Tobias Carlisle (02:58):
And typically that’s something that you see closer to the end of bull market. It’s not portending a giant crash or anything like that, it’s just saying that you probably don’t need to chase stuff right now. There’s a reasonable chance that it’s going to come back to you. If you’re feeling the FOMO, just step back a little bit, because you might get some better prices in the not too distant future.

Stig Brodersen (03:20):
And if you are feeling the FOMO, I don’t know if you should go to Silicon Valley because before we hit record here, Hari had a crazy story from the valley and [Tobi 00:03:31] was like, “You should actually just tell that story.” And so Hari, with that being said, that’s throw it over to you. What are you seeing right now, there in the of valley?

Hari Ramachandra (03:39):
As Tobi was saying, you can see it in the numbers in terms of similarities within the dotcom 99 era and now, in terms of numbers, fear issue, or fear and great indicator, but I can feel it here in the atmosphere. And the sentiments and the trends that I see in the valley. Couple of things that I was talking about is everybody and anybody I know, a lot of my former colleagues or friends, everybody’s starting a startup now, and they’re all getting funding.

Hari Ramachandra (04:15):
And in fact, one of the things that has happened recently here is there are funds who have taken an indexing approach to angel and venture investing wherein instead of doing due diligence, they’re just spreading it across without much due diligence. And this is hurting those who are trying to do due diligence. Angel investors. Because money is cheap. That sounds so similar to what was happening in the dotcom era.

Hari Ramachandra (04:43):
And one of my friends forwarded me a blind-app conversation where an engineer from a startup had posted [inaudible 00:04:52] saying, “Hey, not much work is being done in this startup. We are having parties all the time. The founders are enjoying all the funds they have got, but they’re promising a lot of growth in the future to the VCs and they’re buying it.” And then in the thread, there were others also chiming in saying that they’re seeing similar things happening.

Hari Ramachandra (05:14):
So in terms of people switching jobs easily, getting high pay raises, people upgrading their homes or buying bigger and bigger homes, and a lot of construction’s happening in Bay Area, by the way. And even condos that are built are a million dollars plus, and they just sell like hot cakes.

Stig Brodersen (05:35):
A ton of stuff happening. And it’s really an ungrateful task we’re giving ourself. We kick off the episode talking about how ridiculously expensive everything is. And here we are sitting, three value investors, and then talking about, “Oh, so where do we see value?” Can you find any individual stock picks right now, with the prices we are seeing?

Tobias Carlisle (05:55):
It’s a funny market because value has been so crushed for so long. I’ve talked about this. It’s one of the longest, most drawn-out value under-performances in the data. So actually, I feel the portfolio that we can put together is very high quality for very reasonable prices.

Tobias Carlisle (06:13):
And one example I have right now is Lockheed Martin, which is my stock pick for today, which is something that I hold in the acquirers fund in Zig. I’ve held it for a little while. The reason that I like it is I think that it’s reasonably certain to keep on growing into the future. And it’s very well managed, from the perspective of the business and also from the perspective of the capital structure and the balance sheet.

Tobias Carlisle (06:38):
For those who don’t know Lockheed Martin, they make high end military aircraft. They’re probably, I mean, it’s hard to say what they’re most famous for because they have lots and lots of stuff that they make. But they’re probably most famous currently for the F-35. That’s a 20 year project, which is a good representation of what Lockheed Martin does. They get these very long projects. There just aren’t very many competitors in this space because it’s hard to get all of the technological knowhow, employees, and scale to build this stuff. So they do compete when they bid for these contracts from the government. But once they get them, they’re very long contracts. There’s always cost overruns and not really much that the government can do. They have to eventually pay up. So they get a pretty good return. You know, they make Sikorsky helicopters. They make mission systems, space systems, missile defense systems, all this stuff that’s just… You just cannot break into the industry. The incumbents are the ones who are going to be there forever.

Tobias Carlisle (07:37):
They had a recent earnings release and they’ve dropped on that earnings release. And the reason for that is revenues have backed off a little bit. And then there’s a new president. There’s always a risk that the White House, or Congress, or someone is going to curtail spending. It’s never happened in the past. It’s not going to happen in the future. Biden has already increased the spending 2% over Trump’s level. It’s very likely that it continues to grow. It’s very likely that Lockheed Martin is a beneficiary of it.

Tobias Carlisle (08:06):
Let’s just talk a little bit about the quantitative numbers. So Lockheed Martin is a $92 billion company. As of today, it’s got a hundred billion dollar enterprise value. It’s very cash-rich. It’s got some debt, but that there’s no near-term payments that are material relative to the amount of cash that it has. Revenues were 67.5 expected for the end of the year. It may be 68.5. It’s generating lots of revenue.

Tobias Carlisle (08:33):
On a per-share basis, stocks around $330 today. On a per-share basis, it’s about $237 in revs, $18 per share and free cashflow 26 to 27 dollars per share for the year, in earnings. And it pays out a dividend, likely to the end of the year, about $10.50. So it’s a 3% plus dividend yield here, and that’s on a 42% payout ratio. So it’s reinvesting most of its money. The return on investment is like 90%. It’s got this massive return on equity. So all of that money is reinvested at very high rates, and that’s why it’s continued to grow so consistently for so long.

