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The Investor's Podcast (We Study Billionaires) - The Investor’s Podcast Network
TIP780: Top Stocks for 2026 w/ Shawn O'Malley, Daniel Mahncke, & Clay Finck
01:32:39
Clay is joined by Shawn O’Malley and Daniel Mahncke to share their top stock ideas for 2026.
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A
You're listening to tip.
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B
On today's episode, I'm joined by Sean o' Malley and Daniel Manka to share our top stock ideas for 2026. Sean is pitching Xernv, which is an indirect way to get exposure to Ferrari through a holding company. Daniel is pitching the Latin American e commerce giant MercadoLibre, which has posted 30% plus top line revenue growth for 27 consecutive quarters. And I'm pitching Meta, which is a stock I felt I've sat on the sidelines on for far too long. Sean and Daniel co hosts TIP's very own intrinsic Value podcast. On the show they do comprehensive research and share a stock deep dive every week while publicly building out their intrinsic value portfolio. In the near future, they'll be publishing an episode on Exer and MercadoLibre. So if you'd like to learn more about these picks, go go and follow their show on your favorite podcasting app so you don't miss them. With that, I bring you today's episode with my friends, Sean O' Malley and Daniel Monka.
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Since 2014 and through more than 180 million downloads, we've studied the financial markets and read the books that influence self made billionaires the most. We keep you informed and prepared for the unexpected. Now for your host play Fink. Foreign.
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B
Welcome back to the Investors podcast. I'm your host, Clay Fink. Today I'm joined by Sean O' Malley and Daniel Monka, hosts of TIP's very own intrinsic Value podcast. Gentlemen, so great to have you here.
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C
Great to be here.
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A
Thanks for having us.
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B
While we're ringing in the new year, the day this episode goes live, and today we'll each be sharing our top stock pick for 2026. Of course, these are not intended to be investment recommendations and we encourage each of the listeners to do their own due diligence before investing in any company. So with that, Sean, how about we start with you today?
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C
Let's do it. I would say that to call my pitch a success in maybe three to five years from now, if we can look at it as being this kind of weird bet on an overlooked Italian holding company that did actually kind of quietly beat the market for us, largely because we were willing to own Ferrari in a slightly unconventional way. So that's sort of the setup. And yeah, without any further ado, my stock pick today is technically Exer and V, but that is really a proxy for making a discounted bet on Ferrari. So Ferrari is ultimately the company that I'm most interested in. And so I'll explain what I mean by that in a moment, but I should personally disclose that this is a company I've personally invested in, actually just recently. Personally invested in. And because I'm in the US though, I can't buy the Dutch shares traded in euros, but I did buy the OTC shares with the ticker exxRF in the US at a price of around $85. So. So, all right, let me start with a few words on Ferrari first. Ferrari, to me, is one of the most special brands in the world. It's the epitome of Italian excellence, craftsmanship, engineering and status. And it's been an incredible stock to own. And these are vehicles that in some cases literally appreciate over time in value. And I mean, just think about that for a second, how rare that is for automobiles. And so the returns on invested capital are more than 20% because of how high the profit margins are. And correspondingly, they've compounded earnings per share at 18% a year for a decade now, which is just this incredible track record. And the thing is, Ferrari has this ravenously loyal customer base who takes an immense amount of pride in owning the vehicle. Something like 80% of all sales are made to repeat customers. And as you can guess, these are not exactly price sensitive consumers either. So just by raising prices by maybe 8 to 10% a year, customers aren't going to flinch. And then without even increasing sales volumes at all, they can grow sales at nearly double digit rates and earnings even more, thanks to operating leverage, while recycling some of that excess free cash flow into things like dividends and share repurchases, since there's just very little growth capex needed, because it's not really ultimately a manufacturing business, it's a luxury business. It's a great business, you might say. And so the problem with Ferrari that Daniel and I found when we looked at it on our podcast a few months ago is that it rarely ever looks cheap on paper. But so there is this weird little oddity in this corner of the Dutch stock market where instead of buying shares in Ferrari directly, you can buy a holding company that owns about 20% of Ferrari's total shares outstanding. Yet the value of those shares come at a 60% discount to the holding company's net asset value. So obviously that hold co I'm describing is exer. It's a publicly listed holding company controlled by the Agnelli family, the family that founded Fiat, actually. And you might say in a way, it's kind of like basically the Berkshire Hathaway of Italy. It does not operate businesses day to day, it owns stakes in them and then reallocates capital over time from the top down. So EXER does not have anything close to the same track record or cult following as Berkshire, to be clear. But the idea is that it's also a holding company with long term bets and a few decision makers at the top. And exer's roots go back over a hundred years, when Giovanni Agnelli founded Fiat in the 1920s. And then after a century of mergers and restructurings and spinoffs, what you're left with today is almost like this multi generational family office wrapped in a public company shell trading at what I think is a very attractive discount to its intrinsic value.
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B
It's pretty funny that, you know, we go to school, we learn that, you know, markets are efficient. There are no free lunches in life, especially in public markets where all participants have access to the same information. But in the case of exer, with a discount that substantial, you're essentially able to purchase a stake in Ferrari and getting these other businesses that they own essentially for free. So perhaps when we do come across a free lunch, then we should take notice because they don't come around often, we should say so. With that said, I've personally just always had this strong bias against investments where, you know, the investment case is that there's a discount to net asset value. However, perhaps this might be a good entry point for exer, given that, you know, the discount today is around 60%. Historically it's around 25, 30 to 40%. I'd be really curious just to get your take, Shawn, on why you think this substantial discount exists and how investors should go about thinking about it.
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C
Yeah, so if we keep it very simple, EXER's net asset value, which is the value of all of their stakes minus their debt. And so that NAV is worth around 36 billion euros, while Exer's market cap is roughly 15 billion euros. So you're paying about 40 cents on the euro for the entire portfolio's net assets. And within that, Ferrari is unequivocally the crown jewel. Exer owns again, 20% of Ferrari's outstanding shares. And actually in terms of voting power, it's more like 30%. And Ferrari alone makes up about 2/5 of exers gross asset value. And so I think the really wild part is that the market value of just the Ferrari stake alone is worth more than exer's entire market cap as a company. So today's prices, the way you could think of it is you're Getting Ferrari stock price plus everything else in the portfolio, effectively for free. Or you could ignore any upside in value and everything else and just see it as a chance to essentially buy Ferrari exposure at half the regular price in a way. So the question then is, what else do you actually get for free in this bundling of assets? And you must think for there to be a 60% discount, it must be a terrible collection. But actually, I would disagree. I mean, around Ferrari, EXER has this eclectic mix of assets ranging from Stellantis, which is the mashup of Jeep, Chrysler, Dodge and Maserati that came out of Fiat's merger with a French company called PSA, to C& H Industrial, which competes globally with John Deere in agriculture and construction equipment. The funny thing about C and H being that like Ferrari, it was also spun out of Fiat. So everything ultimately comes back to Fiat when we're talking about exer. And I had never really realized this before, but Fiat used to be this mega Italian conglomerate and in a way it still is through Stellantis, but it definitely used to be even more diverse when you're talking about having Ferrari and John Deere's rival C and H, all under the same corporate roof. And for context, about 3/4 of Exo's assets are in publicly traded stocks. So Ferrari, C and H, Stellantis, the diagnostic healthcare company, Philips, and then actually one of Europe's most valuable football clubs in Juventus, which they've actually owned for nearly a century at this point, and is a publicly traded company too, which I was surprised to learn. And so football clubs are not exactly profitable businesses in most cases, but they are very much trophy assets that can be sold for billions of dollars to a motivated buyer. Forbes, for what it's worth, just valued Juventus at around 2 billion euros, making it the 11th most valuable club in the world. And then just recently we had Tether make an offer to try and acquire Juventus that Juventus rejected. But clearly there is interest in acquiring this asset and there's real value to it, even if Juventus is not a huge money making business in its own right. And so Stellantis's future I think is maybe the part of the portfolio that looks the worst because Chinese EVs have really burst onto the scene in the last few years and are dramatically taking market share in Europe and Latin America. And then there's this bigger picture risk of self driving cars being a further disruption as well. But still you're getting some pretty iconic car brands and some brands focused on the US where Chinese vehicles are banned and you're getting it at cyclical lows. And so, as Daniel knows, we've met a handful of deep value fund managers, especially in Omaha last year, that are looking at the automotive space in particular. Which is not to say that I would personally want to invest in Stellantis on its own, but. But yeah, I mean, I appreciate the optionality. It reflects as a free add on to a Ferrari investment.
