Clay Fink (4:52)

Yeah, I want to tap into just as investors, we're in the business of making predictions whether we know it or not. Right. And you've recently talked about how some investors can fall prey to just taking recent financial results and data and extrapolating the past into the future. I thought that you have this interesting perspective where you're really taking a fundamental approach of analyzing the current state of the business and seeing where that's going into the future and not letting maybe the recent past play too much into that. And some investors, I think, can go as far to simply extrapolating stock returns and unknowingly chasing momentum. And I think it's a good reminder that we as humans just naturally are looking for patterns, right? And that can sometimes and oftentimes work against us in investing. So how about you just talk a little bit about how investors are in the business of making predictions and how useful past data is in making predictions for the future.

Daya Pernas (5:56)

If you agree, like we do, like you just said, that investing is about prediction of sorts, then you have to ask yourself, okay, then what data do I look at that actually has signal. And you had mentioned stock returns and stock returns, actually, it is well documented, do exhibit a momentum effect. So actually, from my perspective, it makes a lot more sense to try to extrapolate just based on stock returns than it does based on financials. If you look at financials, financials, and the data is clear on this, they do not exhibit momentum effect. So if you just take a look at all like data mine right now, look at all companies that have grown the revenue by 5% over the last five years. And then you try to say that is there a correlation between how they grew revenue over the last five years versus the next five years? And the correlation of that is very, very low. So that was a big epiphany for us as investors, because I think investors, and it's almost everybody I talk to, it's like, hey, they grew earnings at X amount over the past five years, or they grew revenue at this and, oh, their PEG ratio is whatever it is. And I think it's a good stock because of XYZ reasons. But the foundation to their thesis is that, hey, because they grew earnings, it's reasonable to assume that they'll continue to grow earnings in the future or continue to grow revenue in the future. If you look at the data, it's just not true. The correlation is very, very low. So once you realize that there's no real pattern in past financials for a business that is a good predictor of future financials, then it's like, okay, well, why are past financials useful to look at? Why are the trends, excuse me, the trends in past Financials useful to look at. And I think that for us it's useful, but just in terms of building context. Like okay, well what happened when revenue did this and management how did they respond? Looking at financial trends can give you an idea of where a company is in its life cycle. And this can help you build context. Once you bolt on many other ideas and understandings can give you a basis for prediction what the business will look like. The point, the takeaway is this financial trends themselves should never serve as a sole basis for prediction in what the trends will do in the future. And I think that it's not that intuitive for investors to think that way. I guarantee most investors you talk to are going to look at a chart and assume that the trends will continue, but for all types of reasons, like maybe the company's riding at a trend that's coming to an end, or maybe they've overhiered salespeople and over hired or overspent marketing efforts and marketing expenses are going to change in the future and as a result of that they've seen improving fundamentals. You know, maybe it's a company that or like a platform company that's raised its take rate a little too high, just continue to bump it up aggressively and it's kind of reaching a plateau and that over monetization is long in a tooth. Or maybe it's a company that's just mortgages features in some respect. I mean, there's an infinite number of ways why historical business performance may not continue. So that was really a big epiphany for us is realizing that there's no correlation. Okay, if there's no correlation, then what do we do to try to build our prediction and that conceptualization of that company's future?

Clay Fink (9:04)

I was reading your research this morning and one of the points I also wanted to bring up was that you mentioned that effective portfolio management is more critical than just being good at picking individual stocks, which is actually something you started to pick up during your time playing poker, during your college years and time in the Air Force. How about you talk about some of the things you've learned with regards to effective portfolio management? Because I think that has to be a key driver in the alpha you've generated today other than simply selecting good stocks.

Daya Pernas (9:36)