Tobias Carlisle (09:16):
The thing that I really like about it, they manage their share count really well. So over the last decade, they’ve reduced it by about 17%. In Q3 when they had the little wobble from the revenues backing off a little bit, year on year, this is just what happens. It’s not a straight line up. It is a little bit wobbly. They bought back $2 billion in stock, which is something that as a value guy, I love to see. They’ve got 6 billion dollars left in that stock repurchase program, which if they executed it here, it’d be like more than six, seven percent of the outstanding stock. They’re just going to keep on doing that. If it’s cheap, they’re going to buy back stock. They’ve got plenty of free cash to keep on doing that. They’ve got plenty of cash on hand.

Tobias Carlisle (09:56):
This is not something that’s going to go up 10 times, but it is something that’s going to go up. I think it could go up kind of mid teens, pretty consistently for a very long period of time, because of valuation and the underlying business. And so that’s exactly the sort of thing that I like in the funds. Consistent, pretty certain where it’s going to be in the future. The risk for these kind of things is always that you’ve got essentially one contract provider. That’s the main risk, that they decide that they’re not going to spend on defense, but think that it’s a pretty low risk that defense spending is actually ever cut and more likely that it’s just going to keep growing over time. What do you think fellas?

Stig Brodersen (10:37):
Whenever I look at the numbers, I like everything that I see. It looks very, very safe. In the best way possible I’m going to say it looks like a really, really boring company. It does. You look at the margin, really stable with a nice upward slope. And then you look at the revenue, same story.

Stig Brodersen (10:55):
It actually looks bit like Hari’s pick, I have to say. Which is a bit ironic here, two days ago, they actually are starting to work with Tobi’s pick. So, I’ll just leave that little cliffhanger there if anyone finds that interesting. And so it looks like a good placeholder for cash. It looks like a very, very stable business. It sounds like there’s a new sheriff in town, right? Whenever you go through that last earnings call and you’re like, “We have a new metric now. It’s going to be called growing free cashflow per share.” And I was like, what was it called before?

Stig Brodersen (11:27):
And so that was kind of interesting in itself. And he was also very much like, the new CEO, “It’s on my recommendation. And we made an intrinsic value assessment. And it is undervalued.” So he’s also doing his job in terms of talking the stock up. And obviously he’s biased. He probably also believes it. But if I can throw it all back over to you, Tobi, I guess one thing I would like to understand a little better is, we all know monopolies. Where you have one seller and then a lot of buyers. And then we have what economists, we call monopsony. But it’s basically you have one buyer, that’s the US government. And then you also have a lot of sellers. So how is the whole pricing power thing work? Where’s the mode? Then another question. How would you as a contractor make sure that you get your fair share of whenever the government says, “Oh, let’s spend 2% more on our budget.”

Tobias Carlisle (12:17):
They do have the risk that there is, as you say, a monopsony, which is one buyer and multiple providers. Although really, I don’t know what you would call it where you have an oligopoly on one side and a monopoly supplier, but it’s a [monogobopoly 00:12:30]. Something like that. They need them healthy because they’re crucial for defense, the US.

Tobias Carlisle (12:38):
So they’re always going to be spending money on it. And there just aren’t that many providers. And Lockheed Martin, it’s a storied name that’s been around for a very long period of time. So they’re always going to be one of guys in there who’s able to. They understand that process, they know how to get that money. That’s what they do. As well as being technologically proficient, they’re good at negotiating the contracts.

Tobias Carlisle (13:01):
I think that it’s not the kind of business that ordinarily you would look at. That’s always a huge risk, when you have a single consumer of the product and they can dictate the terms. But in this instance, they need these guys healthy. Because they can’t starve them for capital. And so you can be the beneficiary of that. Where most of the time, government spending’s running against you as a taxpayer, this is one of the few places where you can participate alongside it. And at a reasonable price, which is the hardest thing.

Tobias Carlisle (13:31):
You can find plenty of monopolies that are doing plenty of gouging, and you are you’re on the wrong side of that. But it’s also hard to participate because the stock’s so expensive. You know, the stock could move around. Here, I think they’re reasonably valued to likely undervalued. And I think that the mid-teens return that you’re going to get from this is pretty good. That’s a pretty good return for the risk that you’re taking.

Hari Ramachandra (13:56):
Yeah, Tobi. I think I was trying hard to find ways to figure out if I should not buy the stock, but frankly I really like this pick. However, I think it goes back to our theme today. The market is overvalued. The greed index is at its all time high. Fed is very monetarily easy in its outlook.

Hari Ramachandra (14:21):
So where do you look for a safe place? And I think it fits really well in that theme. The only cons… I don’t see it as concerns, but areas where I wanted to get your insight is, one, the concentration of revenue in F-35 program of 30%. And 28% of their revenue coming from international, which is subject to geopolitical risks. I mean recently the US government shut down Turkey out of the F-35 program. So those kind of things might happen.

