Andrew Walker (02:58):
Yeah. So I think in our last episode, we actually really talked a lot about all the Archegos stuff and everything. So I’ll refer people to our last episode for that. But I think for Discovery, so this is not the Discovery merger business, the core Discovery business, people looked at them and they said, “Hey, this is a company that has terminal value issue.” Because Discovery, they own the Discovery Network, HGTV, Food, all these brands that were great in the linear cable bundle. But I think people looked at them and said, “As that cable bundle dissolves, what is the place for Discovery? Do they have a reason to exist?”

Andrew Walker (03:30):
And the answer might have been no. If you wanted Discovery-like programming, you might just go to Netflix. And Netflix had a Planet Earth competitor and all this different stuff. So you could get it from Netflix. You could go get Nat Geo on Disney and stuff. People were really worried about the terminal value for Discovery. And I think the merger with Warner Brothers solves a lot of those issues. You put Warner Brothers… There was this great article in The Wall Street Journal on how HBO Max, like 10 million people signed up for it when Wonder Woman 1984 came out, and within seven days, 50 or 70% of them had canceled or something.

Andrew Walker (04:00):
So you combine all those headline grabbing things that people want to sign up for that HBO Max has, their new movies, their Game of Thrones spins and stuff. You combine all of that, which Discovery has content that people watch a lot of, but it’s more of the mindless content. 90 Day Fiance, Shark Week, Chip and Joanna Gaines, Food Network. You can watch a lot of that. That’s the type of stuff that reduces churn. It’s so good at reducing churn. You combine that with the headline grabbing stuff HBO Max has, and I just think this is going to be a killer system. I think the terminal value issue gets solved from this merger.

Andrew Walker (04:33):
Oh, and then why is the stock not moving on all this positive regulatory move? And I think the answer is A, this is $100 billion merger, those are rocky, that’s big. There’s a lot of integration to come. They’re going to spend a billion and a half dollars to realize the synergies that they want to realize, that’s a billion and a half dollars on severance, cost, firing people, all that type of stuff. It’s going to be rocky. And from a technical dynamic, I think a lot of people are really scared to step in front of this stock before AT&T gets rid of WarnerMedia.

Andrew Walker (05:00):
And how that’s going to happen, it’s classic special situations type stuff. Discovery is the fish that’s swallowing the whale in WarnerMedia. For every one share of Discovery outstanding right now, four shares will be created through this merger with WarnerMedia. And what’s going to happen is, Discovery will give 80 million shares to AT&T and AT&T will spin those shares out to all of their shareholders. And I think a lot of people are worried AT&T shareholder base is very dividend focused and very resale heavy. People are worried the guy who’s had 500 shares of AT&T in his brokerage account since the ’90s and lives off the dividends, he sees Discovery stock in his portfolio one day, he wakes up and says, “That thing doesn’t pay a dividend. I invested in a telecom company,” and he sells.

Andrew Walker (05:42):
They’re worried there’s going to be waves of selling pressure when AT&T spins this out. And there’s no real way to hedge it, because so much stock is going to AT&T, and people are very scared to step in front of that technical overhang. And I get it, that’s a concern. But to me, when I look at Discovery trading right now, trading in probably eight times Ford EBIDTA for a global third scaled entertainment company with all this IP, it’ll be gushing cash flow, huge synergies. They haven’t even talked about revenue synergies yet. When I look at that combination, I think it’s just too powerful a combination to ignore at these prices.

Trey Lockerbie (06:15):
Yeah. So Discovery right now has a 10% free cash flow yield, which is pretty tasty. And after this merger, I’m just curious, it’ll be a four and a half X levered merger, but they’ll be able to pay that down pretty quickly, and they have a good record of doing so. Let’s say that retailer does have Discovery stock now in their portfolio, can they expect that a dividend might come in the near future, given the free cash flow they’re throwing off?

Andrew Walker (06:38):
I always say the most instructive place to look at a company is their past actions. Past actions probably predict what a company’s going to do going forward. For Discovery, they did this great merger with Scripps Networks back in about 2017. And when they did the merger that was Scripps Network, I think they owned Food and a couple other TV channels, but it was basically merging two linear cable channels together. And when they finished, they were four or five times levered, and they said, “Hey guys, the synergies are going to be huge here. Our cash flows going to be great. We’ll pay down debt. We’ll get back to a reasonable level.”

