← The Synopsis
The Synopsis
Dialogue. Netflix Walks, Underlying Duolingo Growth Issues, and Bad Decisions at Paypal
00:56:32
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- [00:00]
Drew Cohen
Foreign.
- [00:06]
Alex
Welcome to the Synopsis, a business and investing podcast. Today I'm joined by Drew Cohen and another installment in our dialogue series. Drew, what's going on in the world?
- [00:18]
Drew Cohen
There's a lot going on in the world and our podcast is not going to touch on any of it.
- [00:24]
Alex
That's true. We are sticking to the topics at hand. We, which is we're gonna do a little duolingo take a little Netflix take. We'll see if Drew has anything intelligent to say about how daddy can buy you a whole company if you want it really, really bad.
- [00:40]
Drew Cohen
I don't know about intelligent, but I'll certainly say something.
- [00:42]
Alex
If you stomp your feet enough, your dad will outbid a company beyond all reason because he loves you. Then we'll discuss PayPal and you know what makes a good manager? Is a good manager just gonna start harvesting cash flows like I brought up last week? Or are they going to try to reinvest in growth and position them for the future? What is the moral, ethical and shareholder maximizing behavior that a manager should take? And it was funny. I made a really good point last week and Drew made the exact same point that he's going to make later in the podcast. And I said, ah, that must have been a smart person who brought that up. And Drew's reply was. Or someone who's listened to all my podcasts and read all my memos. So I want you to know if you are listening to these. Any good idea you have, Drew will claim is his as an extension of.
- [01:29]
Drew Cohen
Just to clarify, just to clarify, Alex right now is taking credit that it was his idea that a good manager should have good capital allocation. That's my point.
- [01:38]
Alex
Was a lot more nuanced, very intelligent and well fleshed out. But you know, listen, Drew, I'm going to get credit one of these days. Okay, enough about me in my need for Drew's approval, which I don't ever get, and let's go on to.
- [01:51]
Drew Cohen
Yeah, you're. I'm not buying you any $110 billion companies.
- [01:55]
Alex
Yeah, exactly. Drew's got no love for me.
- [01:57]
Drew Cohen
You got to earn it.
- [01:58]
Alex
I want to outbid Netflix on their next acquisition. So tell us, Drew, what is going on? I mean, is there obviously high level. I think most people know what's happening. Netflix and Paramount have gone into a bidding war. We have Netflix on one side, Paramount on the other side. Paramount backed by, of course, one of the world's richest men, Larry Ellison and his son, who are currently in an all out slugfest for Warner Brothers. And finally Netflix has tapped out. And if you look at where this kind of bidding started, I mean, first of all, I mean, if I was a Netflix executive, I'd just be real upset at Paramount. I mean, they drove, they drove the price up on this through the roof. I mean, what was the first bid there and what is it at currently? Maybe we can just get a little high level overview there.
- [02:40]
Drew Cohen
Yeah, so the bidding started, you know, around $80 billion and then it ended at $110 billion plus the breakup fee that they're now going to have to pay Netflix.
- [02:49]
Alex
So quite a, quite a bit here. I mean, what's your take on Netflix? I mean, obviously you made a video about Netflix. I mean, is there any. Is this a big blow to Netflix? I mean, clearly they still seem to be the undisputed leader in streaming, obviously, you know, leveraging their subscriber base to generate more and more content, I guess. I mean, you know, obviously they lost some marquee brands and storylines here, but I don't know, it doesn't, doesn't seem like the end of the world for Netflix. What's your take here? Seems like if anything, they probably saved themselves from an overly expensive acquisition.
- [03:19]
Drew Cohen
Yeah, I mean, before I get into some numbers, just really kind of high level. This is like the third time, fourth time, I think Time Warner is changing ownership in the past 20 years. You know, you had the AOL merger with Time Warner and then they spun off and were separate. Then AT&T acquired Time Warner for $85 billion in 2018 and then they spun them off and then discovery merged with WarnerMedia to be, you know, Warner Brothers Discovery, which is then the assets that are being acquired now. So it's changed hands many times in terms of, you know, how this changes the competitive landscape. It's hard to say because I think the inclination would be to think that Paramount and Warner Brothers now is like this better position TV streamer because they have all these assets and it's HBO GO plus Paramount and all that. I'm actually inclined to think they are going to struggle because they have so much debt they need to repay. It's going to make it very hard for them to invest a lot in content. And as much as it's nice having a big library of IP and all that, you still need evergreen content and shows and you need a lot of it. So the most important number to kind of simplify everything in Netflix's business model is their content cost per sub. That is going to be the most important number. We are looking at when we're looking at Netflix and the difference between what their content cost per sub is and what the revenue per subscriber is. And so if you take it on a global basis, the last time I ran this math, which was, you know, about a month ago or so, because we had this Netflix video on them, they were making $11.50 per average user against 5 dol and 10 cents in content cost per user. So that's nearly, you know, that's a $6 basically difference between the content cost per subscriber and the revenue they're collecting. So that is a big disparity. Now if you're looking at someone like Paramount plus, and if you have to attribute all of their content spending, which was about 16 and a half billion, so it's already about half the amount Netflix is off the get go. And you had to attribute that to just their Paramount plus service, that would come out to about $18 content cost per sub. So on a content cost per sub, they are three times spending more per sub, despite the fact that their total content budget is actually half as much as Netflix. And so that is one of the most important things to look at. And then what's happening now when you're, you know, add Warner Brothers into the mix is that it doesn't change it that much. I don't think. I don't have the fresh math in front of me. But Warner Brothers, if you have to attribute all the content costs to just, you know, HBO Go, it's a pretty similar basis too. These are not services that are very profitable on a standalone basis. In fact, you know, Disney plus is kind of the only one that if you're doing the same sort of math, attributing all the content cost to just the streaming arm and forgetting about the linear TV arm subsidizing it, they're the only ones that are kind of breaking even, maybe making a small profit. Everyone else is just structurally unprofitable without their linear TV operations. And so what that means is they have to do a balancing act where they're still investing money and they're trying to support their traditional linear TV offerings, which by the way, have a higher average revenue per user than the streaming product while they're simultaneously having to invest more money into the streamer. So, you know, said very simply, what's happening happening is it's just a structural issue that these businesses are having when they're going from the linear TV environment where average revenue per user was higher and they had a captive base that was more people subscribing to their service. So they're able to spread the content costs around a lot more people, and that is basically reversing in its entirety. So they have still this profitable business, though, in linear TV that is subsidizing the streaming operations, and they have to slowly wean it off. But the streaming operations are a worse business for them. And this doesn't show up for Netflix because it's kind of similar to this, you know, idea of your margins. My opportunity. They never had this traditional linear TV operation that was making a lot of profits and a lot of margins. They always came from the bottom and were moving up. And so as a byproduct of that, every kind of extra sub they get, even though the revenues are less than what you're getting on the linear TV side, you know, to put a number on that, let's take just Disney, for example. With Disney, their linear TV business is doing about $13 per month per subscriber, versus about $9 for streaming. So that's about four do less they're getting. And so Netflix doesn't have this issue where they're getting rid of people that are more profitable to sign up people that are less profitable. Now, the other thing with Netflix, though, is that once you get such a lead and you have so many people on your platform, you're able to amortize that content cost across so many more people, which is exactly what has been happening and why their content cost is so low. Again, in the absolute, they're spending twice as much as Paramount on content. It's just that they have so many more people subscribed to that they're able to spread that across so many more people. And so it's very hard to get around that. And even if you're talking about combining Warner Brothers with Paramount plus, you know, it was hard to get exact numbers. I think HBO plus has anywhere from 100, 120 million subs versus Paramount plus on 80 million. I don't know exactly, you know, what the overlap is there. I'm sure there's a good amount of overlap. But that aside, that's still only, you know, 2/3 less than 2/3 the size of Netflix, because there's going to be a lot of overlap in the plans and maybe even even smaller. And it's still just hard to catch up to Netflix. And that's despite the fact that they now have all of this Deb, that's going to really hamstring their ability to increase their content spend. And they're going to have to do Something to manage that debt. They still have the legacy operations that they're counting on their cash flows to support the debt service load. And so all of this, they'll figure it out. Maybe.