Hari Ramachandra (14:52):
And also there are supply chain risks in the current environment. But I discount it, because if that was the case, you can’t buy anything. Security risk, because they might be one of the prime targets for state actors to attack them. How would that… Are they well protected? Will that impede their operations? So that is one. And the last, it’s not really concern, but a thought I had was, are they the name? Because they are actually big tech in defense, in a way. They are a tech company at the core, and they need really good engineers. Will they be able to continue to attract talent at the same rate that they did in the past? I don’t know. I couldn’t check their average employee age, but I was just curious about that.

Tobias Carlisle (15:40):
Yeah. I think those are great questions and I think those are probably the real risks for it. Let’s just, working backwards, attracting talent. It’s tough. As you pointed out earlier, you can get pay raises and you can work at some very sexy companies, some very sexy startups. And that’s very attractive to younger folks. Because it’s partly, that’s where the market cycle is though. I think that not everybody is looking for that massive upside. Some people are probably like me, a little bit more conservative, looking for a reasonable return. And if you go to Lockheed Martin, you’re reasonably certain of tenure and good pay over a long period of time. And that might be, at this point in the cycle, you might say that’s a better risk than going to a startup where we don’t know if they’re going to be here in 12 months time because everybody’s partying and they spend the money on that.

Tobias Carlisle (16:26):
So there’ll be some folks who make that assessment. There’ll be some folks who want to be working with aeronautic-type engineering. There’ll be some folks who like the defense aspect and are attracted to that. And I think that by definition, those are the kind of people who you want working in that business. So I think from that perspective, they’ll be okay. The security front, yeah, that’s a huge risk. They’re clearly a target for state-level security issues from other countries. And so I’m sure that they work very closely with the US government to protect themselves as much as they can. But there’re no guarantees. That continues to be a metaphysical, existential risk for them. But they spend a lot of money trying to protect themselves.

Tobias Carlisle (17:09):
On the supply chain front, I would say that they probably get priority. If it came to the crunch, where it was Lockheed Martin or someone else, I’m sure they’d lean on the government and they’d say, “We need this more than anybody else, because this is defense of the realm.” And I’m sure the government would say, “Okay, you get priority on whatever ship, or widget, or thing that you need.” Just remind me of the first risk again.

Hari Ramachandra (17:34):
The first was the 30% revenue coming out of F-35.

Tobias Carlisle (17:39):
Yeah. That project has been very successful, which is one of the reasons why there’s so much revenue coming out of that. It’s taken a really long time to get that operational. And I think that’ll be in service for a very long period of time. And it’s likely that when the next generation comes along too, I think that Lockheed Martin’s got to be in the best seat to be getting access, because they’ve developed all of the technology. It is a huge advantage to have all of that revenue flowing to you as you’re developing the technology. Have I missed one?

Hari Ramachandra (18:09):
Yes, Tobi. The international revenue. 28% of the revenue is international.

Tobias Carlisle (18:15):
Yeah. That’s a geopolitical thing, where the government can come along and say, “Turkey’s out of the program.” But then likely they’ll come in and they say, we’ve got a new best friend. It’s whoever. I think Australia probably picked up some planes and I’m sure there’s a few other people around who just get told you’re going to get some more planes and you’re going to pay for them, too. So good luck.

Hari Ramachandra (18:34):
I think one more point that’s actually in favor of Lockheed Martin and I wanted to know your thoughts is, are they insulated from economic cycles?

Tobias Carlisle (18:44):
I think that’s right. I think they are. And this is one of the reasons that I like Lockheed Martin at this point. It really doesn’t matter what happens in the business cycle. Because for them, they’re more interested in probably the presidential cycle and what happens in Congress.

Tobias Carlisle (18:59):
And that’s always the risk. That’s why when they have the revenue backing off recently, it was off 10% pretty quickly, the stock. And I think that’s largely because people were the nervous about the incoming into administration. Are they going to spend more money? It’s funny. It happens every single time and they always spend more money. So I guess you’ve got to worry about that risk. But it’s more like a stock price volatility risk than an actual impact to the underlying business. And that’s the kind of business that I like to invest in.

Tobias Carlisle (19:26):
If the stock price goes backwards, then I’m probably a buyer at that level. Because I’m not too concerned about the underlying business. I’m pretty certain that in 10 years time it’ll be quite a bit bigger than it currently is. And if they’re buying back stock the way that they are, then there’s just going to be fewer shares around. So a bigger business with fewer shareholders, you can work out what that does to the stock price and it’s a good thing.

Tobias Carlisle (19:48):
So that’s the kind of stuff that I like. Having said that, it could under-perform the market. The market could do anything from here. It could double, or it could halve and I’ve got no control over that. All I can control is which positions I’m in that deliver a reasonable return for the amount of risk that we’re taking, and Lockheed Martin’s one of my favorite here.

