25 February 2023

Stig speaks to Tobias Carlisle and Hari Ramachandra. Stig only owns five individual stocks, and in this episode, he outlines why he added Spotify as the newest addition to his portfolio. Hari’s pick, Disney, has recently been extremely volatile, and Tobias pitches Amgen, a value stock with strong downside protection in uncertain times.

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  • Why Hari is bullish on Disney (Ticker: DIS)
  • Why Stig has invested in Spotify (Ticker: SPOT) as one of the five stocks he owns
  • Why Toby is bull on Amgen (Ticker: AMGN)
  • Whether Chatbot GPT will disrupt Google’s wide moat. 


Disclaimer: The transcript that follows has been generated using artificial intelligence. We strive to be as accurate as possible, but minor errors and slightly off timestamps may be present due to platform differences.

[00:00:00] Stig Brodersen: As some of our listeners know, I run a very concentrated portfolio. Until recently I only owned four stocks, but I just added the fifth. In this Quarter’s Mastermind meeting, I’ll outline why I did that. I’ll walk you through the bull thesis. As usual, I’m joined by my good friends, Tobias Carlisle and Hari Ramachandra.

[00:00:17] Stig Brodersen: Tobi is pitching a wonderful value pick, Amgen and Hari is presenting Disney, a company wonders strongest brands in the world. Speaking of strong brands and competitive modes, we enter a conversation talking about Microsoft, Chatbot GPT versus Google’s Bard. I hope you’ll enjoy this episode as much as we did. So without further ado, here’s this quarter’s mastermind meeting.

[00:00:42] Intro: You are listening to The Investor’s Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected.

[00:01:03] Stig Brodersen: Welcome to The Investor’s Podcast. I’m your host, Stig Brodersen and I’m here for the Q1 2023 mastermind meeting together with Hari and Tobi. As always, how are you today gents?

[00:01:13] Tobias Carlisle: Hey Stig. Hi Hari. Good to see you guys again.

[00:01:16] Hari Ramachandra: Yeah, good to see you guys. Fantastic. Doing fantastic Stig. Thank you for inviting us back.

[00:01:21] Stig Brodersen: Always. Always, gents. So the market has been crazy. I’m supposed to say it’s always, but it seems like right now, I mean, after 2022 when we saw [00:01:30] that bear market, and then the market has bounced here at least so far here in 2023. We do see a lot of volatility right now, so it’s very exciting and perhaps we should just jump right into it and talk about the picks.

[00:01:42] Stig Brodersen: Hari, you have Disney, and Tobi, you have Amgen. Who wants to go first?

[00:01:47] Tobias Carlisle: Flip a coin.

[00:01:49] Stig Brodersen: All right.

[00:01:50] Hari Ramachandra: I can go first. Yeah, so I think the market is definitely schizophrenic. It’s like every week the mode is different, so I don’t know how Disney will be positioned by the time we go on air for this episode, but Disney has been my long, long-time favorite.

[00:02:06] Hari Ramachandra: I think most of us grew up watching Disney characters and so also our kids, and I’m a captive subscriber to Disney Plus and will be for many years to until my kids grow out of it. But the reason I’m pitching Disney is it’s in a very interesting market or ecosystem, and it’s playing in that, but it has some inherent advantages.

[00:02:30] Hari Ramachandra: So as Professor Aswath Damodaran recently on CNBC described that the direct-to-consumer or streaming content business model is fundamentally broken thanks to Netflix. They have driven up the cost exorbitantly, and hence they have kind of, you know, started this war for talent and war for content. And it’s almost like all these mega players like Apple, Amazon, Netflix, Disney, and everybody else outwitting each other.

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[00:03:01] Hari Ramachandra: So it’s good for content creators and might not be as good as for the content aggregators. And I see Disney as like a railroad in this context. Alright. It’s almost like they have some inherent advantages that others don’t. First of all, there were huge inventory of content that is evergreen. I don’t know how many times we can watch House of Cards or any other show later show, but I can tell you based on my experience, my daughter can watch the same Disney episodes many times, and the same movies.

[00:03:37] Hari Ramachandra: I’ve sat and watched Cinderella with her for more than dozen times already, and I guess I’ll continue to do that. So there are very few other media houses or even the direct to consumers streaming businesses like Netflix or Apple that can come up with an evergreen content. It’s very rare. And the second thing is the sheer volume of content, both through organic production and through acquisitions of Marvel, Pixar, Fox.

[00:04:09] Hari Ramachandra: They have over time. So it’s been like more than 50 years in the making that they have aggregated this content. And the reason I said I compare it to railroads is because if somebody wants to build a new rail railroad today, the cost of acquisition of LAD is so high that it’s almost impossible to create a new [00:04:30] track.

[00:04:31] Hari Ramachandra: And somehow, even for content, I’m trying to use the same analogy because Disney produced Cinderella or whatever the shows they produced back in the day, they’re still run today and on Disney plus, they, you can even see the year of production, 1956 or 1949. The cost was really low or insignificant in today’s price context.

[00:04:53] Hari Ramachandra: But to produce something that can be as successful today will cost much, much more. And it’s almost prohibitive for many players. So that’s one advantage. The second advantage they have is that, They have other sources as well to reach to customers. One of them is the pay television, even though everybody is kind of dunking on it and there is a lot of cable cutting going on, but still 60% of us household watch pay television, so it’s not like it’s going to go away tomorrow.

[00:05:26] Hari Ramachandra: However, I think the more interesting piece they have is their parks and cruises as demonstrated by the public failure of metaverse. People still like to go places. That’s also in their quarterly result. This time their revenue grew 21% for their parks compared to last year. So as soon as the pandemic was over, people are rushing to the parks because they want to go there before their kids start teenagers and don’t want to talk to them anymore.

[00:05:57] Hari Ramachandra: And I’m one of them, like as soon as [00:06:00] I could, I took my kids to Disneyland in Los Angeles. . And then they also have a foot in the future with their Disney plus Hulu bundle with ESPN Plus. So they’re kind of capturing that market as well. I think it’s in a nascent stage. Their losses are reducing, for example, compared to previous quarters, their losses is kind of, you know, steadily declining.

[00:06:24] Hari Ramachandra: In fact, this time it, the loss was better than expected in the sense lower than expected. And the revenues are steadily growing at 8%. But I think for me, the reason I am interested in Disney at this point of time is one written of Bob Iger. There was a fundamental cultural shift that was happening, which was in the long run, not good for Disney.

[00:06:49] Hari Ramachandra: That is centralizing both the creative and distributive decision making. And Bob Iger is basically returning it back to the original state. So that’s good for Disney. And also, he’s talking about cost restructuring. There might be even a spinoff of ESPN because I feel that is their weakest link because one, the sports content is not ever green.

[00:07:12] Hari Ramachandra: It’s shelf life is kind of much less than other content, and there is a huge bidding war for these events, whether it’s WWE or any of the games. And if Disney’s able to spin off or sell it [00:07:30] off, because that’s not their core strength anyway, that might be the catalyst for both their growth in their printing margins as well as profits.

[00:07:41] Hari Ramachandra: So there are certain risks as well to this stock. For example, I feel the biggest risk for them is if they continue to be in businesses that are not their core strengths like sports. And they get carried away in the bidding wars with Netflix and Apple and other players and become irrational.

[00:08:03] Hari Ramachandra: And the second risk is that their exposure to the general economic weaknesses, like you know, whether ads or park wizards or subscribers, they can all go down when there is economic weakness. But I think one of the key things to watch out in case of Disney is are they able to still churn out good creative contents?

[00:08:29] Hari Ramachandra: I think that is their ip. They have a huge pool of talent and are they able to organically come up with good content that will keep them going otherwise over, over the long run? That is what I would be worried about. So today, the price to earnings, I’m pretty sure Tobi will not like it. And knowing your stick, I don’t, I know that I’m actually, I’m getting ready for your counterpoints on those aspects, especially with 65 p [00:09:00] ratio.

[00:09:00] Hari Ramachandra: But the reason I’m pitching is the P ratio is based on the current earnings and without significant growth in revenue, I’m expecting, I’m not expecting more than six to 7% revenue growth for them over the next couple of years for the foreseeable future. But what I am expecting is that they will take some measures, especially with the e incre encouragement of activist investors who have taken major stake in the company.

[00:09:27] Hari Ramachandra: They will engage in significant cost restructuring. They’ve already announced job curves, reduction in non-par expenses and stuff like that. So I expect that to continue and their profits to improve and there are next to increase and their peer ratio to come down. And in the long run, As this model of streaming is broken until it is fixed, I feel Disney has the most strongest position, actually among the players to come out better as they’re diversified and they don’t need to engage in this bidding war. So that’s my pitch and I’m ready for your questions.

[00:10:11] Tobias Carlisle: I like Disney as a business. I like Disney as a company. I think that’s a, I think that the idea of having IP that appeals to little girls mostly, and then know they have other, their own Marvel and so on for boys, but little girls get that Disney princess and then they can remember who the Disney [00:10:30] princess was, who they sort of attached to, and they remain attached to that, I think, for most of their lives.

[00:10:34] Tobias Carlisle: So it’s a powerful connection if they can make it. The question that I have is given that is so important, I have a nine year old daughter who, we have Disney as well, and I sort of, I’m interested in which movies that the kids want to watch. Cause I have five year old boy, a seven year old boy, and they’re not really interested in the Disney, princess driven movies.

[00:10:54] Tobias Carlisle: And so the only way we’re going to watch those movies is if my daughter and I want to watch it. So I quite like Moana. I want to watch Moana. She wants to watch Moana, but she doesn’t connect to Moana. She connected to Elsa, but Elsa, she was a little bit young, so she really hasn’t had a princess for a little while.

[00:11:11] Tobias Carlisle: And there she’s sort of, I think she’s sort of sailing through a little bit and they’re going to miss her if they don’t get a princess for her in there sometimes soon. So I just wonder, you know, how important is that to connect with them early on? Do they have a lot of other content too? They have all of the Marvel stuff.

[00:11:26] Tobias Carlisle: They have Pixar, although Pixar, my kid, it’s funny I sort of, I’m intensely interested in which of those things my kids connect to and I don’t, they don’t really seem to have connected to any of it really for a little while I think. Maybe the pandemic stopped some of the production. What do you think about that?

[00:11:40] Tobias Carlisle: Is that an issue that anybody discusses or is that totally peculiar to me?

