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- [00:00]
A
Foreign.
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B
Welcome to the Synopsis, a business and investing podcast. Today I'm joined by none other than Drew Cohen, portfolio manager and aspiring YouTube star who seems to keep getting pigeonholed into making videos about Adobe. Why do the people love Adobe so much?
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A
I don't get is a video that does like three standard deviations better than my average video. So the people are going to keep getting Adobe video.
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B
You know, Drew, the market is all about supply and demand. And let me tell you, you found where the demand is, but can you keep up the supply? How much can you talk about Photoshop and AI? I don't know, Drew, but you're finding a way to keep the topic alive.
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A
You know, I actually did about 100 page report on Adobe, so I could probably say a lot, but two videos is kind of good enough for me.
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B
Yeah, you know, in this day and age, nobody wants to read the 100 page reporter. They want the 30 minute video on four times speed and see if they retain anything like I do. You know, I probably about four facts from Adobe after watching an hour of your YouTube videos because you know, 3x speed, there's only so much retention there.
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A
And then you'll ask me, hey, what was that video about?
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B
Yeah, what was that video about? What are we talking about today? But luckily, again, I'm kind of, I'm getting a little bit of a win today. We do have some AI software topics, but not too heavily. I think they're a little more exciting. But we're going to kind of do a, a hodgepodge of companies here. We want to touch a little bit on Copart, which you know, we talked about throughout. That's kind of, that's a company near and dear to my heart. I think that's, you know, if I think of quality company, a lot of competitive advantages, you know, good management. I think of Copart, I think that's like a great business. For anyone interested in quality investing, however you want to call what we do, I don't know, good decision investing, even though it's down 40%. I don't know.
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Good decisions.
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B
Good decisions. Listen, on paper, you know, if you look at earnings and the moats, we're doing well, the stock price, you know,
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not reflecting earnings were growing a lot less.
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Earnings are growing less. But anyway, good, I think overall a very compelling company to learn about. And then of course we have Uber that we want to talk about in the AI updates, especially around autonomous vehicles, how that has been kind of transitioning. And then lastly, talk about Netflix, which Drew said was one of his mistakes on our last video. Not investing in Netflix in 2021 or 2022, whenever they were down. And guess what? It's at that price again. Is that right, Drew?
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A
Oh, it is definitely not at that price again. It's like, like 3 or 400% more expensive still. It was trading at.
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B
Oh, you're saying.
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A
You're saying 16 times multiple. Yeah, it was trading 16 times a multiple. Right now I think it's 23 times. When I did the video, maybe right now it went up a little bit. So it's 24 times. But yeah, on both an absolute dollar basis and valuation multiple, it's still a lot higher.
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B
Got. And that's why I'm watching these videos at 3x speed. Because I thought you said somewhere in the video that it's at parody or it's been down a lot. I don't know. I don't follow Netflix like you do,
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A
you know, you know, insider secret, though, if you watch it at three times speed, it records the full watch time. So I don't care. Works out for me.
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B
So why don't we start with Copart? And you know, I know you touched a lot on Copart with Chris Meyer and then we kind of did a debrief after. So I'm not going to spend a lot of time talking about the moats of Copart. You wrote a report on it. We have a deep dive business breakdown on Copart or, you know, we have a deep dive on Copart through the synopsis. So a lot of information on Copart for those who want. But we had originally had this discussion about Richie Bros. And IAA And a little context there. IAA is the duopoly, is the, you know, other half of Copart. They are duopoly in this market. They were acquired by Richie Bros. Which was a construction rental company. And again, we were not exactly optimistic about that merger specifically because IAA has been, you know, kind of acquired and spun off and acquired throughout its history and has not really ever competed well with Copart. We have now seen Jeffrey Law, who is the CEO of Copart, step down and have Jay Adair, who is the stepson of Willis Johnson, the founder. And Jay Adair really, you know, was probably the main operational driver behind Copart's run for the last 20 years. Obviously Willis Johnson was involved, but J. Adair was, I think, probably the muscle, you know, actually going around and doing a lot. And so he's returned. And so what do investors think about this? And I talk about IA and Richie Bros. As a sense that their company has been performing pretty well. I mean the Richie bro stocks up about 100% from that IAA acquisition over the last couple of years. And we have seen reports that Copart is losing market share to iaa. This is kind of speculated, right? We don't know. There's been a couple accounts that they've confirmed that they've been lost, but we're not. They've been blaming it mainly on external factors. So what, what does this all tell you about? Long story short, what's your read on this situation?
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A
Yeah, so I want to start by saying when something is going wrong with the company and in Copart's case, what was happening was growth was slowing, revenue was actually negative a couple quarters, but and actually insurance vehicle supply was negative as well, even though gross profits were positive, clearly they were slowing growth a lot. And so the kind of meta point to make here is that when a company is going through a headwind, something is wrong. Management doesn't necessarily know what the issue is. Now they probably have better insight over the average investor, but they themselves are kind of hypothesizing what is happening. And the hypothesis that they gave over the past couple of quarters was one, that the amount of underinsured drivers has been increasing a lot of. And two, within their mix of clients who are insurance companies, they had basically lost market share. So the customers, they had lost market share relative to the customers of IAA with mainly Progressive, who is an IAA customer, taking market share. And so that two things was the result of them basically slowing revenues and slowing their volumes. That's what they talked about. And that makes sense. And if that was true though, it would basically be a cyclical factor. Right, because it's not like one insurance company is going to continue to take share versus all the other ones. They're just more competitive on pricing. Others can adjust their pricing and they're not going to bleed share forever. So it's kind of a short lived thing. And then in terms of the underinsured drivers, they've seen that before. And so that's also a short lived thing. And the headwind there is if you're not insured and you get hit by a car, then that car is not going to end up in the insurance pools of vehicles for Copart to potentially sell. So those were the two headwinds that they talked about there that they mentioned. Now I think though there was another theory at the time because, and we talked a little bit about this, which was that IAA was getting a lot more Competitive relative to Copart. There was an Alpha Sense expert call we had and we talked about this, that the time it took them to basically pick up a car, clean it, flip it and sell it on their marketplace, the number of days it took total caught up to Copart. And one person thought it was actually better than Copart in some cases. And so that was a signal that, hey, maybe the service IA is offering is no longer this, you know, second tier service where insurers are only signing up to IAA in order to ensure that there's a second alternative, kind of charitably so that there's some competition in this marketplace and we could keep a duopolistic structure because they don't want only one player because then the insurance companies are worried, you know, Copart would take the pricing up. So for a long time people were using IA IAA just to kind of keep competitive structure intact. So Copart wouldn't have too much pricing power. Now though, it seems that IAA service is as good if, you know, according to this one person, better. And when we heard this, this was very surprising to hear, to be honest, because I was very negative on IAA's ability to catch up for a few reasons. One, it's a company that's traded hands many, many times. It never seemed to have a very good management team. The CEO at the time of Richie Bros, who was talking about IAA was saying a lot of sus things that just didn't make a lot, was kicked out of the company basically, or fired or, you know, unceremoniously pushed out, whatever it is. And since then there was a new CEO and things have really gotten a lot better at IAA at a much faster rate than expected. And you know, to think of like some of the lunacy of things going on at IA for existence. They were running dual strategies of having in person auctions as well as virtual auctions since like Covid. And this was something that Copart did away with literally like 25 years ago because they found out that if you do both at the same time, it just becomes way too confusing and it just logistically it doesn't work as well. And so this was a finding at coparts, you know, 25 years ago. And IA just did this like, you know, four years ago. So this is how much IA was behind in Copart in a lot of these decisions. And so total surprise they've been able to catch up to the degree that they have been now. The meta point that I wanted to take away from here is that when something's wrong with the business. Management themselves doesn't always know exactly what it is. So the two hypothesis they put forward, we talked about now what I think has kind of happened with Jeff Law, who is the current CEO until a week ago of Copart, him stepping away and Jade returning to me, it suggests that the thesis he was putting out as to why they were underperforming wasn't entirely true or wasn't the full story. Now that doesn't mean that they were purposefully misleading anyone. He could have genuinely believed that and that could have been the best hypothesis they came up with with the data at the time. But I think Jade replacing him suggest that there's something in the company that needs F. And so if something needs fixing, something was broken. And if something was broken, then that to me suggests that the real problem was that IA potentially was getting better in some regards than Copart. And that is why J. Adair is stepping back at the business.