- [08:51]
Alex
Yeah, maybe a little buyer's remorse at the Ellison camp. We'll see. I mean, look, I'm trying to think just quickly, from a consumer's perspective, is this deal better for the consumer? Obviously the base level thing would be, oh, wow, now there's more content on Netflix. And of course that's really great. Obviously the flip side to that would be, well, if Netflix keeps, you know, consuming all of this content and they become literally, you know, the main place all content exists, well then of course, I mean, that gives them a lot of pricing power as there's not a lot of competition. There's no other places to access that content. So I don't know, what do you think? From a consumer's perspective, do you think that Ellison has done a good thing? He's competing with Netflix. He's not letting them just, you know, consume and absorb all available content that exists.
- [09:36]
Drew Cohen
Well, it ultimately comes down to what you're trying to optimize for. So if you were stuck with a Paramount plus asset and you were trying to optimize to become a leader in streaming, then yes, that could make potential sense to, to do this acquisition. Although it's a very, you know, high price for sure. Having said that, maybe that shouldn't be your goal. You know, maybe something like shareholder returns should be your goal. But this is actually, you know, tie into this PayPal discussion going to get on later on, which is what do you do when you're in a business that's in secular decline? Do you just manage it for the decline? The best thing for them to do probably from a financial perspective, is continue to mine the linear TV business and then start licensing content to other streaming providers. And you'll be able to, you know, basically have higher margins as a result of that licensing the content. You don't need to invest in a direct to consumer streaming app. And on top of that, you don't need to fight the churn war there. And you don't need to fight, you know, all the customer acquisition costs involved in setting all that up. And so that's kind of, I think, if you're optimizing just for shareholder returns now, no one wants to run a business that way, which is kind of the problem. And so what they want, of course, the mature margin.
- [10:47]
Alex
Hey, save the mature margin discussion. I think, look, if, if you are paramount and Again, assuming that you want to have a, you know, a fighting chance. Again, Netflix, this was, I think, an existential acquisition. I mean, if they don't get this, how is Paramount going to put up any type of.
- [11:03]
Drew Cohen
In terms of content, I agree with you, but the problem I'm getting, you know, trying to get around is the price they're paying because it doesn't solve their problem that much. If they have a huge amount of debt they need to service. And now all of this cash flow is just going to paying interest payments.
- [11:19]
Alex
Listen, I'm not saying. I'm not saying it was a good idea, but for example, if I wanted to spin up a competitor to Google, I mean, you're going to. I don't know how you would do it, but I guess you have to pay Apple more than what Google's paying. I mean, I don't know if you're getting a return on that. Like, that's a high barrier to entry. Netflix is in an exceedingly good position. I'm not necessarily as good of a position as Google, but, yeah, I don't know, you know.
- [11:39]
Drew Cohen
Well, it's an interesting conversation, actually, because let's say they put that $110 billion into other initiatives making their own content, you know, cutting pricing on their plan to try to gain market share. Do you think they would go farther if they were able to just. And maybe they could license some select content and all that, but they just spent that $110 billion on content customer acquisition costs and.
- [12:01]
Alex
Well, this is what I'll say to that, which is, I think Netflix has showed that for some reason, throwing exorbitant sums of money at TV and movies does not produce good TV and movies. You know, Netflix has, I mean, for the amount of money they spend on content, Netflix has had, I think way fewer hits. And most of those hits have come from, I think, like, lower budget shows. Right. You know, like if you look at Stranger Things, I mean, that's been one of their biggest hits. But I mean, how much money have they spent on content? And what really gets people to the platform? It's a. Well, a lot of filler content. Right.
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Drew Cohen
That's part of the Seinfeld formula, though, for them. Well, Seinfeld, you know, that's.
- [12:36]
Alex
No, I'm not saying that. I'm saying, like, a lot of the content that drives subscribers is not content they produced. You know, that keeps subscribers around. Like, I'm thinking Brooklyn, nine, nine. How. Not how I met your mother left, but, you know, Brooklyn, you know, like the filler Show Seinfeld. I mean, that was like a big deal.
- [12:49]
Drew Cohen
I mean, those are, those. Those are like big, like franchises. But there is a lot of other content that they have created that has been very popular. They talk, you know, about it on every single press release they have. So I don't know that I agree with that, but I do agree with the fact that they throw a lot of money at a lot of projects and they have no idea what's going to hit. You know, if you're thinking of K Pop Demon Hunters, but they produce so many bad.
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Alex
It's so bad.
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Drew Cohen
That was a bad show. No one would have thought that that would have been that. Have you seen the animation on that?
- [13:18]
Alex
No, I haven't never watched.
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Drew Cohen
It is like, wow. It's very surprising. But then, you know, that's kind of the model is you have everything logistically.
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Alex
I mean, you know, again, if you. It's much easier to go finance, you know, an existing business line with proven franchises versus saying, okay, I'm gonna spend $110 billion and, like, try to make it work. I don't know. Like, I, you know, I think it's a. What's a risk?
- [13:39]
Drew Cohen
I agree with that. I don't know. Of course, like, you. You have ip people are familiar with, you know, dc, for instance, all the superheroes. You could do a lot of great IP around that. Of course, I, I'm totally there.
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Alex
Listen, they could just Disney Channel the Harry Potter franchise and just be like, like, Disney beat Star wars in the.
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Drew Cohen
But even that has limits. It's not even working. Even that has limits. It's not working that well for Disney plus right now. They seem to have already somehow extinguished, you know, the Lucasfilm franchise pretty quick, period.
- [14:09]
Alex
Star wars content stuff.