[00:11:45] Hari Ramachandra: No, I think that’s a very good point Tobi and you’re absolutely right. If they don’t keep updating their characters to the current generation, there is a significant chance that they will miss on making those connections with them, like how they have made with the previous [00:12:00] generations.

[00:12:00] Hari Ramachandra: And that is the risk. I see. And that’s why I felt comfortable when Bob Iger came back and he said like, you know, creativity and profitability that’s there, these are the two key things that he’ll be focusing on. He’s like, back to creativity. I think that gives me comfort. My son connects to Pixar movies quite a bit, like Incredibles or Cars, so, but I guess it’s like each kid has their own preference and that’s the key that they have to really understand their market segment. And I feel Disney plus more than a revenue generator. I see it as a cost center for them because it is kind of aggregating user feedback and user preferences, which they, it’s very hard for them to do through movie theaters, but this is an amazing platform they have, and I’m pretty sure they’ll have a good analytics team looking at all these things because Netflix has mastered the model.

[00:12:58] Tobias Carlisle: Yeah, that’s very interesting. That’s a good point. I hadn’t thought about that. I was, that was my next question. To what extent did they need to own something like Disney Plus? But if that, if there’s a feedback mechanism, that does make a lot of sense. My kids don’t like. And I think that, you know, for us, we have stuff that was made in our lifetime.

[00:13:15] Tobias Carlisle: We consider it to be, you know, newish and I think they feel the same way. So I try to show them stuff that’s just a little bit before their time and they think the animation’s too old, they don’t want to watch it. I’ve tried to show like, you know, the very first thing that they made I’m blanking on a little bit.

[00:13:29] Tobias Carlisle: Is it [00:13:30] Alice in Wonderland earlier ones. That’s very, that’s the, like the very first thing that met. I went back and watched that with them. I thought it was absolutely spectacular for the time when they hand drew all of it. I think it’s an incredible movie. You haven’t seen it in like your adult life. You should go back and watch it cause it’s fantastic.

[00:13:45] Tobias Carlisle: But for my kids it was just torture. It’s just like this is too old. And I’ve showed them progressively like stuff all the way up to probably just before Pixar was acquired and they’re not interested in any of that stuff. It’s sort of like they want that newer looking stuff.

[00:14:01] Hari Ramachandra: Absolutely. I think that is the key, I guess you wrote of an interesting point of maybe. The content they produced long time back is something the adults watch, and the newest job is watched by the kids.

[00:14:14] Stig Brodersen: I guess, Hari, that part is still important. I gave my two nieces, they’re 8 and 10, a trip to Disneyland. They really want to eat a pancake with a princess and it’s like 150 bucks per kid.

[00:14:28] Stig Brodersen: I don’t know if it’s if pancakes are included. And so it’s like 45 minutes you could get a photo with a princess and apparently there are pancakes too. Who knows? And you’re like and you hear yourself saying things like, that sounds like a great idea. And so whenever something like that happens, you just know that there’s just something there, right?

[00:14:49] Stig Brodersen: Like would I have done the same thing if it wasn’t a Disney princess? If it was. I don’t know. You said House of Cards. I don’t think necessarily think they’re directly com , I’ve watched House of Cards four times and I [00:15:00] didn’t see any in disciplines in there for sure. But like, would we do that for our kids for Netflix’s franchise?

[00:15:06] Stig Brodersen: I don’t know. There’s something there. And you know, this just turned 100 years and the Economist had a fantastic series of articles about that. And anyone who’s interested in investing Disney, I would highly recommend reading those. But I remember saying a long time ago to a friend of mine that whenever Disney hit a hundred bucks, I would buy.

[00:15:23] Stig Brodersen: And what happened was that, you know, they hit like 86 or something like somewhere in the eighties and that chickened out, you know, it’s very often happens hardly because whenever something tanks, a lot of other things also tank, but dis tanked more than other stocks for a number of reasons. So partly we have the leadership issue.

[00:15:39] Stig Brodersen: I think the market team, they’re really excited about getting Bob Iger back and like, who wouldn’t. But the task that he has now are just. Just different coming in. He has two years to hand it off. And we all forgotten everything that happened with the Eisner and like the whole, when everything just exploded and like IO came in and he saved the day and, you know, he bought Pixar, he bought Marvel and like those type of eco projects that just never works out.

[00:16:02] Stig Brodersen: And they did work out, which is just amazing in himself. And so guess I would be a bit worried about that. Like, what’s going to happen? And I guess that’s also part of the Watch’s trading. I think at the time recording is trading that $113. So it is a wonderful stock. I also want to say like in Ho defense, whenever he talked about PEs and so forth.

[00:16:20] Stig Brodersen: So one of the things that we’ve, that we learned whenever the interest rate was low, and everyone just started investing some with success and others not so much was to have increased [00:16:30] focused on normalizing earnings. And I’m saying that. I’m going to piss of stock afterwards, , that’s going to look ridiculous too.

[00:16:36] Stig Brodersen: So I’m sort of like doing it to ask forgiveness, but you know, the streaming services they’re losing a Disney plus they’re losing a billion dollars a quarter. And so it would be outrageous to say that it has no value. Of course it has value, but if you have to normalize earnings if you want to do that.

[00:16:51] Stig Brodersen: If you look at where Disney makes their money, they make slightly more on cable and broadcast channels here in 2022, they did like, around 8 billion in operating income. And the parks experience in products are slightly less. And of course, whenever you look back, you have to remember we also had covid, so the parks experienced in product products didn’t rebound before fiscal year of 2022.

[00:17:13] Stig Brodersen: And so it doesn’t look as crazy, like if you just like take a look at it and you’re like, oh my God, that looks ridiculous. It doesn’t look as ridiculous as it might sound like. I do agree with you, Hari, that they have a stronger position in streaming. I guess my question is, One of the concerns I have is, do you want to compete in that space?

[00:17:32] Stig Brodersen: You know, it’s one of those where, yes, there are better, but are they like one of the better in that terrible in industry? And I don’t know about that. Like whenever you look at some of the money that Amazon is spending right now, and you know, apple have started, you know, with that thing too.

[00:17:45] Stig Brodersen: And of course you have Netflix, you know, it’s just, I mean, one of Netflix production companies reached out to us to create a series about us for crying out loud. That just means they must be pretty desperate. That was sort of like my take on it. But you know, it’s like that type [00:18:00] of like volume game and like what you see happening right now.

[00:18:02] Stig Brodersen: It just seems to be one of those where they just pressure each other’s Martins. And that’s also what you’re seeing now. You have this narrative about Disney. I want to say that Disney probably have more synergies than whenever Netflix are doing, not now starting to do their Oh, come and, you know, we have the gaming.

[00:18:15] Stig Brodersen: Also, I guess I see other synergies with Disney than I do see with Netflix, but it’s just a tough industry that they’re in. So I guess that’s my 2 cents.

[00:18:24] Hari Ramachandra: Yeah, no, I think the great points, Steve, especially the last one that you mentioned is like, do they want to be in the streaming war?

[00:18:31] Hari Ramachandra: And my proposition is actually they can participate peripherally and limit the damage compared to other players. Because the way I think about Disney is they’re in the business of creating assets that can be monetized for a long time. It’s almost like a pharmaceutical company or a, you know, think about it that way.

[00:18:51] Hari Ramachandra: And I think Tobi reminded me that they do have an expiry date and like a pharmaceutical company, the IP goes off of wild. But like, think about every character like that they have created, whether it is Elsa or Moana, 10, 12 years after the movie comes in, they’re monetizing it in their parts and they’re merchandising and a lot of other ways basically.

[00:19:16] Hari Ramachandra: and for me, it’s like if you think about Disney, they’re not really doing anything special for streaming. All they’re doing is they’re taking their offline content that they would’ve produced anyway [00:19:30] for movies and then digitizing it and putting it in the, on their streaming service. So like, let’s say they didn’t have Disney Plus, they would still come up with, without Avatar as a movie.

[00:19:43] Hari Ramachandra: Now you have outdoor special edition making of Out Avatar on Disney Plus. And then finally you’ll have out Avatar at some point on Disney Plus, but that people can watch as well. So that is a reason I feel they’re better positioned in the streaming war. In fact, they don’t have to participate but still benefit.

[00:20:05] Tobias Carlisle: They have these little spinoffs too. My daughter loves the descendants. Do you know what that show is? It’s like all of the Disney villains. Like Maleficent and so on. They have these angsty teenage kids who get up to shenanigans at high school. And so that’s my daughter’s favorite show. So that’s another Disney property.

[00:20:21] Tobias Carlisle: So that’s a good argument for them that they can repackage that IP over and over again for different audiences. And all of those Disney villains and those that, those, that’s very old stuff. It’s all the very classic ones from back in the kind of golden age. They’re kids.

[00:20:34] Stig Brodersen: And I think you bring up a good point, Hari, like they don’t have to pay 10 cruise a hundred million to do Top Gun too, right?

[00:20:42] Stig Brodersen: Like they, they own the IP and, you know, the characters aren’t as expensive. I did hear someone from, I think it was a Hollywood producer who said that one of the concerns that they felt about their, the movies was that they were not as captivating as back in the olden day because they didn’t have the big screen.

[00:20:58] Stig Brodersen: It’s harder to build that [00:21:00] franchise today because of that, but also because you don’t get the same type of wire experience because so much is now produced for the streaming services. They’re not produced for the big screen.

[00:21:10] Hari Ramachandra: On the valuation piece. My main thesis is that PE is high today, but the denominator, the earnings will keep going up.

[00:21:21] Hari Ramachandra: Right now, they don’t have to do much in terms of growing the revenue. And that’s the sweet spot they are in. They, I think I’ve distracted themselves personally. I feel E S P is a distraction. It doesn’t add value to their franchisee. It is just kind of an empire building exercise that happen that happens in many companies.

[00:21:42] Hari Ramachandra: And if they can get rid of such non-value ACC, crypto franchisees or assets not only will they improve their balance sheet, but they’ll also improve their earnings, to me will be a catalyst. So in that sense, I feel right now they’re at least they can improve their earnings by 30, 40% or a period of three to five years.

[00:22:06] Hari Ramachandra: And relatively the stock price will also improve. So that’s my kind of back of envelope math, if you will. My fair value comes around one 50 to one 70, depending on how you look at it.