Stig Brodersen (20:05):
Wonderful. Wonderful pick also for income investors. Especially now that the new metric… Sorry, I have to say it again. Now the new metric is free cashflow [inaudible 00:20:16], but all joking aside, that is what you need to look for. If you are looking, as a dividend investor or income investor, and with that type of yield, what 3.3 now? And the payout ratio is just short of 50%. Have very good track record. So, just want to mention that.

Stig Brodersen (20:32):
Okay. So I would like to pitch a stock now, to the group. But before I do, I would like to talk about my latest investment because it’s the last Mastermind discussion we had back on episode 374. I talked about Alibaba and because the greed index is all time high, I doubled down today and it was on Alibaba and it’s the second time I’ve been doubling down. So today the price is 167 and it’s now 7% of my portfolio.

Stig Brodersen (21:01):
So I just wanted to mention that every time we have a Mastermind discussion and talk about a pick, I always get a bunch of emails afterwards. So I’m going to preempt some of that and say, yes, it’s 167 at the time, and it’s now 7% of my portfolio. So for what it’s worth, and what will be interesting, and what we’ll see here as this goes out is how there’s a lot of value investors right now. Prominent names who are invested in Alibaba. Be interesting to see what’s going to go down whenever we have all the data. For a time being, we can see that Charles Munger has doubled down, which was interesting itself. He doesn’t move his portfolio a lot. Let me just put it like that. So, interesting stuff.

Stig Brodersen (21:39):
So my pick here for today is GoDaddy. The stock ticker is G-D-D-Y. I don’t have a position in it, sometimes I do take a small position in just to start learning more. But it’s a stock that’s just come on my radar a few weeks ago. I probably should have had it on my radar before, because yesterday it rose by 10% on their quarterly earning speed, but it is what it is. This is a company that’s relatively old for a tech company. It was founded in 1997. And today it’s most famous for the domains under management. They have 82 million. And it’s a little more than 20% of the market share. It’s actually not how they make most of their money, but we’ll get back to that. But that’s typically what people think of whenever they think GoDaddy.

Stig Brodersen (22:23):
Workforce, close to 10,000. They have more than 20 million customers or entrepreneurs if you want. And the IPO in 2015 at a price of $20. And today it’s trading at 74.5-ish. I’ve known GoDaddy for some time. I remember Preston calling me back in 2014. And he said, “We should buy a domain and call it The Investors Podcast.” I remember he said that it was hosted on something called GoDaddy. I actually thought I heard something wrong because the name sounded so ridiculous. I was like, “What now?” But apparently it was a legit site.

Stig Brodersen (22:55):
And so I never thought too much about it. To me, it really seems like it’s just a commoditized market. It’s a domain. It’s not like one domain is better than the other, depending on where you bought it. So it’s never really been too much of my interest. We bought several domains since then, and what I’ve realized is that they kept on sending me different emails with upselling. So, I took a closer look and lo and behold, they have a full suite of different products now.

Stig Brodersen (23:21):
And so today, domains are only 46% of the revenue. 54% are in two different business segments, it’s called hosting and presence. And also one called business applications. You can basically see this as a one-stop shop for what you need as a small business owner. Say that you have a podcast or something similar to that, you would go there, you would buy whatever domain you need, but you can also get your email there. They even do resales for Microsoft office, or basically anything you need. You can build your website there as well.

Stig Brodersen (23:54):
So COVID took a toll, short-term as it did on most companies when that shock came out, because it did hit a lot of small businesses. But it also gave you a longer lasting tailwind for the economy, as it’s been growing more digital with everything that has happened. And if we look at the investing thesis, the investment thesis is relatively simple in the sense that GoDaddy back in the day, they were a domain company. So they competed in a $5 billion market. Now they made this pivot to new business areas, so now they’re competing in $180 billion market. So far so good.

Stig Brodersen (24:28):
Since 2016, the top line has grown annually by 16% on average. Domain, that’s actually still growing, not just new domains, but they’re also doing sales of existing domains. If you have cars.com or whatever, if you were so lucky to gobble up some of those back in the day, that’s actually one of the fastest growing segments within the domain business unit. So that’s growing 13%. Best is business applications, that’s growing by almost 26% annually since 2016, but it’s also the smallest unit. And what’s really interesting is that in that growth category, you have a much larger total addressable market because you also have an average annual consumer spend between 600 and a thousand dollars.

Stig Brodersen (25:09):
So it’s not just you buying your domain for 10 bucks or whatnot. It’s people there spending real money. The bad news of course, is that it’s also much more competitive. We will be competing with Wix, and Squarespace, and a lot of companies you probably don’t want to compete with. So yes, the total addressable market or TAMs as it’s called, yes, that’s much, much better. But they’re not a big player in that market. At least not yet.