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Drew Cohen
So even having, like, you know, AAA tier IP is still not something that's going to ensure total success. And so I think the big thing here is the content business is tricky, and Netflix tries to get around that in some sense by not predicting exactly what people would want and by giving them just everything. And since they have such an advantage with how many people are on their platform, it's actually at a lower cost. They could, you know, spend 30 billion a year on content, you know, just covering all sorts of different verticals and praying that something hits and something does tend to hit. It's almost like the VC model a little bit for content funding.
- [14:48]
Alex
Yeah, no, I, I'm with you on it. Look, I think we'll see if Paramount makes any money, but I would say that you're Right. I don't know if that's the goal. I'm not sure if this is going to. I mean, it's looking like it'll be a difficult slug, but I think at least that they've became a more formidable competitor. We'll say that. And again, I don't know how the shareholders are going to pan out on this one, but we'll see.
- [15:08]
Drew Cohen
Well, I mean, we didn't put a number on this, but this is about $80 billion in total debt assumption between the existing 30 billion and then I think they're raising another 50 somewhere around there, maybe a little more. And so, first of all, there's not a good base rate success for very large acquisitions. Very rarely do very large acquisitions go according to plan, especially when you're assuming a lot of cost synergies as well, and you're merging two very different entities together. And then on top of that, you have a huge amount of debt that you need, basically a dying legacy business to help pay off in the meantime, while you're trying to invest to become the new future of TV streaming and fend off a much better funded competitor. It's just good luck. And also as a consumer, I think it's kind of unfortunate because you would want them to be able to invest a lot in their TV shows. And I don't think that that's going to happen because as soon as the debt, you know, starts coming due or is even close to coming due, then all of a sudden you have to make these huge allowances to start to pay it all down. And I just don't see that going very well for them. How are they going to be able to pay off 80 billion in debt? You know, I guess the assumption is they'll just keep continuing to roll it and they'll hope everything kind of works out. But I'm pretty pessimistic on, you know, the one, the base rate of large acquisitions, but to just the sheer amount of debt involved in this too. And then three, you're also combining two different entities. One of them again, is kind of in secular decline. They both have these declining legacy businesses and then they're trying to at the same time transition to a newer, you know, business that's going to take a lot of money to invest in. And so I think it makes sense combining, you know, their content libraries and all that, the direct to consumer streaming platforms. And there's certainly a synergy in that respect, but there was a very steep price to pay, no doubt.
- [16:48]
Alex
And you know, the nice thing, though is Larry Ellison's current net worth, 192 billion. So. So let's just say. And that's not actually what would happen, but even if he takes $100 billion L on this, he's still got 92 billion left.
- [17:00]
Drew Cohen
No, because Oracle's also loaded up with that now open AI deal.
- [17:06]
Alex
He'll be fine. No, I mean, he wouldn't. Take a long story short, he's got exorbitant stuff of money. But no, you're right, it's a risky position to be in, and so we'll see where it all lands. But enough about Netflix. Why don't we get quickly into duolingo? So duolingo part of the AI scare? Because now ChatGPT will be teaching me Spanish, I guess. Is that the concern?
- [17:28]
Drew Cohen
I don't know why it sold off, to be honest. There was a lot of AI fears and all that, and this has been going on back since it was trading at like $530 back in May. And it did sell off originally on a lot of AI fears. I always thought that was silly. I have a couple tweets where I said that as well. The AI threat to them just doesn't make any sense to me. Straight up there. There's risk, and a material risk, too, that I noted in a tweet that I want to talk about here. But the actual risk that people are gonna go to a chatbot instead to learn, I don't think it makes sense because. Try that. It's just not a good experience. And then, you know, they'll push back and say, oh, well, what if they focus on language? Okay, sure. Like if they decided to make their focus language and roll out a product with animation and all sorts of other things. But then you're talking about them getting into a different business, and then they're just not. I don't think they're gonna do. There's always imaginary competitors and things that can happen. That chatbot risk I'm not worried about. People are then saying, oh, well, AI can translate everything. You won't need language learning. I also think that that's very silly. People don't learn languages just because that's like the most efficient way to communicate to someone else in another language. Google Translate has existed for a long time, and it's been pretty close to live translation. So that. That risk, I also don't think makes sense. And then people say, oh, well, other apps will be able to spin up. Have you checked out the App Store today? There's millions of apps in there too. Tens of thousands, if not more language learning apps. And they're all competing. And the fact that there's more of them doesn't really change the competitive landscape that much. And so those are the AI risks people talk about. I think they are all silly.
- [18:57]
Alex
Yeah, I agree. I think especially like the way that you learn language, it's very helpful to have some type of interface. You know, if, even if I had a perfect assistant, I. It's just you need an interface. That's the whole thing that this, all these AI concerns. It's like, like. And Drew and I were kind of talking because he's releasing an Intuit video and he's kind of, you know, and I was talking a lot of smack about it, about how, oh, an AI assistant could really knock out QuickBooks. But he's like, like, how, like, what does it look like? And I was kind of like, I can't really think of it exactly, because again, we'll say that for the Intuit video. But I do think a lot of these companies that intuitively like AI is going to ruin it. And I'm just kind of like, ah, like if I actually put the steps to it. I'm not exactly sure how, when, where, why or who, but it sounds like a compelling narrative.
- [19:42]
Drew Cohen
Yeah, I think it's like you don't like QuickBooks that much because they probably piss you off in something and then you're paying them money and then they raise your prices and so you're kind of pissed at them and so you're kind of rooting a little bit for like a new competitor or something to come out. But then when you're actually looking at the competitive set and the products that would actually exist, it's very similar, if not worse. And then you realize, oh, wait, this is a company that's been focused on this for the past couple decades. How is someone that's new and just popping up right now going to all of a sudden do something that's materially better than the company that's been singularly focused on this for many years. And anything this newcomer can do with AI, they could do, you know, tenfold over because they already have partnerships with the AI, you know, companies and they're working directly with them because they actually want to access all their, you know, customer and business spaces.
- [20:29]
Alex
Yeah, well, we'll save it for the Intuit video anyway. Duolingo. So AI, not a concern.
- [20:34]
Drew Cohen
Not the concern.
- [20:35]
Alex
So. But you did do kind of a long ec. I don't know, do they call it a tweet anymore. I'm out of the loop.
- [20:40]
Drew Cohen
Is it technically it's like long form articles. It wasn't really a tweet thread. Alex is not.
- [20:46]
Alex
Wait, let me ask you, what do you call like. Oh, I just X something. Like what do you say? What's the verb?
- [20:50]
Drew Cohen
It sounds dirty. So just don't say that.
- [20:53]
Alex
But what do you say? Like you can't say I just tweeted.
- [20:55]
Drew Cohen
I still say tweet. I still say tweet.
- [20:57]
Alex
You just say tweet. All right. I'm curious. I'm surprised Elon hasn't rebranded that to I.
- [21:03]
Drew Cohen
Some people try saying zeet or something. I zeeted it.
- [21:06]
Alex
Oh, that's horrible. I will never say that. Okay, so you tweeted something about Duolingo. What's your take on the concerns for that company?