Yes, you said it perfectly. It was from my poker days. You can be the best poker player in the world. In poker they call it bankroll management, not portfolio management. But you can be the best poker player in the world. But if you have poor bankroll management, you're just Always going to be broke. You have to be able to have the right bankroll management. And that's part of being a professional poker player. It's very, very similar when it comes to investing. You be the best stock picker in the world, but your returns can be abysmal because you are, you're speculating too much on the wrong name or you're sizing things incorrectly, or you just don't really understand how to size, when to add, when to trim, when to have dry powder in the portfolio, when to have cash, when to be fully invested and when to be a bit more defensive. And all those things are massive drivers of return. And especially if you look at just kind of, you just deconstruct your portfolio returns contribution wise and see, okay, where my returns came from. And they'll often be. There's a bit of a power law there. There'll be a few names that kind of really help things along. We tend to have somewhat higher turnover at portfolio. We tend to run a concentrated strategy where we have our core positions, which will be weighted around 5, 15%. Then we have our start positions, which are positions which we would like to make a core. But maybe speed is more of the essence there than deep dive research. And sometimes you just have to take a position when you're in the fourth inning of research. So these are names where they have the potential to graduate to a larger position. And then we have speculative positions where their downside is more severe, but they have significant upside potential. And Kelly Criterion, which is one of the tools that gamblers use, is very, very, I think, very, very relevant when it comes to portfolio management. And what the Kelly Criterion tells you is anytime you have a situation where there's 100% downside, you should probably size smaller no matter what the upside is. Where I'm not sure if that's very intuitive to investors. Investors typically look at the upside and like, oh my God, this thing keep whatever go up 1000%. Let me try to load up in this position. When it's the exact opposite mentality that you should use. It's like no matter what the upside is, if the downside is severe, then you should size down. I think just that key is just instrumental to anybody's ability to manage portfolio. Since we run a concentrated strategy, our portfolio methodology is going to be a little different than somebody who has maybe 100 different positions. I think averaging up becomes a lot more important than that kind of strategy. Where for us, initial sizing is extraordinarily important, where maybe it's not really that important for somebody who takes kind of an = weighted 100 names or something in their portfolio. So I think there's a lot to portfolio management. There's a lot in the curriculum that I think is very misleading with respect to modern portfolio theory and mean variance optimization. I think that stuff is kind of useful to maybe understand a little bit on an intellectual level. But at the end of the day, you really have to understand exactly what risk means in your portfolio. It's not volatility, it's something else. And trying to structure your own risk.

Clay Fink (12:38)

Portfolio management strategy, one of the things that I see in your approach, you're very value driven. I think fundamentally, even though you might not give yourself that label necessarily in some cases, you're admirer of Buffett and Munger. But you hear a lot of value investors say the same thing, say they think independently and whatnot. And then a lot of them just hold a lot of the same stocks. And then I look at your portfolio and I'm just like, I really think this guy does think independently because these are a lot of names that I have not seen before. So I think there's something really here. And one of the things that I haven't heard you talk extensively about how you view cash, but it sure seems to me that your team is really willing to let cash build up at certain points and being really opportunistic in entering some positions. And I think it's easy to say that markets go up every year. You should likely hold very little cash. But then there's also the case where at times there's these variables, extreme dislocations. And if you don't have cash, then how do you allocate to those positions? So talk a little bit about how you view cash in a portfolio. In this discussion of portfolio management, I.

Daya Pernas (13:47)

Think there's few things as terrible from a portfolio management perspective as there being opportunities out there in the marketplace and you not having the cash in order to take advantage of them. And we never want to be in a position where we have to sell a position where it's in the portfolio because we like it. We don't want to be in a position to have to sell it to buy something else that we like more. We think that makes the calculus more complex than it needs to. So we tend to have cash, we idle at around 15% cash. And at the end of the day, the prevailing wisdom is that cash is a drag on performance because as you said, markets, they go up over time. So the other side of that is that if you don't have cash, you can't take advantage of opportunities when they present themselves. So that's also an opportunity cost that I think gets lost. So we never want to be in a situation where markets are a little fragile. There tends to be enormous volatility at individual stock levels. A stock that we think is quite interesting sells off with extreme rapidity. For whatever reason, we don't have cash. So being able to tactically deploy that cash very aggressively, which I think has to be part of your repertoire. If you are somebody that does carry cash, you don't want to be in a situation where it's structural and it's like, oh, okay, well they have maybe 30% of cash on Tuesday, then Friday something happens and now they're at 5% cash. That's how we think about cash. It's very aggressive or very defensive. I think it's an amplifier of returns, at least the way that we've used it. Let's take a quick break and hear from today's sponsors.

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Daya Pernas (19:06)

All right, back to the show.

Clay Fink (19:08)

One topic I haven't discussed in depth on the show is working capital. I feel that working capital is something, you know, it's easy to overlook because it's sort of happening behind the scenes. How about you talk a little bit about the importance of working capital from an investor's perspective?

Daya Pernas (19:23)