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B
Has there been what has been the communication from the company? I mean, I was trying to read the press release. It feels like there's not a lot of, there's not even a narrative around it. I mean, they're not saying, oh, he's spending more time with his family. It was very just Jeffrey Law stepping down and J idea is coming back.
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I mean, just basically they haven't had
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B
an earnings since then. Right. So there hasn't been a lot of communication.
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And they said Jeff Law would, would stay on basically as a special advisor to J. Yeah, that's, that's, that's a,
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B
that's a severance package. That's what that is. Right.
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A
Right. Yeah. What are you going to tell J there? So to me though, that means that, you know, it was cordial and it wasn't necessarily, it doesn't seem like it was him finding another opportunity and wanting to leave the business. It does seem like he was pushed out. And you never know these. Sure. You don't know everything that's happening in the background, but that's just kind of being around a little while. That's kind of my pattern matching. There is. It does seem like he was pushed out of this business. And then the second part of my pattern matching would suggest I don't know this for sure, but I think it suggests something was not working inside of Copart and that's why J. Adair is stepping back.
- [11:01]
B
Right. And again, it's hard to read the tea leaves on, you know, hey, what's happening here? I mean, hopefully they do a little better of communicating with the investors, which normally they do. So I'm, I'm sure on the earnings call, a lot of questions be answered here.
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A
Yeah. And, you know, it's the same thing. By the way, what's happened with Adobe. When the CEO Shantanu Naran had, you know, stepped down, even though he was staying on the board of directors, it was kind of weird that he, he stepped down at such a important time for them and at a time they were so confident saying, you know, our AI strategy makes a lot of sense and it's perfect and I'm leaving. And then they're saying, well, who's going to replace you? We don't know yet. Okay. So that to me was like a very similar sort of thing where this kind of narrative, it just didn't fully match with what was happening internally inside of the company. And again, I don't know for sure why he stepped away. You know, he is older than Jeff Law is. You know, he's in his early 60s, I believe, 62, 63. So that's, you know, around the age of retirement. But he didn't come out and say, you know, I want to just spend more time with my family. I'm. I'm kind of over this, or something like that. And they didn't have a successor. It didn't seem planned to such a high degree. Instead, it seemed like the board saw a stock price that was down for such a long period of time and thought, it's time for a new leadership change. I really think it was that simple.
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B
And, you know, one thing that, you know, you don't want to speculate so much that, oh, the whole business is unraveling or something of that nature, because I don't think that's the case at all. I think this is, I mean, this is what is great about companies, where the founders still have a huge stake and are around and, you know, who's the best possible person to lead Copart? I mean, obviously Jay Adair has the tenure, the experience to lead through difficult times. And maybe this is a difficult time with IAA really stepping it up. But to me, what's somewhat concerning is even if Copart in the IAA became parallel in terms of service component, Copart has always touted that they've had deeper auction density, meaning that, you know, their online platform has more buyers and therefore that they're going to surface higher ASPs for their insurance companies. And that's really a network effect, is that not.
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A
They said that. You're right, they said that. That never made any sense. To me, because if you think of, from the insurance company's perspective, they. They do want to ensure competition between IAA and Copart, but they're not going to do that at the cost of them literally making less money. Now, they might be willing to stomach, you know, slightly worse service, maybe a little bit, you know, higher cost, some customer complaints or something like that. But if it was actually the case that every vehicle sold Copart made a materially higher amount of money than if they sold that same car in iaa, then that, to me, there's just no way that IA would have been able to stick around. That just doesn't make sense to me. At the same time, car buyers and sellers on. On both platforms, and I just don't see how that arbitrage could really exist systematically for such a long period of time. It just doesn't make sense to me.
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B
Yeah, it's kind of like checking homes.com and Zillow. You're probably going to look at both, right?
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Yeah. Yeah. I don't see how there could be a big difference, but that's a pretty
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B
repetitive argument they've made throughout their tenure as a company. So what do you. Do you think they're overselling that? I mean, that's been.
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A
I think at one point. I think at one point it was definitely the case, especially because they had an international presence and they still have a bigger international presence than I. And so one of the benefits with international sales is that a lot of times they don't have the same automotive regulatory restrictions. So, for instance, if you have a car in the US and the airbags go off, you're not allowed to sell that car to, you know, a regular consumer unless you fix the. The airbags and then get it certified again. You can sell it, though, to, you know, a country in Africa because there's no laws against that. And when they import the car, they don't fix the airbags because it's too expensive to do. They just cut them out and then drive the car as it. And so because of that, having international buyers does make certain vehicles much more valuable. And I do believe that Copart still does have a larger international presence than iaa. And so maybe on some specific vehicles, there's, you know, somewhat of a difference. I just can't see in aggregate, if you're looking across the entire portfolio of cars of selling on IAA versus Copart, that there's this huge difference. And then they just say, oh, well, for competitive reasons, we're going to make less money than our competitors. Do when we sell cars. It just. I can't see that.
- [15:21]
B
Yeah, it makes sense. I mean, because again then it would go back to my counterpoint, which was, well, you know, you have better auction density. So theoretically that's another, you know, selling point if service reached parity. So I guess you're right. The, the evidence that they may be losing share would echo the fact that. You're right. It's probably not that big of a distinction. Even though they've, they have message had that I think implied for quite a few times while they're always talking about the density and oh, we added this many buyers and our, the liquidity of our auction and all that. Right. So. So seems like they constantly intimate that. Is that fair?
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A
Yeah, it is. And again, I just, I don't see how that could be the case. That was not something I ever fully. That fully made sense to me. Even if you have more bids on an individual car than for iaa, I just don't see how they could just make more money and then all these insurance companies would still go to iaa.
- [16:12]
B
So as obviously a. Someone who follows Copart very closely. What are you looking for in the next few quarters? I mean, are you looking for. I mean, to me, I'd like Jay Adair to come out and say, look, you know, we've been, we need to do better. I mean, we're losing share. This is what we need to do. When you're turning around, I think that that would be. I think that's an okay message to me because I don't know, companies go through ups and downs and if they're in a down period, that's okay. I mean, we gotta have confidence that they'll pull it back together. Or he'll just say, this is a very challenging environment. And, you know, Jeffrey Law just wanted to go sit on the Bahamas and beach chair. I don't know.