[00:22:22] Tobias Carlisle: I see, I got a three, 3% free cash flow yield in a market where the 10 year is over [00:22:30] four and a half and probably going higher from here.

[00:22:33] Tobias Carlisle: So that says to me that the free cashflow yield has to come up quite a lot before. I don’t know how much growth you are. You can rely, I mean, it’s been I sort of, I feel like the number for me and admit I’m a very conservative, deep value investor, so Disney’s sort of not really in my area of strength.

[00:22:54] Tobias Carlisle: So for me it looks expensive and I would say even a hundred is expensive for me. Like I would want it down in honestly, somewhere between 15 and $30 is sort of my range to get a reasonable return out of it. That might be too harsh. It’s possible that they do some rationalizing, spin off some of the spinoff ESPN, you know, right size Disney plus maybe all of that changes the valuation.

[00:23:18] Tobias Carlisle: But yeah, I think it has the core of a very good business there. But I also think the market is a little bit over at skis for, you know, if you’re looking at a long enough period of time where the valuation starts to matter, I would be much more comfortable. I’ve quite a bit lower than here. I don’t mean to be too aggressive from that Hari, because I do like Disney and I like you too.

[00:23:37] Tobias Carlisle: It’s not, it’s nothing personal, it’s just, that’s my bias. I just, I prefer stuff to be closer to fair value.

[00:23:44] Stig Brodersen: So you said I just want to make sure, Tobi, you said 15 to 30 and then Hari, you said 150 to 170?

[00:23:50] Tobias Carlisle: I mean, we’re talking about a wide range here. Like we, we are talking about a very wide range, but this is a 3% free cash flow yield in a market where, you know, you can get risk free, [00:24:00] pretty good rates.

[00:24:00] Tobias Carlisle: And I, my bias is probably that risk free rate is going higher still. You know, in a market where you get to 6% on the tenure, which is a long run trend, the very long run trend, and who knows if we get there or not, but that is the long run trend. You know, a 3% free cash flow yield for Disney, admittedly a growing 3% free cash flow yield.

[00:24:18] Tobias Carlisle: Like where should that trade quite a bit lower to get to, you know, to de-risk it and get to get down there. I think there’s been a little bit of a regime change in the market where previously really high rates of growth, really good IP protect competitive position and so on, that was probably more important than valuation.

[00:24:35] Tobias Carlisle: And I think that was from like 2015 to 2022 or 2021. I think that the market is changing a little bit right here and it’s going to be more of a, you know, show me kind of market for a while at least.

[00:24:50] Hari Ramachandra: I think that’s a fair point, Tobi. I think especially considering the risk three rate today and for the foreseeable future, it becomes really hard to justify a 3% pre flow yield.

[00:25:02] Hari Ramachandra: In that sense, I feel from a timing perspective, this might not be a great timing. I see Disney more as a long-term bet that I can buy at a price that is not exorbitant, where I can park my funds safely for some decent returns or a long bit of time, but it’s just this price, the right price. I think I am also not very sure, so I would be more comfortable when it gets the below hundred for.

[00:25:29] Stig Brodersen: I [00:25:30] said a hundred before, I do think that the intrinsic value is lower than a hundred. So how do we square that circle? Partly is that when I, whenever I originally made evaluation of Disney, the interest rate was very different. So we also have to remember that. So to, to Tobi’s point before about what’s the 10 year and to all remember not too long ago, the tenure was almost nonexistent.

[00:25:49] Stig Brodersen: I guess another reason is that I see the competition differently now in the, in streaming services, and it is sort of like, how much is something worth that’s losing a billion dollars a quarter? Like, we can probably do an entire series on how to value that, but of course it has some value.

[00:26:03] Stig Brodersen: But if you look at it like, the really attractive thing here would be the park experience and products and just, I know we can take that income segment, you know, a long way back, but we are around like seven, 8 billion. Then you have, you know, what’s a cable broadcast? Let’s call it 8 billion ish.

[00:26:17] Stig Brodersen: Like that’s a dying segment. It’s slow and steady, but it is. You know, in the wrong direction. And of course you can also make the argument, you know, that it does create some embarrass entry to some extent because it’s not a, it’s not a market. A lot of competitors want to enter because it is declining.

[00:26:33] Stig Brodersen: But then you also have to remember that there are a lot of different things today that can substitute cable and broadcast channels. So, I don’t know I’m definitely below a hundred today on the intrinsic value because of those reasons.

[00:26:45] Tobias Carlisle: The thing about Disney though, the thing that it does have, and I think when you alluded to this at the start, was that there is this transition from the pipes to the content creators.

[00:26:54] Tobias Carlisle: And it, that has always been the w that, you know, you can go back and look at broadcast TV, cable [00:27:00] and so on. There has always been an initial value bump to the pipes, but it has always, the value has always trended back to the content creators. So it’s good to be a content creator. And they have these two machines.

[00:27:11] Tobias Carlisle: They’ve got Disney animation and Pixar, both of which are very good and Marvel now, like all of those are really great. Content IP libraries and content creators. Like that’s, that is where I see all of the value in this thing. And the parks. The parks are a way of monetizing that. And all of the Disney stores is a way of further monetizing that.

[00:27:27] Tobias Carlisle: I think their problems are the streaming. But you point out that’s a way of generating analytics. It’s $4 billion a year in analytics. Could you get that cheaper? I don’t know, maybe somewhere else. ESPN, that’s a tough asset cause it’s, there’s so many places to get your sport now. And ESPN sort of become a political they’ve taken a political view on a lot of the things.

[00:27:46] Tobias Carlisle: It’s turned off half of the population already in a market where it’s the bundles going away. And so you have to pay, you have to like actively seek it out and pay for it. And there are other options, but you know, there’s still the core of this amazing IP there that is valuable. And I would want to de-risk a lot before I would want to have a look at something like that.

[00:28:04] Tobias Carlisle: But I can see, you know, Disney’s not going away. Disney’s not a donor. So there’s a lot going for it. It’s go, it’s, you really have to do a lot to hurt that franchise. But sometimes it feels like they are doing a lot to hurt that franchise.

[00:28:16] Stig Brodersen: Honestly, to your point, Tobin, we all, you know, being students of above it and talks about that replacement cost of Disney, like that would be humongous, right?

[00:28:27] Stig Brodersen: Even for this company with the EV of 250 [00:28:30] plus billion, it’s tough. I’m sure that there are extra amounts to, it came up with this interesting stat here, cause today, whenever you include Hulu and p n, they’re the biggest in the world. In Netflix is number two. They have, what do we have? They have a bit more than 200 million subscribers.

[00:28:44] Stig Brodersen: 61 million of them are in India. The main reason why they do that is for cricket and it’s 58 cents a. So I just think it’s important whenever you, you look at those numbers, like some of those are advantage metrics to some extent plenty of pricing power there.

[00:29:00] Tobias Carlisle: Plenty of just keep plenty of pricing power margin

[00:29:03] Stig Brodersen: yes.

[00:29:03] Tobias Carlisle: I saw a statistic that of the dollar, every dollar spent in cricket globally, something like 89 cents of it comes from India. Yeah,

[00:29:13] Hari Ramachandra: I can imagine that. It’s practically a religion in India.

[00:29:17] Stig Brodersen: All right, anything more here to Disney before we move on?

[00:29:21] Hari Ramachandra: No, I think this is really good insights. Thank you. I think some of the facts that you brought up actually does make sense to me and I will go back and revise my fair value based on some of the points that you brought up Tobi and Stig. So thank you. That was very helpful.

[00:29:36] Stig Brodersen: Thank you for saying so. And Hari, please make sure to push back whenever you hear my pick because my pick is facing a lot of the same competitors. So you can just throw it back into my face afterwards. But I know Tobi, would it be okay if I go next cause it’s-

[00:29:48] Tobias Carlisle: Yeah please.

[00:29:49] Stig Brodersen: Somewhat I don’t know if it’s how much really it is, but thank you. Thank you, Tobi.

[00:29:52] Tobias Carlisle: Mine will be very short and sweet so you can stick mine at the end.

[00:29:56] Stig Brodersen: So gents, my pick is Spotify [00:30:00] and it’s not the first time that I have pitched that here to the group. I bought it original back in June, 2020 and sold it 318 January, 2021.

[00:30:11] Stig Brodersen: And you know, this is my humble break. This is actually not so much a humble break. And what happened now is that idea board it at 78 whenever it buttoned out. Ah, close to button on December and it’s turning hundred and 23 at the time of record. So let’s call the 57% return in two months.

[00:30:26] Stig Brodersen: But who, who’s counting right? ? No, this is not, this is well, well on. Congrats, Hey, Jen, this is just because I’m usually wrong in my picks. So, whenever, you know, it’s the broken clock theory, whenever it happens, I’m right twice a day., I have to bring it up. But guys, let me give you the pitch of Spotify.

[00:30:47] Stig Brodersen: The business model is somewhat simple. It’s a service where you can stream music, you can listen to podcasts, and more recently you can also buy audio books. They have two tiers, premium subscription with no ads and access to all the features, and then a free version with ads. And you like some of the features.

[00:31:03] Stig Brodersen: And the main purpose of the free tier is to convert to users to being paid users. If you read the financial statements, you can see that all the money is being made by premium subscribers, and it looks like the ad supported gross margin is just around 5%. So it looks like it’s barely breaking even.

[00:31:20] Stig Brodersen: And that’s true, but also they put a lot of the cost, a lot of the content creation in that segment too. So it’s just something to consider. Spotify was founded in Stockholm, Sweden. It’s [00:31:30] technically registered in Luxembourg today. Due to tax reasons, it was found in 2006 and was the first company to bring stream music to the masses.

[00:31:39] Stig Brodersen: As some of the listeners might remember. This was at the time where iTunes root the world. They had access to 800 million credit card details. At the time, Steven Jobs’ Public said that no one wanted to rent music. So he had liked a really hard time seeing how you could disrupt iTunes. I kind of feel, I want to give him a pass on that one because he’s been right in so many other things, but it does show you how brutal capitalism as.

[00:32:04] Stig Brodersen: With 30% market share. Spotify is by a large margin, the biggest streaming, the biggest music streaming service in the world. And whenever Spotify launched, they were really at the mercy of the major labels. And I re label, so Emmi, Sony Music, universal Warner Music Group, together, they have more than 85% of the market share.