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Stellantis being a traditional automaker gives me room for pause, since that industry isn't exactly known for shareholder value creation. But again, you mentioned that you're essentially getting that asset for free. Then the question is where it goes from here. It looks like Stellantis is their second largest holding, with Ferrari being their largest. And I definitely think it's right to think of Ferrari more as a luxury company than a traditional car maker. And their bet on Stellantis also gives me a bit of pause in management's ability to effectively allocate capital from here. Because if public shareholders start to question capital allocation, then it might be difficult to see that discount to NAV close to a significant degree, at least in the near term. When I looked at their 2024 annual report, they've compounded net asset value at 18% per annum since 2009, while the MSCI World Index has compounded at 12%. So there is a history of good capital allocation by management. And you mentioned there that 3,4 of the assets are publicly traded. What about the other fourth? What else do they own?
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C
Yeah, so the remainder is a mix of cash, about 9% of their assets also being in private equity. So within that private equity portion, they own a large stake in the Economist, the business magazine that I think most people will be familiar with. And then Christian Louboutin shoes, the luxury shoes. And then they've also built out a venture bets side of things and have this asset management arm that has backed companies like Neuralink and Brex. So when you step back and it's cars, tractors, health care, luxury media, European football and a VC portfolio all under one roof. And that is exactly the sort of monstrosity that public markets love to slap with a conglomerate discount.
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When you first looked at exo, Sean, you kind of asked me if I have any experience with such companies. I've actually invested in an Italian holding company before. It was a bit smaller than exo, and it wasn't based on the premise of using it as a proxy for essentially owning just one core asset or core stock, and that as a discount. But when I looked at the space as a whole I noticed that discounts tend to be larger for companies with unclear strategies and that seems to be the case with Axure. And it's less about owning companies from just different niches or industries and more about the investing strategy. I mean some companies clearly focus on value place while others are focused on small high quality businesses that can compound over many many years. And in that case you ideally have a management team at the holding company level that also helps through expertise. And what I found is that that expertise of missing when a holding company mixes a range of different investment styles. And of course another reason for the discount could be due to just the large concentration on just one asset. Although Ferrari is definitely the best company in their portfolio. But I'm really just out here speculating. So why do you think that the discount is so extreme?
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C
I do agree with you, the lack of strategic clarity at the top is a major factor. But I would probably bucket the reasons for the discount into three main things. And the first is complexity. So most investors don't want to try and value Ferrari, Stellantis, C and H Phillips, a football club, the economist Louboutin and a VC portfolio all in one shot. And if you're a luxury focused investor, the cyclical autos and tractors are gonna drag you down. If you're a deep value industrial person, Ferrari at a premium multiple probably just gonna make you very uneasy to think about investing in. If you like just clean and simple stories adding in Juventus and Elon Musk neuralink inside your Ferrari exposure would probably drive you crazy. And so that degree of complexity all under one roof I think alone deserves some discount just because of the uncertainty that any investor would really have about what they're getting when they buy shares in this company. And then just secondly there are friction costs. If you imagine exor selling everything tomorrow, they're not realizing full marks on that paper. Net asset value, obviously large block sales of Ferrari or C and H stock would move markets against them. And then there also would be real tax implications of doing something like that. So a very tangible example of this, the kind of things that can arise and eat up their net asset value happened a few years ago when they moved their legal headquarters to the Netherlands. And so the Italian tax authorities hit them with this one time exit tax bill that was around €845 million to settle it. And so that's almost a billion euros gone in. Just tax friction. And as we were talking about a little bit before the call, Italy as I understand it, doesn't even normally have an exit tax. And so that gets into Exorcist kind of very special role in Italian society where it's very much a business and political family that is very well known and prominent and people look to them to invest in the country's future. So it was seen as kind of giving up on Italy by moving to the Netherlands. And yeah, this 800 million euro plus fee to leave I think was kind of a way that the Italian government burned some bridges with exit. Anyways, I'm sure over time Exar will make that back in more. Otherwise I don't think they would have made the move. But still the point remains that there are these unexpected costs that can very much arise. So the market is right to say, at least partially, that this net asset value is not instantly monetizable, it's not highly liquid, at least entirely, and so therefore deserves some degree of discount. And then the third thing I'd mention is that an investment in EXER is a bet on management, which is true with any company, of course, but in this case, the capital allocators at the top are making these huge investment decisions as almost the operations of the business, while also sitting as chairman at the top of these hold cos. And so John Elkin is the CEO of Exer, but he's also the chairman of Ferrari and Stellantis. So not only are you trusting him to allocate Exer's capital effectively, but he's also exerting a degree of direct influence over their investees. So when you have a situation when the underlying holdings of a company like Exer are public, you can almost see exactly what John Elkin in this case is doing. And so if EXER traded at par with its net asset value, then you would effectively be paying full price for Ferrari and Phillips and C and H plus taking on the risk that Elkin reinvests your capital in mediocre ways. So typically you would expect there to be some holdco discount and that would actually be rational, unless you're talking about Warren Buffett, which is one of those rare exceptions that we've seen to this kind of scenario with Berkshire Hathaway. And so where I think things get interesting is when you actually stress test those assumptions. Even if you haircut the net asset value for taxes and transaction costs, and you assume, let's say, the private assets are marked way too optimistically, you still do not get to a world where a 60% discount feels justified. I mean, historically, EXRA has traded in the 25 to 30% discount range. To me, at 60%, the market is just effectively saying Elkin must either be an absolutely terrible capital allocator or the net asset value numbers are completely fantasy, and I don't think either of those are close to being true.
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A
All right, back to the show.
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B
If I were to put myself in Buffett's shoes, I think that if he were in Elkin's shoes, he would consider repurchasing shares if he were running this company. I think it's pretty clear that with the market valuing the shares well below net asset value, then it would be value accretive to shareholders to repurchase shares. We look at Berkshire's history, they started venturing into share repurchases in 2018, and they've managed to deploy a decent amount of capital through that when they view the stock as attractively priced. But I think it's safe to say that Berkshire was never trading at a 60% discount to net asset value. So if Exer wasn't doing share buybacks, that would certainly give me pause if I were owning shares in this company. I think I looked back at Exer's capital allocation in recent years and since 2021 they've retired around 14% of the shares outstanding. So talk more about Elkin and what makes him the right guy to to steer the ship for this company.
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C
Well, when Elkin stepped in, Exer was not really in a great place. It was heading into what would become the great financial crisis with very high debt and then these very shaky industrial businesses. And kind of also on top of all that, you had this lingering risk that the family would just slide into complacency or the vanity phase, as he likes to talk about it, where you just sit on these legacy assets as the second and third generation beneficiaries of massive wealth, while the real value of that wealth slowly decays, either because of misallocations to capital or overspending and poor planning or some combination of all of those things. And instead they brought on Sergio Marchioni to run Fiat, and that turned into one of the greatest corporate Transformations of really the last few decades. They would go on to buy Chrysler during the crisis at a very, very attractive price. They would spin off Ferrari and create tremendous amount of shareholder value in doing so, would spin off C and H and then ultimately would merge Fiat with Peugeot to create Stellantis. And so XR simultaneously built out a venture arm run by people from Apple and Amazon, deployed several hundred million in euros into over a hundred startups, including as I mentioned, Elon Musk, nerlink and the FinTech Brax, and tried to reposition the group as really more, more of a modern tech forward capital allocator rather than just being this remnant of an old world Italian dynasty and everything that comes with that. And so, I mean, beyond the narrative, obviously the numbers are what matter here. And we can kind of fact check the counter narrative that I'm suggesting here. From 2009 to 2024, Exer's net asset value compounded around 18% per year, versus roughly 12% for the MSCI world. And over the last decade, its NAV growth has been roughly 13 to 14% annually since Ferrari was spun off. And even if much of that more recent success was driven by Ferrari's returns, I'm really not sure why Elkin wouldn't get any credit for that. I mean, in business it is so easy to mess things up. And even if he wasn't the original mastermind behind the Ferrari investment decision that happened way back in the 1970s, just being disciplined enough to not sell out of that position over time while pushing for a spinoff that would unlock shareholder value, I mean, all that strikes me as being very, very pragmatic. And so I don't know if he's a wunderkind, but at a 60% discount to net asset value, he just doesn't have to be either. He just has to be minimally competent. And I don't know, maybe I'll make a little analogy here. It's like a backup quarterback coming into play in the fourth quarter with the team up 20. And he does not need to be Tom Brady or Patrick Mahomes. He just needs to not make catastrophic mistakes. So valuation matters here is what I'm saying. If there were a much narrower discount to nav, then the stakes would be higher for his performance.