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A
Yeah, I think that I would like to see them reiterate that the couple macro things of the underinsured drivers wasn't totally made up. That that still is a factor in a case. Same with the fact that Progressive has been gaining a share versus their competitors. And I would also like them to like, fess up to whatever's been happening and what the truth is about the CEO change, if it is health problems, just say so. Like, that's not a big deal. They didn't signal that in the press release or anything like that. If it is the case though, that their service is slip versus IA and for the first time in, you know, 25 years now they feel like they don't have a real head up on them. Then you need to confront that and just be very open about that. And I am optimistic by the way of Jay Adair coming back because he does have a big stake, invested stake in the business. I feel like when you do have someone that originally built the business coming back, it does reinvigorate employees in kind of a different way than having, you know, a rotational CEO does. And so I really would expect this to actually change kind of the organization. But I would want him to be honest with those, what those changes are. And then in terms of what I'm looking for is pretty simple. I want to see supply of the insurance vehicles inflect back up to be positive because it was negative for US insurance vehicle supplies. So that flipping back up positive and then gross profit growth re accelerating.
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B
Yeah. And obviously copart down, you know, 20% year to date. Where does that put it in terms of valuation? I mean this is a company that, I mean just a few years ago was trading at what was at high 30s or something. I mean it was a pretty remarkably valued company.
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A
Yeah, yeah, I think it touched a 40s multiple.
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B
Right. Touched a 4 and again so a massive re rating here, that's just year to date and then down 53% from its all time high here. So clearly a re rating in the, in the value of the company here. Some of that's probably coming from growth. Is some of that coming from how long is this competitive advantage going to last? Is some of that coming from autonomous vehicles? You know, being autonomous vehicles getting adopted faster? I'm not sure what the narrative is at this point, but it's, it. It all seems to not be going well.
- [18:45]
A
Yep, that is very accurate. Having said that, right now it's at one of its cheapest valuations it's been at in decades. So you know, they have some 4ish billions of dollars of cash on the balance sheet. So you back that out and the interest expense associated with that and it's trading around 16 to 17 times earnings. So one of the cheapest valuations they've had. They've also been extremely selective when they bought back stock. So they do not regularly buy back stock, but when they do they make it meaningful. And they're very selective valuation. And last quarter was the first time they really bought back a meaningful slug of stock. They bought back $1.4 billion. And you know, as I mentioned, they still have another 4ish billions of dollars in cash on their balance sheet. So I would expect them to extinguish a good amount of that cash. You know, they should. Even if they do have to invest more in operations and all that, they should still have plenty of ability to do both. And so that's kind of pretty interesting in terms of a signal because again, this is not a company that regularly buys back stock. And in fact, the last time they really were buyers of their stock, 2019, but they haven't bought back a big, a big amount of stock in, since 2011. So it's been that long since they've really taken a good slug of their common shares and retired that. So that, you know, to me is a, is a signal. And take that for what it's worth.
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B
So, again, something we'll kind of continue to monitor here, perhaps a bargain, perhaps a trap.
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A
Again, are you going to monitor the situation with your multiple Bloomberg models or.
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B
We're going to monitor it. Oh, yeah. We're going to be looking at the, the, you know, daily trading volume and we're gonna.
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A
Why don't you be honest like you want Jay Adair to be. You're not gonna monitor it. You're gonna ask me what's up in like four months from now?
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B
Oh, of course.
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A
Yeah.
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B
I mean, about one week before we hop on this podcast, I'll, you know, try to refamiliarize myself at three times speed about what's happening. But, you know, we can keep the facade alive. And I do remember now, and I had a big thing about Adobe. We are gonna talk a little bit about Adobe. Like I said, give the people what we want. We're all about markets and supply and demand. The demand's there. So give us a little update. You just did a kind of a. In a re release of Adobe. I actually just was listening to Ben Thompson interview the Figma CEO, which of course there was the famous botched acquisition between Adobe and Figma that was blocked by the ftc. Now figma's a standalone public company that is doing as well as Adobe is, which is not well. But again, I think similar narratives for both of these companies. And it was interesting to hear the Figma CEO try to beat back how his narrative is, you know, the baby gets thrown out with the bath water. When AI, you know, when everyone, the market has decided that software is no longer a good business, all the software companies just get slashed. And that's kind of why Adobe, Uber, not really Netflix, but Adobe and Uber have kind of been battleground stocks for this AI autonomous wave. Are they, you know, what's going to happen with these business models. So, quick update. What's going on with Adobe? I don't want to spend too much time here, but where, where's our, what's our latest State of the Union there?
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A
The quick update on Adobe is they had yet another quarter of ARR growth decelera. So their annualized recurring revenue growth has continued to decelerate. I believe this marks the 10th consecutive quarter this number has gone down. And so the question is, why does it continue to decelerate? The answer that management will give is twofold. One, they're pushing more into freemium products, which increases basically the sales funnel. It delays the amount of time it takes to monetization because you're giving a product away for free and it'll take them a while to monetize them. So. So that's the first reason they say ARR has been down since they pushed into the Adobe Express free product. And then the second reason that they give is that they delayed pricing changes on the Adobe Creativity Suite. So the first thing makes sense to me. The second one, I pause a little bit, because the question is, why did you have to delay price increases? Interestingly, they're delaying it until after the current CEO leaves. So whoever the next CEO comes in is going to be the one to withhandle that potential backlash from raising prices. And on the one hand, you could say, if they have to feel that they need to delay price increases, is it because they're worried about churn? Are they worried about the competitive environment? Do they feel like they don't have the pricing power they once did? So that's kind of, to me, the open question there. On the other side, you could say, well, you know, maybe they just want to leave that decision to the next CEO. But if it was such an easy decision to make, taking up pricing like it kind of has been historically for them, then I feel like they would have just done it. So, and you know, they are rolling out new features alongside these price increases. But the big kind of difference there is the price increases because they're constantly updating the existing apps, and very few people sign up just because you roll up a new feature on the app, because most people are already going to subscribe to the Adobe Suite, already are. And you don't get someone to subscribe to it very often because of a new feature. These are just kind of incremental updates that happen. So all of that together, it seems like a moderate negative for the business, combined with the fact that at the time, the CFO also stepped Down. So this one I didn't think was as big of a deal because he left to go to Marvell. And I could imagine, you know, for his career, like you move from a company that's kind of seen as being this, you know, legacy tech company to moving to one that's like really hot right now. That makes sense to me why he would do that. So that one I don't actually think is that weird or a red flag or anything. Still negative though, that you're, you don't have a CFO and you don't know who the CEO of the business is going to be in a year from now. But to me that the CEO is really the question mark. What they're doing with that, that aside, you know, they continue to be very profitable, continue to buy back stock, you know, they $25 billion stock authorization. So they're buying back a lot of the business. The stock hit new all time lows, or maybe not all time lows, but at least, you know, at least in the past few years, all time lows, I think it got as low as $190 a share. Now it's back up to 220 a share. So still, you know, a very cheap multiple. Depends if you're looking at cash flow of earnings. But it's 10 to 12 times if you're picking cash flow versus earnings multiple. And still, you know, growing revenues, low double digits. So the concern here, it's still ultimately about the future. Is this a melting ice C. Does the ARR continue to decelerate? Maybe they're not going to be irrelevant. They're still going to be a very key player in a lot of professional work. But maybe the amount of professional work continues to fall. But then the key question too is what percent of the business is kind of this consumer creativity business that are not professionals? And they've never disclosed this number. And I wonder why. Because if it was a small amount and they could just put to rest the bear case, why wouldn't they just disclose that, you know, creativity revenue for consumers or total revenue from consumers is only only 20% of the business. It's not 50% like some people are worried about. It's a very small portion. And so if that was the case, I don't know why they would never have said that number. So their lack of disclosure to me in that regard, it's a little bit telling, especially because they just re segmented their entire financials and they did it in a super confusing way where they call certain segments by customer group that are not organized by customer group, they're organized by product groups. And so one of the segments is business professionals and consumers. And so you would think that that would apply to the actual customer group, people who consider themselves to be, you know, business, you know, businesses that are subscribed to it, and then also consumers. You'd think that this is applying to a group of consumers. But that's not the case. It's a group by product segment. So this is the Acrobat business and the Express business. It doesn't include any creative cloud revenue in this segment at all. And so that's really confusing. And it seems almost purposefully confusing in a weird way. I don't know why they did it that that way. And so that to me was another kind of weird thing.