[00:32:23] Stig Brodersen: So what you see now after Spotify made agreements for all of these labels, what you see now is that a lot of the smaller competitors, I’m not just talking about the main competitors like YouTube music and Apple Music and whatnot, they’re using to some extent the type of contracts that were pioneered back then by Spotify.

[00:32:40] Stig Brodersen: So Spotify, for obvious reasons, knew from the very beginning that the needed to limit the influence of the labels. The labels really pushed hard against free music. This was at the time of Naspers and Pirate Bay and all of. And so like today it seems like an obvious thing to go to Spotify or whatnot, but it, that was not the case at all back then.

[00:32:59] Stig Brodersen: And [00:33:00] one of the things that they had to do to get them on board was to give them equity at the time. And you might be saying that sounds completely counterintuitive. How can you say that’s part of independence if they gave equity to the labels? Well, as it turned out, some of those, a lot of that was sold back during the IPO O in 2018.

[00:33:15] Stig Brodersen: But also they made agreements where the co-founders, Daniel Egg and Martin Lawrence got the voting rights, even though they did so it’s more like European system, but you can more or less compare to am b in the States. It’s not completely the same that happened here, but they still remain in control today, even though they do not have a majority of the equity.

[00:33:31] Stig Brodersen: So music streaming is just a. Tough business. It’s a, it’s an absolutely terrible business. I want to say it might be marginal better than streaming, but, you know, I can completely agree. I completely sympathize with Hari, if he wants to bring up the bats. Whenever I was talking about music streaming, gross margins are in the 25% range.

[00:33:52] Stig Brodersen: If you look at this for Spotify, it probably will be a bit higher as we go along for different reasons perhaps we can get to later. And that’s also one of the reasons why they’re going to podcasting. So I want to point out the irony of that, because the business case for going into podcasting is that partly they’re independent from the labels, but also because they’re lowering the production cost per listener.

[00:34:12] Stig Brodersen: But then you can make the same argument for streaming services. And I just , I just bashed that. But you do have better margins with podcast than music. You can’t really scale music in terms of ex expanding margins. Spotify would more or less have the same margins with music if there were half or twice as big.

[00:34:29] Stig Brodersen: And if you [00:34:30] look into how Spotify calculate the cost of good source in financial reporting, it all looks like a big mess. The way to really understand that is just going to shamelessly promote this book. I think that’s, it’s one of the good sources to, to understand, oh, I, for those of who actually, it doesn’t really make sense.

[00:34:45] Stig Brodersen: I just put this up to the camera whenever this is this is the podcast. It’s called Spotify Play. So you can reverse engineer some of those things of how they’re constructed, but they probably won’t be getting much higher gross margins. Probably a few percentage points higher than what they do today, but it’s not going to be like, oh, we’re just going to scale and then we going to have, you know, half the cost or anything.

[00:35:03] Stig Brodersen: Like, that’s just not how those contracts work. Of course, for podcast, which is the second business second biggest business unit and perhaps in time could be the biggest to knows they’re betting really hard on that even so much that Daniel Eck the CEO has said that he probably got carried away in 2022.

[00:35:19] Stig Brodersen: But they have their premium content that’s only available for paid subscribers. Some of their acquisitions have been quite good in the podcasting space. There also been a few dos in between. That’s how it goes. And so, what I want to highlight is that in 2018, Spotify came out basically from nothing and said, we are going to be the biggest end podcasting.

[00:35:38] Stig Brodersen: And at the time, you know, there were only Apple Podcast and more or less no one else. There were other platforms, but no one anywhere near an Apple podcast. And, you know, you also had Apple Podcast, you know, pre-install on life, on iPhones. You know, there, there were so many things where you could say, how can Spotify ever compete with Apple Podcast?

[00:35:57] Stig Brodersen: And here we are. They’re bigger than Apple Podcast [00:36:00] in a bit more than four years. It’s just amazing what they have achieved. As someone who is an insider in the podcasting space, I can say that they’re both the best studios. They have the best companies in the podcast ecosystem. They’re just miles ahead of everyone else whenever it comes to advertising attribution.

[00:36:17] Stig Brodersen: I can say that because I’ve used their pay tools for years on a daily basis. And speak with ’em on a regular basis, like they know what they’re doing. And let me just give you an anecdotal example. So we have three shows here in the feed you’re listening to right now. So we have, we study billionaires when you’re listening to, right now we have President Biden show and we have Williams Richard Savvier show.

[00:36:36] Stig Brodersen: So if you listen to this on Spotify, you can see that, you can see the artwork change. Apple Podcast have set the past two years that they’re going to get right to it. And it hasn’t happened, like everything. But Apple Podcast is just like a black box. They still have the order download function, which is just like a, no one advertises just hated.

[00:36:54] Stig Brodersen: And you know, Spotify is just, they got to it out. So if I had to sum it up, I would say that Spotify’s best positioned in this space. So let’s transition to talking about competitive advantage and competitors. So whenever I look at Spotify’s competitors, they’re mainly competing with Apple Music, Amazon Music, and YouTube music.

[00:37:15] Stig Brodersen: And that order, Spotify’s market share is just above 30%. Apple Music 13, Tencent, they’re not really competing with Tencent actually. They also own share in each other companies with a different story. But that’s a 13 two. And then they have Amazon Music that’s [00:37:30] 13 and YouTube that’s 9%.

[00:37:32] Stig Brodersen: So this might sound a bit counterintuitive whenever I say that they have this huge advantage that then audio platform first because then you could say, what about Netflix? You just talked about how your Netflix do not have the same benefits as Disney, even though they’re just focused on one thing.

[00:37:49] Stig Brodersen: You might be thinking that Spotify is a disadvantage, for example, compared to Apple Music. Because Apple Music, since it’s pre-installed on their app, Spotify’s basically, depending on, you know, apple as a toll bridge. And I wanted you to talk a bit more about that whenever it comes to risk, cause I, it might be slightly different, but in short they’re creative for all platforms as opposed to, for example, something that’s on iOS or Android.

[00:38:13] Stig Brodersen: But let me give you an example of not being an audio platform, audio first platform. So Google have gone back and forth on whether they wanted to display a play button in the browser for whenever you search for a podcast. And you might be thinking, well, you know, Google there, they own YouTube music, so that’s an advantage.

[00:38:28] Stig Brodersen: But the thing is that audio is just such a low priority for Alphabet or for Google that now they removed it. Like they have so many other priorities that the way that Google, because, you know, that’s why they make all the money the way that works together with podcasts isn’t efficient at all because it’s not about audio.

[00:38:45] Stig Brodersen: And so, you know, when, whenever you go through also the earnings calls, like for obvious reasons, it’s just clear whenever you listen to what Daniel Egg is saying in the in the transcripts, that it’s driven all by audio and you don’t hear any of that whenever you go through what Alphabet are doing, apple and [00:39:00] Amazon, which again, it’s also Amazon’s value prop system is slightly different because it’s part of Amazon Prime.

[00:39:05] Stig Brodersen: So I wanted also to have, I have a section about re I also wanted to talk to you about, but I also want to start a different, Do you know the person who doing a job until you says something ridiculous, like the biggest weakness is that he works too hard. that, that kind of ridiculous response. So care too much, care, too much stuff like that.

[00:39:28] Stig Brodersen: So with that in mind, and the irony of me saying that that may go to this part about Brisk. So I also want to say that there is an opportunity with the risk that Spotify has because they are competing with Google and they’re competing with Apple, and you need those devices to access Spotify. Of course, you can also go to your laptop and, I don’t know, go to Firefox and what, like, you know what I mean?

[00:39:51] Stig Brodersen: Like in effect that’s not how you use Spotify today. I see it as a problem, but I probably also see it as an opportunity in the sense that as anyone with an iPhone knows, they are selling Apple music hard. And despite that, Spotify is still more than twice as big as Apple Music. And also Apple Music requires for you to use an iPhone.

[00:40:15] Stig Brodersen: And so what has happened with Spotify is that from the very beginning, they lived on all platforms, not just smartphones. This is obviously the biggest medium, but they had lived on all platforms or mediums because they had to do that. There was just ingrained in them. You can have the same criticism about the whole Android [00:40:30] system, e ecosystem.

[00:40:31] Stig Brodersen: If you want. It might sound ironic, but to me that’s not Right. Now what I’m mainly concerned about, of course this is in tech, this is like a sexy field. There you have a lot of interests that want to go into this field, which you just know by definition you don’t want into a field like that.

[00:40:47] Stig Brodersen: But I guess that the elephant in the room is not so much the competition from Apple podcast and from YouTube music. I also, like I mentioned before, I don’t, I think Amazon Prime and what they do through Amazon. Amazon Music is interesting. They bought, Wondery is one of the better podcasting studios, but they have a different strategy.

[00:41:07] Stig Brodersen: It’s a strategy of making sure the people stick with Amazon Prime. They’re doing great job, they’re doing great things in advertising, but I do not consider them the main competitor. One thing I would like to highlight, they’re have come in from their field here a few years ago, has been TikTok.

[00:41:22] Stig Brodersen: That’s, you know, we have all of these rumors about how they are going to start signing their own artists and how that’s going to disrupt the entire music industry. And they’re also the target group. What’s the, where do we have the most, the biggest discrepancy between the all public and what Gen Z’s, like, that’s TikTok Spotify’s number six on that list, by the way.

[00:41:41] Stig Brodersen: And so to me that’s a big risk that some people, but not a lot of people talk about. It’s someone who has, depending on how you measured it, close to no market share, but could get a huge market share very soon. And then have a, I have a segment about valuation. But I kind of feel there’s been a long pitch already, so I want to open up and then perhaps for any questions and your thoughts, and then perhaps we can [00:42:00] together walk through evaluation.

[00:42:02] Tobias Carlisle: I think Spotify’s an interesting pick because it’s the opposite of Hari’s pick. So Hari had the content and you got the pipe, and Spotify I think is one of those really interesting business success stories for those reasons that you outlined, that they’re really in hostile territory on an iPhone where they’re pushing iTunes hard.

[00:42:21] Tobias Carlisle: iTunes had a huge lead. They had to overcome that, and they’ve managed to do that. So, you know, hats off to Dan Eck and whoever else is in there who’s responsible for that. The issue that I see is the one that I sort of articulated in relation to Disney, in the sense that it tends to be this drift from value for the pipe to value for the content producer.