- [21:16]
Drew Cohen
So this is, you know, a few weeks back and I've talked about Duolingo before, but basically I wasn't fully understanding the reasons why they said growth was going to decelerate. So if we go back a couple quarters to like that first sell off or I guess the second sell off, I don't know which sell off it was. There was a lot of sell offs, apologies to holders, but I think this was around maybe October, something like that. This sell off was, you know, they basically decelerated growth expectations and so they're growing 30 to 40% and then they guided bookings to 20%. And the reasons they gave at the time was they said we're going to do less like unhinged viral marketing and we're also going to focus more on improving user engagement and the experience instead of monetization. I didn't understand why those things would lead to a growth deceleration that much. And so the on the marketing thing, I didn't really understand why the unhinged marketing thing was really a problem for their brand. And if it was a problem for the brand, how come they didn't realize that for like the many years that they're already doing it? I think the more likely thing that ended up happening was the unhinged marketing stopped working. And you know this because by the way, they stopped doing it only in western countries and they're still doing it in other countries that they were newer in. And so it was probably more novel there. I think what was happening was basically there's this issue when you are looking at a business's existing users and they don't have churn statistics. You don't actually know how many users have tried their product and left so if Duolingo, you know, and they say they have 135 million users, that's very possible that they've really had over half a billion people that have used the app. And so that means a vast majority of them have already tried the app and they're not interested in it. So if you hit them with another unhinged, you know, marketing ad that's not going to work on them again because they're not going to be as impulsive and they already tried the app, so now you need to change your marketing to them in order to win them back. So I think that was the first thing that was really happening with the marketing was the reason why it wasn't working as much was because a lot of users have already tried their app, they know what Duolingo is about and the value prop for them wasn't there. So if you're going to win it back, you had to change the messaging. And so I think that was the first aspect of there, the thing that didn't make sense when they talked about it. Then the second one was this kind of idea that we needed to increase engagement. And so that was kind of a weird thing because I don't understand why that wouldn't have always been a focus. Because they're talking about, oh, no, we pushed too much on monetization. You know, we had too many ads, maybe. I think there was a thing where they rolled out energy instead of hearts, where energy penalized you for basically, even if you got answers correct, it would start to run out. And once your energy was out, it booted you out of the app versus hearts, which was it only penalized you if you got something wrong. And so the idea behind, you know, this energy system basically running out was it's trying to push people to the paid tiers. That did kind of make sense to me in terms of that, you know, potentially turning users off. But then the flip side of that is it's also evidence at the same time that there aren't more people that really want to pay for your app. And so that one's kind of mixed. I mean, maybe if they stayed on it long enough, they could be engaged in all that. But on top of that, because they did something called Duolingo Wrapped, where they basically looked at, you know, what Spotify Wrapped was doing, where they, you know, tell you what your most listened to artists are and all that. And there's people that back engineered the data from this Duolingo Wrapped and it showed that, you know, the top 10% of users are spending just a couple minutes a day on the app, two to two and a half minutes a day. And so that's not long enough to of course learn a language. And what this really is, is it's kind of showing that the habit that they built, which is a good thing, especially with the score streaks. But it's a lot of people just getting a lot of notifications, checking in, doing just the bare minimum in order to keep the score streak and moving on. And so on the one hand, like, that's great, they've been able to engineer an app that has got people to open up every single day, spend a couple minutes on it, that's good. But if you're thinking about the actual engagement and what you're really trying to sell, that's not that high of a value added to consumers. And so it makes sense why there's a good portion of them that aren't willing to pay for the app because that's not providing a lot of value to them. You know, this random two minute lessons you're clicking through, getting a score streak. And yes, there are people that use it a lot more and a lot more religiously. But to me, this was kind of speaking to the bigger issues of the business, which is that, that this product is not something people are really using to actually learn and educate themselves. Which is fine, it could be a game and all that, but I don't think as a game it's that fun. And so I think it's just kind of not the strongest value prop for customers. And that is why you're seeing them now once again guide bookings down because now they're, they're really trying to focus on increasing engagement. And I think the thing that happened was a mix between the fact that their customer acquisition engine wasn't working as strong as it was in the past, so it couldn't cover up the fact that user Churn was really kind of higher than maybe people appreciated. And then secondarily, right now they're shifting to trying to increase engagement more to keep users on the app and reduce Churn, which is now actually causing an issue to bookings because they're not going to focus as much on some of those monetization things. I already saw that they're doing tests to reverse the energy thing to bring it back to hearts in some areas and a B testing. And so all of that's just kind of a synopsis of, of what's going on with Duolingo, my take on it and kind of some of the Issues that were overlooked when everyone was just talking about, you know, this AI risk. I think the real risk underlying it all was really engagement and then basically their user acquisition engine not working as effectively, which then in turn meant they couldn't cover up Churn as well.
- [26:50]
Alex
And I do like how you said you gave the synopsis on the synopsis. You know, you can just. We know it's a synopsis. True. That's, you know, come on, it's the episode. I'll be here all week, guys. I'll be here all week. But no, I mean, Duolingo is interesting in the sense that I don't really know what's happening. I don't know if this is just kind of. Are they trying to get away from this, this constant marketing spend? Are they trying to. Is it just actually like maybe they've fell off on the penetration of people actually trying to learn a new language? Like, I don't really know. What's your take on the underlying issues here? I mean, do you think that management just thought that they could maybe. I think management's take here, I think is that if they make the app more engaging, then perhaps they can, you know, long term spend less on marketing. I guess that's their plan. Right. But it seems that that plan may not actually work.
- [27:39]
Drew Cohen
I think that that is the intention is that now we have AI, we can code a lot more apps, we can make them more engaging. We could add features that allow people to like, talk to someone that's like animated in the app and that's going to help improve engagement. It's going to mean that it's also a better value add because people are actually going to be learning if you could practice talking and all that. And so I think they're trying to do stuff like that. You know, they rolled out different categories too. Chess was an example of one that was more popular. And then it also has a little bit of kind of a network effect of playing other people in chess. And so that's what they're trying to do basically is they are trying to make the app better, they're trying to make it more engaging and all that. But said differently, the way it exists right now is not enough for most users to want to stay.
- [28:23]
Alex
Yeah, and again, let's see. I mean, you know, obviously management's done a good job so far. So I mean, who are we being short term here by saying they're not, you know, they're obviously saying this is better for the long term. I mean, what are you to say?
- [28:34]
Drew Cohen
It's better for the long term because they have a problem. This is not them doing this while they're seeing, you know, user metrics increase, like monthly active users actually saw a slight drop. This is them doing it, in my opinion, because they saw some issues with their business and they need to fix them for the long term. And so yes, they did kind of spin this out as saying this is the best for a long term. It makes sense. You know, you cut margins, you invest in your business and it'll be better for the long term. We're all long term investors. But this was in response to them seeing something that was wrong in their business. At least now it kind of seems like that's certainly the case with Maus actually dropping. And so that, I think was again, back to this idea that you couldn't acquire users as quickly as much as before because the old way of marketing to them didn't work as well because most of these users that were susceptible to it have already tried the app and have now churned. And since that means you're not acquiring as many users, the, the churn that is more obvious, basically. And so that, I think was the dynamic that was happening here. And so, yes, it makes sense for them to do it, but it's still in response to a problem.