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B
I personally am praying on the downfall of Adobe. And, you know, that's just me. I hate them. I think they're. The PDF is a relic of the 1990s. And the fact that they have been able to extract this much value out of the entire American society and most of the globe for this stupid feature that makes a Word Doc lockable, I mean, it's mind blowing to me. And it's frustrating to use. And they keep raising prices because for some reason, reason Microsoft, Google, have not wanted to create a competitor that just, it's. It's literally a Google. It's a Word Doc that's not editable and you can click a button for $20 a month that lets you turn it back to a Word document. How has this existed for this long? How Drew.
- [27:03]
A
So I might change your life right here. So the PDF is just a standard and while they created it, they no longer keep exclusive rights over it. So there are other PDF editors that you could buy for less money. Money. And they serve the same function. Most people don't know that though, so they still buy the Acrobat.
- [27:23]
B
Please send me the link because I can't wait to stop giving Adobe money. I can't wait. I'm gonna. If one of these work, let me tell you, Adobe's ARR just went down again because everybody that I know is getting off of Adobe Premium. And I do think that in general, that's my honest take. I'm not happy with him as a consumer, I don't think. I think they're just attacks on utilizing business in a conventional sense. Unfortunately, it's just where the world went. And yes, they monetized it for a long time. I don't see great prospects for that business. The whole creative cloud thing I think there's a lot more businesses that are going to be AI native to editing photos videos that I think it'll be difficult for Adobe to compete with on a startup basis.
- [28:06]
A
Two different things. So the PDF Acrobat business, I hear you. Competition should have done better but they've existed for a long time and most people don't even know they exist. And it's a hard thing to optimize, get people to become aware of your name and product when the incumbent has such a brand name and it's kind of been there for so long. So I agree with you because my experience using Acrobat, it's very frustrating. The UI feels like very locked and it's, it's very hard to get it to do what you want to do and it just like it jumps all over the place and it's very annoying. I am fully there with you. Having said that, I'm probably not going to deal with an alternative.
- [28:46]
B
So I mean if you give me an alternative that lets me edit a PDF that's not Adobe, I will.
- [28:51]
A
Yeah, they're out there. They're out there literally. Google them. You could get one for like eight bucks a month. Some of them are even cheaper. So that, that's there. The.
- [28:59]
B
I just need to understand why.
- [29:00]
A
Go ahead. Sorry.
- [29:01]
B
Microsoft or Google, how hard was it to come up with a competitor? Everyone has Microsoft Word on your computer. Come up with a Word version of PDF. Why didn't they do that?
- [29:10]
A
Google Chrome does have one. You open up a PDF, it opens up in Chrome. Right. And then you could click the fields and type directly into it. It doesn't have the same full level of features that Adobe Acrobat has, but it does have the ability for you to type into a PDF form and then hit download.
- [29:28]
B
Yeah, but it doesn't give you the full suite of I need to make an edit or I need to add a signature. Like it makes it very challenging.
- [29:35]
A
Yeah, it does. That's not their full business. Maybe there's a weird way you're able to do that, but I haven't seen anyway feedback. Yeah, the bigger piece though is creating creative where you're saying there's other creative work businesses are AI native, whatever the hell that means. You're just throwing out a bunch of marketing now.
- [29:54]
B
No, I think it's the innovators to level I think a company that comes from a stand ground up AI upload your photo. It's AI native. I think Adobe, you know, maybe they'll
- [30:03]
A
again, I have no idea what you're actually talking about. So let's say that you want to edit it.
- [30:09]
B
Sounds promising though. AI native. It sounds like a $10 billion valuation right there. AI native.
- [30:15]
A
No, you're great. You should doing fundraising for some hire me.
- [30:20]
B
I'm ready to go.
- [30:21]
A
So let's say you're gonna edit a video or you're gonna edit a photo. What are you gonna use?
- [30:28]
B
I mean for me again, this is me talking. I've only read about it. I don't edit photos or videos. So I think but again I think if I was a new photo editor or video person, it all comes into the lock in which is I'm sure in photography schools and videography schools is like Adobe is still or not Adobe but the Adobe suite is still the standard for editing training. I think if I was a freelance photographer, I don't think I'm going to Adobe as my my new and again there wasn't really any alternatives before AI has launched. Like I know there were more compelling but I think the AI native and I don't mean to keep saying AI native but I think the AI has unlocked easier photo editing than has ever been available available. Would you say that's accurate?
- [31:13]
A
I, I agree with that. But the idea that there wasn't competitors is just not true. There was a lot of competitors. I'm going to list them all for you right now. So Canva is one competitor that is mostly going to be out, you know, in kind of the, the digital social media kind of space, creating everything from Instagram slides, YouTube, thumbnails, whatnot. It's not that high end but they do have the ability to edit photos. Figures. This is going to be a UI UX designer. That's a little different. That's kind of a point solution. But they took that entire business from Adobe in terms of video editors. You have Avid Media Composer. This is kind of the top tier one that a lot of Hollywood uses. You have DaVinci Resolve, also known as being a really good photo editor. Also pretty top tier. Apple Final Cut Pro, not quite as good, but a lot more consumer friendly. And then at like the very low end editing videos, there's a bunch of them, you know, bytedance's Cap Cut for instance, if you're moving to photography, for instance. Adobe does have fewer competitors. One of the bigger ones there though is going to be Affinity and other alternatives like Capture one. Now the thing though that the real kind of selling point with Adobe is not just Photoshop, it's actually Lightroom which adjusts the lighting in a very Minute way on a lot of photos. And so that is something that is really good for kind of the leading photo editors. And so if you're saying in terms of competition there is a lot in terms of video, they're not a leader in audio either either. It's really photo, Photoshop, Lightroom that they're really kind of excelling in. But competition is still existed in all these regards, especially at the low and the mid end. It's really the professional end in photography that they continue to have a little bit of a lock or dominance, if you will. Now there's a lot of people though that may not need such high end photography and maybe not anymore if they can lean on kind of mid end consumer tools and AI that can help get them to that other end. So that's going to be kind of the question there. But if you're thinking about of like which franchise is the most dominant, it's probably Lightroom, Photoshop and then probably lower down it's video. You know, Adobe, Premiere, some of the other apps, you know, they have a bunch of other ones.