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A
I don't watch American football, but I think even I got the analogy here. I mean, just looking at the numbers, it certainly looks like Akahn just did a phenomenal job. And you should give him credit for holding Ferrari for so long. That decision alone created an enormous amount of value for shareholders. And I guess the concern investors have now is simply that nothing else in exo's portfolio looks remotely like Ferrari. So while the returns, especially over the last decade, look impressive, after selling some of its Ferrari stake due to valuation, you just got to ask yourself what will drive returns for the next decade. And also, like I said before, the skill set required to hold a long term compounder through volatility or when it is already trading at a premium, it's very different from the one you need to actively buy and sell value plays or value situations. Well, and if I look at Axel's portfolio right now, they seem to own a lot of those right now. And you just have to place, as you mentioned before, a lot of faith in the management team. Because in Europe, many holding companies are still very family controlled with concentrated voting power. So as minority shareholders, you just largely rely on management to allocate capital well.
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C
And exorcist unapologetically still a family vehicle. I mean, the annuality is control of votes in a way that is almost similar in spirit to having a dual share class that you see a lot with tech founders. I don't love that Elkin earns an eight figure pay package from Exar, plus the compensation he gets from roles at Ferrari and Stellantis. But to me, the important thing is what's happening at the share count level. They've been shrinking the share base by roughly 3% per year for the last few years. And they've actually done some really unique ways to approach that and create shareholder value. And so one of those being they did this reverse Dutch auction to buy back stock aggressively earlier in 2025. And so the way it worked was that EXER published a price range that they'd be willing to purchase shares within and then asked existing shareholders to provide their asking price that they would be willing to sell their shares at. And then the company ranked these asking prices that they received from cheapest to the most expensive and then executed 1 billion euros worth of buybacks at the lowest price ass rates, which could be below the market price at that time. And so it's a pretty subtle thing, but I'd imagine that this actually saved them maybe tens of millions of euros versus doing repurchases in the open market, where especially in a less liquid stock, they could really move share prices just with their own repurchases. So what that ultimately translates to is them being able to buy back even more shares per dollar of repurchase, and that just creates more value for ongoing shareholders. So The CEO comp is not modest. I don't feel like Elkin, as the patriarch of the Agnelli family, now needs to be paid millions of dollars to be incentivized to run the business well. But overall, again, things are being done pretty pragmatically and the shareholder actions are mostly friendly. And when you have a 60% margin of safety, that helps make a lot of these concerns more digestible. At a 10% discount to net asset value, I would probably have harder opinions on CEO comp or the pace at which they do buybacks. And so, and then just so financially the balance sheet is conservative too, which I appreciate as a shareholder. The vast majority of their debt is fixed at low rates and then the company carries an A minus credit rating, so. So there's no obvious solvency risk lurking here. I mean, this is not a levered roll up that just falls apart completely in a downturn in the next financial crisis. I mean, this is a company that already survived the last great financial crisis and has persisted for a century, which is a rare thing to come across. And so another thing that they've done is they've made their financial reporting much more transparent, which I would think in theory should contribute to the net asset value discount narrowing. And under this new treatment as an investment company, in line with IFRS 10, they now mark their holdings to fair value through the income statement and treat dividends and sales of proceeds as operating cash flows. So you can't just look at the reported earnings at face value because they're distorted by swings in prices of their investments. And it's the same thing with Berkshire Hathaway. And so they've also deconsolidated most of the underlying companies for further reporting clarity. And then they've begun auditing the net asset value numbers that they publish. And so again, all of this should boost investor confidence over time because to me, I see them making a real commitment to transparency that makes me feel more confident that the nav discount at least is not going to widen dramatically further.
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A
I guess anyone who has ever tried digging into holding companies, and I know that all three of us have done that in the past, I actually looked at Berkshire Hathaway for our podcast a couple of months ago, and we all can appreciate those changes for transparency reasons. And it's just not always easy to fully grasp what's going on in these holding companies that can be complex at best. And in this situation, more transparency is probably not enough to materially reduce the discount. But since I would assume that is a huge part of your board thesis for Axure. How about you walk us through how you're thinking about the upside, what has to go right for Axure to deliver Great returns in 2026, but also in the next couple of years?
- [32:08]
C
For me, the right way to think about EXER is not trying to estimate their reported earnings per share next year or five years from now, but to think about how fast the net asset value can grow over that period of time. And so where might then the discount to NAV settle out longer term? And so in what I would call a pragmatic bear case, so not the worst outcome imaginable, but a plausible version of reality where things don't work out nearly as well as hoped, I modeled net asset value growth slowing way down to around 5% a year, and then the discount narrowing only a little bit from a record high of approximately 60%, as we said a number of times, to about 50% over the next five years, which is still very much above average for the typical discount to exers nav that we've seen over the last decade. Which is why I would call this a longer term bear case. Who knows what will happen in the short term, but longer term, that feels pretty bearish. And so yeah, I mean, that's a pessimistic take. You're assuming they become a mediocre capital allocator and the market remains extremely skeptical over time, hence that large discount remaining. And even still in that world, the combination of just a little bit of modest net asset value growth plus a bit of discount compression gets you a roughly 10% annualized return over the next five years. That's the IRR math and it's one heck of a margin of safety. And just in a base case, I assume that net asset value could compound at a little bit more typical rate of about 7% a year. That would be in line with global equity markets historically. And with the discount to nav closing from 60% to 40%, which again, that 40% is still at the high end of where exers discount has historically traded well off of that from today's prices that you'd be expecting like a 15 to 16% rate of annual return over the next five years, if that very basic outline of things comes true. And then in my bull case, which I don't even think is that bullish, I have net asset value growing at 9% a year and then the discount closing to something more normal like 30%, which I really do not think is all that heroic for a Holdco with such a gem of an asset like Ferrari at the center. And in that case, you'd be talking about expected returns north of 20% annually. And so none of that includes the incremental benefit of additional buybacks made at such a big discount to NAV that shrinks the share count or the small dividend they actually pay out. But you know, Daniel and I on our show, we like to use these very rough frameworks to guide our thinking. And so that is kind of how I put things together. That's my mental model for exit. And to me, the main point is not whether the IRR is 16% or 18%. It's completely speculative. Really. The takeaway is that even if things go noticeably worse than they have in the past, if NAV growth very severely decelerates and the discount stays pretty wide, you can still plausibly earn double digit returns from here because you're starting so cheap relative to such a high quality anchor asset. And so for me, the range of outcomes is dramatically skewed in our favor. That's really what I see having a margin of safety to mean. And there's a relatively low likelihood of having our capital destroyed. I mean, this is not some high flying speculative AI bet.
- [35:28]
B
I do like how you think about the company's valuation. As they say, if you can eliminate the downside, then all you really have is upside that's left. And as I was reading through last year's annual report, I noticed that In March of 2024, Exer sold 3 billion euros worth of its Ferrari stake. And as we know, Ferrari has done a lot of the heavy lifting when it comes to compounding NAV up to this point. What are the biggest risks you see in the stock and the company today?
- [36:01]
C
Yeah, I think the big one here is that this is ultimately at its core a Ferrari anchored thesis. If Ferrari's business stumbles badly, or if the market rerates it from a luxury compounder, which is how it's been priced since ipo, to a valuation closer to just being a premium auto company like Mercedes Benz, then both exers and asset value growth and the perceived quality of the portfolio would take very significant hits. I don't think that's very likely. That would be something of a worst case scenario. And so I'm fairly bullish on Ferrari long term. So to me, the risk really actually is that EXAR slowly sells down its Ferrari stake and then recycles the proceeds into lower quality or at least harder to underwrite assets. So more cyclicals, more venture bets, more private markets, maybe some big acquisitions that we don't necessarily like that would be really the red flag to me. They've already trimmed a few billion euros of Ferrari, as you said, Clay, and they've done that to, as they say, reduce concentration and to fund new acquisitions. And I think that has spooked investors a little bit. And so, I mean, from the Agnelli family's perspective, I don't think they see it that way. You know, they want to diversify their wealth. But for me, I would rather have them convert almost all of their net asset value into Ferrari rather than sell it down. So that the thesis becomes even clearer that you're just buying Ferrari at a discount. And that would be very attractive if it meant buying Ferrari to 30 or 40% discount. I think that would really be the best way to remove that nav discount over time by just simplifying the story. And so it's all these other investments and concerns about investments they'll make in the future that make things a lot messier. But like I said, I mean, ultimately this is the kind of the trade off we're making is that it's a family run company and they are trying to diversify and protect their wealth. So the last thing they want to have is 100% exposure to Ferrari just so that it makes the thesis more convenient for me. But if they do continue to reduce the Ferrari position dramatically, to me, that would ultimately be the sign to consider exiting the position. And I should say, though, they have not expressed any interest in doing that, they have said that their goal is to keep it around 40% of net asset value. And so when you look at the sell off that they did, they trimmed the position from 43% to 39%. So I do believe them when they say that they're not really trying to fundamentally exit the position, but maybe they're just trying to manage it at that. Two fists cut off. And you touched on this at the beginning, Clay, the big criticism here is that there's no clear catalyst. This is not an event driven trade where you can point to a spin off or take private. And so in a way, it is maybe just classic value investing where you buy a collection of assets at a big discount, let the underlying assets continue to compound while buybacks quietly shrink the share count in your favor, and then just trust that over time either that discount will narrow or you'll still do at least fine or good enough because you started from a dirt cheap entry point. And so as long as Ferrari remains the crown jewel, that's worth more than exer's. Entire market cap. Just to emphasize that again, and the discount stays abnormally wide. I am very happy to bet that a rational family owner with a pretty decent track record can keep compounding net asset value in the background here, at least well enough to generate satisfactory returns for me. So yeah, that's the pitch. Not the sexiest pitch ever, but you can see why I like it.