[00:42:40] Tobias Carlisle: And the content producer in this part is the musicians and the podcasters and to Spotify. You know, Spotify’s sought to overcome that issue by getting exclusive access to certain podcasts. Probably the most famous one is Rogan, who they pay him a hundred million began Rogan’s political and polarizing.

[00:42:57] Tobias Carlisle: And that potentially alienate half your audience and also potentially some of your, you know, there was a lot of the musicians asked for their music to be taken off Spotify because they didn’t want to be associated with Rogan and so on. The issue that I see is going to be one of valuation naturally , because that’s who I am.

[00:43:15] Tobias Carlisle: But when I look at it, it’s a 29 billion market cap. It’s got some debt in there as well, and it’s got 12 billion in revenue. Admittedly, revenue’s growing pretty quickly. None of that revenue’s falling through to the bottom line at present because they’re spending so much. I just wonder, at what point does it reach scale?

[00:43:29] Tobias Carlisle: Does that [00:43:30] competition from iTunes ever go away? When they do, how much of it falls to the bottom line? And so as an investor, you know, what do you actually end up owning? Because do you see the competition going away at any point? Because I don’t think that I don’t see how that happens because it’s iTunes and Apple are always going to be there because that’s the dominant device that people listen to it on.

[00:43:51] Tobias Carlisle: Although I’ve downloaded it onto my television, I have Spotify, so I can watch the podcasts on Spotify mostly Rogan’s, so I can watch it on, on, on the tv. But I find it, I sort of think this is at two times ribs with nothing falling through to the bottom line. What, like at what level is scale?

[00:44:07] Stig Brodersen: So, great question, let me start with the thing you said about Rogan not to be politic in any kind of way, whereas it was interesting was that the artist came back, like there was a huge discussion about all that and then young and a few others, and there’s, they said, no, we don’t want to do it. And then they came back and one of the reasons just that the tables have turned whenever it comes to the music.

[00:44:29] Stig Brodersen: It used to be so that Spotify needed the labels. Now that labels need Spotify, which is interesting in itself to your question about when do they reach scale. I think if you ask Daniel Eck, the CEO and co-founder, he would probably say never. He’s a very interesting person.

[00:44:46] Stig Brodersen: It’s very interesting to go through his interviews and he’s clearly been inspired by Jeff Bezos and I know this is going to come off as ridiculous when I’m saying this being, being a [00:45:00] value investor and being one to have a very conservative valuations because there is an element of faith in this.

[00:45:06] Stig Brodersen: Because whenever he talks about, you know, in 2030, the goal is a hundred, or sorry the goal is 1 billion users. They are at 489 million right now. And he talks about making a hundred euros per person or per user. That sounds pretty ridiculous to me. It sounds highly ambitious.

[00:45:24] Stig Brodersen: And at that time he, he think that they will have 4% gross margin and Right. I think right now it had on 25, 26, and it talks about operating margin of 20% at that time, which is right now close to ocean, non-existing. And so you might be thinking, is that possible? How are you going to see that margin expansion?

[00:45:43] Stig Brodersen: One of the ways is that more revenue will come through non-music type of revenue, and they want to set up different type of verticals. So the first one for was podcasting. Then they have audio books. They just came sent out now last quarter they had 500 million bought audio books, which giving in the quarter given it’s just launched.

[00:46:01] Stig Brodersen: It was, I was quite impressed by and who knows what the next vertical could be. But, and we can co come back to what of what those verticals could be afterwards, but just talking about hitting scale. I think it’s also important to look at, whenever you look at, for example, the free cashflow, which has been more than 200 million over the past three years, you have a lot of growth CapEx in that.

[00:46:20] Stig Brodersen: And they talk a lot about, it’s not about short term profit, it’s about , to use your word. Like, so it’s hit scale, get the users in, and then start to, to [00:46:30] monetize them. They also have a net, sorry, a negative network capital. There were some contracts that were. From back in the day. I can’t say if it’s cause these contracts are being renegotiated, but to get the money upfront and then it takes 45 days before they have to pay the labels again.

[00:46:44] Stig Brodersen: Now we’re talking about music that is traditionally how they made money. And so if we say that they’re got to do between 25 and 30 and gross margins, of course, to get to 40, they have to do a lot of other things that are not music, which is they’ve shown that they’re successful.

[00:46:57] Stig Brodersen: But I also think it’s important whenever you talk about podcasting, not to be too fixated on the exclusive shows. I think, you know, when, whenever we hear about some of the beta studios and the ex the exclusive for Spotify, I think you have to consider that the ecosystem that Spotify is built up around.

[00:47:13] Stig Brodersen: And so we talked with Spotify, just the Investors Podcast network not too long ago about hosting on that, their platform instead of another platform, and they make money based on. They also make money based on how they sell advertising. So you cannot buy, you can’t go to Joe Rogan show now and say, I want to buy ads on your show.

[00:47:31] Stig Brodersen: What they’re doing is they’re packaging and saying, okay mail between 1834, yada, yada, yada. So like, that’s the way that the that they sell that. So they have very personalized ads for everyone who are hosting on the platform. And they also bought Anchor, which is where new podcasts today start. It wasn’t in the past, but they bought that.

[00:47:49] Stig Brodersen: They have pod sites, ChatAble, that’s how you do attribution. And they have megaphone. It’s the leading hosting platform. We don’t use it for different reason, but like, I can see what they do also because it’s [00:48:00] just a pain to, to move hosting and all that. But like, they buy the best assets.

[00:48:04] Stig Brodersen: You can just see how much they understand the podcasting space. And it’s very interesting to see also now how they include audiobooks in their app and how the, their competitors are not doing that because they’re not audio first. So I kind of feel like I’m selling them a bit too hard. , if you believe in dental x projections, which you probably shouldn’t, you won’t last long in this game.

[00:48:25] Stig Brodersen: If you think that what management thing is going to happen in seven years, that’s a hundred percent probability in that happening. But, you know, you’ll have returned to 30 plus percent a year next seven years. I don’t think that’s going to be the case, but I end up with a valuation around $200 ish today.

[00:48:43] Stig Brodersen: And you might be then be thinking, well, steak, you said before like you sold at 318. That was like a huge, all of valued before you managed to sell it. Of course, that also kept a gain tax and different things to consider, but also remember again that the interest rate was very different back then. So giving interest rate that we have now, that’s probably where I am.

[00:49:01] Stig Brodersen: But again, like we talked about today, it’s, you know, all models are great if you have the right inputs. So, Hari, let me, let me throw it over to you.

[00:49:10] Hari Ramachandra: No, I think this is very interesting. Pick. And personally I’m a fan of Spotify. It’s almost like the Google forecasting, like many people use it, and it’s almost anonymous with forecasting.

[00:49:22] Hari Ramachandra: Where I see risks are in the long term for this it’s almost like a toll ridge on a toll bridge. [00:49:30] Like it’s kind of in the Facebook realm in the sense they’re dependent on or at the mercy of Apple and Google. But however, I feel probably they’re not as risk, guess Facebook in that sense that Apple would do something to them.

[00:49:44] Hari Ramachandra: But where I am really concerned is the two things that we discussed during Disney is one is there are pure content aggregator. So the cost of content will keep going up for a period of time. The loyalty of the listeners is to the content creator, not to the channel. So if j or still you decide to move out of Spotify and go on YouTube only, I will listen to you on YouTube so they can, because the cost of switching is easy.

[00:50:13] Hari Ramachandra: There’s not much, I think this makes it risky for me in the long run because we don’t know, because they might, they, the content creators might have more leverage on them than they having leverage over the content creators.

[00:50:29] Stig Brodersen: You know, I wish that was true. Hari, if you’re listening to this on Spotify right now, and you’ll, you are here ask that you probably going to skip.

[00:50:36] Stig Brodersen: But if you are listening to this on Spotify right now, these are agreements that we’ve made with our sales teammate, with appetizers that are running from our feed that’s hosted on a platform in our case called R 19. Spotify does not make any money of that. Spotify could say to us, we are not going to pick up your feed.

[00:50:53] Stig Brodersen: Unless you pay us. That will be really tricky for me to say no to. I would be willing, I [00:51:00] hope they’re not listening to this, but I’ll be willing to pay a good price for us to continue to send that out to all our listeners on Spotify. Because Spotify, what they want is that you, you host on that platform called Megaphone, and if you do that, then they can sell the appetizing.

[00:51:15] Stig Brodersen: And if you have exclusive content, you can sell that on Spotify and they take, I want to say right now it’s 15% the first year and then it’s third percent afterwards. But anyways, and so, so they have a lot of power right now around the system. So I want to highlight that. And I also want to highlight that being on the app is very powerful because they control the discover function so they can say, you listen to we Billions.

[00:51:40] Stig Brodersen: Great. Why don’t you also listen to startup, like one of the bigger business shows, which is their show. And so one of the things that independent publishers like us are afraid of is that all the different studios have teamed up with different type of different apps, and they promote their stuff.

[00:51:56] Stig Brodersen: They’re not promoting our stuff. So I hope you’re right that content creators have the bargaining power Hari. I don’t think it’s as powerful as I, I would’ve loved it to be. The other thing we had Brian Lawrence on the podcast some time ago, and , he had this quote, I can’t remember which stock he was talking about, but I remember him saying that he really wanted to invest in companies where Google have tried to compete with them and fail.

[00:52:22] Stig Brodersen: And I kind of like that way you’re thinking like, look at this company. They’re first mover, they’re dominant in the field, [00:52:30] and they’re the biggest by a big margin, and they’re competing against Google, Amazon, and Apple. Like, there’s something there, there’s something they can do. So it depends on how you look at it, of course, with that type of competition.

[00:52:42] Stig Brodersen: But I, I’ll be the first one acknowledge Hari also to, to what I said to you about, to about Disney. It’s a tough business to be in and the barrier of entry that they used to be in the music space are not there anymore. Just the way that the deals are being made with the labels today, it’s much easier for new entrants using the Spotify manual if you want to start licensing that music.

[00:53:04] Stig Brodersen: I think that was a good summary. Thank you. All right. Thank you, Hari. Tobi?

[00:53:09] Tobias Carlisle: Thanks Stig. Mine is Amgen. It’s an old biotech pioneer. Started in about 1980. It’s trading today a little bit south of $240. It might be 238 or something like that. When I wrote it down. It’s 240 market caps, about 130 billion to get to that level.