Yeah, I think working capital is one of those things. There's the accounting definition of working capital, current assets minus current liabilities. That's not really what is relevant, you have to strip out non operating accounts from there. So if when we're talking about a working capital for business, we're talking about intuitively we don't care about, you know, current debt or you know, cash or cash equivalents. That's not unless you're a finance company and you need cash, cash equivalents support revenue. But when we're talking about it, it's purely the amount of money in a business that needs to be tied up to support a unit of revenue. And it's going to be different for different businesses. So maybe in some businesses you need customer service agents to support revenue. Without them you will lose revenue. So that should be part of your working capital. So for us it's really, really important. I think working capital, I think especially depending on the life cycle of the business, if you're somebody who looks at small cap names, often working capital is especially relevant when you have a smaller cap name that's trying to grow. Because when a small cap name is trying to grow, cash is like oxygen. It's not like these larger companies that have many levers to pull and they can finance things in all sorts of ways. You want to have confidence that they can maybe, or probably finance their growth internally. And a big part of that is if they have negative net working capital. So if their customers are paying them ahead of time or they have really good terms with their suppliers, or maybe that those metrics particularly aren't great, but they're getting better, then they're going to have a little bit more liquidity to help them grow. On the other side of that, you can have a company, and this happened during COVID where a company needs inventory as part of their working capital to support their revenue. And when supply chains are very efficient, they don't need to have just in time inventory, they don't need that much inventory to support a unit of revenue growth. But once things get a little murkier or geopolitically, things get fractured. They're going to need more days on hand of inventory, which is a drag on free cash flow because they need more cash to support a unit of revenue. And if that never gets fixed or if that never becomes more efficient, then that's going to decrease from your future free cash flow. Obviously everybody here agrees that the value of any business is its future cash, discounted present value, and that cash is no longer free to discount to present value. So you need to take a discount on that. So it's just, I think it's very, very useful, especially when dealing with small names or when dealing with structural changes in inventory or relationships with suppliers and so on. So it's something we spend a lot of time looking at smaller names because there tends to be more. Just incidentally, there's more smaller cap names than they are larger cap names generally always trying to be focused on a company that's growing. So their liquidity, now they're able to finance that growth is exceedingly important.

Clay Fink (22:09)

Yeah, there's a couple interesting things about working capital that I can highlight here. I think one is that it can sort of help highlight the strength of a company's moat. So you mentioned if a supplier's being paid after the inventory is received, then that's like a business like Costco. Right. They're largely being financed by their suppliers because they receive inventory far in advance of needing to pay suppliers. And that sort of illustrates how the suppliers need Costco more than Costco needs the suppliers. And then the other point is, you guys highlighted something that Joel Greenblatt said where if you compare a company like Coca Cola to a company like Moody's, Moody's can largely grow revenue without having increased working capital needs. Whereas Coca Cola, as they grow, they have increasing working capital needs with every incremental dollar of revenue. So with that said, does high working capital needs ever keep you from investing in a company?

Daya Pernas (23:08)

It's not necessarily. There would be high working capital needs. And in Coke's situation, obviously, high working capital needs is not indicative that they have a lower motor or anything. It's just the nature of that business. So you have to take a nuanced view. And I think that with it's more about how the working capital is changing. So if for whatever reason, they have to pay their suppliers sooner or their customers are starting to pay them later, that's something that should raise an eyebrow. And you should be asking a lot of questions as to why that's the case. So for us, it's just something to be cognizant of. And if it starts changing, it can absolutely affect whether or not you invest in it. We just looked at a. I'm not going to name the ticker, but it seemed like their DSOs were increasing, their customers were taking longer to pay them, and they didn't really release customer concentration information. And this was a smaller company where they essentially roll up waste haulers. So any business that creates waste that needs that waste taken to a landfill or a compost facility, this trash company would assist them in their needs. There. It was just taking longer for their customers to pay them. They had accumulated debt because they're rolling up these other waste haulers and it just, it seemed like they run into liquidity issues kind of where they're headed. This was a company that if we had seen their terms of the customers start to get better, maybe it's possible that we could have taken a position. But there's just too many headwinds along with the debt. They have service and not being able to have that liquidity buffer from negative working capital.

Clay Fink (24:36)

So one theme I wanted to discuss today is digital payments. So this is an industry I've personally tended to avoid. One reason being that there just seems to be so many payments companies out there and just it was difficult for me to understand where the moat was for some of these names. So wanted to be sure to touch on this theme and maybe one or two companies as well. How about just broadly what makes the theme of digital payments interesting to you as an investor?

Daya Pernas (25:03)

So I like the idea of and just part of our overall strategy, we like to see the just tailwinds for a certain business and it's better when the tailwinds aren't entirely obvious. But our most ideal situation is we find a business that's a share gainer and there's certain tailwinds in place. So with payments you have this extraordinary tailwind which is just M2 growth. Central banks are going to continue to print more and more money. Even in a recession where you see M2 growth fall off, there's a whole lot central banks have learned to do since 2008 stimulate to print and that M2 growth is going to just pick back up. But if it doesn't just like they did during COVID they'll just start handing people money. So you can be pretty convicted just from the historical record that M2 growth is going to continue. So if you have a company that has a scrape on M2 growth, that's obviously very attractive given their take rates can remain stable. And if you find the right kind of payment company, like if you caught stripe early for instance, or Addie early or something like that, it can be enormously profitable. There's a few payment companies we like, but that's really the broad strokes of it is that look, there's going to be more and more money that's out there and if there's a company's lever to just a little bit of that, it can be enormously beneficial. Especially since that incremental investment when it comes to a payment company, the cost needed to support extra year of revenue growth is very, very, very low, so it scales wonderfully and the tailwinds are amazing. So it's one of the reasons why we like payment. Obviously, there's a lot of them, some of them are decent, most of them are not. But that's the whole kind of gist about why we find payments interesting.