Stig Brodersen (25:36):
I always want to say something bad about whatever I pitch here. One thing that I know that Tobi and I, we talked about multiple times has been the fear of inflation. And if we look at the macro environment right now, if we look at what’s priced-in, in terms of inflation, we are around 3% and the way I’m looking at that and saying, “What is priced in?” I’m not talking about the headline inflation number. I’m looking at the five year treasury yield, and then comparing that to the TIPs.

Stig Brodersen (26:02):
Because then you can see, and the TIPs, that will be the treasury inflation protected. So you can sort of see what the market includes in that. What is the general consensus? And it’s baked in to be around 3%. So right now, if you really want to lock your money in for five years, with a tip you can. I think it’s 1.8, minus 1.8 right now. But it will go up and down together with inflation. So why am I saying that? Well, I’m saying it because my best guess, and it’s a guesstimate, is that inflation is here to stay for quite some time. I don’t think it’s as transitory as it’s been told and retold in the media.

Stig Brodersen (26:39):
Hari said himself not too long ago about the supply chain issues. I can only see that persisting for the foreseeable future. And so all eyes are on the [FAT 00:26:49], whenever that comes. And not to try and predict what they’re going to do, we heard they’ve started tapering now and everything that’s happening with that. But GoDaddy did take out some debt as they’ve been expanding, and that was being renewed in 2024. So to make a long story short, I’m looking at the debt level right now. It’s not alarmingly high, but it will have to be refinanced. And how will it be refinanced? What does the macro environment look like that? And often you would like to invest in companies where you don’t have to look at that. Where it’s not an issue in the first place. So it is something I’m looking at, and just to give you some numbers, the free cashflow for the trailing 12 months, that’s $712 million. And you had interest expense of 112.

Stig Brodersen (27:27):
So again, not alarming right now. But whenever you log in debt at these levels, by definition, just a few percentage points in terms of the interest rate, can give you multiples of the current interest expense. So it’s just something to keep in mind. Whenever I look at the valuation, I’m looking at a price of free cash flows in the high teens, and I’m looking at a company that’s growing in the high teens too.

Stig Brodersen (27:51):
And whenever you look at some of the trend lines, you see revenue growing faster, like 16%, and you see some of the newer segments really making good results. And then you see G&A cost. It’s gone up by 12% in comparison. So it’s a scalable model, also because it’s upselling. And you just see, I know it comes off as very plain and simple, but you see revenue increase more than costs, which is something you want to see as an investor.

Stig Brodersen (28:20):
And if you do look at comparable companies, and I’m not saying that something like Wix is completely comparable, it is comparable to one of their business units, but just as an example, we have a price to free cashflow of 138. The investment thesis is different from Wix, but we are seeing some crazy valuations. For Verisign, which is much more comparable to the domain business, it’s 33. And you know, domains are as [SAS 00:28:46] almost if we can use that, as this example, because you don’t change. I don’t think I’ve ever had the thought of changing my provider because I can save one buck because I don’t want the hassle of changing my domain. Once you’re locked in, you’re locked in.

Stig Brodersen (29:00):
And of course there’s a huge difference regarding how much they can then start upselling you. But once you’re locked in with your domain and you have their retention, that’s just how it is. And it’s very sticky. Which is also one of the reasons why you would have, at least at these levels and this crazy market, it makes sense why something like Verisign would have a… In the thirties in terms of price of free cashflow, because it’s like a bond.

Stig Brodersen (29:19):
So those were my first part of the pitch. I wanted to throw it back over to you Hari, because I know it’s not Silicon Valley based, but I wanted to know more about the reputation. It seems like there was so much fighting for talent right now, and without having any prior knowledge to this, I do not expect GoDaddy to be like a top of the totem pole for talent. But how is it seen from programmers? It’s all due to talent at the end of the day, for these type of companies.

Hari Ramachandra (29:47):
I think this is a very interesting pick because many of us are customers of GoDaddy. It’s the granddaddy of public cloud. Way, way before AWS or anybody came in. It’s sad that they didn’t really capitalize on that and move into other segments. Basically, they just stuck to domain and web-hosting. I think the positives I see in this company is of course, the brand recognition among all the small businesses mainly. And also their diversified customer base. Huge tail of customers. And also, recently I think they also bought a new payments platform and for eCommerce enablement that might also have some tailwind for this company, in terms of revenue and growth. And obviously customers are sticky. So those are all the positives.

Hari Ramachandra (30:36):
In terms of your question about talent. Before I come to that, I see some issues with the talent aspect because what is happening is, this is one of those markets or areas where the barrier to entry is not very high. So you see a lot of new iterations. Every now and then you’ll hear about a new hosting company, whether it’s Wix, you talked about, Bluehost was there, Squarespace, I guess there’s another one. And then there is all these other companies like Shopify and others, this being a very low barrier to entry, no network effects. You will see a lot of new iterations coming in and they will attract a lot of talent. Even from Godaddy, I believe. Because they are much cooler, new ventures with a new take.

Hari Ramachandra (31:24):
And then there is also pricing pressure, comprising competition and stuff like that. So in Silicon Valley, it’s not really seen as a tech company, in the sense that programmers from top schools would even consider it. I think it’ll be at the bottom. So I think that’s one of their weaknesses, I would say. And along with the competition, those are the things that worries me about them in terms of their future growth. There must be some ceiling for them because of that.