- [39:35]
B
Excellent. Well, thank you so much, Sean, for the very thoughtful pitch. And for those who aren't familiar with Sean and Daniel, they host the Intrinsic Value podcast and they do a stock deep dive every single week. So if you've been following along with the show, you're not going to find an episode on XUR as the time of this episode goes live. It's actually going to be released a few days after, and then Daniel's pick will be released the following week. So please stay tuned to learn more about these picks. Daniel, please take it away.
- [40:07]
A
Yeah, thanks, Clay. I mean, I don't know if my pick is the most sexiest either, to be honest. But yeah, since today's call is about our top stocks for 2026, I wanted to pick a company where I generally see next year as the moment things could turn around. And as Sean already knows, there was and still is a company in our intrinsic value portfolio where I felt 2026 might be the inflection year that was actually the company I planned to pitch today. I'd even finished all my notes and then literally an hour later and I texted Clay about it, the CFO spoke at a conference, and let's just say the tone of that presentation changed the timeline a bit. I would say the core thesis still holds, especially at the current valuation, but the setup for 2026 just doesn't look as clear anymore. Anyway, that company was PayPal. So after a very long introduction here, I am not pitching PayPal today, and instead I thought I would pitch a company that is Mercado Libre. And then a funny way, it's not entirely unrelated to PayPal, because often people describe Mercado Libre as The Amazon and PayPal of Latin America, which isn't a perfect analogy, but it captures the basic idea, which is that this is a company that built both the dominant E commerce platform and it's also one of the most powerful payment ecosystems in the region.
- [41:25]
B
Yeah, I mean, I was excited to see you switch your pick to MercadoLibre. This is a company that's been on my radar for quite some time, especially since one of our members of our Mastermind community pitched it. I Remember, he compared the early days of MercadoLibre more to eBay than to Amazon. And one stat that just really struck me is this company's history of consistent high levels of growth. So back then, they delivered something like 23, 24 quarters of 30% plus top line growth. And now that's ticked up to 27 straight quarters. And that's just something that no other publicly traded company has ever done.
- [42:11]
A
Yeah, it's impressive. The ebay comparison might be even more fitting. Ebay is far from having achieved almost 27 consecutive quarters of 30% growth. But in the first couple of years, Mercado Lieber followed ebay's business model of facilitating mostly online auctions. And it took them a couple of years, but then they realized, okay, well, there's this other business model which seems to be a lot better. So at that point, they decided to move away from auctions and become more of a marketplace similar to Amazon. And obviously, with the benefit of hindsight, that turned out to be a very smart decision. And I also like the ebay analogy because the two companies have something in common that Amazon never had, and that's a payment operation. Ebay acquired PayPal to create trust and reduce friction at a time when people were still nervous about buying online. I still remember that 15 years ago, my parents never trusted ebay and thought the seller would likely never send the product. And to their defense, that happen from time to time. Now Latin America is probably about five to six years behind the US when it comes to adopting new technology. And that's actually one of the key parts of today's pitch, because Mercado Libre benefited from that dynamic in a big way. And to some extent, they still are benefiting from it. They couldn't simply acquire a PayPal equivalent because, well, nothing like that existed in Latin America at the time. So they decided to take matters into their own hands and just it themselves. And that's how Mercado Pago was born. And that decision created a very powerful flywheel. Once Melle offered a trusted, seamless way for millions of people to pay, those people suddenly started to go online and shop for things like clothing online. And they've never done that before. And that flywheel just started spinning. So you had more buyers, which led to more sellers, then more sellers brought more product variety, and that in turn drew even more bias into the entire MercadoLibre ecosystem.
- [44:04]
C
Well, Claire already mentioned the phenomenal track record of growth here, but what excites me even more is how much Runway I think still lies ahead. And so I've looked into this space a little bit when I've done research for nubank, and what I found was that over the next decade, Latin American e commerce is expected to grow at a CAGR of almost 11%. So that is driven by millions of more people starting to shop online for what would really be the very first time and ultimately increasing their shopping frequency as a result of that increased convenience. And so today, just for context, e commerce penetration in Latin America is only around 14 to 15%, whereas in the US you're talking about 24%, the UK is close to 30%. And then China is an illegal, it's owned well above that. And there's really no structural reason why Latin America can't at least follow a similar trajectory, even if it's to a lesser extent. Over the coming years and decades, as payments digitalize, as logistics improve and as trust increases, the region's online penetration should naturally converge toward the levels we've already seen in more mature markets. That is one of the broader secular trends that really is true across the entire world, but especially in this region.
- [45:22]
A
Yeah, that's what makes Melee so interesting to me. I mean, even if you think about places or regions like South Asia, you see that actually a lot more people shop online than if you compare to the US or the eu And South America, and especially Latin America could become something like this. And a company with this kind of growth history should naturally be slowing down by now, but it really isn't. I mean, Clay already mentioned it and you just repeated it. The streak of 27 consecutive quarters with 30% growth, which is just unheard of at this scale, like no company ever did it. And to me it just sounds completely surreal. And that momentum comes mainly from two places. So first, you have the massive tailwinds of what is essentially a multi decade super cycle for Latin American e commerce. Then second, Mercado Libre's overwhelming dominance in the markets where it operates. And to bring the flywheel back into the conversation, Mali didn't just build a payments operation to support the marketplace. They also took a lesson from Amazon and started building out a logistics network. And what's impressive is, at least to me, how they did it. Because Amazon chose, as we all know, this, this fully integrated approach, highly capital intensive route, and they spent billions to own nearly every piece of the infrastructure. And Meli took a bit more of a flexible and a less capital heavy approach. They own and they operate their fulfillment centers and basically the backbone of the network, moving goods from distribution centers into major city Hubs. But once the package is inside the city, then they hand it off to so called local delivery service partners, or in short DSPs who handle the last mile delivery. And this hybrid model just gave Meli the speed and reliability that it needed to compete with Amazon, but without anywhere near the same capex burden. And it's one of those reasons why they have been able to scale so efficiently and why their logistics network has become such a powerful moat across Latin America.
- [47:14]
C
Correct me if I'm wrong Daniel, but I mean the part of the reason why Meli built its own logistics network was that third party delivery services were just not good enough, right? I mean, that's my understanding. And so in E commerce, speed and reliability are everything. And Latin America does not have and did not have the same infrastructure as the us and so packages just took too long to deliver or sometimes they would never arrive at all. From what I've heard on various subreddit forums about MercadoLibre. And so the need for a network owned and operated by Mercado Libre itself was probably even larger than the need for Amazon when they made that decision to try to fill that gap in the market. So I mean, if that was the problem in the first place, I'd be curious to hear why you think Meli did later bring third party delivery partners back into the ecosystem.
- [48:07]
A
You know that's, that's a good question because it is a bit counterintuitive. But I would say that the key thing to understand here is that by the time the package reaches the city hub, most of the infrastructure problems are already solved. The DSPs that Melle works with at that stage, they are mostly small and local delivery companies that know the area pretty well. And many cases they have Meli as their own or at least their primary customer. And that makes them just far more reliable than these state run carriers used to handle the entire journey basically. And the benefits of owning the logistics network are obviously enormous. It's one of the main reasons Amazon became so dominant in the us. And if you want to accelerate ecommerce adoption, there are really just two ways to do it. And that's secure payments and then it's fast and reliable delivery. And especially in a region where existing logistics networks are inconsistent at best. Being the only platform with an end to end fulfillment system, just a massive advantage and extremely hard to copy. And even with Malle's more capital light approach compared to Amazon, they still operate close to 100 warehouses and distribution centers. They run their own fleet of airplanes which are called Meli air and they've built so called Melie Places which is basically this huge network of hundreds of third party stores that function as pickup points across the regions that they operate in. Let's take a quick break and hear from today's sponsors.