Clay Fink (26:46)

The other aspect of payments that has made it a bit difficult for me to get comfortable with some of these payment players was the rise of stablecoins. So I was just looking at a couple stablecoins this morning, and it just seems like the market cap of some of these is just only exponentially growing. So for those not familiar, stablecoin is a cryptocurrency that's pegged to a reserve asset such as the US dollar, and it allows people to transfer these tokens, we can call them peer to peer without necessarily needing a third party. And part of the issue with stablecoins I think, though, is that if you're in a developed country, you probably don't want the stablecoin. You want dollars or your local currency or whatnot. I'd be curious to hear what you're seeing on the stablecoin front.

Daya Pernas (27:29)

Yeah, I think stablecoins right now are really the domain of the crypto world. And if you look at the usage, it's overwhelmingly people who are buying crypto, and it just facilitates it a lot easier on exchanges, even being able to send, being able to hold your money in stablecoin and then trading for crypto and then going back in the stable coin and so on. And the US Government, I think, is, I think, through the Genius act, is going a long way to regulating those reserves to give investors confidence in something like a circle that those reserves are intact. And obviously that benefits the U.S. government because it creates a sustained demand for treasuries, which those reserves are placed in. So it's in the interest of the government to provide this type of regulatory framework. But if you look at the data, there's limited use of stablecoins in the real economy. It really hasn't happened at all yet. There's some situations in some frontier markets where just the banking system is totally ruptured and people are using stablecoins to pay each other. There's a few countries in Africa like that, but other than that, there really hasn't been any penetration at all. I'm not saying there's not going to be, but the market seems to think that remittances are going to be the first to be affected. Remittances being people sending money to others, typically Cross. And when I say remittances, I'm talking about cross border remittances because they tend to be more expensive. But that hasn't happened at all yet. And I personally think that you're going to see stablecoins as an alternative payment method first before you see it in remittances. Primarily because the cost of remittances have come down significantly. And as long as people are continuing to use fiat in their local economy, it's hard for me to suspect given the cost of remittances that people are going to start using other methods to send money to friends and family or whatnot. So until their friends and family start using maybe stablecoins to pay for things in their local economy, we believe that traditional remittance providers are still going to be completely relevant, just as they were in the past. And those are the services that can be used to transfer money. So we don't think the remittances will be the first to be affected. We think just payment methods will and it'll start to show up as an alternative payment method. Much like you can go in and kind of use Venmo to pay for something at your Walmart or your CVS or something like that. You're going to see that, oh, okay, maybe I can use my stablecoin to pay for something. And then I think that's where it'll start. And once that penetration starts to happen, then we can start to talk about maybe how it's going to impact remittances. But I think we're a very, very long way off. And if you look at just how sticky payment methods tend to be like historically, payment methods, even if they're not exactly optimal, tend to stay intact for a very, very long time. So it tends to require quite a sense of urgency for people to switch to a new payment method. So I just don't see that changing anytime soon. When it comes to payments or remittances, I think it's going to stay in the crypto space for a considerable amount of time.

Clay Fink (30:26)

Since you mentioned remittances, let's dive into remitly, which is a shared gainer in the remittances space. So remittances is just a whether people might not know this, but it's a massive market. So the World bank estimates that just over $800 billion in remittances are sent per year. And this brings us to discuss remitly. I've been learning about this company through some of your write ups and then my co hosts Sean o' Malley and Daniel Monka also did an episode on this company on the Intrinsic Value podcast. For those interested in learning more, how about we start with what makes remitly well positioned to capitalize on this big growing market.

Daya Pernas (31:06)