Tobias Carlisle (31:51):
I was just going to agree with Hari, that I don’t view it as a tech company either. I think what it is, is a marketing… They’ve got this great setup, right? They used to have these very attention-grabbing ads. And now they’ve transitioned away from that a little bit, but they’re still heavy ad spend. So, ask the average small-business owner, “Where do you go to get your domain?” I’ll bet you that most of the time they’ll say GoDaddy first. And then you go to GoDaddy and I say this as a customer, many times over. I hate to think what I spend every year on domains that I don’t use. It’s a lot. Could be a thousand bucks a year, or something like that. I go and I buy a domain and they say, “Hey, guess what? First year or so, it’s $9.99.” And you’re like, “That’s not very much money. I’ll get one of those.” And then I just get this email every now and again that says, “Oh, by the way, you just spent 80 bucks on domains.”

Tobias Carlisle (32:48):
And so cleverly, and I’m not going to switch away, it’s just too hard and I couldn’t name another one off the top of my head. As a portion of my business it’s not very much money, but it’s this consistent little tail of money that I’m going to spend. And I’m not going to give up these domains because who knows, maybe I’ll want to use one of them one day. So I think it’s a clever marketing business that does have this little software as a service recurring revenue model. And so that is a good little business. And then they can upsell you all of the other stuff.

Tobias Carlisle (33:14):
I think the fact that they’re not going to get top level engineering talent, and that’s why they didn’t figure out that they should have transitioned from all of that cloud hosting over to an AWS style thing. If they’d had those guys, maybe they would’ve done that, but they didn’t. So they probably as Hari points out, they’re going to miss out on those ideas. But it’s going to be a very consistent, solid growing business for a very long period of time. So I think the business is actually not too bad for it. And it’s the very high returns on… It doesn’t cost them much to provide those domains. But as Hari points out, it’s going to be hard for them to charge much more for them either because any time there’s too much margin, there’ll be a competitor that comes in. But I still think it’s a good business, and it’s a good recurring-revenue model business.

Stig Brodersen (33:58):
If I can just put to Hari’s about the payment platform. They bought a payment platform called Point for $320 million. Not too long ago. And the numbers haven’t come in there yet. It will probably come in next year, or 2023. So we don’t really know that. It’s a part of the one-stop shop type of thing. I think we can all say that it’s very attractive to be in payments, but it’s also one of the most competitive fields ever. And I cannot necessarily see why GoDaddy would perform better. My best guess is that there was at some point in time, a CEO who said, “We need to have the full suite. So we need to buy these five different…” Or whatever that was bolt-on acquisitions. And oh, let’s do one of them. And then one of them, and then it’s also a way to acquire talent.

Stig Brodersen (34:43):
Do think that’s probably what went down? Are they going to do a better job in the growth segment? Probably not. And the one thing that they have working for them, and I know I’m talking my own pick down now, but I do think that the valuation is quite attractive. That’s the other side of the coin.

Stig Brodersen (34:57):
But what they do have going for them is that whenever you’re in sales, you realize how difficult sales is. Everyone who has a sales job would tell you how difficult it is. And it is difficult. The fun thing about sales is that getting the attention of the customers is really like 80%. Once you are there, and it’s so hard to get there, it’s such a huge advantage. Of course, you can still mess up, but just getting there really means a lot. And so by having [inaudible 00:35:24] 82 million domains and also being in a space where most people are generally not interested. Most people, we don’t care. We want what is easiest.

Stig Brodersen (35:36):
And if we get a discount offer for Microsoft Office and it’s bundled together, of course price still matters, but how can we make it convenient for ourselves? And I think that’s the mode they have, because in the market that they’re entering right now, there’s no mode and not the best talent. And so the thing that they do have going for them is that. And I do also think that they have the track record going for them, in the sense that the period that they did, it’s many years ago now, and you can just look back at the last five, seven years. It has proven to be successful.

Stig Brodersen (36:08):
I think if you’d told me seven years ago, “Oh, they’re going to do this.” I would be like, “I don’t know if they can swing that.” And now we can just look back and say, well, it’s probably not being completely appreciated by the market. So if I’m looking at returns, I would also say probably mid teens. That’s sort of what the model is saying at this price point. That was my pick. I don’t know if you have any questions, thoughts, anything like that, or? All right, Hari, you’re up.

Hari Ramachandra (36:36):
Awesome. Going with the theme of being conservative, my pick today is Verizon. And I see it as a bond with a kicker, considering the environment today. And the reason I say this is Verizon is a proven player in communications. One of the three majors. It recently grabbed my attention because Buffett invested through Berkshire, $8 billion, which is a significant amount. In terms of absolute dollar amounts, I believe it is right next to Apple when he made that investment. After that, I think this is one of his biggest investments. It’s in the top eight or top 10.