Andrew Walker (07:06):
And guess what? Synergies were better than they expected, cash flow was gushing. Within 12 months, they hit their leveraged target. And then what did they do? Discoveries a John Malone company. They started buying back shares. So I think what happens, the share buybacks are on pause right now because they’re in a merger, it’s a big merger, there’s going to be a lot of debt. But once this is through, I think history rhymes. They’re going to merge, synergies are going to be a lot bigger than people think, cash flow is going to come in even higher because of their synergies. They’re going to pay down debt rapidly. There’s going to be so much cash, the debt is going to come down so fast.

Andrew Walker (07:36):
And then once that’s done, I don’t think they paid a dividend because this is a John Malone company. I think they buy back shares aggressively and they shrink the share count. And if it’s a 10% free cash flow yield, they’ll buy back about 10% of their shares every year. And eventually, the shares start going higher just because the cashflow numbers get so crazy.

Trey Lockerbie (07:52):
Also last time we were talking about this, there was a prospect of Comcast maybe coming in and entering the picture and disrupting this whole deal. Is that still on the table or have we passed that at this point?

Andrew Walker (08:03):
No, it’s unfortunate. I think when you look at the media landscape, there are two companies that stand out as subscale and in a bad place. And that’s NBCU, which is owned by Comcast, and Viacom CBS. And the reason is, look, they’re just subscale. If you look at their assets and the interest in them versus Netflix, Disney, and the merged HBO-Discovery, I think they pale in comparison. I thought NBC should step into this business and try to win either HBO or Discovery, lob in a topping bid, try to win one of them, so that they could be the scaled player. They didn’t do that. And I think when you look two years forward, if you play this forward, I think HBO Discovery is going to be in such a good position because there’s another merger to be done.

Andrew Walker (08:43):
They could buy either Viacom CBS, or NBC, and they’ll be buying a weak subscale player from a position of strength, so I think they can get a really good deal. And they can also say, “Hey, NBC, merge with us or else we’re going to go buy Viacom instead.” Because Viacom and NBC, they just can’t merge together because NBC and CBS together, that’s a no-no. They could try it and they’d have to sell NBC or CBS. And that scenario, Warner Brother Discovery would be a great buyer, but they’d still basically be winning by buying that way. I just think Comcast should have stepped in here, and I would not be surprised two years for now if there’s another big merger, HBO Warner Discovery merging with either NBC or a Viacom.

Trey Lockerbie (09:21):
So the stock today is around $29. Bank of America analyst, Jessica Reif Ehrlich just upgraded Discovery shares to a buy and raised her 12-month price target to 45. She had it originally a 34. Do you have a price to target similar to that in mind?

Andrew Walker (09:38):
Yeah. Look, I think I don’t read tons of sell side, but I do think 45 seems reasonable. At $45 per share, if I’m just doing my math right, this would be $100 billion market cap company. I think in 2023, they could do 8.4 billion in free cash to equity. So that’s fully taxed, after interest, everything just free cash flow to equity. So at 100 billion market cap, you’d be talking about 12 times free cash flow. That seems very reasonable to me, especially because I think earnings will be growing after 202. In 2023, they won’t have fully realized all of their synergies. So they’ll be more synergy to come in 2024.

Andrew Walker (10:14):
They’ll be leveraging more of their investments into content. Everybody’s over investing in content right now, it’s hit scale. So they’ll be leveraging more of that. So it’s not just 12 times price of free cash flow, it’s 12 times, and I think growing pretty quickly and we’ll probably be getting starting to share buyback thing. So yeah, I think 45 sounds reasonable. I think three to five years out, it doesn’t take a crazy amount to go right for you to be looking at the stock and saying, “Hey, this could be 60, 70, $80 in three to five years,” just because of those cashflow dynamics and everything that we’ve talked about.

Trey Lockerbie (10:48):
Fantastic. Well, thank you so much for that update. I’d like to now move on to your top five predictions for 2022. Prediction number one is that deep value finally out performs. So let’s talk about what’s been happening with deep value stocks and why they continue to be so depressed and maybe talk to us about which sections you’re seeing with the most promise.

Andrew Walker (11:08):
Yeah. On the blog just at the start of the year, I do a predictions thing. And this year I had five predictions for 2022, and number one was that value out performs. But I think it’s really easy to say you outperforms, but how do you define value, is it low price, earning stocks and everything? It’s really hard to point back and say, “I won or I lost on that.” So I took it a step further and said, “Look, there are two sectors that I’m seeing lots of interesting things. I’m seeing really low multiples, record results, aggressive share buybacks, and insider buying. And those two places are cyclicals, so steel producers, oil and gas explorers, lumber, that type of stuff.