[00:53:26] Tobias Carlisle: They’ve got about another not quite 30 billion in debt. So enterprise value altogether is about 158 billion net debt of about 29 billion as I mentioned, and that’s generating about 11.5 billion in free cash flow a year. So the free cash flow yield to the enterprise value is in the order of seven plus percent.

[00:53:46] Tobias Carlisle: So free cash flow yield on the, or the 10 years at four and a half. So it’s very far north of that. The reason it’s trading at a little discount that to that’s a wide discount to the 10 year is clearly the market expects some material [00:54:00] decline in revenues over the foreseeable future.

[00:54:02] Tobias Carlisle: Biotech’s are not something that I would typically. I don’t really like to pitch them as individual stocks. I do buy them and I own Amgen in full disclosure. I own it in Zig, and I own it in, I own it in Zig Rather. And I don’t know, you know, when I come to rebalance, it’s entirely possible that these things get rebalanced in or out.

[00:54:19] Tobias Carlisle: I don’t want to make it sound like I’m entering into some sort of blood relationship with all of the other picks that I’ve had. I want to make it clear to everybody that my picks are largely quantitative. I like to look in the financial statements. I don’t spend a lot of time looking at the business.

[00:54:33] Tobias Carlisle: It’s mostly driven by the financial statements, cause I think that you get management’s attitude to various things in the financial statements. And so I, I have a little bit of trouble often pitching biotech’s because for the reason that Hari pointed out before, they’ve got kind of a limited period of time where they can earn all of the money from these drugs and then they become, They go off patent and the most successful ones get competed with very heavily.

[00:54:57] Tobias Carlisle: Having said that, when I say heavy competitions, you know, Charlie Munger talks about that like white glove gentlemanly kind of competition, and I think that is really what prevails in biotech land because they never really, it’s not that bare knuckle competition where they drive margins and profits to zero.

[00:55:13] Tobias Carlisle: They really do compete at a very gentile level, and they all make pretty good returns on invested capital even after they’ve gone into off patent world. I can mention all of the drugs that, that these guys have, but there’ll be somebody listening out there who knows this stuff really deeply.

[00:55:27] Tobias Carlisle: it’s difficult to understand what the [00:55:30] universe looks like after all of these things come off patent. problem for Amgen in particular, they’ve had this very successful drug ember that will gradually the profit from that will gradually decline. They’ve made some acquisitions and they produce things called biosimilars, which is like, that’s what competes with patent say.

[00:55:44] Tobias Carlisle: They’ve got this leading, Humira is the number one selling drug in the world and Humira is just about to come off patent and they have a biosimilar that’s about five months ahead of everybody else. That will be probably the thing that will generate pretty good revenues and cash flow growth in the future.

[00:56:00] Tobias Carlisle: The attraction that I have to Amgen is it’s quantitatively cheap and they have this exceptional buyback record since about 2018. They’ve retired about 26% of their shares outstanding, which I like buybacks for a number of reasons, particularly when they’re done at Undervaluation. Amgen’s been a something that I have owned on and off for a very long period of time in various different accounts and funds that I’ve managed because they’ve been such a consistently strong repurchaser of stock.

[00:56:30] Tobias Carlisle: cause when it gets cheap, they buy back stock and it never really gets too overvalued. They sort of tend to be quite good at buying back. And then for all of the reasons that I articulated before about biotech’s, they just never get. Particularly expensive, although did, if you look at the chart, you’ll see that it ran up to two 90 last year.

[00:56:46] Tobias Carlisle: It’s come back to two 40, so who knows what ha. Lots of loopy things happened over the last few years. That’s just one of them. So they’re likely to continue to buy back the stock. In addition to that buyback, they’ve got a three and a half percent dividend yield, which is, or it’s about [00:57:00] 3.2% as of today.

[00:57:01] Tobias Carlisle: So they’ve got a very consistent record of paying dividends. They’ve paid dividends. They’ve raised the dividend consecutively for the last 11 years, the last five years. The compound annual growth rate in the dividend is about 11% a year. In addition to the buybacks the shareholder yield is monstrous and it’s driven by the fact that they’ve got a free cash flow yield of over 7%.

[00:57:22] Tobias Carlisle: So they’ve got plenty of headroom there. Their payout ratio is about 44%. That’s not going away anytime soon. They had a slowdown in revenue last year. They had 2% growth in revenue to the last quarter. That was actually driven by, there was a 9% increase in volume, which is pretty healthy, but they had some Forex headwinds that reduced it by sort of 7%.

[00:57:43] Tobias Carlisle: So you can see that might reverse at some point. The strong dollar hurts companies like, like Amgen. I like it because in, in very simple terms, it’s priced as if the revenues will permanently decline from here. And they’ve been reasonably successful at making acquisitions and so on. And I think it’s unlikely that revenues decline.

[00:58:03] Tobias Carlisle: I think it’s much more likely that revenues grow, even if they just grow slowly from here. There’s an enormous amount of headroom in this valuation so they can make plenty of missteps. And you, I still think it’s undervalued. You combine that with the fact that they’re very good at buying back stock and they’ve got that great dividend.

[00:58:20] Tobias Carlisle: Plus pretty consistent growth. If you have a look at the stock chart, like the stock has been a very consistent returner for a very long period of time, and it never gets too, it never [00:58:30] really falls out of bed because they’re so good at buying back stock when it goes down, they buy it.

[00:58:34] Tobias Carlisle: I just think this is one of those opportunities where you can buy some reasonably cheaply. I own it as for an in-depth discussion about the competitive dynamics of this market. I can’t really help you and I don’t think anybody else can either. I think it’s a really tough industry to know, which is one of the reasons I don’t particularly like pitching these names individually.

[00:58:54] Tobias Carlisle: I own it as part of a basket of 30 stocks, all of which have characteristics like this, and I expect over my portfolio of stocks that these will generate pretty good returns. But as for any individual stock, I don’t really know which one it will be. I pitched this one today because this is a. From my perspective, this is a reasonably frothy market.

[00:59:14] Tobias Carlisle: And I think I’ve discussed this before on, on the last podcast that I saw that ten three inversion has historically preceded recessions pretty consistently. It’s never had a false positive. We’ve gone, we’ve flipped negative. Now Cam Harvey, who’s the bloke who came up with that idea, has come out and faded it.

[00:59:30] Tobias Carlisle: He says, ignore my little indicator because there are all of these other things going on that mean that not relevant this time. Cam Harvey said the same thing in 2008. He said, ignore it. It’s likely to be a slower growth, not a recession. And as we all know, 2008 was one of the worst ones we’ve seen.

[00:59:45] Tobias Carlisle: So I think you can discount what he says a little bit, and I think you can pay a little bit more attention to the indicator. But he’s by, by no means the only person who’s saying it. There are lots of other people out there who say that the 10 threes not relevant and it’s not going to work this time. I don’t have a view one way or the other.

[00:59:59] Tobias Carlisle: I just [01:00:00] look at its track record and its track record’s pretty good. I wouldn’t trade on it in on, in any way, shape, or form. I just think it’s worth considering. Particularly given that s and p 500 Ford earnings have now gone negative and it’s coincided with this incredible spike in the market since about October.

[01:00:19] Tobias Carlisle: And that’s totally common too to every other point in time. When you go back and look at every other real nasty bear market has looked the same way. Where there was this, about a year in there was this little recovery. I’ve always said it, in 2000, 2008, we almost rallied back to all-time highs happened in 2000, well, almost rallied back to two all-time highs before you really got the pain.

[01:00:41] Tobias Carlisle: I think that 2023 is likely where we see an enormous amount of pain. So I’m trying to pick things through here that I think are financially robust and will survive. We’ll do something about the fact that they might get even further undervalued and, you know, the end consumer of these drugs doesn’t really care what the rest of the economy is doing.

[01:01:01] Tobias Carlisle: They’re going to pay for this because they need these drugs to feel good and so on. So, I think this is a reasonably safe bet with reasonably good to conservative returns regardless of what happens to the global macro picture and it’s Amgen. That’s my pick. Thanks gents.

[01:01:17] Hari Ramachandra: Interesting pick Tobi. I think when you are talking about their patent expiring and their revenue falling off, I feel like it’s almost like dead ceiling, like for these pharma companies, right?

[01:01:28] Hari Ramachandra: Like every now and [01:01:30] then, investors expect that the revenue will fall off and then somehow they manage to come up with few more drugs happens to Johnson and a lot of other companies that have been following. But I like your basket approach for pharma though, in the sense you don’t have really worry all the cyclical I just said, and then you can just nicely and safely collect your dividends because it’s, as a group they’ll be paying always good dividends.

[01:01:54] Hari Ramachandra: So that, that is definitely interesting. And also I think you are positioning it as a safe haven in a turbulent market. When we expect that there can be further selloff, that is also valid. The only concern I would have is at P 20. Is it a safe haven? Because are they, it’s almost like price, like a growth stock at this point.

[01:02:18] Tobias Carlisle: Yeah. I ignore the, I, you know, my, my favorite metrics are ebit, Evie and I, like, I look at return on invested capital, even though I think that as I’ve sort of written about in the past, that’s a highly mean reverting series and you have to find some strong reason why that won’t mean revert. I think the best metric, aside from Evie EBIT is ev free cash flow.

[01:02:39] Tobias Carlisle: Free cash flow is a little bit more, there’s a little bit more management discretion in free cash flow than there is in. EBITDA is sort of, I know that everybody says, you know, Buffet’s got this quote out there where he says, you know, EBITDA or manga EBITDA is like liar learnings. That’s true, but you have to understand the perspective, understand why they say that.

[01:02:57] Tobias Carlisle: They say that in relation to management teams telling you what [01:03:00] the EBITDA adjusted EBITDA numbers are, or in, that was in the context of a leveraged buyout boom where people were using EBITDA multiples for acquisitions and EBITDA doesn’t help you pay down debt. Free cash flow helps you pay down debt. I do these calculations myself.

[01:03:16] Tobias Carlisle: I don’t care what management’s estimate for adjusted EBIT is. I couldn’t tell you what it is for any of the companies that I look at. I don’t even, I don’t care. I just don’t look at it. This is my own calculation. I calculate, I actually calculate, it’s called operating earnings. I calculate it from the top of the income statement down rather than reconstructing EBIT from the bottom of the income statement up because it’s a little bit more, you know, you, it’s hard to lie about revenues, although people do lie about revenues cause there’s net revenue and so on that there, there are ways to lie about it, but for the most part, revenues are real.