- [29:35]
Alex
The thing that's always shocked me about Duolingo is that it's as big as it already is. I, I, I thought that, I mean, it's just mind blowing to me. I, I think that overall this team has executed exceptionally well. I mean, you mentioned about the dearth of competition for kind of language learning services and the fact that Duolingo's gotten to where it is. I would never have gotten that investment. Right. I mean, I just, it's, it's actually mind blowing. So maybe you can talk a little about the valuation. I don't know how much investors are expecting from Duolingo. You know, what do we kind of need on a go forward basis here?
- [30:08]
Drew Cohen
Yeah. So on valuation, there's one adjustment. This has always been a contentious adjustment, at least every time I've talked about it on Twitter, which is whether or not you backed out. Unearned revenue from cash flows. And the idea behind that is just to explain it in a moment, why that exists is whenever you have someone paying upfront cash for something, then of course all of that gets recorded as cash flow, but then the revenue gets amortized over a longer period of time. And so when you have a company that's growing a lot, you're collecting the cash flow up front, but the revenue is recognized over a slower period, basically. And so it creates a positive working capital dynamic. But the caveat is this exists only as long as it continues to grow quickly. As soon as growth starts to slow or stagnate, then this no longer is a source of cash and instead disappears, basically. And so when you get to the point where bookings are equaling revenue, you don't have this as a working capital dynamic anymore. And so that's why I don't like to put a multiple on it, at least a high multiple on it. Because you're suggesting when you put a multiple on it, you're doing a dcf. And if you're doing a dcf, you're saying this is like the lifetime of this cash flow stream. And if you're putting the same multiple of it on the business, that just theoretically makes zero sense because the business will not be growing at high rates of return for indefinitely. Right. And so that's why it doesn't make sense in my opinion, to include this in valuation. I would still want to look at it to know what it is. But if I'm putting a multiple on it, it could disappear. So you should be aware of that, which is what's going to be happening as their growth slows. This as a source of cash flow is going to be shrinking. And so that's the preload. But if you're looking at it on a free cash flow basis, backing out stock based comp, it trades at 16 times enterprise value. So free cash flow to EV 16 times. If you do back out the under earned revenue though that portion, then it's going to be 33 times. Or if you just want to look at operating income or no pat after tax, then it's going to be 34 times. And so it looks pretty cheap if you're including that unearned revenue. But again, that's going to be a headwind if they continue to slow. So you could be looking at more like 30 times or somewhere probably in between the 16 to 33 is fair.
- [32:17]
Alex
Yeah, it's funny how little accounting adjustments like that can make all the difference. And yeah, easy to kind of misquote that.
- [32:24]
Drew Cohen
What say you, cpa? Do you have any pushback?
- [32:27]
Alex
No, I agree. I mean, how do I put it? It's difficult because yes, from a cash flow perspective, if you can get someone to sign up for the full year up front, I mean that is a positive working capital dynamic. And working capital can be a source of cash. So yes, it's positive and Are you penalizing them? This is kind of the art, right? The art of valuation. I mean, y. I think they should get some credit. I think a business that can command cash upfront, that's useful. Do I want to put a large multiple on it and assign, you know, make the business twice as valuable? Because they can, you know, have that dynamic. That sounds a little generous. So it's a tough question. I think it's. And this is, again, I always talk about it. This is why I love the reverse dcf. I just love it because it's kind of like, well, do you need to have that very positive working capital dynamic? Is it necessary? Is it not? And kind of look at it like that. So that was my lawyer, CPA answer. You Nothing. I kind of backed out of it. I was evasive. Like, all good. Like all good.
- [33:25]
Drew Cohen
You actually said something, though. No, no. You said something I really like. So I'm going to give you credit here. So you might want to, you know, stay present, soak it up, enjoy it. But I liked what you said where you said, does it make it twice as valuable? Because what you're basically saying is, does getting cash 12 months earlier than you would otherwise make the business twice as valuable? And so I think that's an interesting way of kind of framing it.
- [33:46]
Alex
Well, and the answer is, of course not. Because. Yeah, yeah, of course. Because it's like, if I get a dollar in January versus a dollar in December, did my dollar. Did I double my dollar or what did I do with my dollar? That. That was so impressive, right? I mean, it's.
- [33:58]
Drew Cohen
What do you do with your dollars? That is the question.
- [34:00]
Alex
That is the question, you know, so. Okay, that's enough about Duolingo. Interesting company. We'll kind of continue to follow it. I do think.
- [34:07]
Drew Cohen
I want to say one thing, though. I want to say. I don't want to leave it too pessimistic.
- [34:11]
Alex
All right. Give me some optimism.
- [34:13]
Drew Cohen
Some optimism. I do agree with what you're saying. You know, the founder of the company, Luis Alfonso von on Arilano. If I'm saying that incorrectly, then that was definitely intentional. He deserves a lot of credit for building phenomenal business. It is very hard to build a mobile app, let alone a mobile app that makes, you know, a billion plus in revenues and is cash flow profitable and all that. So. So all of that he deserves credit for. There are still a lot of people that use the app. He could have success, you know, increasing engagement and all of that. Do I think that the investment thesis has changed from a Year ago when they were growing some 40% and now they're saying, oh, we might have an engagement issue. We have to read. Yes, I do. But that doesn't mean it can't work out from here. It doesn't mean he can't turn things around. All of that is possible. And so that was me doing my little bit of a weave on that again.
- [35:02]
Alex
It was. I know they were growing and they're cat. It's just mind blowing to me that a language, like a language teaching app was valued at what was it? Height, like $25 billion market cap. I mean, I don't know, it just, it just sounds. Sounds too high. Just sounded too high. There's a lot of different language teaching apps if you try to monetize too aggressively. And again, like people, they have these New Year's resolutions, I'm going to learn a language and then just kind of drop off. I don't know. Again, this is me talking with no information. So I'll stop. Okay, let's move on with. Let's move on to something I know a little bit about, which is PayPal. You did another great video on YouTube. Only 45 minutes. So when I watched at two times speed, it was pretty, pretty palatable. I can't, there's no way you're listening
- [35:51]
Drew Cohen
to me at two times speed.
- [35:53]
Alex
Yeah. Didn't someone already talk? I feel like when, when I hear our discussions. So I play it back at one time speed. We speak painfully slow. But I remember you showed me some comment that it was like all the Americans talk too fast. I'm like, like, yeah, no, they said
- [36:06]
Drew Cohen
we talk like machine guns.