Andrew Walker (11:45):
And the other area I’m seeing it is retailers. And retailers spans the gamut. But the areas I always really think of is specialty retailers, so names like Abercrombie, Bed Bath & Beyond that type of thing, or sporting goods retailers, which are the ones I’m really interested in and I think we’ll talk about in a second, but things like Dick’s Sporting Goods, Academy Sports + Outdoors, Hibbett Sports, and Sportsman’s Warehouse. And again, all of them they’re trading for crazy little multiples, great balance sheet, gushing cash flow, buybacks, insider buying. And I’ve just been looking seeing, “Why is the market trading this so cheaply? What am I missing? What is the market missing?”

Trey Lockerbie (12:20):
Yeah. So when people are stuck in their house, they’re trying to pick up new hobbies, they’re maybe going camping, they’re finally buying things like for activities that they maybe weren’t in the past. So there’s this big surge. And I think the ideas that will taper off now that people are getting into the world. Is that correct?

Andrew Walker (12:35):
Yeah, that’s exactly it. Especially Sportsman’s Warehouse, Academy Sports + Outdoors. There’s a lot of outdoors activities and people say, “Hey, did these guys… ” Yeah. Gun sales were going crazy in 2021, but maybe everyone who was going to buy a gun for the next three years has bought a gun already. So they’re going to have this huge trial for the next couple years. Or yes, people bought tons of Nikes from Foot Locker in 2021, but now they’ve got enough Nikes, and maybe the purchases going forward look a lot weaker. So yeah, that’s definitely the big concern.

Trey Lockerbie (13:03):
You said you want to circle back to Nike? Did we touch on that yet?

Andrew Walker (13:06):
Yeah. So I think right now the market’s concern, I can tell you, is they look at 2021 earnings and they say, “That is peak earnings. Earnings are going back to 2019 levels, across the board.” And I think that is painting it with two broad a brush for two reasons. Number one, on the outdoor side, if you are a person who, I’m just going to use a hypothetical consumer, if you are a person who lived in New York City, COVID struck, you took your family and you moved to the burbs or rural or something, and you picked up hunting, you picked up fishing, you picked up golfing, any of those three. You’re not going to churn just because COVID had stopped. Maybe you have exited city, maybe you don’t. But if you took up golf, you probably invested in golf lessons, you bought clubs.

Andrew Walker (13:44):
I’m not saying everyone who took up golf, hunting and fishing is going to stick going forward, but it’s a habit. It’s a habit and a hobby. Once you form that habit and hobby, a lot of these people are going to stay. So I think their customer base has expanded markedly. You talk about COVID and you’ve got these COVID winners who they were growing like this, and then COVID step changed them up. Yeah, they’ll probably come back as COVID normalizes, but it’s not back to the original baseline, it’s a higher baseline. So across the board for the outdoors, I think they’ve got a lot of new customers.

Andrew Walker (14:09):
And then the other thing is, I think, the competitive environment has really changed, and it’s changed in two ways. So Hibbett, which again, they’ve got a lot of places and places that aren’t quite as competitive. And they say, “Hey, in a lot of our communities, within a 20 minute drive, there were two stores that sold the type of goods we sold, us and JC Penney. JC Penney went bankrupt during COVID, so now it’s just us. So our competitive environment’s much better because our competitors sold.” And then the big overarching thing, that’s just Hibbett on one side. But I think that does apply a little bit to all of them.

Andrew Walker (14:36):
The a real change, I think, is Nike in 2018 or 2019, something along there they said, “Hey, we’re focusing on our direct consumer business. We currently sell to thousands of suppliers, customers, whatever. We’re going to cut that down. We’re only going to work with 40 of our key suppliers and everyone else is out. So the mom and pop store across the street might not have Nike anymore, but Dick’s Sporting Goods still does. Big 5 Sporting Goods, which is one of the companies I talks about, I believe they got kicked out of the Nike program. So when you compare their 2019 earnings, that’s 2019 earnings with Nike. They don’t have Nike anymore, I think.

Andrew Walker (15:10):
I haven’t studied Big 5 as much as I have the other companies, but those sales have to go somewhere. A lot of it goes to the Nike direct. It also probably goes to Academy or Dick’s, who still have the Nike store. So I think the competitive environment is so much better because a lot of the competitors went bankrupt. And of the ones who are still there, a lot of them don’t have Nike anymore, and that’s huge. Nike’s the most popular sporting brand. So I just think the competitive environment for these guys is a lot better. Their customer relationship and their loyalty programs have grown leaps and bound. Their omnichannel stuff is much, much better now than it was pre-pandemic. So I just think they’re in a much better space where they’re not going back to 2019 earnings.