Yeah, so I think regarding tailwinds and trends and why remittances continue to increase and the number's closer to a trillion now, why the number continues to increase. If you look at just demographics, I know the political climate is quite charged. There's been a rise in nationalism and as far as immigration tends to be a topic on the top of every politician's list and trying to limit immigration. But if you look at median ages for a lot of the developed economy, Japan, Italy, Germany, I mean Germany, the median age is 46, Italy is closer to 48, 49 and even the US is 39. There's not exactly young economies and the fertility rate other than the US and most of the economies that I mentioned are significantly below the replacement rate. So once you have that dynamic, the only way to stop a population decline is through immigration. There is no other way. So unless you're saying that developed economies are going to let their whole demographics go upside down and have all sorts of issues supporting retirees, immigration is going to continue en masse. And that's why you're seeing global remittances continue to grow by 5,6% every year and it's now outstripped foreign direct investment when it comes to emerging markets. So that is a megatrend that is going to continue to persist and something that we really like obviously when looking at businesses that operate within that ecosystem and remitly has the best in class digital solution and their ability I think to compete with legacy players and their focus purely on their remittance space I think just gives them an edge. When you look at the other players involved in the space that are pure remittance providers like MoneyGram, Western Union, Aria and even some of the regional players. And on end there's wise kind of is in that space a little bit not exactly. Their product is solely optimized for remittances and it's digitally native compared to a lot of the legacy competition that is still sending cash and that cash is starting to. That's another trend where a lot of their cross border mintas being sent are cash, cash to cash. So you still have overall 100 billion or so that Western Union MoneyGram sends that's in cash and that cash is going digital and remitly is going to be another beneficiary There. So there's a couple trends that we really, really like. They have the best digital solution. It's totally optimized towards migrants. They're doing a lot to build mindshare with migrants. Their marketing engine is really second to none. We don't have many holds in our portfolio that we think our generational holds. And we would hate to say we were ever wedded to a name. But if there's any name in our portfolio that we think we're going to be holding for a very, very long time, it's Ramilli. I just think the economics are going to work really, really well.

Clay Fink (34:03)

Yeah, there's a lot of stuff that I think is really interesting with a name like this. Remitly's market share looks to be in the low single digits. And as you sort of alluded earlier, payment solutions tend to be pretty sticky. And I think one of the reasons for that is just trust. Right. Once customers get acquainted with a way to send payment, they tend to stick with something that they trust, especially as something as important as remittances. The CEO of Remitly has highlighted this and I think he understands it. So say if someone's making 20, $30,000 in the US and they're sending $200 to another country, let's say India, for example, they obviously want to work with a brand that you trust, even if you have to pay maybe a little bit more in fees, that trust is really important because that $200 payment might be what's needed to put food on the table for your family, for example.

Daya Pernas (34:56)

Yes. I think just when it comes to financial services in general, banks, if you agree that banks, it's very important for banks to build trust, then why can't a remittance provider? I mean, it's very much the same. Somebody walks into their bank, they want to feel secure, their money is safe. And it's the same exact thing with a remittance provider. They want to have that trust. And the brand is extraordinarily important. So I think there's a lot of people who will try to say, well, oh, remittance providers is kind of a commodity or a race to the bottom, but any sort of finance company that's B2C, that trust element is going to be huge. People want to feel secure about their money. So if that brand, if that mind share with that customer, if those emotions are of that, of trust and security, and we're going to do whatever we can, bend over backwards, customer service wise, to make sure that your money gets from point A to point B. Yeah, I think that goes a long way. I think it's very interesting when there is a business that is more complex than it actually is and people think that it's a commoditizable business, and you know that it's not. I think that's a source of variant perception. And I brought up the example of In N Out in California, which is a burger chain. And from my perspective, and obviously there's some subjectivity to this, but I know there's a lot of Californians that agree with me. There is almost no other burger chain that has been able to produce a quality burger for as long as In N Out has, just bar none. I mean, there's a couple that came up, I think Habit or Smash Burger or even Shake Shack, but the quality is. It's not been consistent over time. So here's something that should be the easiest business in the world. It's like, oh, you're producing a burger. But clearly it's a lot more complicated than just a cursory glance would tell you. And I don't know anything about the burger business, but I know that it has to be complicated because there hasn't been a competitor to do it as well as they have. Not even close. So to me, it's similar with remittance providers where it seems like it'd be easy, but when you peel back the curtain a little bit, you realize just how complex certain quarters can be, the makeup of certain receivers. You obviously have to have a cash distribution network. You have to maybe disperse money to wallets or maybe have some sort of way to deliver money through just mobile payment or through even on demand or in the Philippines or somebody, you can send money and a courier will go to somebody's house and deliver the money. So being able to optimize for just the different ways people receive money in these different corridors is quite challenging. Obviously, there's the regulatory, the intermediaries. You have to have the licenses and so on. And then there's fraud prevention and all sorts of KYC stuff that needs to be correct and totally aboveboard at all times. So once you start thinking about all complexity, it makes you realize that for midlease, focus is very, very special. I think another example that really spells out just how complex it is that PayPal in 2015 and 2016 ended up buying Zoom Xoom for about a billion dollars and as part of their foray into remittances. And it was like, okay, Zoom's growing leaps and bounds and it's going to help us to plant other remittance providers in the space. And what happens after they acquired Zoom is a couple years later they totally stopped mentioning it. Their growth has been anemic. It's a total nothing burger. They're trying to sell it that they can't. So clearly, if this business is that easy, Zoom would not have been so disastrous of an acquisition for PayPal. But there's something more there, obviously. Let's take a quick break and hear from today's sponsors.