- [33:20]
B
But see that's all nice Drew, but I'm with the average investor here, which is AI native. I mean they're going to, it's just the competition is different this time. I kind of buy that. And it's, it's funny doing the litmus test. Obviously you've done tremendous amounts of work on Adobe, but sometimes I just feel like it's Occam's razor, which is, is AI. I mean you've already seen what Sora and all of these companies are capable of. And I know they discontinued Sora, but clearly there was evidence of what is feasible with AI. And I, it's just Adobe's kind of reminiscent of a melting ice cube to me and I can't get over it. And again, that's just me on a 10,000 stan foot view watching your videos on 3x speed. I can't get over that narrative.
- [34:02]
A
Sure. I'll say. The important thing to note though is that AI is creating different images and Adobe is not an image creator, it's an image modifier. So as long as you actually have to modify an image right now there's actually not anything that AI really offers that could help you much with that because you're stuck going to a chatbot to try to change things in the image and it, it just sucks as an experience. I could say this because I make all my own YouTube thumbnails. Whenever I want to make something in the background and change it I go to the word box, I tell it to do it. 90% of the time it doesn't do the thing I want it to do. Even if I say give me the exact photo, just like remove these weird words that you added into the photo, it can't even do that reliably. And so it's not a good experience in terms of using it. And then you could say, oh well, the AI could continue to get better and better and better and sure, but is it really going to be the best use of a model to tell it to, you know, move some words a little bit to the right or change the coloring a little bit versus me just grabbing my mouse and like clicking on it and dragging it it. And so that's going to be kind of a question. And right now Adobe Express is free to use, same with Canva. And so I think if you're talking about whether or not the AI model companies themselves are going to displace, you know, the use of image modification, I don't totally buy that. I think that the AI companies do have an option and Google could do this if they wanted to. I don't think they will, but they could very easily roll out very simple editing tools, maybe even very complex editing tools to edit images. If they wanted that business, they could. I don't think they're going to do that though.
- [35:39]
B
And it's funny because looking at Adobe at 10 times, it kind of, and I love the market because it kind of feels about right, honestly. You know, it's kind of, you know, it's, it's, it's priced as if it's kind of a steady business. Is there going to be a lot of growth? Perhaps there's some deceleration. It just feels, to me, it feels like it's in the too hard pile. You know, maybe Adobe withstands and maybe that's how you look at it. But if I'm looking, looking at a real easy use case of AI, it feels like Adobe's, you know, one, one of these software companies, I have a more challenging time seeing them maintaining what they've maintained at this point. I think when you talk about, and we've spoken about QuickBooks, we're going to talk about Uber, not really, you know, to an extent a software company, I think Adobe definitely more challenging to see what that world looks like. And I think investors are right, it's very binary and we were kind of talking about this. Adobe's either going to be pretty much, much useless or it's going to kind of continue to have its position and perhaps adopt these AI things and, and everyone's really going to be wrong. And I think it's going to be a pretty compelling return from here. But it seems very zero. Like it's going to be a zero or it's going to be a win.
- [36:45]
A
I don't know if I agree with that on this one. Actually I do see options of being in the middle somewhere where all of this AI usage just bleeds into different end markets, customer journeys kind of change. So maybe before you hired a photographer to take photos of your e commerce products and listed them online line but now you go directly to Amazon and you take a photo on your iPhone and it automatically AI generates the photos. You don't need to hire a photographer so he doesn't need to pay for Photoshop. And there could be a lot of markets like that that go away and then they continue to just do well in the very high end markets where people care about these very minute adjustments to a photo or to a video or something like that.
- [37:26]
B
That's kind of a, that's kind of a loss for Adobe because again at this point point and the amount of ARR they have and the amount of people they have, that's a very small Adobe.
- [37:33]
A
That's not 100%. But you said, you know, if you're,
- [37:37]
B
as an investor from, I don't think as an investor from here, 50% of their, 80% of their business goes away. That's, that's, I mean they're not going to.
- [37:43]
A
Oh no, we don't, we don't know what it is. It could be as small as 20%.
- [37:47]
B
Well, there you go.
- [37:49]
A
The range I was able to come up with was somewhere between 20 and 50, which is a very conservative range. I wanted it to make it big enough that was positive. The number was in between there. I think it's most likely probably somewhere in the 30ish percent range and I don't think they're going to lose all of that. Adobe Express is a free product right now and has been gaining a lot of users and they've been somewhat successful at already monetizing some of those. And so you know, but that could be a big headwind to a third their business. I'm not disputing that. That is definitely kind of the fear now the other businesses, particularly the businesses that integrate with Adobe Enterprise Platform, which is kind of the enterprise marketing analyt and kind of a top tier analytics aspect of it and a lot of the creative work integrates with that. That to me is Kind of a different, a stickier business. But when I had the expert on from AlphaSense and I was asking him about that, he said that they actually didn't integrate those businesses that commonly. So that was kind of surprising too. I don't want to dispute your kind of first take and the first feel that you have like this visceral sense of like you see these AI models come out and it's kind of like it just doesn't feel like this is going to be good for Adobe. But I think as an invest or were pressed to come out with what are the actual things and doing the actual analysis of the different circumstances that can actually impact their business. What are the actual risk? And when I wrote, you know, my 99 page report on Adobe, I came up with eight risk. I think, you know, basically two of them are probably the most formidable and the couple others kind of linger there. But, you know, you could read that report and see what we said there.
- [39:26]
B
Yeah, I think this one, this one, I do appreciate that it's a battleground because at 10 times earnest. I mean, it's, you know, at 10 times.
- [39:35]
A
And it's still growing, right? Like it is still growing right now. If you're looking at, you know, revenue in the last year it grew 11%.
- [39:45]
B
So I mean, yeah, I get it, it's, it's compelling. I mean it is an intellectually stimulating conversation because you don't need a lot. It kind of reminds me, I'm not going to compare it to Meta and you know, whatever in 2021 when it was down. But you don't need a lot to go right for Adobe to. That kind of makes sense here. But it does seem like there's a pretty strong case for a lot to go wrong. So I think people are going to have to. I think people are going to land on one side of the fence here. But that's enough about Adobe. We were supposed to touch on it
- [40:11]
A
briefly, but are you an Adobe fan now? Are you in on Adobe? You like the Adobe?
- [40:15]
B
For me, for me that's a too hard pile and I think there are other.
- [40:18]
A
No, no, the conversation though. You like talking about Adobe now?
- [40:21]
B
Yeah, you know, not really. To me, I'm kind of over it.
- [40:24]
A
It's kind of like talking, talking about.
- [40:26]
B
I like talking about. To me, this is kind of a company where it just feels like I don't have a strong opinion either way. And I think that there are better software companies that have stronger positions and I can kind of see how that's going to not see, but I feel like I have a stronger position on where their value proposition lies in a world where, again, not a world where AI literally replaces every human who's ever existed and we're in a wall E scenario. But you know, AI becomes, becomes much better. And how does the software interact with AI, I feel like there are much more compelling companies than Adobe. Of course they're valued differently than Adobe, those companies too. So I understand that.