Andrew Walker (15:46):
And by the way, you can also run the math, what if they go back to 2019 earnings? I’m looking at Academy. If we just said they go right back to 2019 earnings levels, creating a 12 times EBIDA and like 15 times unlevered free cash flow. Is that crazy cheap for a retailer? No, but it’s not like it’s the most expensive thing in the world. And by the way, they’ve opened some stores up since 2019. So their earnings base you should think should be a little bigger just because their stores have opened up. I just think the market’s so concerned about bad comps, but it’s not like reading through the complexities of the situation.

Trey Lockerbie (16:17):
So how are you playing this? Are you putting together a small basket of these sporting goods stores? It sounds like you don’t have a specific favorite out of the bunch.

Andrew Walker (16:25):
Yeah. I’m still really thinking it through. Each of them are different. Academy’s really interesting because they’re in the south, I think they’re stored, and I love their focus on outdoors. Sportsman Warehouse is really interesting because they just had a merger. We talked about HSR when we were talking about Discovery Warner Brothers, sportsman warehouse was going to get bought by Bass Pro shops/Cabela’s and the DOJ said, “No that’s too much concentration. And a lot of rural towns, the only places that sell guns are a Sportsman Warehouse and Cabela’s/Bass Pro. If we let you merge, there’s going to be rural towns that there’s only one gun salesperson there.”

Andrew Walker (16:59):
So they block that merger. So I think there’s been a lot of fore selling at Sportsman Warehouse, and they got a big break fee from Cabela’s as part of the DOJ blocking that deal. So that’s interesting. Hibbett. they run the AutoZone model where they just repurchase shares like crazy, very cheap, but it doesn’t have outdoor piece. One of the things I like about gun sales, leaving the politics aside, gun sales are very insulated from the Amazon risk. Amazon doesn’t sell guns or ammo, Walmart an Dick’s… Actually, another interesting thing about comping to the 2019 environment. In 2019 and 2020, Dick’s and Walmart who were some of the largest sellers of guns and ammo in the nation, they way pulled on gun sales like Walmart, you can still go get guns, but the selection is really limited.

Andrew Walker (17:39):
You have to go ask for it, they’ve got ammo. But again, it’s not like Front and Present, whereas Sportsman Warehouse, Front and Present, you go there, huge gun selection and everything. And in 2019 is when they started pulling back. And one of the things Sportsman Warehouse said is, “Look, in 2019, Walmart was liquidating their ammo and gun sales. It was the worst environment for us forever. So if you’re comping them to 2019 earnings, you’re comping a really bad environment for them.”

Andrew Walker (18:02):
So I like that Academy and Sportsman still have that gun sales piece, which I think is a little bit economically sensitive and it’s very unamazonable.

Trey Lockerbie (18:12):
So you’re predicting also that we might see some outperformance in cyclical commodities. There seems to be this strange phenomenon happening where there’s a lot of these types of companies throwing off cash and even exceeding their quarterly expectations but the stocks aren’t climbing. Talk to us, especially about the commodities focused business and what’s happening there.

Andrew Walker (18:30):
Yeah. The one I specifically mentioned is US steel. And what happens is, the classic thing with cyclicals is everybody says, “Look, you don’t buy them when the multiples are cheap because that’s when they’re at absolute peak earnings and things are really good for them. You buy them when the multiples are expensive because that’s when they’re at absolute trow earnings and things are probably going to turn around and the cycle going to resume.” Well, right now you’ve got this weird thing where they’ve had really low multiples for about a year now, so everybody’s been saying, “Don’t buy them with low multiples, wait for bad times and everything.”

Andrew Walker (19:02):
But because they’ve had low multiples for a year and this economic boom, oil price is through the roof, steel price is through the roof, lumber price is through the roof. Because it’s last it for so long, these guys are minting an insane amounts of money. US steel, I think they made like, I don’t have the numbers in front of, but 30 or 40% of their enterprise value they generated in cash last year. It’s just absolutely insane. So I’ve been looking to them and saying, “Okay, I know the old adage, but there’s so much in cash coming onto their balance sheet. And every day that the environment doesn’t fall off a cliff instantly is a lot more of their cash coming on their balance sheet, and similar to the retailers, insider buying, buying back shares like crazy.”

Andrew Walker (19:40):
US steel as we speak, I think it’s trading around tangible book value right now, and that’s for a company that right now is generating like 10% of their market cap in cash every quarter. That’s a really strange combination. So I just think those are interests. Oil is a popular one. Oil has gone from 60 to 90 over the past six months. Have the oil stocks moved? Yeah, a little bit, but they’ve probably moved at levels that would imply oil went from like 60 to 65. So again, right now, they’re just minting cash flow and it’s just very strange to see oil, steel, lumber, aside from the fact they’re all commodities and maybe a little economically sensitive, they don’t have a lot to do with each other. And all of them have the same dynamics where these companies just aren’t getting any credit for how much cashflow they’re producing right now.

