaran ([26:41]): "Boeing is in complete survival mode and... the company’s in serious, serious trouble."

d. Estee Lauder and Disney’s Decline

• Disney’s Management Transition ([31:53]): Damodaran uses Disney as a case study for poor management succession. He laments the departure of leaders prepared to fill post-Bob Iger’s tenure, leaving Disney vulnerable amidst a transformed entertainment landscape dominated by streaming disruptions.

  Professor Damodaran ([31:53]): "If you were writing a case study about how not to transition top management, Disney would be the case study."

• Estee Lauder’s Challenges ([35:10]): Focusing briefly on Estee Lauder, Damodaran acknowledges governance issues and a shifting market landscape but admits to having less comprehensive insights compared to Disney.

e. Succession Planning: Internal vs. External Hires

• Strategic Insights ([35:37]): Damodaran emphasizes the importance of aligning leadership changes with the root causes of a company’s troubles. If issues are operational, internal hires who understand the business may be preferable. Conversely, if strategic or narrative shifts are needed, external hires can bring fresh perspectives.

  Professor Damodaran ([35:37]): "If your trouble is with storyline, you've lost your narrative as a company. You have to go outside."

f. Tech Sector Earnings and Trends

• Earnings Expectations ([38:08]): Damodaran anticipates mixed results from major tech earnings reports, noting that while some companies like Meta and Alphabet have lowered expectations, others like Nvidia face high benchmarks that lead to stock volatility despite earnings beats.

  Professor Damodaran ([38:08]): "I think expectations have been lowered for some of the tech companies... It’s easier for them to meet those expectations."

• Cloud Services Dominance ([39:36]): He observes that major tech firms have increasingly significant cloud divisions, which are both highly profitable and potentially antitrust targets due to their dominance.

  Professor Damodaran ([39:36]): "Microsoft... gets about half its revenues from the cloud business. It’s more cloud business than software company now."

g. Election Impact on Markets ([53:37] - [56:55]):

• Market Pricing of Election Outcomes ([54:02]): As the election approaches, Damodaran reflects on how markets seem indifferent to the candidates’ economic plans, suggesting that neither Trump nor Harris is perceived as serious about altering fiscal policies drastically.

  Professor Damodaran ([54:02]): "The markets don’t believe that either presidential candidate is serious about what they're saying on their economic plan."

• Investment Strategy Amid Election Uncertainty ([56:10]): Damodaran advocates for avoiding politically driven investment decisions, emphasizing the difficulty of predicting election outcomes and their direct impact on markets.

  Professor Damodaran ([56:10]): "I prefer to keep it that way. So for better or worse, I've stayed away from making any politicized investment decisions."

4. Closing Discussion and Final Thoughts

• Scott’s Personal Experience ([55:35] - [58:46]): Scott shares his past mistakes of letting emotions dictate investment decisions post-election, advising listeners to stay the course and avoid trying to game the market based on political outcomes.

  Scott ([55:35]): "I would not try to game the market here... Stay the course and also recognize for your own mental health."

• Professor Damodaran’s Final Advice ([52:35] - [54:02]): Reinforcing his stance, Damodaran reiterates the importance of separating political sentiments from investment strategies to maintain rational and effective portfolio management.

5. Notable Quotes

1. Scott on California's Tax Incentives:

   "[05:07]... I think the talent pool around Hollywood is so deep."

2. Ed on Boeing’s Share Sale:

   "[08:05]... this is just a nightmare."

3. Professor Damodaran on Brand Names:

   "[23:34]... need nurturing, need being taken care of."

4. Scott on Robinhood’s Gambling Nature:

   "[12:16]... it's where you go to gamble."

5. Professor Damodaran on Disney’s Management Issues:

   "[31:53]... Disney would be the case study."

Conclusion

The Third Quarter 2024 Review of Prof G Markets offers a nuanced examination of critical market developments, strategic business challenges, and investment philosophies. Through dynamic discussions between Scott, Ed, and Professor Damodaran, listeners gain valuable insights into navigating a complex capitalist landscape, understanding the implications of corporate actions, and maintaining disciplined investment strategies amidst economic and political uncertainties.

Thank you for tuning into Prof G Markets. For more insightful analyses on the capital markets, financial literacy, and investment strategies, subscribe and follow the Vox Media Podcast Network every Monday and Thursday.