Clay Fink (38:35)

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Daya Pernas (42:37)

Yeah, absolutely. You have this giant Western unit, their payment volume is about 120 billion or so where remitley run rates around 80 or so. So you have this giant player in the space that's given just very steadily continue to seed share. They've had to make an acquisition recently of a regional player just so they can kind of show boost their revenue inorganically. But yeah, they're going to continue to seed share and Remitly is the direct beneficiary. So you have tailwinds, you have a huge player in the space that is just going to be consistently seeding share, you have just a better product. I just think there's a whole host of reasons just to be really bullish over the long term. So I have no idea what the stock's going to do in the short term. But yeah, I think the fundamentals and their ability to create just robust revenue growth is going to continue for structural reasons.

Clay Fink (43:26)

We're recording here on August 19, 2025, and I believe it was last week that remitly released their quarterly earnings. Just prior to that, you guys added to your position. And one thing that stuck out to me was that I guess I should also mention after the earnings release, the stock jumped something like 15, 20%, something like that in that ballpark. But one thing that stood out to me in that update you guys shared was that you said the PE was 17. And I'd be curious just to hear you walk through the valuation a little bit. That definitely sounds appealing for a company that's growing 30, 40% a year at the moment. So, yeah, how about you just touch on the valuation a little bit given that this name might be a little difficult for some people just to wrap their arms around.

Daya Pernas (44:07)

Yeah, it's trading under three times revenue and I think that it's a company that has really not reached its potential profitability wise. There's so much growth ahead of it that you would almost feel fine if they just continue reinvesting and trying to build out growth for the future and so on, which is what they're doing. They're not really pulling the profit lever as much as they can. But even in that situation, yeah, you have a forward PE of close to 20. You have a revenue multiple of under 3x. So I think that from a valuation perspective, if you say that, hey, this company is going to continue to grow revenue for 30% plus over the next several years, given their growth profile, I don't know how many stocks out there are trading at a similar valuation. If you just look at that cohort, I would say they're pretty much going to be top decile as far as from a valuation perspective. So valuation is clearly important. You want to make sure you're not overpaying. And if you're right about the future of Vermitly and their growth profile, you're getting it at an extraordinarily attractive valuation today. So, yeah, it's really that simple. This asset should be trading at north of 5x sales and it's trading right around 3. So that's kind of how we look at it.

Clay Fink (45:22)

Before we move on to our next theme. I know you follow several companies in the payment space. Are there any others you think that are worth highlighting here? I know Wise is one that's also in your portfolio and you follow some other names as well.

Daya Pernas (45:36)

Yeah, I think Wise is a very interesting company. A lot of people think it's a competitor remitly but they play in a much bigger space. If you look at just payments in general or just cross border money movement, remittance is just a small part of that. You have businesses paying businesses, you have banks sending a lot of money, the space is 50 trillion or so and then you have remittances that are right around a trillion or other measures cited at two or so on. So Wise is not optimized for the migrant remittance tam. It's optimizing for another TAM that is much bigger which is businesses paying overseas suppliers or neo banks having to send money around that don't want to go through correspondent banking. So it's really focused on a much bigger markets and that's why its send amounts are so much higher. It's medium send amounts where Vermilion is around about 300 or so and E of Wise that is significantly over 10x that for as far as their median send amount. So they're completely different businesses and anybody who's used the Wise app and the Remitly app can understand how different they are. Wise almost feels like a neobank compared to the Remitly app. The Remitly app is just permits as you have a contact center, it's very, very easy to send, totally optimized for that space. But I do think Wyze is doing something very interesting. The potential there is quite large. The challenge for Wise is that instead of being more intermediary heavy like Vermitly, where remitly you can go anywhere and pretty much just very quickly find the right intermediaries and set up a corridor for people to send, start marketing to people who associate with that corridor and get the ball rolling. Where Wise takes some more heavy lifting with respect to integration into countries, local rails, you need a certain membership, you need certain licenses to be able to to be a remittance player. So they're like, hey, we want to reduce the amount of intermediaries. We don't want any intermediaries. We want to plug into their banking system correctly and then that way we can cut out all sorts of costs and stuff. Which I think is great, has worked in some corridors but getting that regulatory approval is very, very difficult in others. They've already done a whole lot of work and they've already had a whole lot of integrations. There's just a long way to go. Which is also one of the reasons why Remitly sends to maybe I think around 170 countries and wise is less than half of that or so as far as the different countries you can send to. That being said, I think WISE is very, very interesting. Wise doesn't have anything to do with the VISA network or remitly. Their structure is really built on the Visa network and their migrants send money using their debit card. And where WISE tries to influence you not to use your debit, WISE is bad for something like a Visa because WISE continues to grow and grow and grow. Core networks will feel a bit left out where with Ramilli it's not the same anyway. Maybe that was a bit technical, but the whole part of it is that Wise is doing the heavy lifting to build out actual piping and infrastructure, which I think is very, very useful and can leverage them to a very, very large market if they continue to make progress. So the upside with WISE is quite large. That being said, you do have regulatory obstacles.