[01:03:44] Tobias Carlisle: Everything else that falls under that has a little bit of discretion in it. I calculate it from the top down. It’s not management’s calculation is the point that I make. So I like ebit. I also like free cash flow, but there’s much more management discretion in what free cash flow is. They can make decisions about, you know, there’s lots of different ways that you can play with free cash flow.

[01:04:01] Tobias Carlisle: Having said that, buybacks and dividends, you cannot lie about those. Those things actually happen. You can declare a buyback and not do it. That’s an, that’s a, lots of them do that. That’s why I don’t look at management. What management says, again, I’m looking at what management has done in relation to buybacks and their track record here is very good.

[01:04:18] Tobias Carlisle: So that 7% free cash flow yield is real. Three and a half percent dividend yield are real and the 26% of the outstanding stock they’ve bought back is real. So all of those things together, [01:04:30] that tells me that the free cash flow is likely real because they’re actually employing that. So buyback. Again, something, it’s a reasonably controversial topic.

[01:04:38] Tobias Carlisle: It has, most management teams aren’t very good at buying back stock, or they’re using it to mop up, share issuance on the other side, there’s a lot of share-based compensation. They buy back enough stock that the stock price doesn’t move. Oh, sorry. The shares out don’t move. So this is an instance where shares out have come down materially.

[01:04:55] Tobias Carlisle: And so that’s real, that’s a real buyback. And that, for me, that counts. So I agree with you that the PE might be sort of optically high, but there are lots of decisions that by the time you get to the bottom of the income statement, there are lots of decisions that go into how much they report. And when they get to this size, they’ve got an office of this chief financial officer.

[01:05:12] Tobias Carlisle: They are, there’s a lot of engineering in that, which is why I try to sort of ignore some of those metrics because it’s, you know, Jack Welsh used to say to, you know, he had these things called acquisition reserves. And they’d just, he’d say I need another penny cause I’m going to hit that number. I need 20 million out of that acquisition reserve.

[01:05:30] Tobias Carlisle: And his, they’d financially engineer it and they’d give it to him. So I don’t necessarily look at the bottom line. I’m trying to look a little bit further up the income statement and I’m trying to look at the cash flow statement and I’m trying to look at shares out and actually making sure that what they what they are sort of representing us happening is actually happening in the financial statements.

[01:05:49] Tobias Carlisle: Which is why I’m more quantitative than sort of, which is a big distinction between me and say Buffet and other guys. Like whom are actual real investors who know how to analyze businesses and do that sort of stuff, you know? So Spotify for me [01:06:00] is a difficult one because it’s not mature enough for me to really do any financial analysis on Amgen has been around for so long.

[01:06:06] Tobias Carlisle: It’s a mature business. The risk is the decline. That’s a real risk. But I think it’s ameliorated by the fact that they’ve got plenty of money to play with. They will be generating money for a long term into the future. I think it’s reasonably. Safe about as safe as it gets. But as I say, I don’t particularly like biotech’s as part of a basket.

[01:06:25] Stig Brodersen: I think they’re fine. The first thing I thought of whenever I saw it was didn’t we just do Colgate? Oh wait, this is. This is Amgen. Oh, this is different stock. No, sorry for people out there who’s like, why is Stig talking about Colgate? It was Tobi’s pick last time. It’s a very Tobi type of peck.

[01:06:42] Stig Brodersen: You know, you look at the 10 year financials here and you just see slow and steady wins the race revenue go up. You see dividends are hiked every year. You see shares being bought back. All the, like, it’s just, it’s a Tobi type of pick. And remember the old fable, right? Like slow and steady wins the race.

[01:07:03] Stig Brodersen: And so I think it is important also to understand like who is pitching with stock and why are they doing that? So Tobi has a basket approach, I want to say 30 ish.

[01:07:14] Tobias Carlisle: Please correct me if I’m wrong. 30 in my large cap, a hundred in my small cap.

[01:07:18] Stig Brodersen: Yep. And you have a huge part of your own net worth in in your funds which I think is admirable and the way to do it, whenever I talk about a pick, like a Spotify also talked about, I think last time was [01:07:30] process.

[01:07:30] Stig Brodersen: I talked about they are in Tobi’s words, he, last time he said racist stocks. So I’m, I’ve got to use that expression.

[01:07:37] Tobias Carlisle: I don’t know if process is so racist. I think processes, processes more, much more sort of special situation. If you understand, you can, I can get there on process. Spotify’s a different question, but I don’t have, I’m not antis Spotify.

[01:07:49] Tobias Carlisle: I’m just, you know, I have my own biases when it comes to these things.

[01:07:53] Stig Brodersen: Yeah. And also to, to your point and what we talked about before about where this coming from. Yeah. I own five stocks. I’m not as smart as Tobi to own a lot of stocks. So I guess you could, you can also say the Bipo-

[01:08:04] Tobias Carlisle: Mine too, its stocks to be fair. I own Zig and Deep and they own everything. But the only things that I ever mentioned on the show are things that I do own in the funds. And having said that, there’s always a possibility that I sell out in the next quarterly rebalance. So I should make that clear as well. The decision is sort of largely out of my hands. It’s, I look at the entire universe, what looks cheap, what’s what looks expensive.

[01:08:24] Tobias Carlisle: So things I’ve pitched a few things that I have then, you know, have had a little run and I’ve rolled out of pretty quickly. And I sometimes I feel like I should just make that clear to people that this could be rebalanced out of at the next rebalance date, which would be which is the sort of quarter end in March.

[01:08:39] Stig Brodersen: I really like this pick and I’m reading this book right now. It’s called Competition Demystified. It’s written by Bruce Greenwald. I will highly recommend that book. So what is typically taught at business goals is something called Porter’s Five Forces. And he’s talking about competitive situation and how you should look at it as a business person, but you can also say as an investor, and even Buffet has [01:09:00] talked about Porters five forces in one of the shareholders meeting actually.

[01:09:03] Stig Brodersen: Well, to be fair, someone quoted Porter Five Forces then ran through it and Buffet was like, yeah, I think I do. I think I’m doing that. I just didn’t know it was called that. But , apparently it’s been somewhat ordained by Buffett. And so those five forces, that threat of substitutes, power customers, power suppliers, competition, the industry and barriers of.

[01:09:23] Stig Brodersen: And what Bruce Greenwald is saying, and for those of you who don’t know Bruce Greenwald so he’s teaching I don’t know if he’s anymore, but he’s retired. He’s retired, right? Yeah. But he used to teach Graham’s old course at Columbia University and quite an icon in in ease of value investing.

[01:09:38] Stig Brodersen: And so he’s saying no polar five forces. That’s way too complicated. There’s only one. And the one thing to, to think about that’s barriers of entry. And he has these amazing case studies about barriers of entry. And so one of the things he’s saying is that you can typically see that through stable market share and then the high consistent return on investor capital.

[01:10:00] Stig Brodersen: And to your point, before Tobin, you talked about how people in biotech and in, in pharmaceuticals, how they don’t compete too much with each other, and they do that for good reason. I’m going to give you the very short version. You can read the 387 whatever page version in competition demystified, but it’s really about it’s painful whenever you start competing on price and like everyone loses, well, the customer wins, but you can do different things in terms of signal to competitors that you don’t want to go into a price bar.

[01:10:26] Stig Brodersen: And which is if you pick up the phone and call your competitor, it’s illegal. But if [01:10:30] you signal it different ways, it’s not illegal. But you can still make a lot of money with this diarrhea at all. But you can do different things. And so what’s interesting in this industry, you have high barriers of entry, and you can typically also see that because you have high fixed costs, it’s extremely expensive to be in, in this space, but also very low marginal costs.

[01:10:47] Stig Brodersen: So what these major companies do is that they com they have different drugs, and they don’t want to step too much on each other’s toes because then they’ll know that they will start, the competitors will start step on your toes. And remember, a prize competition is really painful. If you are the bigger player, you might be thinking, I need to lower my prices because I’m the bigger player and I want to keep the entrance out.

[01:11:06] Stig Brodersen: But thinking about it, if you have 90% of the market and you are lowering the prices, you are the one who are getting hurt the most. I can say from a competition standpoint, whenever you look at the numbers, they’re absolutely beautiful with high barriers of entry. Then if you can just, and this is just on, on a really notes, just because when, at the time of recording, like all the rates is about this new chat bot and you know what Google is doing and they’re bared and all of that.

[01:11:30] Stig Brodersen: So I just want to, now we’re talking about barriers of entry. I just want to pull up a quote here from c Munger from 2009, Google has a huge new mode. In fact, a probably never seen such a white mode. Just kind of feel how interesting that is in the discussion and what we’re seeing right now.

[01:11:47] Stig Brodersen: Whenever we talk about barriers of entry and look what’s happening right now. I don’t know. Hari knows a lot more about that and whether that’s truly, you know, if Google will still have the same barrier of entry, but it just, even the best barrier of interest. They [01:12:00] are. Eventually they’ll be broken down one way or the other.

[01:12:02] Stig Brodersen: I don’t know if it’s going to happen this time around with this chat bot. I don’t know if it’s going to happen in for Amgen, but it’ll eventually happen. I guess that’s what I’m trying to say here. Didn’t throw it back over to you Hari or Tobi.

[01:12:13] Tobias Carlisle: It happens quite a lot in biotech because the patent runs out.

[01:12:16] Tobias Carlisle: That’s the, that’s my main objection to it. You know, you would never, I don’t, I think it would be highly unlikely to see Buffet buying something like this. Like Buffet doesn’t buy biotech. He doesn’t really buy farmer. So I always feel very uncomfortable when I buy this. If the guy who really understands competition won’t touch this stuff, what am I doing in it?

[01:12:32] Tobias Carlisle: And the way that I justify it is it’s a little bit of a basket and it has quantitative features that attract me. If I had one board, I wouldn’t spend it on this thing.

[01:12:41] Hari Ramachandra: Yeah. I think if, what of a good point about Munger saying that Google has the deepest more, well, he also bought into Alibaba, so I think, and that is also having its own trouble.