- [36:07]
Alex
Yeah. I was like, we could talk way faster than this. I feel like I could talk at two times in real life because I think that that's. I would like everyone to talk at two times speed in real life. Just get a lot more done. Anyway, let's move on to PayPal a little bit and we're going to keep it. We've been at it for a while here. Let's keep it high level. Give us the quick way PayPal makes money.
- [36:27]
Drew Cohen
So just really high level because we have the PayPal video out there already that goes into more detail. In short, you know, they have the PayPal button when you purchase through them. You know, they're taking two and a half percent, 2.9% take rate on that. That's a pretty high margin for them relative to their other services. They do have unbranded payment processing. That's a pretty bad service for a long Period of time for a reason that I'm still not sure why they thought this was a great idea. They use this as a loss leader to try to secure positioning for the PayPal checkout button. And so if you're going to Uber, for instance, in the wallet, there's one of the options is that you can use PayPal. But in turn, they basically processed a bunch of payments for them and lost money for that and hopes they'd make it up on, you know, PayPal checkout volume, which is higher margin. I this didn't seem like this was going well for them for some period of time. And they kind of just kept pushing on this strategy. So that's why I was kind of dubious on it. But the last, you know, thing they have is they also have Venmo, of course, and there's a couple other things going on in there that they have some, you know, bad acquisitions, honey and all that. But, but Venmo is their kind of biggest growth kind of engine right now. But it's not that big to really matter relative to the rest of the business and relative to PayPal size. And so they've also had some issues kind of monetizing that because people like using the app a lot. You know, free peer to peer payment transfers, it's easy to use. A lot of people use it. The problem is, how do you monetize that? Well, they make money off of sweeping the deposits. Okay. That means you're really interest rate sensitive. And then they try to upsell on, you know, credit cards, debit cards, other financial products, which, you know, it's very competitive. Right, because every single, you know, finance app tries to sell you a credit card too, tries to cross sell you something else. And so that's a tough business. And you know, as I was mentioning too, they are pretty interest rate sensitive. And so if you are looking at their just revenues as a whole, it's about $33 billion, operating profits of $6 billion and that is up almost double since 2020. Now, a lot of that, not all of it, but a lot of it is driven by interest rates being higher. And so that's going to be a headwind as interest rates kind of slow down and get lower. That's going to be one aspect. And then the other aspect is more recently though, they have been kind of running a little bit of a turnaround. They stopped taking on so much of this loss making volume in the payment processing business and the unbranded segment. So that's been, you know, good for them. And also Kind of just not doing so many silly things. There's a lot of silly things we'll talk about, but it seemed like they're spending a lot of money and they had room to. To kind of tighten the cost structure, which is something else you've seen.
- [38:53]
Alex
And of course, I mean, PayPal, PayPal historic company, giving you kind of the PayPal mafia. Peter Thiel, Elon Musk, you know, the Affirm founder. Max. I just forgot his last name again. Max Levkin. Levchin. What is it?
- [39:04]
Drew Cohen
Drew Levchin. Levchin. Levchin. You're making me pronounce the names. You didn't forget it. You just wanted me to pronounce it.
- [39:09]
Alex
You're right, Drew.
- [39:10]
Drew Cohen
Yeah.
- [39:10]
Alex
I'm glad you take the heat for that. But of course. Okay. The video. And obviously an investor knows that they become a much more challenging, challenged position. And it was funny. I feel like PayPal had kind of a renaissance in, like, 2021, where everyone, you know, when it was the crypto, everyone was like, PayPal is the company to own. I mean, you remember that, Drew?
- [39:26]
Drew Cohen
I mean, I remember their stock price going insane. Yeah.
- [39:29]
Alex
Yeah.
- [39:30]
Drew Cohen
I never actually met too many people using it, but.
- [39:33]
Alex
No, neither did I. But I remember. I mean, I was working in San Francisco at the time, and everyone was, like, really excited about PayPal. And I was like, I guess I like Venmo people, but I don't know how they make money on me on Venmo because I don't ever do instant transfer and I do nothing of interest to them on Venmo.
- [39:47]
Drew Cohen
PayPal was a $308 stock. It now is a $46 stock. Yeah.
- [39:53]
Alex
And again, I remember that. I think the narrative was very. I felt like crypto driven in 2021. I felt like that was maybe the narrative driver. I don't exactly get talking about this.
- [40:03]
Drew Cohen
I'm sure they had some benefit from commerce and Covid and all of that, and more people shopping online. And then people just extrapolated out those growth rates because. Why not?
- [40:11]
Alex
Yeah, why not? I mean, you're right. That was the narrative. No one's going to the store again. We're going to be. We're going to be shopping online for everything. You know, PayPal's great. And again, Apple Pay already existed. So I feel like, for me, at least, I feel like PayPal. What's the advantage of having a PayPal wallet? Like, I understand if I created a PayPal account, like, 2005. Fine. But why else would you create a PayPal account?
- [40:36]
Drew Cohen
Yeah, that's It, I mean, there's no, there's a lot of competition. They all do the same thing that actually they're better because PayPal has a legacy architecture where whenever you go to use them, it hops you to a different web page. You know, it's a small webpage, but it's still a different webpage and you have to log in. And then once you log in, then you could use your PayPal to check out. Whereas if you're on Apple Pay, it's just face ID and it scans it. And then you could go and you're, you're clean to check out. And so that's how, you know, newer payment checkout plugins kind of work. And so they have to actually re architect that, which they're doing now, where now it's going to be an email code you get if you're not logged in and then you just put in the code to check out. And that's, you know, actually been a big uplift to increasing payment conversion because instead of doing that, you know, years ago, for some reason, they're focused on building a super app and becoming an ad network.
- [41:26]
Alex
Yeah, I mean, a complete non sequitur. Last time I used PayPal was to cheat at a online game called Runescape. And I was buying coins from a stranger online. And I was scammed. Scammed. So I've had a bad history with PayPal. I lost some of my lunch money and my online character did not get the gold coins to buy the cool sword that I was trying to buy. So maybe that's why I'm bitter about PayPal. Personally. Drew's loving that. He loves it. Just thinking of me, 11 years old, Mom, I lost all the money you gave me for some virtual gold coins. Anyway, enough about my childhood. So again, Drew loved that one. But anyway, talking PayPal, the kind of thesis behind your discussion here is they are not in a very attractive position on all fronts. They have very well funded, very intense competition. They don't have a great hold on the consumer. I do think Venmo is a pretty dominant app. Again, how well can they cross sell that and all that? Maybe that's a growth opportunity. But this comes to the discussion that Drew and I had about mature margins, which is, is it time to stop reinvesting and trying to beat Apple Pay, beat some of these other kind of business lines and just kind of look, you're in your position and just kind of start harvesting cash back to shareholders, stock repurchases, dividends, and just become kind of a melting ice Cube. And. And that's kind of where your thesis was with this, right, Drew?