Clay Fink (48:42)

So I feel like AI is all a lot of people want to talk about nowadays. It's clear that it's going to be impacting so many industries. What's interesting about AI now is that, you know, many of us can see and experience, you know, just how fast some of these things are moving, given the progress of ChatGPT and other LLMs. And you and I can probably see this progress on a weekly or monthly basis, just using it day to day. And I don't think it's common for value investors to become well versed on AI because it's an industry that's just constantly changing, has a lot of capital pouring into it, and it can be difficult to determine who the winners are going to be, similar to how in the late 90s people knew that the Internet would be huge, but very few people would end up determining who the winners would be. So how about you talk a little bit about why a decent amount of your research has shifted to this area of the market?

Daya Pernas (49:38)

Yeah, I think that part of it is existential of sorts. It's affecting so many industries you want to know how it's going to affect you. Similar to if you're an employee somewhere, you probably want to start learning about AI and how it might affect things or how it might help you and so on. So part of it is just understanding the gravity of the moment and understanding just how huge of a general purpose technology AI is. So this is also true if you look back. I remember reading some transcripts from 1999. It was coca Cola who asked what does Coca Cola know about the Internet in 1999? But they were even talking about, here's how we're going to leverage the Internet to improve our marketing efforts and so on. So you can't avoid it. Every company is talking about how it's affecting them or how they're trying to reposition XYZ or so on. The latest stat on the hyperscalers is close to half a trillion has been invested in training models and data centers and so on. Anytime you have that level of investment going on, it's kind of important to ask who might be the beneficiaries there. Are there any companies that are taking advantage of this? And we've had a lot of success with especially smaller companies that have been pivoting towards providing some solutions for some of these bigger data centers, given their energy needs and so on. So I think that you want to know how the world's changing. It's having such a massive impact on how everything's changing. You want to try to understand how things are changing, whether or not it has any direct investment implications. As an investor, you always want to know how your world's changing. And we tend to be more attracted to dynamism. We like it when there's a little bit of complexity or people may not know how things are going to. There's a bit of a fun war situation. We like to try to analyze to be in that area and do some analysis there. And a lot of times you're not going to be able to gain a full understanding. That's fine, but I just think that there tends to be more opportunity where there's more dynamism.

Clay Fink (51:32)

You initiated a position in Meta in March of 2022. You're a bit early in the drawdown, but definitely captured a lot of the upside as you close your position at the end of July this year, representing over a 300% increase in the stock price over that time period. And with Big Tech making up a substantial amount of the S&P 500, many are asking what sort of returns they're going to be getting on this ever increasing spend on data centers. I'd be really curious to hear your take on how these investments could potentially pan out for them going forward.

Daya Pernas (52:05)

Yeah, I think that it does seem to be a bit of an arm race at the moment, and I can understand how investors might think. There's a lot of capital destruction going on and I'm sure not every dollar is going to be spent as efficiently. That being said, if you look at maybe Meta is a clear example of this where you alluded to in 2022 when we took position and there was Also people thought TikTok was going to eat Meta's lunch and Zuckerberg was going crazy investing in VR and there was that Apple data change that also affected things. So just a confluence of we think narratives that promoted selling, promoted just that rapid price decline. But then you can also see that Meta's response to the competitive TikTok pressures where reels started to massively increase active users engagement. And it was clear that hey, they're responding to whatever the market thinks this threat is. And there's actually evidence, you can actually see the progress being made. And with respect to Meta, they're using AI to make their ads better. It's already helped increase their top line. So that's probably out of all the hyperscalers, I think the best example of how that's improved their return on investment, where it's actually helping businesses. Just give us a criteria, what kind of ads you want to make. We'll use AI to test 100 different versions and see which one gives you a better return on ad spend. So that's been enormously beneficial for Meta and for most of these hyperscalers, their revenue per employees increased dramatically. You just need less developers to produce the amount of work you do. And obviously they're all trading their own models and it's having an impact already whether or not something like a Microsoft, how that's going to affect their top line or how that's going to help them increase revenues. I think that remains to be seen. But you're already starting to see massive efficiency improvements for all of them.