[01:12:53] Hari Ramachandra: And that goes to say that, you know, we all should be humble when somebody like Munger can get it wrong. Regarding Chat g pt though, I think it’s phenomenal. If we haven’t used it, I highly recommend being recently integrated Chat GPT into Bing. And this goes to tell the staying power that Microsoft has.

[01:13:12] Hari Ramachandra: I think they have been at search; I was back working at Yahoo when they acquired the search division of Yahoo and they have that capacity to suffer almost for decades. And the other thing I was looking at was like, if you look at decade after decade among the top 10 [01:13:30] companies, From tech, many came and go.

[01:13:33] Hari Ramachandra: Microsoft has always been there. So I would say we had to be careful betting against Microsoft and Yeah, and looking and also the culture, like, you know, Microsoft culture has transformed. I think that’s Satia, I think Bomber was kind of driving it to the ground in a way, but Satia really rescued it.

[01:13:51] Hari Ramachandra: But I think Google is looking more like, the old player here and not inno almost being forced to innovate in this case. So the optics is bad. And even when they did come out with that demo, I don’t know who is their marketing team suggesting the names like Bard, like, you know, and also like, you know, the dead demo had some glitches in it, and it just shows that, you know, they were Dr. Bed.

[01:14:14] Tobias Carlisle: The thing is that, the question is sometimes not who has the better technology. It’s, you know, Buffet’s analysis is often at the consumer, at the person who actually consumes this product. How will they consume it? And I think about it too, like I have heard that Bing. Delivers better search results than Google.

[01:14:28] Tobias Carlisle: And now with this integration of chat, G P T, I was using it a little bit cause I kind of, I think it’s fun to chat to it and people have come up with some great questions that you can really test the limits of it. But I went to use it this morning and it was over capacity, and it wouldn’t let me in.

[01:14:40] Tobias Carlisle: And when I go to search something, I just type it into the Chrome bar, and I don’t even think about it. Like I would have to add an extra step going to Bing and like I am trying to do it cause I want a, I like having a second competitor in there. I’m one of the guys who uses Lyft rather than Uber.

[01:14:56] Tobias Carlisle: Cause I want the competitor for Uber, but I, it’s a kind [01:15:00] of a hassle and like, if I’m being honest still most of my searches are going to be into the ones that I don’t even think about are going to go into the Chrome search bar and I’m going to type that in and use that. It’s hard to change behavior.

[01:15:10] Tobias Carlisle: It’s really hard to change behavior. And I have Gmail powers the backend of my business email. It’s my private email. I use YouTube. I pay for YouTube. You know, Google has one of the great moats that sits a little bit below the line of sight, which I think is one of the best kind of moats to have that people don’t even know that it’s there.

[01:15:28] Tobias Carlisle: Like there are lots of companies out there like that, that you’ve never heard of them. They just do all of the back end of something and they basically just put their price up a little bit every year and you pay it because it’s a key part of some bigger thing and you don’t even know that you’re paying it like those are the good businesses to have, but everybody else knows about them too, so they’re never cheap.

[01:15:47] Hari Ramachandra: That’s a very good point, Tobi. In fact, the power is in the distribution, not just in the technology. And in fact, it’s almost like the role reverse is, you go back to 2000 or 98, 99, Microsoft was in the position of Google and that’s how they kill Netscape Navigator, right? Because they could, Microsoft operating system was like Google.

[01:16:11] Hari Ramachandra: Basically today that you would just use whatever the operating system gave you, but over a period of time they lost the share of their distribution channel basically. And that was what made Microsoft weak at that point of time. That they had this really bad phase in the [01:16:30] late like, you know, late nineties or late 2000, like late 2000, sorry.

[01:16:34] Hari Ramachandra: So, the bomber years, basically, I think Google is at that cusp right now. They control the distribution channel, as you said. I think, I totally agree with you that I would, it would take me a lot of effort to go to Bing and search, whereas here I’m just typing into the Chrome browser. As long as they own the browser, they get the, get my search, however, What has happened over a period of time is the searches that are really valuable, high returns in terms of pay per click are the ones that I’m searching for products or something like that.

[01:17:08] Hari Ramachandra: Nowadays, I directly go to Amazon to do that. So what is happening is lot of different competitors are taking away the mind share of entry point of the distribution channel away from Google. And I think Microsoft is, and definitely understands this. So they came up with this new edge browser, which has Chat GDP integrated, and I have to still try it, but I heard that it can even write a letter for you right from the browser, all that stuff.

[01:17:37] Hari Ramachandra: So they’re definitely trying hard. I can see that, that Satia and Microsoft team are definitely trying hard-

[01:17:43] Tobias Carlisle: And they’re focused on it too. They’ve said that the search margins are huge and they’re going to have a shot at them anyway.

[01:17:48] Hari Ramachandra: Yeah. Whether they will succeed or not, I think time will tell, but I guess… the days of Google being complacent are over is what I would say. And that has been going on [01:18:00] for a couple of years. Now. This is, strategy is one other blow at the mode, but I think Amazon actually, it’s not visible, but actually Amazon is the one who is taking away lions share offs. Google Sur sponsored search ad share, because a lot of valuable searches is now going to Amazon, not Google.

[01:18:20] Tobias Carlisle: The other point worth making is that the way that these moats get crossed is not sort of a direct competitor. It’s something that comes out of the blue in the same way that the browser sort of overcame Microsoft’s desktop dominance. The next level is probably something I don’t know if it’s the metaverse, but that idea is the kind of idea that it will be, it’ll be something.

[01:18:43] Tobias Carlisle: Somebody I saw it was circulating around on Twitter yesterday. Somebody wrote this long, it, it came out in 1979. It’s very old. And they said, you know that, and that was back when people were having to talk to computers and you had to be a, had to be able to program in order to talk to a computer. And we’ve clearly come a long way where you don’t have to be a programmer anymore to get us to do a lot of stuff.

[01:19:00] Tobias Carlisle: But it’s going to get to that point where it’s just a conversation. And at that point you’re sort of in the metaverse where you say, this is what I need you to do. And the AI and the computer goes and does that. That would’ve sounded crazy five years ago. It doesn’t sound so crazy now, even though I think that’s an incredibly difficult computer that’s a processing logistical nightmare.

[01:19:19] Tobias Carlisle: Now, it’s not any time soon, but at some point in the future, you will just have a little wristwatch and say it to the ether and it’ll go away and do it. And it’ll know what you’re talking about. And at that point [01:19:30] is a chrome that seems unlikely, right? It’s some, I don’t know who it is. Maybe it’s Facebook. It’s meta, it’s the metaverse.

[01:19:38] Stig Brodersen: It’s crazy who know what’s going to happen. I’ve tried playing around with the chat robot, GPT and to me it was more like, just like playing around just like, just for fun. And I was looking at it probably cause I’m super biased. I’m, I invested in an alphabet a long time ago knowing that of course no one could break down this mode like manga talked about, right?

[01:19:57] Stig Brodersen: So I wasn’t too impressed other than it was fun to play around and then speak to our YouTube post. Ronen says, yeah, whenever we talk about a new a new topic, I just ask, you know, the chat bot to write it for me. And then I just edit and like do my own thing. So it’s mine, but you know, that’s where I start.

[01:20:11] Stig Brodersen: And I was like, wow, . Like I did not see that one coming at all. So I guess the jury is still out. What’s going to happen?

[01:20:20] Tobias Carlisle: It’s quite useful for programming Hari. You might know better, but people can ask it like, how would you get this thing to do this? And its answers are instantaneous and exactly right with the little bit of code that you need. Like that is incredibly powerful.

[01:20:32] Hari Ramachandra: Yeah, I play on later on with it. I was fascinated like it could just generate core. You tell it the problem, and then let’s say you say write a program in Python or Java to script the web and search for this content and it’ll actually give you the core. Or you say, write a story for based on following characters or like animals.

[01:20:57] Hari Ramachandra: It’ll write you the story. But [01:21:00] I think going, the risk that Google has is just not about market share. What is not visible to most of us is these are really 10 X engineers, really Uber engineers who are working on this, and there are only few of them. If you think about it, and the risk for Google is losing those two open AI because in the valley today, open AI is the Google of 2000.

[01:21:26] Hari Ramachandra: That is the cool working on the block and Google is this old company, which is bureaucratic and big, right? So think about from an engineering talent perspective as well, where would the top talent flow and the recent layer of Google, there might actually be an impetus or an opportunity for open eye to steal more engineers from.

[01:21:49] Hari Ramachandra: And Microsoft is backgrounding open ai, so it’s like they’re on offensive. So it is going to be very interesting how this will play out. And I don’t think the story is over yet in the sense I would not write off Google at this point of time. They have the kind of round one, they have lost him, is how I see it.

[01:22:07] Tobias Carlisle: But there are more rounds to go. Yeah. Early, early days.

[01:22:12] Stig Brodersen: Let’s end on that note, gents. As always, thank you so much for making time to come on the show and talk about chat bots, biotech, Disney and whatnot. It’s always a pleasure to speak with you two gents. As always, I would like to give you an opportunity to tell the audience where they can learn more about you. Tobi? [01:22:30] [01:22:30] Tobias Carlisle: I manage a firm called Acquirers Funds. We have two ETFs, Zig the Acquirers Fund, which is small sorry, midcap, large cap, deep value in the us And I have a small and micro fund called Deep. I have a website, acquirersmultiple.com, where you can get free stock picks that are similar to the one that I did there quantitatively generate.

[01:22:50] Tobias Carlisle: And I’ve written some books. Most recent one was Acquirers Multiple, which came out in 2017. I’m working on a new one right now. Chat GPTs writing it for me. Thanks for having me. I always love coming on. Good seeing you too. Hari.

[01:23:02] Hari Ramachandra: Yeah, same here. Tobi and Stig. Anyone can find me on my blog, bitsbusiness.com. I hang out in Twitter. @harirama is my handle. H a r i a m a. Look forward to the conversations there as well. But this was fun hanging out with you guys. Thank you.

[01:23:19] Stig Brodersen: It was fun guys. And I hope that the audience are going to, wanted to hang out with us. I think we all plan on going to Omar here in, in May.

[01:23:26] Stig Brodersen: So if all starts line starts a line we’re going to, we’re going to put a link in the show notes. We’re going to have some events there and people can come and talk about stock investing, what, whatever they want to talk about. So that should be good fun. gents, thank you again so much for your time. I look forward to seeing you in Omaha soon. Thank you.

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