Trey Lockerbie (20:22):
All right. So let’s move on to prediction. Number two, which is cable stocks, another beaten down industry. What are some of the more compelling opportunities you’re seeing with cable stocks here?

Andrew Walker (20:32):
Yeah. I’ve been a long time cable bull. Right now, all the cable stocks have pulled back quite a bit over the past six months. Charter, which probably is the industry bellwether has gone from over 800 per share to about $600 per share, that’s about 25% drawdown. That’s a big move for any stock. But for a cable company that should be like pretty economically resilient, low beta, that’s a really big move. People are really concerned, fixed wireless competition is coming. T-Mobile was actually the fastest growing broadband company in America in Q4 with their fixed wireless business.

Andrew Walker (21:05):
They’re worried about fibers to the home overbuild. Every legacy telecom company, AT&T, Verizon, Frontier, Lumen. All of these guys are trying to upgrade their legacy copper DSL to fiber. So people see lots of competition on the horizon for cable and they’ve been selling down the stocks. I’ve actually been doing a series with Tegus, with expert calls and diving into the cable, but my base case has been, “These concerns have been around for years and years and years, and they haven’t really impacted the cable companies.” And my base case continues to be the cable companies are going to continue to perform just fine going forward.

Andrew Walker (21:39):
They are gushing free cash flow, they’re buying back shares like crazy. They’re very well run. They are growing. And I think this year, the combination of that continued growth and cash flow and the share buybacks is just going to be too powerful of a story for the equity market to continue to ignore. And then the other interesting aspect is, we’ve seen transactions in the space. So there’s a publicly traded over builder, which an over builder is the company who comes in and there’s already a cable system there and they say, “Let’s build a second cable system.”

Andrew Walker (22:06):
And that’s a very poor business because it’s not a monopoly, at best to duopoly. And if there’s a fiber at home player, it’s a tri-op. But it’s a poor business, but it makes cash. And once the assets are there, the assets are there. WOW! sold a bunch of assets for 11 times EBIDA over the summer. And right now, Charter, Altice, Comcast, the implied prices of their business is lower than 11 times EBIDA. So that’s a worse business, a worse asset and the assets that WOW! sold that went for a premium multiple. And we’ve seen normal cable assets tend to trade for 15 to 17 times EBIDA.

Andrew Walker (22:38):
We don’t have to do math here, but 15 to 17 times EBIDA on these stocks, it’d be a hefty premium from the current levels. Charter and Comcast in particular are much, much better assets than a lot of the even normal cable assets that are selling for 15 to 17 times EBIDA.

Trey Lockerbie (22:53):
Yeah. I was just going to ask about the overbuilding, I’m glad you touched on that. Is there anything we should hit more on in the cable stocks?

Andrew Walker (22:58):
Yeah. I think the only other thing with cable is people are really scared about the looming competition, fixed wireless, fiber to the home. And again, that’s been there for years and the cable stocks have done well. And I just did a series on discussing all the risk and people can go look at that if they want to really dive in. We talked to the former head of the FCC, telecom industry experts and everything to frame that. But I do think people really dismiss the wireless opportunity that these cable players have. And I think they’ve got a great opportunity in wireless.

Andrew Walker (23:27):
Charter and Comcast are growing their wireless business basically as fast as Verizon. And Verizon covers the whole nation, and Charter and Comcast each only cover a third of the nation. So for them to grow that fast says that there’s a real value there. And you can see why. Right now you could go sign up for an unlimited plan with Charter if you had broadband with them already, adding a mobile line with unlimited would cost about $20 per month. So broadband’s about $50 per month, a wireless line from them is $20 per month. You probably pay about $70 per month per line for your mobile service right now. So they could save huge amounts of money if you get broadband and wireless from them.

Andrew Walker (24:01):
So that’s why I think it’s so powerful, I think they’re going to take huge, huge share in wireless going forward. And as they do that, Comcast wireless business just hit profitability in 2021, Comcast will in 2022. So right now when I mention earning is multiple, they’re a drag because they’re investing in them and as you grow a mobile business, it shows losses, but once it hits stability, it’ll be profitable. Once they hit profitability, I think are going to be really surprised by how profitable these are, how quickly they’re growing, the opportunity there. And I think when you add that in, the cable socks are even cheaper than they appear on the surface.