- [49:31]
B
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- [52:58]
A
All right, back to the show.
- [53:00]
B
As this business has been on my radar, one of the things that has been a bit difficult for me to wrap my head around is the competitive position. You know, Sean and I being based in the here in the US I think we would say when we hear E Commerce, we think Amazon, right? But when you look at some of these international markets, it becomes a bit more competitive. I think you have multiple different players. So as I mentioned, many people think of Amazon when they hear E commerce, but when you look at Mercado Libre, you know they're competing with players like Shopee, who's based out of Asia, temu. And these are companies that are incredibly successful in their home markets and have also made attempts to compete in Latin America as well, especially Brazil, which happens to be Meli's largest and most important market. Do you think these competitors will be able to steal share from Meli or do you think they're just all going to coexist in these Latin American countries?
- [53:58]
A
Yeah. So Mali operates in close to 20 countries, but the markets that really matter are Brazil, Mexico and Argentina. And those three alone account for about 80%, even a bit more than that of all E commerce activity in Latin America. And what's interesting is that this hasn't always been the case. Venezuela, for example, used to be one of Mali's biggest and most promising markets. And then hyperinflation hit, the economy collapsed and the opportunity essentially disappeared overnight. And there are a few other examples like that. And that just shows you how much more dynamic and sometimes unstable that region can be. What's remarkable to me is that none of this throughout its entire history has stopped Meli from compounding. Through its entire history, whenever one market struggled, another country picked up the slack. And both the marketplace and Mercado Paraguay are also naturally protected against inflation. At least when we talk about high inflation, that is not yet hyperinflationary. But to actually answer your question about competition. Meli is a top two player in every market it operates in, even in Mexico, a market where you would naturally expect Amazon to dominate just because of its proximity to the U.S. malle has maintained the leadership position, and in Brazil, which is the crown jewel of Latin American E Commerce, the only two players that really operate at scale are Malle and Amazon. And there as well. Malle is the clear leader, typically holding roughly three times Amazon's market share in most of the countries where they go head to head. And that gap hasn't been narrowing down either, even if Amazon has actually been investing quite a lot of money in those markets. That gap has been pretty stable across the last years basically. And Shopee is relevant in Brazil too, especially in those low ticket categories, but its business relies heavily on external carriers and promotions, and it hasn't yet proven it can actually be profitable the way it operates right now over the long term. So if I had to bet, I would go the highly profitable, fast growing incumbent with physical infrastructure and just a much more developed flywheel than an unprofitable foreign company. Even though that phrasing might be not totally fair for what Chopi has done in the last couple of years. And I would argue it's kind of similar for temu. I've talked to people who live in the region and to me it seemed that Temu has a similar position in Latin America as it does in Europe. So many people use it, but it's nowhere close to Amazon in the EU or the US and Mercado Libre in Brazil. And it almost seems as if you buy something when you're willing to take a gamble on both shopping times and most importantly on product quality. And to me that just doesn't sound as sustainable. So if I had to summarize it, I think it will be extremely difficult for any outside competitor to beat Melle on the combination of logistics density, payment integration and the network effects that come from running the entire ecosystem basically end to end. But also don't think that E Commerce is a winner takes it all market or it doesn't have to be. Most regions except for the US maybe settle into more of an oligopoly position with a massive Runway ahead for Latin America. There's plenty of room for multiple players to grow, so it doesn't necessarily have to be at Melle's expense should Shopee or Temu keep growing in that region?
- [57:12]
C
I mentioned it earlier that you and I covered nubank on our show, and now it's holding in our intrinsic value portfolio. So we're familiar a bit with Latin America, but we also know that fintech and banking in that area of the world is just incredibly complex. Maybe the understatement of the year. So I wouldn't want to ask you to go deep into the weeds here, but I am curious whether nubank and Meli through Mercado Pago are actually competitors. And if they are, how do they stack up against each other, in your opinion? I'm the one who did a lot of the work on nubank. You've now done most of the work on Mercado Libre. So it'd be very interesting just to kind of compare the perspectives there and because, you know, I mean, we've been blown away by the numbers that nubank has been consistently putting up for quarter after quarter now. And nubank is actually even trying to expand into the US with a banking charter. So some very big ambitions coming out of that company. And yet at the same time, we've also made it clear that this is a business model where we're both a little bit out of our depth. As I sit here in the US and Daniel sits in Germany trying to figure out what's actually happening with the end consumer in Latin America. And obviously even just saying, Latin America is a massive generalization. So it's a big dynamic market which is so many moving parts that are hard to fully grasp. All the forces at play.
- [58:28]
A
Well, I mean, both companies offer credit cards and both operate in the biggest Latin American markets like Brazil and Mexico. So there's definitely some competitive overlap. But nubank, as the name kind of suggests, is fundamentally a neobank. And its core strength are low funding costs and incredibly trusted consumer brand and also a cleaner and more traditional credit portfolio. And Mercado Pago, on the other hand, was born out of the commerce system and was born out of the commerce ecosystem. And you can see that DNA everywhere. It started as the payment solution for Meli's marketplace, then expanded into off platform payments and eventually even into offline acquiring. So they basically sell these point of sale devices, especially mobile ones, to small shops and local merchants. And that essentially does two things at once. First, it drives more payment volume through Mercado Pargo, and second, it becomes kind of a bridge that brings offline merchants into the digital economy. And that's a big deal in a region where roughly 85% of merchants are still entirely offline. So for many of them, a malle point of sales device is the first step toward eventually listing products online and becoming part of the broader ecosystem. That Meli offers. And the part of Mercado Pago that I personally find easier to understand than nubank is its access to first party behavioral data. When they issue loans, whether to merchants or consumers, they can base those decisions on thousands of data points so they know what you ended up buying, how many products you returned and how you paid for them. And they have so much data to decide who should get a loan and who shouldn't, and also how to price them. It just makes me a lot more confident that I can understand this business. And perhaps it's one of the reasons why Mercado Pago is willing to take on slightly more risk than Eubank. One of the best ways that you can see this difference is in so called npls, which stands for non performing loans. And analysts usually look at two checkpoints. So loans that go delinquent after 15 days and then loans that go delinquent after 90 days. And Nubank's NPLs are noticeably lower than Mercado Paco's, which simply means a smaller share of its borrowers end up missing payments. And the flip side of that is that Mercado Paco earns risk adjusted a margin of a little over 20%, which is roughly double the margin of Nubank. And this is basically after you account for all the credit losses that both of them face. So in other words, you could say that Mercado Pago takes more risk, but it also gets paid significantly more for taking that risk. And most importantly, probably both of them carry more reserves than needed to cover all expected losses. So neither of these companies is out there gambling with credit cards or loans that they give out to other merchants or consumers. And still this is the part of the business that would come under pressure if one of the major economies Mercado Pago operates in were to experience a serious downturn and more risk. Obviously beautifully in stable or improving environments. But it can cut the other direction if macro conditions deteriorate quickly.
- [61:35]
B
I think everyone listening is going to be familiar with the risks that come with investing in emerging markets. And Mercado Libre is obviously exposed to many of them as well. Well, for example, you just look at the high inflation environments in countries like Argentina and Venezuela. But the company just has a phenomenal track record of navigating these storms. And a lot of that comes down to management, right? Marcos Galperine, he's the co founder of Meli and he's been leading the company for more than two decades. And he's consistently steered through every macro crisis the region has thrown at him and all while keeping this long term vision intact for the company. He's also made these remarkable decisions that are very shareholder friendly along the way. So Meli might be the only large tech company that I've seen with stock based compensation running at about 1% of revenue. And this means that there's essentially no dilution for existing shareholders. So for a company operating at this scale and still growing as fast as they are, I think that is just very hard to find. The one thing that can look odd at first glance is the margin profile. Normally you would expect margins to expand for a company like this, but with Meli, it's almost the opposite. Operating margins, they were north of 30% in the mid 2000s and today we're in the low to mid teens. How about you talk more about that?