- [42:49]
Drew Cohen
Yeah, yeah, 100%. And so the problem with a lot of businesses when they start to shrink is that even if they don't really have a right to win anymore, the management feels like they need to save the day and save business. And so they're going to divert a lot of capital instead of going back to shareholders to reinvigorate growth and make sure the company is around for another century. Whereas the right decision is probably to just let it, like, gracefully age and return the capital to the shareholders. Don't do these weird acquisitions like Honey, which is like a coupon service to, like, find coupons and like, plug it in to the web browser and, you know, go out and say you're going to be a super app, even though no one wants that. They're trying to do that just because it's solving a business problem. It's not solving a consumer problem. They're saying, what other revenue pools can we look at? Let's be an ad network. All of these things don't make any sense. And they're doing them because they're trying to solve their growth issue. And instead, I think it makes the most sense to do the best you can with your core business and managing that, and it's possible you're going to shrink. A lot of people might disagree with me on this, but not every business is going to be around forever. The point of a business is not to exist forever. It is to provide, you could say, value to your customers, but also to provide returns for your shareholders. That is the reason why. And if you're not providing that value anymore, I don't think it really makes sense to go out and try all these different things, to figure out different ways to try to defend, you know, your existing business when the core of what you were doing, the value prop, it's just not as good as it once was because there's a lot more competitors there and you were too slow to catch up. And so do what you can to defend that. I already mentioned that they're doing something where they're letting customers just sign in with an email code with fast lane. That is a perfect example of a product that they should do. It adds value to consumers. It helps make the checkout product better, and it is right within their lane to do it. What is not within their lane to do it is, oh, we're now going to be a leader in AI agentic commerce. For some reason, I didn't really even understand that part of their pitch. To be honest, I didn't understand why they thought, you know, the super app would work either. Because again, super app exists because it provides value to people. The reason why Tencent was able to create a super app in the first place was because they started with messaging, which was a new thing. It was free to message if you were on WeChat instead of paying SMS fees. And then they added a lot of other features to the app. And once you had customers captive in the app, it became a lot easier to cross sell other services within the app. But everything was about adding value to the user. It wasn't about solving a business problem. The reason why PayPal wants a super app is because they want new surfaces in order to have an advertisement business and they want to be able to cross sell other products. That is not a good enough reason that a customer is going to want to download your app. A customer doesn't care about your business problem. You need to provide value to the user. And so what's happening with management teams like this is you're basically in a business that it's struggling and you can't really compete against the competition that directly. It doesn't seem like they have any great moves against Apple Pay, for instance. And so Apple Pay is going to probably just continue to win against them. And what are you going to do in response? Okay, well then you're looking at these other vectors of growth and all that. They don't really make a lot of sense. And what you should do, I think, is you should return capital to your shareholders. You can make the moves that make sense, that are well within your right to win, that are providing customers value, you know, fast lane, the rest of it, you should just return back to the shareholder. And so they're kind of doing that now. They have taken up the stock buybacks a lot. You know, they're looking at about $6 billion in buybacks last year, year plus, you know, 1.3 dividend yield. And so if that's what they're going to continue to do, I think it materially changes kind of the thesis here. We'll see because the, they just did another CEO switch. They've gone through now three CEOs in the past five years. They're onto their third one now. And so I, I think it's because this issue they're trying to solve the problem that people don't want to be this company that is just maintaining the existing business. They have, doing the best they can with it, but is acknowledging it's going to shrink and eventually probably go away. But we can make shareholders a lot of money money before that happens. You know, PayPal, it was still growing a little bit. The PayPal branded checkout was growing 1%. And so with these other moves they could, you know, re accelerate growth. But it's probably going to still be, you know, longer term, low single digit, mid, single digit grower. That's a fine business. Just that's accept that's what your life is going to be and take the cash flow, give it back to shareholders. Shareholders can then take that cash and put it in other businesses and invest it elsewhere. It doesn't need to be this management team and business that like exist and make sure that the PayPal corporate entity is around forever even if like the PayPal checkout button dies.
- [47:19]
Alex
Yeah, it's well said. I really think that the only person who's in the position to kind of like take. And again, theoretically you shouldn't do this but like if you're a founder led company who's a founder owner and they have like, we're going to make this company keep surviving. Keep surviving, fine. But I feel like once you kind of handed the company over to quote unquote professional manager, I think that you need to take a very honest look at your competitive position and determine what the best path is. Having said that, again, it's kind of like investment managers. Investment managers who trade a lot, make it look like they're doing something to justify their pay, even though that's not necessarily a compelling strategy to be trying to time the market all the time. Obviously it's not a compelling strategy, but they look busy. I feel like that's the same thesis that happens with management when you're like, well, I'm getting paid by the board, so let me try to like come up with all these cool growth initiatives and not just like, well, I'm going to cut cost of the bone and I'm going to make a big dividend. I'm going to sit here and hopefully I get all the money back shareholders and it'll be a slow and steady death. It's just not an attractive 100%. Yeah, it's not an attractive message. Right.
- [48:25]
Drew Cohen
And I think also people just don't want that job either. Like if you're a CEO of a company, it's very hard for them to be like, everything's fine, we're going to do what we're going to do. We're going to make very small improvements and give all the cash back to the Shareholders.
- [48:36]
Alex
Well, listen, private equity, which is their. We're going to screw over the customer and raise prices and fire everybody. And I don't know, they find people to take those jobs.
- [48:44]
Drew Cohen
So your incentives are better. Yeah, that's true.
- [48:47]
Alex
The incentives are better.
- [48:48]
Drew Cohen
Yeah, yeah. I mean, that's also why you want someone who actually has ownership in the business and all that. So, I mean, you could look at tobacco companies because they've been good investments and all that. Well, by and large, it depends your time period. You're looking at. If you're looking at, you know, a more recent time period, like someone like Altria Group, they did all sorts of silly things where they had this very lucrative business, obviously in cigarettes. Cigarettes. And then they're going out and they're buying juul, they're buying cannabis companies, they're buying alcohol. They're doing all sorts of stuff with their money because they can't just give it back to their shareholders because cigarettes are declining in volume. And of course they need to make sure they're around for the next century. And so it's the same sort of issue there. You know, you could have a very high quality business, but if you're not okay with the fact that it might shrink and still be a great return to shareholders, it could end up being a bad result for shareholders overall as they divert capital out into lower returning opportunities in order to ensure sort of a survival of a business.
- [49:40]
Alex
And I think ebay is a great example of a kind of one of these early Internet companies that has. Does what they do very well and they're not trying to do anything crazy anymore. And they just kind of have their platform, they invest in some things like customer support and maybe trying to create some more trust between buyers and sellers. But at the end of the day, ebay is not doing anything crazy anymore. I think that they're like, look, this is our, this is what we're going to do. We're going to try to run high margins, we're going to try to buy back stock, we're going to try to dividend money out. And this is, this is what we're at. I. I don't. Would you agree with that? I think ebay is a pretty good example of like one of these companies that's in harvest mode to a degree.