Trey Lockerbie (24:34):
Yeah. Again, Charter, especially looking, just really interesting, market caps at 105 billion today, enterprise values at 196 billion, and just an interesting observation there. Let’s go on to your third pretty, which is that the COVID winners will win again. I want to focus, especially maybe on Peloton because that’s become a bit of a meme as of late and almost this poster child for a greed and fear index. What is the bull case for Peloton moving forward?

Andrew Walker (25:03):
I guess I should caveat by, if you talk to someone and they’re like, “Oh, I love this stock. I love this stock.” And you ask, “Hey, do you have any money?” They’re like, “No, I don’t own it.” That’s one thing. But if you talk to them, they’re like, “Yeah, it’s 20% of my portfolio.” That’s another. The first two are ideas and themes I’ve done a lot of work on and I really believe in and we’re invested in pretty significantly. The next three things we’re going to talk about are things that I call it mouth betting, where I’ve got a belief, but maybe it’s not like so firm that I’m ready to put money in there. So I’ll just caveat out with that.

Andrew Walker (25:29):
But Peloton, I look at this company it’s gone from $20 pre-COVID to 150 at the height of COVID winners winning to 30 or $35 today, I look at it and say, “Hey, this is a business. It’s not like all the subs they gain during the pandemic just go away magically.” People got Pelotons into their home, they paid for them. They spent thousands of dollars on them, they form a relationship. Peloton, people who love it, it becomes like a cult with them. They’re using it every day. So I look at all that, I look at a company that trades, if you just look at the subscription revenue line, the consumers, they’re growing. I look at what it trades for, it trades, I think last I checked about eight or nine times subscription revenue, which is very cheap for a subscription company.

Andrew Walker (26:11):
I think they’ve got all sorts of optionality and I think the market’s got a little too pessimistic on Peloton, Stitch Fix, Zoom, companies like this, where their consumers love them, they were big COVID beneficiaries, and there’s lots of tangential opportunities that they might be able to capture because their management teams are hungry and because consumer loves them. Like Peloton, the classic is, at some point Peloton is going to have a giant apparel business. And why couldn’t Peloton get into, I don’t know, restoration hardware, got into doing hotels and stuff?

Andrew Walker (26:39):
Why couldn’t Peloton started opening Peloton-branded gyms, Peloton-branded hotels, Peloton-branded lifestyle stuff. I’m just spitballing, but I’m just saying these brands that consumers love have so much optionality. And when I look at the stock price and how depressed the market is on them, it doesn’t seem like the market is recognizing that. And by the way, they’re also probably pretty strategic. You heard the rumors that Apple, Nike, Amazon, whoever might be looking at Peloton on like… There’s nothing quite as strategic as somebody who’s bought $2,000 to put a product into their house that they’re going to use five times a week or something.

Trey Lockerbie (27:10):
Yeah. The acquisition thing is really interesting. You saw Lululemon purchase Mirror, for example, for half a billion dollars. It makes sense that some of these companies might be taking a look. I’m not so sure I buy it yet, the speculation. Do you see much merit in say someone like Amazon actually purchasing Peloton instead of developing their own?

Andrew Walker (27:30):
Yeah. I think it’s really tough to go and build your own thing. People like to say, “Oh, a Peloton is just a bike with an iPad on it.” If you’ve ever used a Peloton and then use any competing spin bike, it’s night and day. People used to say Tesla, oh, why can’t the ice companies do this and stuff? Well, have you driven a Tesla? It’s really nice that people who do it love it. I’m not saying the stock’s under or overvalued here, but these things where it just works and it works like magic are really hard to recreate. And there’s also a little bit of a land share grab. I have a Peloton in my house now.

Andrew Walker (28:03):
If Amazon rolls out Amazon prime bike, even if it’s the same or better than Peloton, I’m not going to get rid of my Peloton. Now, if they gave it to me for free with my prime membership, maybe, but I also have a relationship with the instructors I love and stuff. Those things are very sticky. So I do think when you look at these things, if you’re a company and you look at Peloton strategically, you say, “Okay, millions and millions of members who use this frequently, we get all sorts of data on them. We have a product that they’re using frequently in their house.” Why did Amazon want Alexa and Echo and these things? Because having something in your house that you’re frequently using is the best form of building customer habit.

Andrew Walker (28:38):
Having a Peloton in somebody’s house, there’s lots of interesting ways you could use that as optionality. You could have Amazon Prime Shows on there, you can do product integrations. There’s just lots of endless opportunities there for them to dream big and think of ways to integrate it, bundle it into the prime membership as an extra benefit to get more people in prime. There’s just lots of things there that they could do. And by the way, again, eight or 10X revenue for subscription revenue for a very sticky service, that’s probably cheap in and of its own right.