- [63:04]
A
Yeah, that's a great point. It's a bit counterintuitive, but the Decline started around 2017 and that was a time where largely the result of deliberate reinvestment showed up in the financials. And there was a period when the company aggressively expanded all of the investments they wanted to do for the long term. So we're talking about the logistics network, we're talking about expanding free shipping subsidies to accelerate adoption. They also began scaling Mercado Pago at about that timeframe. So beyond the marketplace, when you expect to scale a payment provider, you have to do a lot of investment upfront and you only get the benefits of that later on. And each of these moves temporarily compressed operating margins, but dramatically strengthened the long term competitive position of the company. So in other words, the margin volatility was one of those long term strategic choices of the CEO to take more market share and just solidify Mati's position. And today margins are picking back up again. As you mentioned, they are in the low teens right now because most of the heavy lifting from at least that investment cycle is now done. Utilization of the logistics network is increasing and the fintech business has reached scale in their biggest markets. Although there is still plenty of room for margin expansion. That's definitely part of the thesis. If you look out five to 10 years. We didn't even talk about the ADS business. That Melle just rolled out last year, for example, which is growing very quickly and is obviously a high margin business. And I think there's no reason why you shouldn't expect similar numbers to what Amazon has pulled up. They, like I said, just started out, so I think there's a lot of growth coming from that. And overall I wouldn't be surprised if we see margin declines from time to time. There will be new investment cycles. And just this year there was another free shipping initiative that put pressure on margins. I would generally say I see this as a positive thing, first of all because more people come into the ecosystem and second of all because the more people come into the ecosystem, the more people or the more money you will save on your logistic network because it just gets more efficient every time. So, yeah, I believe it will be a while before Meli starts optimizing for margins. There's still way too much growth ahead to stop reinvesting in the business now. And yeah, I guess that's it. That's pretty much most of my pitch. I basically switched from what you could call a deep value pitch by now with PayPal to a company that is probably on the more expensive side, which is usually not where I look for opportunities. But this stock traded down about 25% from all time highs at the time of recording and factoring in its growth. It's not trading at unreasonable levels or valuations. And it's really a pick that, if you believe in it, I would say you need to hold it for probably four to five years and it could be a fantastic company over the next decade.
- [65:41]
C
Sounds a lot like nubank and Mercado Libre. People love to compare it to Amazon and in some ways that's a good comparison. In some ways it's lacking. One of the big differences is that Mercado Libre does not, as far as I know, have the same kind of cloud computing ambitions as Amazon, which has really become just a juggernaut of their profitability. And then as you said, and we didn't have a ton of time to linger on it. But what makes me most excited about Mercado Libre is probably the advertising opportunities. You've seen Amazon become one of the largest advertising platforms in the world. And with companies like Uber that I've pitched to Clay in the past and Daniel we've talked about at length before, advertising is really materially increasing their profit margins. And this is probably an equally difficult business, if not more so. But there's a lot of potential to the upside if they can implement digital advertising at scale. At least that would be my thought.
- [66:33]
A
Yeah, totally. I mean, I honestly look forward a lot to when I pitch this stock in a deep dive on our show to you, Sean, in a couple of weeks because I think there's so much more to talk about and so much more to get excited about.
- [66:44]
B
I am just totally with you guys on the advertising business that definitely excites me. I think advertising is a tough nut to crack, but if they can do it, the potential upside is just enormous and that should be no surprise given my pick today. So thank you Daniel for the wonderful pitch here. I was very surprised you put this together on a Saturday night, so thank you for grinding out that last minute research too for the discussion today. And had you guys shown me these two picks ahead of time without saying who was picking what, I would have said Daniel was pitching Xurb and Sean was pitching Meli. So I like that you both try and think outside the box from your more conventional investing styles. So while you guys have been, I would say, a bit more creative with your picks, I hope you'll forgive me today for simply selecting a Magnificent seven player that's trading slightly out of favor. And my hope is that this pitch will hopefully nudge you guys to cover it on the Intrinsic Value podcast this year.
- [67:50]
C
I'm sure we will at some point. Slowly but surely we're making our way through the S&P 500. And the fact that we're a year into covering different company every week on our podcast, we still have not done all of the Mag 7. Maybe that's surprising to people, but I guess we've taken our time with this one.
- [68:08]
B
Well, it certainly is a fun one to cover, and maybe it depends on how you look at it. On the one hand, there's just so much to talk about. On the other hand, it can be very controversial. I'm sure some listeners are going to love the pick. Some listeners are going to hate the pick for various reasons. So my pick today is Meta. First, I'll mention that I did recently purchase shares for my own portfolio. My average purchase price is around 648 a share and it's currently around 3% of the portfolio. I'd love to add more. I just have a hard time selling existing positions to fund a new position. So zooming out. Unfortunately, when it comes to investing, I can just be a slow learner. Meta is one of those stocks that I've watched for the longest time and obviously we're all familiar with the company and just given the level of controversy with this name and the regulatory pressure they face, it's gone through a number of significant drawdowns which gets a lot of investors interested at different points in time. But I never really acted in size with this name, but I hopefully wanted to correct that mistake from the past. So the first drawdown I witnessed was in 2018. If investors or listeners remember this was during the Cambridge Analytica scandal, the stock fell by around 40%. And I temporarily owned the stock for a short period of time before locking in a profit. And part of what kept me from really betting big on Meta was simply this bias I had against investing in very large companies. So in 2018, the market cap dipped below 400 billion. And it's just like, you know, how much bigger can it really be at that point in time? You know, you had Apple, that was like the only trillion dollar company at the time. Well, today met as a $1.5 trillion company, so they've nearly 4xed their market value over that period of time. It also wasn't until just recently that I appreciated the service that Meta is providing to advertisers. So I've been running Meta Ads for a small e commerce company over the past couple of years, and I saw firsthand how advertisers are able to view the data behind their ad spend. So you can see the number of impressions, the number of clicks, the click through rate, the number of conversions, cost per acquisition. There's all this data that really gives advertisers exactly what they need to understand the performance of how every dollar they're spending is performing in terms of return on investment. And it reminds me of the old saying, half of my advertising doesn't work, I just don't know which half. And Meta just completely eliminates that problem. So in my research on Meta, I came across an interview all the way back from 2018. It was with Pat Dorsey of Dorsey Asset Management. And I thought it was such a great line that I had to share it here today. So in the interview, he said something to the effect of if God invented an advertising platform, it would be called Facebook. And really the biggest breakthrough with Meta was being able to measure the return on ad spend. So when you look at billboards or radio advertising, these may never go away. Just digital advertising has proven to be significantly more effective for businesses wanting to market their products and grow. So Meta and Google or Alphabet, these two have really been the dominant players in digital advertising. And over the past decade, when I look at their stock returns, it's been surprisingly correlated between the two. But when we look at 2025, we saw a pretty drastic divergence. So here, as of the time we're recording in mid December, shares of Alphabet are up around 70% on the year, which is just phenomenal. It's been labeled an AI winner now, and shares of Meta are up around 9%. But Meta's business has been firing on all cylinders. They have revenue growth over 25% in the most recent quarter. And they're capitalizing on immense pricing power as well as the average price per ad grew by 10% year over year.
- [72:07]
A
It's funny to me, and probably to you Sean as well, that we now talk about Alphabet as a winner of 2025. For a long time we heard about our stock pick, that Alphabet is actually lagging behind OpenAI and now it worked out pretty well, which of course is great for us. But I've actually gone through a very similar journey with matter as you did, Clay. It's been on my mental watch list so many times, but I never ended up pulling the trigger. And it's funny because looking back at the max seven, it feels like their success was so obvious. But in reality, and you mentioned it, they kind of redefined how much companies can grow at the scale that they had reached even 10 years ago. I mean, you mentioned that in 2018 Apple was the first publicly traded company to ever reach a trillion dollar market cap. And that milestone really seemed like it wouldn't be surpassed that quickly again. And now less than 10 years later, we have more than 10 companies that have crossed that mark and some are worth multiples of that. So if anything, that has taught me that there's still plenty of opportunity even in the biggest names, especially when they're beaten down by either temporary issues or just general doubts about the management, as it has been the case with Zuckerberg now multiple times.