- [41:01]
A
So you like talking about companies where you have high certainty of their competitive moats in the competition landscape, like with Copart vs IAA, of course.
- [41:10]
B
And we spent hundreds of hours researching that to be completely wrong. But you know what? I liked that we had conviction. And listen, we're all dealing in a world of probabilities. I think the inputs were right, the outputs didn't quite work out. And hey, it's not over, okay? The game's not over here. Copart's got some time to make things right. But yeah, I don't know, Adobe, it just seems like a, it seems like a question I'm not personally that interested in answering. So we're going to move on and we gave the people more Adobe than I thought we were going to give them, so they should be happy with that.
- [41:39]
A
The synopsis where we talk about and don't help you on the things you care the most about,
- [41:45]
B
like Speedwell, which is of course the, you know, research company that you have, which has, you know, tremendous reports. We are just merely a vessel to provide information so that you can make your own decision. Unless you want Drew to manage your portfolio in which he will make decisions for you. But that's another discussion. So let's finally get into the discussion we said we were going to have, which is a little bit of an update from Uber and we're going to do a little Netflix. But this is droning on a little bit because, you know, we got into an argument about Adobe. So Uber, we had discussion of that historically, how platform business didn't necessarily work out. We went back to the Uber and Lyft wars about how theoretically platform should be a great business. You're just doing a take rate on each side. It should be kind of low overhead. Obviously not how Uber and Lyft worked out. When they were kind of in their heat of customer acquisition. Uber seemed to have won that market. You know, really leaned into Uber. Eats used that as lock into Uber, the app rewards programs. And they really took, took off and ran with that. Now they are kind of facing a new existential crisis which is the autonomous vehicle rise. I think a great place to start on this was Waymo, used to be kind of a option on the Uber app in Arizona. But they have recently decided that Waymo had kind of enough of their own publicity in their own app that they didn't need to be paying Uber, whatever arrangement that was. So I think a lot of investors are saying, oh, does this bode pretty poorly for Uber going on to the future? Especially when you had these autonomous vehicle companies, companies that have a lot of name brand recognition. I mean, Tesla, I don't know, one day, hopefully they get an autonomous vehicle, taxi cab. I know that they're piloting some of it. Apparently that's going to turn on at any moment, according to Elon Musk. And there's going to be a huge fleet of autonomous vehicles. And my Tesla, while I'm at work is going to go make me money. I'm excited for that future. But of course, a lot of name recognition there. And then Waymo, which has been very successful in delivering their consumer platform. Personally in la, I'm always checking if Waymo is in my coverage area for where I'm going. I love Waymo. I think it's a better experience. I think the journey is, we'll say it's pretty safe. I mean, there's a couple of times where I go, whoa, hey, Mo, what are you doing over there? But, you know, I haven't had any issues with it and it's just a much better experience. It's a nicer car. It's just comfortable to not be in somewhere with a stranger. I don't know what to say. It's just nice to not have a stranger in the car with you. I can take phone calls, I can speak freely. I'm sure Waymo's recording me. And then, you know, Google's gonna try to sell me some ads later, but that's fine. So you have that narrative. And of course the company's down about 25%. So where does this all lead? I mean, is this really all the AI fears? What's going on with Uber today?
- [44:19]
A
I think that if you're to just ask a simple question. Do you think Uber is a better or a worse business in five years? In my opinion, it seems like Uber will become a worse business simply from the existence, first of what? Waymo just being in the market at all. And secondly, from Tesla, who, even though they've been pretty late, I do think they're going to eventually hit the market with a Robotaxi and be able to turn on a lot of vehicles with autonomous. And I think they're going to also have their own direct app and want to circumvent the Uber app. So even one competitor, but let alone two competitors who want to gain share in my thinking, could restart the sort of competitive cycle between Uber and the other players. And it could be similar to what we saw with Lyft, where when you're fighting for rides and you have to promote for them, that is very destructive to margins. Uber was not profitable until three years ago, maybe when they were able to turn down promotions because Lyft was basically structurally impaired. And I talk about that in my first Uber video. So that is my real concern with Uber on the right hail business is Waymo. They do want to fight for the consumer they promote. Uber actually put out in the fourth quarter of 2025, which came out in February and 2026, this kind of rebuttal to the AV fears. And one of the things that they said was, you know, our utilization is already a lot higher than Waymo. And by the way, we've already seen Waymo's resorted to promoting. Now the way they framed this was, you know, look at us, we're creating so much more value for our drivers because our utilization is higher. And obviously Waymo is going to want to be on the network with the higher utilization. I didn't read it that way. I took that as meaning, oh, they want to fight for utilization and they're doing that with promotions. Why would they stop? They don't need to make Waymo profitable anytime soon. I mean, this thing is a brand new experiment for them. You know, Uber had, you know, what, 10 years, 15 years, ish. While it took them to get to the level of network and utilization they have already. And Waymo's already at a level in the cities they operate where they're not having that big of a problem filling rides, at least during peak hours. Not an issue at all. I get there's some issue during, you know, some off hours in the middle of the day on say a Monday, and that's where they're kind of promoting now. But I don't see why that's not scarier for Uber and for an Uber investor that they are willing to lose money, they're willing to promote in order to get those incremental rides. So I don't see why Tesla won't eventually do the same thing as well to try to spin up their own network. The other thing that Uber will note is that the top 20 cities, cities are only 25% of profits in the US and the way they say this is kind of saying that's not that much profit. And so, you know, even if we have headwinds in these markets, it's not that big of a deal. I take that to be different. I think that if you only have to, you know, compete in 20 of the biggest cities and you could get a profit pool equivalent to 25% of Uber's US business, then I don't see why Waymo wouldn't do it. They're already in nine cities in the U.S. u.S. And so I don't think that they're going to necessarily go out to every single suburb. I don't think that that's the plan. And so that business is more insulated for Uber. But for a lot of the big cities, it seems like people prefer the autonomous vehicle experience. And Waymo's not having a very big cost in getting these customers to download the app because they want to try the av, which is, by the way, the real friction point is getting a consumer to download an app, create an account, and launch login. Once you do all of that and that app is sitting on your phone, then it is pretty easy to price check between the two. I don't know about you, but I price check between Uber Lyft all the time. Sometimes I check between uber eats and DoorDash. I look at Apple Maps all the time versus Google Maps versus Waze to see the different places they'll take me. It's pretty easy once you're already set up on an app to check multiple apps. And so this idea that users only want to go to one app, I don't think is really the case. I think it's a pain to download an app and set one up, but once it's already done. And I think because of the novelty of av, as they're entering more cities, and they're the only ones, you know, in the US that have a AV that is L4 and operational. They're able to get people to download the app pretty cheaply, or, you know, I've never seen a promo to download the app. Maybe a few bucks off of your first ride. I haven't actually even seen that, but maybe that's something they do. And so it's pretty cheap to get people to use their app. And once that's there, that's competition that I don't see why would go away. I don't see Wayo saying, you know, we built this direct consumer business, but, you know, the utilizations on Uber in our second year of business are higher. So we're going to bail out. Like I don't see how. This isn't something they don't fully play out. And that doesn't weigh on Uber's profitability eventually as they have to respond with promotions of their own.