Trey Lockerbie (29:04):
Talk to us about why the stock for out of bed, it was trading in up around 80, 87, and then it woke up one day and it was in the 50s. So what exactly happened? Did they miss some earnings? They’ve obviously lowered their forecast a little bit, but what happened here with this huge almost 60% drop?

Andrew Walker (29:19):
You and I are talking on what is it’s like Wednesday, February 8th or 9th, we just found out yesterday, their CEO is stepping down, he’s going to become the exec chairman. They hired a new CEO. I think what happened is mismanagement. In March 2020, demand for Peloton went through the roof, and for the rest of 2020, Peloton was trying to catch up. I got my bike at the end of 2020, and it was like eight week wait time. They were trying to catch up with demand far out tripping supply. They bought a bike manufacturer, they were ramping, ramping, ramping, hiring like crazy, everything.

Andrew Walker (29:50):
And then around the middle of 2021, demand starts to normalize and they just bought all of the supply. So now supply is, they probably overinvested in supply versus demand. And along the same time, they’re facing a lot of other issues. They have the Peloton treadmill recall, which I think was handled abysmally. In Q3, they come out and the stocks at 70 and they release earnings, which are a huge disappointment, they’re pulling down guidance to everything. And somebody says, “Hey, you guys, you’ve got a lot of fixed costs, you’ve got a lot of investments. Do you guys need capital?”

Andrew Walker (30:21):
And the CFO, if I remember said, “Nope, we don’t need capital.” Three weeks later, they go and raise equity. So it just all speaks to a company that was mismanaged. I know John Foley, who was the CEO. He built this business after tons and tons of venture capitalists turned him down, said it was a silly idea. So he had some vision, but I think he was mismanaging it towards the end. They were running from one fire to another. I think they burnt a lot of their credibility. And look, it has not been a great time in general for the COVID winter stock. So I think that all explains how we went from 80, $90 to 30, 35, wherever we are right now.

Trey Lockerbie (30:55):
Okay. Let’s move on to prediction number four, the law of large numbers. What high flyers do you see falling and what high flyers now seem maybe reasonably valued here?

Andrew Walker (31:06):
Again, this is not one that I’ve got insane conviction in, but I just look at how Apple, Amazon, a few others are up like 30% every year, it seems like. And at some point, the larger law numbers has to catch up to them. Apple’s market can’t be 15X the entire global GDP or something forever. And I just thought this was the year because you look at them in a lot of them don’t look cheap anymore. Five years ago, Apple’s P/E was like 10 or 12 times, and today it’s like 30 or 40 times, I haven’t looked post the numbers, but the multiples have expanded quite a lot. There is a lot of interesting competition and regulation that’s coming.

Andrew Walker (31:44):
We talked regulation in Discovery, Warner Brothers, but regulators do not love Amazon and Apple size and everything. And there’s always things with break them up and everything. And in the short term, that might not matter, but in the long term, that’s a headache. Look at what happened with Microsoft in the early 2000, management’s distracted, you can’t do everything. It’s really tough having that regulatory scrutiny. So multiple are higher, I think regulators are coming. I think there’s a lot of looming competition in some of their businesses. And I think you just put it all together.

Andrew Walker (32:10):
And I’m not saying that these things are going to go down 75% overnight, but I do think they can’t keep delivering market beating returns forever and combine all that with rising interest rates, which 40 times P/E on some of the largest companies in the world, I think part of that is the fact they can borrow money at 2% and buy their shares back. If interest rates actually did rise, I think you get some P/E compression from that as well. Combine all those and I think you’ve got the market for some stocks that stall out over the next couple years. And then other company I mentioned was Tesla, which has just an astronomical valuation.

Andrew Walker (32:41):
And people have been saying, competition is coming for Tesla for years and years, and years. But I do think at this point you are finally seeing, you’ve got the electric F-150 and all of these things rolling out. I think you’re finally seeing progress on the competition side. Again, not to say Tesla’s going to go down 75% or something, it was up like 12X from 2020 to the end to 2021. It just can’t keep growing like that.

Trey Lockerbie (33:02):
I’m glad you brought up Microsoft because it seems like they’ve broken through that regulation scrutiny you mentioned because they just announced a $69 billion acquisition of Activision Blizzard. And I think back in the ’90s, to your point, something like almost 70 billion acquisition would trigger a lot of concerns from the DOJ, etc, but they seem to be moving without that kind of friction anymore. What’s your take on that?