- [73:14]
B
Yeah, I mean it also sort of points to how if I were to wrap some sort of narrative around this, I think the Internet has just enabled just this winner take all dynamic where you look at digital advertising, for example, just Meta and Alphabet have just eaten this market as it continues to grow at double digit rates. So the recent drawdown in Meta is really primarily driven by fears related to their capex spend. So AI capex is just all the rage with many of these mag7 stocks. In 2025 Meta is going to spend around 70 billion on capex. And since they don't have the capacity that they currently would like to have, which is pretty remarkable, they do expect significant growth in CapEx in 2026. So they clearly don't want to undershoot their compute needs that they've had in recent years. So Zuckerberg mentioned on their recent earnings call that they do expect this additional spend to yield good results and of course they believe that, otherwise why would they do such a thing? But he made the additional point that if it turns out that they over invest in these Compute needs, then they would be able to allow other companies to use that compute, should they not really need it. So that's the big question that the market is really trying to figure out, is will Meta's huge AI spend turn out like the Metaverse spin, For example, that didn't really deliver any positive returns for investors. But if we look back historically at Meta and understand the bigger picture, Zuckerberg clearly has a history of being a good capital allocator and overcoming the challenges of the businesses that the business has faced. So if you zoom all the way Back to the mid-2000s, Facebook Blue was started one year after MySpace and Facebook managed to overtake MySpace, which was pretty remarkable given that it was the number one social media platform and one of the most popular sites globally. Then you have the transition from desktop to mobile in the early 2010s 2011-2014 timeframe. They started out, you know, their mobile had a pretty terrible experience. And then in the years that followed, mobile would end up generating around 90% of their revenue, which again is just another example of Zuckerberg being able to weather through these storms and these transitions. And in the span of just a few years, they essentially traded, transform their entire business. And then in 2012, they had the purchase of Instagram. They bought it for just $1 billion. It had no revenue, 13 employees. And today it's estimated that Instagram generates nearly $100 billion in revenue per year. And then 2014, they made another home run acquisition and buying WhatsApp for 21 billion. And they've also integrated what's been successful for other social media companies. So, for example, you have stories after Snapchat released those, they integrated the same feature on Instagram and Facebook Blue. And then with the rise of TikTok, they were very fast in launching reels. In their most recent earnings call, they shared that reels crossed a $50 billion ARR. So Zuckerberg has a long history of navigating the company through these periods of constant change and uncertainty and with the capital and resources at their disposal. I just like the risk reward profile at this level. So Meta generates the vast majority of their revenue from advertising on their family of apps. Think Facebook Blue, Instagram and WhatsApp. And my thesis is that AI will be a big driver for the business going forward. So by all measures, the strength of this business only seems to be improving, whether you're looking at margins, growth in active users, time spent on the platforms, et cetera. And if anyone is looking for a company that will be a beneficiary to the trend of AI, I think that Meta is certainly a good candidate. So many are speculating on how all these companies will be able to capitalize on AI spend in the future. I think it can be argued that Meta has been doing this for more than a decade now. Social media apps like Facebook are being run by AI and machine learning already, so them alongside Alphabet have been at this for a while now. So I wanted to talk a bit more about why AI will be a tailwind for Meta. So I have four points here. First is AI is going to make it easier for users and content creators to generate content and Meta themselves, even as tools that allows users to do this. So since creating new content will be easier, I think it's pretty reasonable to assume that more content is going to be generated going forward. Second, it's just not enough just to have the content. Meta needs to be able to deliver content that is relevant to users. So as AI continues to improve their algorithms and recommendation models, improve engagement on the platform will increase. I mean, we've been seeing that for many years now, and this isn't speculation. Engagement across all of Meta's apps are improving, so it's already happening. And third, more engagement on their platforms means more ads are going to be delivered to users. Which brings me to my third point. Meta has the models that deliver advertisements to users, and as their models continue to improve as a result of AI, this essentially means that their ads will continue to be more effective at converting and delivering more value to advertisers. As a result, they can charge more for ads over time, which gives them more pricing power. And lastly, on this point, I would mention that AI also makes it easier for advertisers to spin up new creatives and test them out in their campaigns. So it's cheaper and easier to run different ads, which will allow advertisers to put together more effective campaigns. And perhaps AI will also remove some of the barriers to entry for advertisers. For example, some just don't have the technical experience to figure out how to run ads, how to test new creatives, and I think that Meta is just going to make advertising on their platform more and more accessible over time. So if one were to hire an agency to do this for them to manage their digital ads, it can quickly cost thousands of dollars per month. And it's certainly in Meta's best interest to try and remove that barrier for as many businesses as possible who just don't have the time or don't have the capital to run ads. Today. So I think the opportunity in Meta is getting some exposure to the potential upside of AI's capabilities while also getting that upside at a reasonable price price. So really quickly on the valuation here, when I adjust for a one time income tax provision, Meta trades for an adjusted pe of around 22. And if we look at the S&P 500 and exclude the Mag 7, the market's also trading at a similar level. So essentially the market's telling us that Meta should trade in line with your typical company in the S&P 500, which I just don't think is giving them enough credit. It's similar to how for an extended period of time Alphabet traded below that of the market, and yet Alphabet continued to publish solid results and quietly be at the forefront of AI. When we look at Meta today, Top Line's growing north of 20%, profits are up a similar level, and the company's deploying more than 40 billion into share repurchases in addition to paying out a small dividend as well. And lastly, I would mention a few embedded call options that investors get when investing in Meta. So WhatsApp, they currently have over 3 billion monthly active users and they're in the very early stages of monetizing this platform. So I think in the coming five years WhatsApp is going to be a significant contributor to earnings growth. They also have reality labs, think virtual reality, augmented reality. You know, this segment doesn't give me too much inspiration or interest me too much in terms of what it will deliver going forward. Perhaps it'll be another profitable division for them down the line by generating broad appeal for consumers or enterprises. I'm not going to place a big bet on that segment specifically. And then lastly, the company has released an open source LLM and it's estimated to be the number four player behind Anthropic, OpenAI and Alphabet or Google's DeepMind. So that pretty much sums up the pitch. I'd be really curious to hear what you guys think.
- [81:37]
C
It's a good one, Clay. And gosh, I remember really looking into Meta for the first time in 2022 and reading Azloth de Motorin's valuations of the company at the time. And I was just pretty wild that from its peak in 2021, the stock was down nearly 80% in 2022. And for a company that has more than 1 in 3 people on Earth just using Facebook, with this track record of incredible growth and profitability and really shareholder stewardship, it really makes me question the whole idea of efficient markets. That were taught in schools. Volatility of that magnitude is just not supposed to happen to companies like Meta. And clearly in hindsight, it shouldn't have happened. And so that was a missed opportunity for me and I was probably too smart for my own good. And that I remember wanting to be very disciplined and feeling like, okay, even though intuitively this looks to be pretty clearly a point of extreme pessimism in the market on arguably one of the best businesses in the history of capitalism. I also did not want to be investing in businesses that I didn't feel like I could fully wrap my head around. And I was taking inspiration from Buffett and how he tends to avoid tech companies. And I remember really wanting to pull the trigger and being proud of myself for not having done so because I hadn't done the prior research, the no the company well enough and just to feel comfortable with understanding their moat. And so the concern now with Meta that I have at least, is that the Metaverse investments are pretty clearly looking to be a flop, which is what the market was worried about, rightly, in 2022, maybe just to an extreme extent. And then now you're looking at them having the fourth best LLM and unfortunately I'm not sure having the fourth best is going to take them very far. And so there were all these headlines earlier this year about them signing top AI researchers to contracts that would honestly make some of the most famous athletes in the world blush to how much they were paying these people. And then yet we just really have not seen the payoff from all that spending, just like with the Metaverse. And that's a little bit of a yellow flag to me. So I think you could look at this and say, okay, Meta is undergoing a phase shift. It's not the capital light business it once was, as it's making these huge bets on the future. But so far, one of those bets with the Metaverse has really gained no traction and does look like a money pit. And then with the other area they've invested significantly into with AI, they are pretty clearly a laggard. So it's hard to say to what extent their investments in that area are going to pay off for them. Even though I do hear your point that for really, in a way, they've been monetizing AI for something like a decade now. And just for me, I think it's falls into the too hard bucket of there's two core areas that they're dumping capital into. And the thing we have to remember with investing is it's the future. Returns on capital that will drive our experience as shareholders and not necessarily the historic returns on capital, which are obviously very, very attractive in this case. And so it seems like a business where the capital intensity is fundamentally changing, and that doesn't have to be a bad thing, but it just means that buying Meta today is potentially a very, very different type of business than it was like a decade ago. And so I'm not going to be here to say that I'm shorting Meta, but just to provide maybe a little bit of pushback and just to say that as the capital intensity scales up, which is something you could say really about any of the Mag 7 companies, including our portfolio company, Alphabet. And as the law of large numbers continue to kick in, given their existing size and just how difficult it is to find attractive opportunities to redeploy capital that actually move the needle, I could easily imagine over the next decade that Meta would produce somewhat mediocre results, but I'm just feeling a little bearish, so I don't know.