- [49:03]
B
I mean, from a cost standpoint though, how can Uber ever compete with Wayo if, if the, again, the density of their cars are significant enough, clearly if a wayo is 20 minutes away or something of that nature, because there's not a lot of Wayos, then of course, you know, even if, if it's cheaper than an Uber, then you probably, based on time, I want to go with an Uber. But Waymo, obviously you have a fixed cost, you have an asset that you put into. There's, you know, incremental, there's variable costs associated with doing that. But they've gotten rid of the most expensive part, which is the driver. And so how can Waymo or Tesla or whoever, these autonomous vehicles are not constantly undercut Uber. I mean, Uber's really only, I think long term hope here is to have their own autonomous fleet that they manage, which is again a very different business than a platform business. Right now you have capital intensity, you have to purchase vehicles, you have to maintain the vehicles. I don't think there's this Goldilocks scenario where they just sit on top of these autonomous vehicle apps and collect a percentage. I'm, I'm not exactly sure why Wayo or Tesla or anyone who's invested in that would give them that amount of economics.
- [50:01]
A
I think you are too bearish on Uber. I do think that there's a way out for them, that they end up being a fine business and that is that there are a lot of autonomous vehicle providers. So you know, we know that there's Zoosk already, we know that Lucid and Neuro are, are teaming up and then there's Rivian and they're having their own deal with Uber. And there's a lot of other players too, in Europe and in China that are building autonomous vehicles. And so if you have a lot of supply a lot of different autonomous vehicle players, then the value of an aggregator becomes a lot higher. And so in this scenario, I think Uber would basically be fine. Having said that, I still think Waymo exists in this, in this battle and I still think Tesla exists in this battle. So it still is new competitors that I do think could ultimately weigh on profitability of this business. And so that to me is kind of the risk. I don't see Uber necessarily going away. I just see new competition picking up and maybe it is a short term or shorter term thing. And by short term I mean, you know, several years where competition picks back up again, you get a new subsidy war, then market share set again and then everything is kind of the way it is currently with the dynamic between Uber and Lyft and they're not fighting that hard for users from each other. But that to me is kind of the big risk that I see here.
- [51:19]
B
Again, it just seems to me the Uber business was finally in a good place. They won Lyft, they won the ride share wars, we got the food delivery app, man, we executed on a very challenging situation and now it just seems like, wow, the walls are closing in on them. Again, agree. I guess you're right if there's thousands or not thousands. But there's a lot of these rideshare players and they don't have a consumer relationship, which I don't think Zook and these other autonomous vehicles are going to have a relationship that's going to overcome the friction. Downloading the app Uber makes sense. Uber takes a rate. But again, to me it just comes back to the subsidy wars where right now they got down to Uber and Lyft people. I think their behavior is stopping to check Lyft because of the Uber Eats and Uber one lock in. I think that behavior has declined quite a bit. But you're just re going back to now you've got viable competitors with very compelling value offers and you're also backed by Google and Tesla, which I mean they're not, they don't have, you know, they don't have shallow pockets. I mean they, I think they're willing to invest quite a bit and for these to be not super high margin businesses. So. So again I'm not overly optimistic about Uber, but I'm not optimistic about a lot of things.
- [52:32]
A
Yeah, I mean I want to make sure I addressed your question where you basically were asking if Waymo can promote more because they don't have a driver and Uber does have a driver. And I think the answer to that is yes. The thing to keep in mind though is that the cost of a Waymo right now is still pretty high and that's being borne by the company versus Uber who basically has more variable cost and less fixed cost involved. And so it's kind of interesting to think about the dynamics of the two where you have a high upfront fixed cost but very low variable cost for an incremental ride, it's lower than Uber. Whereas Uber has no fixed cost to get a new driver on the network, but a much higher variable cost because of that big driver payout. And so I do think that that means that Waymo might actually have more of an incentive to promote and discount for those incremental hours that they can't sell because their variable costs are so low, and it's better to get some money than no money. Whereas when Uber promotes because of their higher variable cost, very often promoting actually eats into margin. And, you know, we. We saw that prior. And so I think that's a really interesting kind of competitive dynamic going on between the two. Now, it'll be a separate question if it ends up being fleet owners that own the autonomous vehicles, and then the question will be, who's paying for the promotion? In that case, it would probably still be Waymo. And so then that's a different kind of situation. It puts them in a more similar situation to Uber in that case, but that's not the way it currently is. And they also could have a vested interest in creating their own network. Because I was reading something one of the CEOs of Waymo was saying. They have two of them, but Dmitri was saying that they want to sell their technology to OEMs, to regular traditional car manufacturers to give them autonomous abilities. And if they do that, it'd be interesting to think what the business model they would be, because I can't imagine they just want to sell the hardware and, you know, be done with it. Do they sell the car companies a subscription or a licensing fee in order to access Waymo's autonomous features? Or do they say, you know, you can charge the customers a fee and then we're going to split the fee? Or do they say, well, you just have to use our Waymo app and it's going to be restricted to our network. If a customer ever decides to lease out the car that they just bought, it has to be through Waymo. And so there's different variations of this business model. But I think that if you're looking at autonomous vehicles and Waymo maybe is seeing all the competition and they're realizing that maybe AV does become commoditized, but we have a pretty good head start, you know, it's more competitively defensible than just the technology is if we also add a network on top of that. And so let's own our own Ride Hill network, let's own the consumers and all of that. So I think that's something. Something that could happen. And the last thing worth pointing is that Google also owns Google Maps. They also have Gemini. They're building AI assistance. And so all of those could be surface areas for when a consumer tries to figure out how to go to a certain place. It could push them to Waymo. And so these could all be benefits to the Waymo network. Imagine you're searching something on Google, you know, business or something like that, and it says right there, order a Waymo. And maybe it's any car from the Waymo network. Or you go search how to get somewhere from Google. Google Maps, it says there, order a Waymo. That's Alibaba, owns a business called Amap, which is an app that works very similar in China. These ride aggregators, ride hail aggregators are much more popular. So that could happen in that vector or it could happen on the gentic AI layer, which is another risk where you're saying, hey Siri, hey Gemini, order me a ride hail, order me a vehicle. And then it just checks all of them, it doesn't care. But maybe if it's Gemini, it's just only going to order you Waymos. Maybe the partnership between Siri and Google, who knows, maybe it restricts them to ordering Waymos. I know that might be kind of illegal, but we'll see. So I don't know. There's a lot of different things that Google could do to really push their network out because they have a lot
- [56:23]
B
of consumer distribution, again, a lot of scenarios. So to me, the rerating of Uber, the winner of the rideshare market, and that narrative I think deserves a readjustment because I don't think that's, you know, you can extrapolate that out into the future. And there's now a very wide distribution of outcomes for Uber. Some are mediocre, some are okay and some are bad. I don't really see a great scenario for Uber here, honestly. I mean, what's a great outcome in the ride hailing market for Uber in the next 10 years? That they're not going to sit on top of all these AV comfortables. That's not, that's not an outcome. I just read that.