- [50:15]
Drew Cohen
It is. And then I could also criticize them for like missing the stockx market. Like, that was very in their wheelhouse. Like use sneakers. And then see, well, there you like,
- [50:24]
Alex
what do you want? You want harvest or you want them to go after new markets, what do you want from them?
- [50:28]
Drew Cohen
Well, I mean, look, they're running a 20 margin right now, so that's not really a full harvest for me. So they should definitely be at a higher margin if that's the way you're running the business. I mean.
- [50:38]
Alex
But I do get what you're saying.
- [50:39]
Drew Cohen
Twitter could cut 80% of the staff, you know.
- [50:42]
Alex
Yeah. Like, if there's something, you know, for example, like, if you want to invest in Venmo, you know, like, I think Venmo credit cards or they want to invest in maybe loans to Venmo. I don't know, some way to, like, monetize Venmo users. It's adjacent. It's not. It's not a crazy. You know, you're in your core. You're not going to try to, like, go buy another payments platform and go compete with Apple Pay and spend a bunch of money chasing them. Right. Like, I think you can delineate between what's kind of in the wheelhouse and what's like, all right, this is going to be a big swing, and it might dump PayPal.
- [51:12]
Drew Cohen
Making an ad network that's not in their wheelhouse.
- [51:14]
Alex
I think that that's a little outside the wheelhouse. But ad networks are hot. I mean, you know, trying to get a. Try to get some better.
- [51:20]
Drew Cohen
I heard they're really easy to run. I heard, like, no problems at all.
- [51:23]
Alex
You just run an ad network. I mean, they had. They had PayPal shop. I don't know if that's still a thing. Right. Where. I didn't. They have, like, an online mall. I don't. I'm.
- [51:32]
Drew Cohen
I don't know about you, but when I shop, I don't want to go to Google or Amazon. I don't want to, like, go to a brand. I just want to go to a PayPal app and pick my store based on whether or not they accept PayPal. Because that's the most important thing when I am shopping.
- [51:47]
Alex
Yeah. Thank God for PayPal. That's exactly. That was.
- [51:51]
Drew Cohen
Oh, God.
- [51:51]
Alex
That was part of the 2021 thesis. Like, PayPal, Shop, Shopify. Try to do the same thing with, like, the Shop app. It's like, that's not. No one's gonna scroll through the Shop app or the PayPal app. And again, maybe people feel comfortable.
- [52:03]
Drew Cohen
The Shop app, though, I don't know. Because, like, you buy stuff on Shopify, you may not know it's a Shopify merchant, and then you just, like, track it in the Shop app, and then you end up there. I don't think I've ever actually bought something from there. But, like, I could get why that app, like, why you would go to that app. And then they're like, oh, maybe some people search here or something. Maybe it's an existing store that you've already bought from. I think I've, I've bought something from again. But no, I'm with you. I'm with you. That's just not the behavior. And they kind of know that too.
- [52:28]
Alex
No, they know that. But I mean, again, like, you know, it's easy for the, for to parrot the management talking points and, you know, you get excited because they're excited it's going to work. They're going to own the consumer relationship. Yeah. Doesn't always pan out. So let's talk valuation here of our melting ice cube. Do we need PayPal to continue growth or what's the market saying? Market's thinking there's.
- [52:50]
Drew Cohen
So this is, this is melting ice cube. This is imminently melted ice cube territory. Eight and a half times earnings multiple is what it's at paying out much, much of the cash right now. And so this was, by the way, maybe we should have opened with this because this contextualizes the discussion better, where it's like, if you're able to get, you know, an eight and a half times multiple is basically, you know, 12% earnings yield. And then if you get, you know, just a one to two, a couple points of growth on top of that, like, that's already a great return. If you could just give investors that return and stop mucking around, that could be, you know, pretty decent. Whether or not that happens, I'm not sure. I mean, of course there's other risk. You know, things fall apart faster than expected. You need to watch the full PayPal video for it for a better context on that. But that's the valuation and that's the context of this and why we're saying, like, there's an opportunity here to just return capital and, you know, they're doing it right now, but I don't know, new CEOs and all that. And we'll see whether or not they stick to that.
- [53:45]
Alex
Yeah, eight and a half times multiple sounds like, you know, some of the, some of the value investing, quote unquote, value investing people I think are going to start looking at PayPal, which I don't know if that's a good sign or not.
- [53:58]
Drew Cohen
Yeah, I'm in the right some of the time.
- [54:02]
Alex
What a ringing endorsement from Drew. They're right some of the Time. Oh man, I'd love to be right some of the time. I think it'll be very compelling to watch PayPal, see what the narrative of the CEO is. I just, I wish they would be a little more transparent and just say, we're entering this mode. We're doing that. It just doesn't feel like there's ever, ever clear communication around the intentions of kind of the cash flow harvest mode. And so it's very. I think that's a part of the problem. Right. It's hard for investors to know is it time that they're going to start returning shareholder, are they going to invest back in, what are they doing? Because it just feels. It's not really well communicated, I think.
- [54:42]
Drew Cohen
Yeah, no, I'm there with you because it's not a very confidence instilling message. Our business is going to slowly decline for many years, but. But the shareholders will make more money this way than if we try anything else.
- [54:53]
Alex
Listen, if management said that, I'd be pretty impressed with their honesty and, you know, they could theoretically earn another shareholder that way. But I think that's enough about PayPal. We got some exciting stuff on the horizon. We got into it where Drew and I are going to really argue it. I'm going to take the negative. I'm going to come locked and loaded. I'm going to have some very good, compelling points that Drew can't refute. It's going to be good.
- [55:16]
Drew Cohen
Is this like your dream scenario or something?
- [55:19]
Alex
Yeah, yeah. I was already overhyped that I already. Drew was kind of trying to play devil's advocate with me at lunch today about into it and I was already, already losing where.
- [55:28]
Drew Cohen
Already slipping pretty bad, pretty honest.
- [55:30]
Alex
I already took, I took the negative of my own position. It was, it was, it was kind of a. I gotta, I gotta think a little more deeply.
- [55:37]
Drew Cohen
He did argue against himself, you know,
- [55:40]
Alex
but it's kind of. Both were the bear cases. So I'm gonna say, you know, both were reasons why Intuit could do poorly. But anyway, we're gonna save that for Intuit. It's gonna discussion. What else is on the horizon?
- [55:49]
Drew Cohen
We got shift four interviews with the CEO and CFO coming up next week, and so it should be out the week after then. We also are dropping Intuit Video as well as AMD is coming up soon, so both of those will be out. There's also a big backlog though of videos right now. If you go to the YouTube, you go to the company analysis playlist, there's Uber, Netflix, Novo, Nort, Disk. Microsoft Meta Salesforce, ServiceNow, Adobe be literally more than I can remember right now. So go check all those out and we will be back soon.
- [56:19]
Alex
Drew did amd. I'm very impressed and I can't wait to hear that one. So we'll look out on the horizon for that. But until next time.
- [56:27]
Drew Cohen
Until next time.