Clay Fink (53:54)

And when it comes to some of the applications of AI, which ones have you found to be most useful and interesting to dive into and take a look at some of the companies that are developing these new technologies?

Daya Pernas (54:07)

I think there's a lot of areas, there is robotics is one that comes to mind. We basically have the hardware for robotics, but we don't have the brain yet. And I think there's rapid progress being made there. It's quite similar to how they trained models to play like chess or go where it was basically unsupervised. You give it the rules of the game and then it just plays itself trillions of times and comes up with these really, I think, unique ideas. It knows how to play things very, very efficiently. It's similar to what's happening at robotics right now. They're testing them through simulations. They're using physical sciences to provide just the rules framework around that simulated reality. And they're optimizing for A certain outcome and then it's running that simulation trillions of times. So I think that brain is coming and we're going to combine that hardware that's going to have a massive impact and it's going to be, I think, a very, very exciting future. And that parallels a little bit to defense. I think there's applications in energy. If you look at data centers at the end of 2025, about 2% of the electricity being used is going to be used by data centers. So that has a lot of questions for the grid and alternate power sources. And there's a lot of companies that are positioning themselves to provide alternate sources of electricity for data centers. And then there's nuclear that hasn't made the headway that I think a lot of hope, but that might be in the discussion more and more later. So there's a lot happening in energy. It's really, really interesting. Biotech we haven't dove into quite as much as we'd like to yet. Just the speed of drug discovery and using AI to iterate on how different molecules are binding together and just speeding up drug discovery I think is going to be a very, very interesting. So there's so many, I think applications that from an investor's perspective, it's just the best time to be alive. As an investor, I mean we're very, very fortunate I think especially just the changes in all these technologies and how it's going to impact our lives. I'm very, very excited for the future. But yeah, those are just some applications that I think are going to have some serious relevance for all of us in the future.

Clay Fink (56:14)

Yeah, it does certainly seem that robotics is going to be more and more prevalent. Even Amazon is utilizing more and more of that in their fulfillment centers and whatnot. Tesla big investments into that and even have uses outside of manufacturing use case. Are there any companies in your portfolio that play into this theme of researching and better understanding AI?

Daya Pernas (56:38)

I think that a company that's using AI to facilitate manufacturing, industrial manufacturing and that's xometry and I think the more robotics and these prototypes, these short runs that produce these different types of robots to help facilitate any never ending human needs, rizometry is going to be a huge beneficiary to that because they provide a platform that enables any sort of manufacturer to submit their CAD designs or whatever the specifications are and through kind of an AI quoting engine, pick the exact manufacturer to help them to produce these parts. So I think that the more and more robotics are being produced, given that a lot of these robotics are prototype. I think that fits very well in Xometry's hands, which is really a leverage on digital manufacturing. So we're very excited. That would be one, I think, that stands out in our portfolio.

Clay Fink (57:32)

I have one more fun question before I give you the handoff and close it out here. What is something that you think AI will be able to do in 10 years that would be totally crazy if we saw it today?

Daya Pernas (57:44)

I think the real breakthrough in AI would be if it helps us solve something that we scientifically that we couldn't solve. I mean, really, if you look at the physical sciences, there hasn't really been a huge breakthrough since the turn of the century. So are there breakthroughs to be made and is AI able to do them? Is AI more than just a regurgitation of data and can it create something actually new? It's already done it in certain games where I talked about chess earlier, or go where it's made a move that no human has ever seen. It almost doesn't make sense from a human perspective. Is that going to happen with something like science? That remains to be seen. And I think that that would be the next huge breakthrough. It just takes the human race to an unbelievable next level. Is that going to happen in 10 years? I have no idea, but that would be pretty exciting.

Clay Fink (58:35)

Yeah. I'm reminded of a book I just finished on the story of ASML and ASML and building these lithography machines. These are some of the most complex machines on Earth and no person understands how they work. But I think eventually AI is going to help them figure out how continue Moore's Law and think in ways that humans just can't possibly even imagine.

Daya Pernas (58:56)

Yeah, just some of those advances on those techniques are unbelievable. Getting down to one nanometer or something. I mean, it's crazy. That level of technological advancement in that arena has been so impressive. So, yeah, if AI can help us there, I'm just very excited to see it.

Clay Fink (59:12)

All right, Daya. Well, I really appreciate you joining me here today. For those that are interested in learning more about you and the work that you do, where can they go?

Daya Pernas (59:20)

Very happy to be here, too. Thank you very much for the discussion. Anybody that wants to learn more about our business, Visit us@pronounced research.com. we produce actionable stock research for professional investors and RAs. So anybody that wants to take a look, that's where to go.

Clay Fink (59:34)

Excellent. Well, thanks again, Day. I really appreciate it.

Daya Pernas (59:37)

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