- [56:56]
A
So you could say the market expands a lot because AVs are a lot cheaper than ride hail. So eventually the price of rides goes down. And even if there is these two other players, Uber still has a huge, huge portion of this market share that's much higher in absolute dollars than it currently is today. There's a lot of AV alternatives and all of them, they need higher utilization and so they all plug into the Uber network. As a result. And so that is the reason why Uber Ride Hail actually does even better. On top of that, you see that they've enjoyed a lot of operating leverage in the past few years, but they're still only at a 14.5% margin. You know, maybe they take this to a 30% margin business, which doesn't seem crazy if they don't have to promote and defend their turf. And so you have a lot higher usage with operating leverage giving them higher margin. And then you also have kind of the benefit of the Uber Eats business and the loyalty program. And those two together mean that people that use Uber tend to be more loyal users, they retain longer and they're better customers ultimately. And they don't switch between different AV providers. And that's just part of it. Then you could also say their advertising business continues to improve and maybe they have some success with selling these other services like they just got into hotels. So that would kind of be one of the success stories there. And it's also worth pointing out that the Uber Eats business has different competitive dynamics than the Ride Hail business because when you are dealing with restaurants, it's a very fragmented base. So an aggregator serves a larger purpose there. So that to me is a more defensible business. Having said that, you know, Jordache in a lot of areas does have slightly higher market market share, but it still seems like a better business. But also if you're combining the two, loyalty, retention, spend, all these things go up. And so it is interesting though because you know who else has a lot of restaurants on, on aggregated together and knows about them is Google. Right? You could search any restaurant you want and the first thing that's going to come up is the Google business page. It's going to have photos on it, reviews and everything. So maybe that is a legend to food delivery delivery using Waymos and robots and, and such. So that I don't know about that one. That one seems a little more far fetched, but it doesn't seem impossible either.
- [59:05]
B
Yeah, I mean, I think this all comes down with Uber again valuation. Right. You know, Adobe has this very uncertain future and you know they're at 10 times earnings. So an investor can say, okay, well I'm taking this uncertain future, but am I being compensated properly for it? I think Uber has a pretty uncertain future at this point and the market has tried to rewrite rate that to some extent. What kind of valuation are are we looking at after this rerating?
- [59:29]
A
Yeah, so it's trading at like 20 times forward earnings at this point right now, 32 times trailing. So that is, you know, more of this operating leverage kind of shining through. So you know, if you're talking about what assumptions you need to make, it's basically, you know, revenues continue to grow. Right now they're growing mid to high teens. So if they're able to keep that momentum up, get even low double digit to mid double digit revenue revenue growth and you're going to still get operating leverage. You know, if you're growing revenues like that, you should still get operating leverage. That could definitely be a good recipe for investors. You don't need necessarily a multiple re rating, you know, 20 times. That's, that's you know, pretty moderate multiple. So the market in my opinion is very much pricing in margins going down or profits going down in the future. I don't think the market's assuming that they're going to be able to grow earnings, you know, mid double digits, 20ish percent plus. I think they're kind of assuming that this is a rosy time for the them and the competitive response will eventually weigh on the financial results. So this is an opportunity for an investor to disagree. Because if you do disagree, I think there's definitely a return to be made here.
- [60:35]
B
You know, and it is funny because we do have that discussion with Copart about the time it takes for the fleet to be replaced for autonomous vehicles. And then kind of here I am on the other end, well, oh, Uber's dead. I mean it's all going to be autonomous. My I, my broader argument here is that it will be easier for Waymo to put place cars in some, some cities and with some level of density that Uber does lose market share or has to compete to some extent greater than they have been. I do think the longer time frame on the whole autonomous vehicle is longer. But perhaps people say, hey, you're, I'm over indexing to LA and as San Francisco where Waymo has proven that the cars work here and maybe are they going to put a bunch of Wayos in perhaps a more rural city or a less dense city where it doesn't make as much sense and they can't leverage those fixed costs. Well, and the ride economics don't work as much in Uber. Makes sense. I mean that's kind of another, I would say mid scenario that we haven't really spoken about and then I'm going to end it there. But that's our last.
- [61:29]
A
Yeah, yeah. What I would say is I think it's two things. One is that it still is relatively concentrated profits in the biggest Cities, you know, 25% of profits in the top U.S. cities, and I would expect similar concentration internationally. So if Waymo is just picking off those big cities and maybe Tesla's doing the same, that could be enough to be a good headwind to profits. To your point, on the suburbs and all of that, I don't think that is going to be a, or Waymo market, but I do think that if this business model changes to them selling autonomous vehicle technology to different OEMs, and then the individual consumer buys their, their cars that way and they're either leasing them out on the, on the Waymo network, or they're just calling their own av, which, by the way, is another thing we haven't mentioned. If you're buying a car and it has autonomous vehicles, maybe you're just summoning your own AV to go to a place, maybe you're taking your own AV somewhere and you don't need rider hail. But you know that that's kind of a different scenario. Yeah, I do think that Uber in, in the suburbs is going to continue to do much better. And so if you were to ask me, like, on margin what I actually think is going to happen, I think Uber is going to be fine. I, I'm just worried about kind of the next several years for them in terms of what this means for their profitability, if they have to respond in terms of promotions and all of that, which I do think is going to end up happening in a lot of their cities. And I think, I just, I do think a competitive cycle between fighting for the customer could eventually kick up again, even if they're fine in the end. And, you know, I think that that could be a rough transition to live through and there are some tail risks, but I don't know that I necessarily fully believe those are the most likely. But, you know, as an investor, you have lots of opportunities and you got to decide which battles you want to pick and fight. And which ones do you see as having the best returns and an acceptable return, return for the risk you want to accept. And how much confidence do you really have in that? And whether or not you are going to get a little scared out of hearing, you know, Waymo's launching in all these new cities, maybe teams up with a private equity firm like Blackstone and funds 100,000 Waymos, and now they're going to be the fleet owner. And I don't know that I would really feel that confident that that can't happen and that that's not going to have an adverse effect on Uber's business. But I don't know. I guess if you're asking me base case scenario, I think they'll be be fine. Drew, you know, I have to say
- [63:47]
B
you've been a little more optimistic these days than you were historically. I'm not sure what's happening to Drew the pessimist, but again, no response there.
- [63:54]
A
No, I do want to respond there. I don't think I've been a pessimist in terms of a business surviving. It's usually more in terms of what's priced into the stock or not. And that doesn't mean Uber isn't facing a lot of risk. I think I've kind of laid out a lot of them and on Twitter too, I've talked about a lot of them. But if you're taking, you know, a ten year time horizon, do I think they're still going to be around? I think they're still going to be around. You know, what their margins are going to be, I do think is up for debate though.
- [64:21]
B
Yeah, I guess. So your use of the word Uber is going to be okay as a broad interpretation. Is Uber, you know, going to be teetering on the edge of bankruptcy? Is Uber going to be, you know, just hanging in there? Okay, broad definition, but I agree that it probably will be a company from now, ten years from now. I'm sure it will be, but you know, will investors at this stage time paying 20, 25 times for it be okay? I guess time will tell. So I think we're going to push our Netflix discussion to the next dialogue because we've droned on about Uber and Adobe much longer than we anticipated. But that's okay. Gives someone, you know, gives you guys something to look forward to. What, what hot takes do we have on Netflix? And that won't be too big of an AI discussion, so it'll be less speculative, which has been a lot of speculation about the different distribution, the different outcomes on these companies. But for that we'll leave you and until next time.
- [65:16]
A
Until next time.