- [85:27]
B
Yeah, I mean, your points are certainly well taken to the point about the doomsday scenario that aswat to Modern published. I mean, you aren't getting the bargain price that investors were getting in late 2022, but sometimes good investing is all about just trying to hit these base hits and just avoiding the losers. So if you can consistently pick up great companies at fair prices, then I think that will fare well for a lot of investors. But to the point, on the Metaverse, as Stig likes to say, capitalism is just brutal. And I think that's exactly what we've seen with the bets on the metaverse. Meta could be a great case study that can illustrate that many projects a business will work on just simply won't work, but the ones that do work will make up for the losers many times over. And I totally get the capital intensity concern. It is a legitimate risk. And you are putting a lot of faith in management and Zuckerberg and understanding the returns they believe they're going to get on this spend. And the numbers are just unbelievably large. Meta is still burning billions of dollars in cash in their Reality Labs division. And just the other day they announced that they'll be reducing their Reality lab spend by 30%, which the market reacted positively to. But with that said, I still think that the majority of their increased capex is to build out their existing infrastructure that underpins their core business of their family of apps. And this historically, of course, has delivered a positive return on investment. And I think that management has a good feel for what that will look like, at least in the near term. We'll see what happens if they continue to increase this year after year for the next decade, how that will end up panning out for them. But much of the reason that Meta sold off in 2022 was due to them making these largely speculative investments in the Metaverse. And now I would say that they're really doubling down on what's already working. And these AI systems are already driving higher engagement and better ad performance. So the return on investment is showing up in the numbers today. As I mentioned earlier, ad pricing is up 10% year over year, which is a direct reflection of their investments delivering strong growth for the core business. And I'm not sure that Meta has to have the best LLM to win. What really matters, I think, is optimizing their models for their own proprietary data and specific use cases. And on the point about whether Meta should license LLMs from OpenAI or Google instead of spending all of this capital themselves, I just don't think this is a direction they could go. You know, the core of Meta's business depends on real time ranking recommendations and ad delivery. And the latency requirements are so tight that those models have to run on Meta's own infrastructure. And on top of that, they can't ship all of this data on user behavior to an external model without running into privacy and regulatory issues. And lastly, I don't think they want to hand over control of a core part of their business to another big tech company.
- [88:32]
A
Well, you said to yourself at the beginning of your pitch, Clay, there's just so much to talk about and so much to consider when we're talking about matter. And personally, I'm just very interested in how they want to monetize WhatsApp. As you said, there are 3 billion people and I'm one of them. And I know that I'm the only one here on this call using WhatsApp every single day. So I'm thinking this is huge potential. And at the same time, I don't really know how they're going to monetize it. I don't think it has the same potential as, let's say, Instagram. And I don't really know where to place the ads in a way that it doesn't hurt the user feeling when they use WhatsApp. And still it's 3 billion people, so it could be a phenomenal driver of revenue in the future. And by now it's basically not monetized at all. What gives me confidence as well, in the most recent investments, and you mentioned it, is that it's almost certain that there will be demand for more data centers and compute infrastructure in the decades ahead. And so even if it turns out that Meta won't need all of it themselves, there will most likely be a way to monetize all of those data centers at at least a decent return. And on the other side, what gives me a bit of pause is that at least when I look at the past track record of their investments, I think they never really managed to invest successfully outside of its main social media operations. And when you just gave us the numbers, Clay, it honestly blew my mind that Meta's apps still see these increases in usage. And it probably says more about my personal preference and the bubble I live in than anything else. But from my perspective, it feels like people are generally trying to consume social media more consciously, which is a polite way of saying just less social media consumption. But clearly that's not what the data shows. And I would definitely not put my personal opinion above the data. That is clearly true. I mean, if the core business weren't still compounding the way it is, there would be a good argument to make that Zuckerberg is spending heavily to find the next big thing because growth is actually slowing down. And that will obviously not be a bullish interpretation, but with the core business or the core app still getting stronger every single year, and with the current investment cycle being much more adjacent to the core business than Metaverse ever was, I don't think Meta should trade anything close to an average S&P 500 multiple. So, yeah, I really like the pitch. And if your goal was actually to convince us to finally cover Meta on the show, and I saw that Sean is not as bullish, I can tell you that mission has been accomplished because I would definitely go for it.
- [90:55]
B
Yeah, it's funny, I think Meta is one of those companies, if you talk to the regular everyday person, that they would not see this as one of the greatest businesses here in the United States. I think a lot of people think of Facebook Blue as an app for older demographics. All the kids are on Snapchat and TikTok, but it's just remarkable that the family of apps are still growing. And I think even us, I think we sort of see Facebook Blue as an app for older demographics, and all the younger demographics are going to other apps. But I think Instagram does attract that younger demographic. And then even when you look at the advertising business, I think most people would assume that, you know, who's going to buy something that they see on Facebook. But the reality is that people do. And I think there are even some cases where I myself end up seeing an ad on some of these apps and end up eventually purchasing. And part of it is they just keep delivering that to you. You might not buy it on the first impression, but maybe the sixth or seventh impression, you finally are like, hey, I'm going to pull the trigger on that. But I think we would all love to use social media less. And knowing who you are, Daniel, I think that I just don't think most people are as disciplined as you. A lot of people just fall prey to the algorithm. And the reality is that these apps are getting better at delivering content that's relevant to users and that might be my way of saying that they're becoming more addictive. So I do appreciate your guys feedback on this pick today and I look forward to tuning into your episode on Meta and your upcoming episodes on XR and MercadoLibre. And I'm sure you'll find some things on Meta that I'm overlooking when you do some more digging. So lastly, I just wanted to congratulate you guys. You just crossed the one year mark since launching the Intrinsic Value Podcast. What you've done in the past year is just incredible. And along the way you've been just incredibly supportive of me doing the presentation you did with our group in Montana and doing a couple presentations for our Mastermind community. How about we just close it out by talking a little bit about the show for those that haven't tuned into it yet, what can listeners expect from the Intrinsic value podcast in 2026?
- [93:10]
C
Thank you for saying so, Clay. Yeah, more of the same, I hope in the best way. We're gonna just keep continuing to grind through different companies every week, pouring dozens of hours of research into each one, and then just sharing our findings with the world completely for free on our podcast and in our Intrinsic Value newsletter while trying to build a portfolio publicly of our highest conviction bets and like I said, doing so completely transparently for anyone at home to follow along with. And we've got a ton of really fun episodes planned for the new year. So yeah, just keep tuning in or start tuning in if you haven't before and you can go through our whole archive of content to get up to speed on the stocks that interest you most.
- [93:54]
A
Yeah, perhaps a good episode to start with is actually the one we just published, which is the one year Portfolio Update. I think we published it a couple of weeks ago. And you know, for context. As Sean just said, whenever we find companies on the show that we feel are great opportunities, we include them in our show portfolio. And since it has been almost one year since we started, we did an episode looking back on many of our positions, the thesis and performance, and just discussing how we want to position ourselves for 2026. So yeah, might be a good one to get an overview of what we have done last year and what we will do more of in 2026 and.
- [94:32]
C
Then I'll just quickly say for folks who do want to take their investing to the next level, Daniel and I run a group called the Intrinsic Value Community, similar to the Mastermind group, and this one is devoted really entirely to sharing and discussing stock ideas in depth. And so you've got to apply an interview to be considered. It's a small but special group to join if you're admitted. And we host weekly calls digging into stock ideas, having debates about them, or we also will have private talks given by guest speakers. Folks like Adam Cecil and William Green have joined in the past, as has Clay. We also do stock pitch competitions, organize private dinners in Omaha during Berkshire Weekend, and really just a whole lot more. It's a lot of fun. So if you're looking for like minded investors to support you on your investing journey, because investing can be lonely work and to connect with on finding new stock ideas or just to get feedback on your ideas, I'd really encourage you to join the wait list for a spot in our group@theinvestors podcast.com Intrinsic value community excellent.
- [95:37]
B
Well, I'll be sure to get all that linked in the show notes, the podcast, the newsletter, the community. Especially if you're a podcast listener, I'd encourage you to just get on your podcast app now and hit follow on the Intrinsic Value Podcast. But Sean Daniel, it's such a pleasure working with you guys. Thank you so much for joining me here today and cheers to the New Year.
- [95:58]
C
Cheers to the New Year.
- [96:00]
A
Cheers. Thanks for having us. Thanks for listening to tip. Follow we study billionaires on your favorite podcast app and visit theinvestorspodcast.com for show notes and educational resources. This podcast is for informational and entertainment purposes only and does not provide financial, investment, tax, or legal advice. The content is impersonal and does not consider your objectives, financial situation, or needs. Investing involves risk, including possible loss of principal and past performance is not a guarantee of future results. Listeners should do their own research and consult a qualified professional before making any financial decisions. Nothing on this show is a recommendation or solicitation to buy or sell any security or other financial product. Hosts, guests and the Investors Podcast Network may hold positions in securities discussed and may change those positions at any time without notice. References to any third party products, services or advertisers do not constitute endorsements and the Investors Podcast Network is not responsible for any claims made by them. Copyright by the Investors Podcast Network. All rights reserved.