Hari Ramachandra (37:18):
Verizon is the biggest player in the communication industry. The industry is going through consolidation. There are two other major players AT&T and T-Mobile. Verizon has the largest wireless user base among all of them. They have 121 million. The next one is T-Mobile at 104, after they consolidated with Sprint.

Hari Ramachandra (37:41):
They also have extensive communication infrastructure among all the players across the bands. Whether it’s 3G, 4G, 5G. 5G, T-Mobile is ahead, but they’re closing the gap with their recent acquisition of C-band’s spectrum for $53 billion. And they also have a very good network of fiber laid out through their [inaudible 00:38:08] as well as VAN. So in fact, a thousand miles or more of fiber laid out, and then they have VAN network as well, that helps other ISPs leverage them. Verizon works with other companies like Microsoft Azure or AWS for edge computing through their latest 5G [inaudible 00:38:32] acquisition.

Hari Ramachandra (38:33):
They do have some vectors of growth, whether it is in 5G IOT, 5G Edge compute, and also broadband for home, which they plan to cover with 5G for more than a hundred million homes. So that’s a huge market as well. I’m not too much looking at growth, but they project around three to four percent revenue growth in the next couple of years. And these spectrum auctions are valid for up to 10 years, so they have a long runway that way, where they’re protected. So with the 4.5% dividend yield and a 50% payout ratio, the dividend is safe. And if you get a three to five percent earnings growth, I’m looking at a low teen, at least, growth overall. So what I would like to know from Tobi and you, regarding the financials.

Tobias Carlisle (39:28):
One of the things that really jumps out when you look at telcos, particularly, is always the amount of debt that they carry. Every time I see, it’s just a little heart starter. It’s like a $217 billion market cap, with $178 billion, 178 billion with a B, in debt. Why are they able to support such a huge debt load?

Hari Ramachandra (39:51):
My assumption is that their cash flow and revenue are pretty stable, and hence they have a good rating for their debt. And considering that if you look at their interest payment versus their cashflow or their dividend payout versus their cashflow, they’re comfortable.

Tobias Carlisle (40:07):
I was just going to say, that’s it. They’ve got all the infrastructure in the ground. They can borrow against the infrastructure. They’ve got pretty good cash flow against it, and so it makes sense for them to be levered up. Sometimes I’m a little bit surprised at Buffett. But I guess Buffett’s comfortable with the ability to cover the debt. And I’m not going to argue with Buffett.

Stig Brodersen (40:24):
Whenever I look at the pick Hari, please correct me if I’m wrong but it’s trading around 52, and I think it’s a little cheaper than whenever Buffett bought it. I used to own this stock. I’m not really sure what to say about it. And you might be like, “Well, Stig, how do you own it in the first place?”

Stig Brodersen (40:43):
So I was in this funk last year where I had some cash and I wasn’t sure what to put it, because I couldn’t really find anything interesting at those price levels. I could put into Berkshire. It was trading at an okay level last year, but it’s already a huge equity position of mine. Other people might want to put them into ETF for tax reasons. I’m taxed on unrealized gains. And it’s a horrible system.

Stig Brodersen (41:11):
And so ETFs were another one possible. And so I was thinking, well, how can I find perhaps a basket of stocks and put my cash in that would just hold its value while I figure out what to do about it. And Verizon was one of those stocks that I found. Because it seemed to me that even at that time, inflation was high. And whether it’s 3%, whether it’s 5%, whether it’s much, much higher, I think that’s always up for discussion. But what appealed to me was the safety and stability of Verizon, that was clearly not going to be the best performing stock, but was also clear that it wasn’t going to go anywhere, which was very comfortable at the time. And we all remember 2020 at and everything that went down.

Stig Brodersen (41:54):
So, a ton of stuff I don’t like about this company with all that being said. I don’t like the CapEx. The CapEx for this company is just huge. And that’s just how it works. They bought this very expensive license for 5G that they are now utilizing together with Tobi’s pick, for the military. You want someone else to pay for your lunch if you can. And I don’t want to keep on pitching GoDaddy, but one example for a company like GoDaddy, they take advantage of companies like Verizon spending billions of billions of dollars building infrastructure for them to make money. It’s not [inaudible 00:42:32] because GoDaddy can say the same thing about… Same events for Facebook, or Google, or whatever you want to say.

Stig Brodersen (42:37):
And so obviously, this is something that Buffett already knows. And so whenever I saw that pick, and also the magnitude of how much was invested, it seemed to me that perhaps, and I know Buffett doesn’t talk about individual stock picks, it was a placeholder for cash. Not in the sense that they need to be shifted out right away, but he’s sitting on what, $140 billion? There was only so many stocks he can go after. The downside is really, really nice. The company has a very sticky product. You don’t want to change your provider because it’s just a pain and it’s already locked in. Branding value is really, really high.

Stig Brodersen (43:15):
And as I was going through it, compared to the other players, AT&T, T-Mobile, Telstra, whatnot. The numbers are really, really good. They had the highest return of assets, the second biggest EBIT margin, highest revenue employee. They had a lot of good things going for it. The question you had to ask yourself, as an investor was, are you the best or the worst? And so, I do think that they’re really good in what they’re doing. The industry isn’t that attractive, but on the other hand, at $52, I think it’s a very decent pick because the price also reflects all of the things that I’m mentioning right now, which is known to the market. Everyone knows how expensive it is to run a company like that. Everyone who looks at this also knows how much debt they’re carrying. So I do think they’re top of the class. So yes Hari, I don’t know if that was useful at all.

Hari Ramachandra (44:07):
I would like to add that we still don’t know how the 5G usage will evolve, especially with VR, AR, as well as autonomous cars, IOT, and that’s where the usage might be much, much different in five to 10 years than what we see now. So that’s the only kicker I see as the vector of growth, but otherwise I totally agree with you Stig. It’s a place to safely park your money and protect yourself against inflation.

Tobias Carlisle (44:39):
It’s inevitable, right? That we’re just going to consume more and more data over time. Because as fast as everything is, everything can be faster than it currently is. It can be in higher definition. There’s going to be more things. Internet of things, sucking down more bandwidth. These guys are basically monopolies in the areas where they are and they get very long term contracts. I think a minimum will be two years, which is why it’s so easy for them to borrow. These are great little regulated businesses that are basically just infrastructure that will probably earn better returns than what you would expect from most utilities. And so they’re going to do that for an extended period of time. So I think that this is a pretty good, safe pick from Hari.

Stig Brodersen (45:20):
One thing that I can’t help but point out that irony in, is that very often, whenever we’re having this Mastermind discussion, I’m pitching something from the valley. Something that’s a bit more high flying, trading at higher multiples. And then Hari, perhaps because he is in Silicon Valley, always choose these really boring, high quality companies like Union Pacific or Verizon. I just can’t help but point out the irony.

Stig Brodersen (45:45):
But if I can ask specifically about your approach, Hari, because you do have those high quality companies in your portfolio, would you call yourself an income investor who are living off… Well, not living off. I know you’re doing your thing with Salesforce. That’s not so much my point, but how do you see your portfolio with this type of high quality companies? Are you building your own ETF of high dividend yield companies? Or how do you see it?

Hari Ramachandra (46:12):
After you point it out, I am also starting to see the irony. But my thinking is, it’s more like a barbell approach to me. I’m living in the Silicon Valley. I’m working in Silicon Valley. I hold Silicon Valley stocks based on my employment and other avenues. So I’m heavily invested in the high tech growths right now. And for me, I need to balance it out with other things which are value or income oriented stocks. So that way, when there are cycles, I’m protected. So that’s my approach.

Tobias Carlisle (46:50):
That’s a good barbell. So when, if value ever starts working again, you’ll be retired off the value stocks.

Hari Ramachandra (46:56):
Yeah.

Stig Brodersen (46:58):
All right guys, I would definitely like to give you an opportunity to hand off to wherever people can find you Tobi, why don’t we start with you? Where can the audience learn more about you?

Tobias Carlisle (47:08):
I run a firm called Acquirers Funds and we have two funds, The Acquirers Fund, which is ZIG that’s midcap, large cap, US domestic, deep-value style picks like Lockheed Martin, which I pitched earlier. And then I have a small and micro version of it. It’s exactly the same strategy, just in a slightly different universe. That’s called Roundhill Acquirers Deep Value Fund. And the ticket is deep, D-E-E-P, small and micro type picks. And I’ve also got a website, acquirersmultiple.com, which has got free stock picks. And I’m on Twitter at greenbackd. It’s a funny spelling. G-R-E-E-N-B-A-C-K-D. And I’ve written some books too, but all of that stuff you can find on the acquirersmultiple.com.

Stig Brodersen (47:49):
Wonderful. Definitely recommend to check that out. Hari, where can the audience learn more about you?

Hari Ramachandra (47:55):
You can head to my blog, Bits Business. B-I-T-S-B-U-S-I-N-E-S-S.com. I’m also active on Twitter, harirama is my handle. So I look forward to the conversations’ feedback.

Stig Brodersen (48:09):
Fantastic. And I just want to say Tobi and Hari, thank you so much for yet again, making time for the Mastermind Discussion. We’ve been doing this for what? Five, six years? Something like that? It’s crazy.

Tobias Carlisle (48:21):
Yeah. I love it. Just you keep on inviting me. I’ll keep on coming back.

Stig Brodersen (48:24):
Right?

Hari Ramachandra (48:24):
Yeah. Same here, Stig.

Stig Brodersen (48:25):
Will do, definitely. I always learn a ton whenever we have this discussion. So thank you for sharing your knowledge. All right. So, for listeners out there, make sure to follow us on your favorite podcast app. If you are watching this on YouTube, make sure to subscribe. That’s all we have for you for this episode of The Investor’s Podcast. We’ll be back again next week, and next quarter with a new Mastermind Discussion.

Outro (48:47):
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