Andrew Walker (33:25):
Well, I think you’re right, Microsoft, I remember a great tweet from a couple years ago that was like, “The bull case for Microsoft is they’re the only mega cap tech company that can do M&A anymore.” And when the government was going to force TikTok to divest, Microsoft was the only company that could buy them. So I do think that’s true. But to your point on regulation, Microsoft, it’s buying Activision. If you look at the spread, I think they’re buying them for like 90 or 93 in cash or something. As we speak Activision is at 81. So it’s coming a little bit, but that’s still a big, big spread for a cash merger with the most credit buyer in the world.

Andrew Walker (34:01):
Microsoft’s going to take the cash off their balance sheets to pay for it. The market is saying, there’s a good chance that regulators are going to step in and try to block Microsoft Activision. So even Microsoft’s running into problems with that, but as you said, they’re buying nuance, they’re doing lots of M&A, they’re the only person out there who it seems can acquire. I thought somebody put another funny thing out there, Facebook tried to acquire Jiffy or whatever, which makes jiffs, and they got blocks. And that was like a $200 million acquisition, but they can’t buy Jiffy, but Microsoft can buy 70 billion Activision Blizzard, is that serious regulation? It’s just hard to believe.

Trey Lockerbie (34:37):
So moving on to prediction number five around SPACs. Last time you were on the show, you gave this very informative introduction to SPACs, but you’re now writing that there’s been this spec bubble that has burst. What’s your outlook on SPACs nowadays?

Andrew Walker (34:50):
Yeah. So I think you and I talked in June, 2021, which the height of the spec bubble was February and March of 2021. By June, it was very cold. And since then, I’d say it’s gotten even colder, but what I’ve always loved about SPACs is if you buy a pre-deal SPAC, so you buy a SPAC, most SPACs have about $10 per share in trust. If you buy a pre-deal SPAC, they announce a deal and you just hope, “Hey, they announce a deal and the stock market goes parabolic for the deal.” And the best example of that would be DWAC that’s the SPAC that’s merging with Trump’s fledgling social media network.

Andrew Walker (35:24):
And the day before they announced that deal, the stock was trading at or below trust, so it was trading around $10 per share. And as you and I are speaking, it’s trading at $84 per share. Now, unfortunately I wasn’t involved in that one. I would’ve loved to be involved with that one, but that’s obviously an extreme case, but that can happen. You buy a SPAC, you buy below trust, you hope they announce a buzzy deal that the market loves and it goes crazy. Rumble, another social media network’s coming public through a SPAC. And every time they tweet about Joe Rogan, the stock price goes up another 10% or something.

Andrew Walker (35:51):
So you just hope you get lucky and that happens to one of the SPACs. And if it does, you’re going to make an outs standing return. And if it doesn’t happen, well, you bought the SPAC, and you bought it below trust, and I can give you some examples, and it’ll liquidate in six or nine months. So you’ll make one or one and a half percent of your money because you buy it at 985 and it’ll liquidate for 10. So you make one and a half percent of your money in nine months. And is that the best return in the world? No, but it’s a hell of a lot better than what you would get if you just parked it in like a cash account or something, and you’re getting better return than cash with cash like risk with the added optionality of if you bought it and the stock went absolutely bonkers,

Trey Lockerbie (36:25):
It’s interesting, the last I checked there was around 500 or so SPACs and there’s still around $900 billion private companies. So 900 unicorns to choose from that you think would all want to go public. So it’s not like there’s not a lot of opportunity, is it that the private sector is saying, “Hey, we’re good right now.” They don’t necessarily want to go, where’s a stall out coming from?

Andrew Walker (36:47):
So a SPAC is you go and raise the, We Study Billionaires. And you get $200 million and you throw it in a bank account. And then what’s going to happen is you go try to find a company to merge with and you’ll come and present it to your shareholders and say, “Look how great this deal is. Approve our merger, give us our $200 million and this will become a publicly-traded company.” But the reason I, as more like a trader like SPACs is you get the free look at it. You come to me with a deal, if I love it, I can keep it, if I don’t, I redeem it and I get my money back. And the reason unicorns aren’t going public through SPACs right now is right now, everyone knows when a SPAC finishes this deal, the stock’s going straight down. So everyone is redeeming.

Andrew Walker (37:26):
So you’ll see actually, TREB, T-R-E-B merge with a company I’m forgetting what the ticker became. I’m going to look it up as you and I are talking, it became System1, SST. And that was like a $500 million SPAC, and I think 99% of shares redeemed. So if it wasn’t for outside financing, we could talk about that in a second, when they merged, they were like, “Great, we’re getting three, four or $500 million,” whatever was in trust. When they went to actually collect on the trust, there was only like three or $4 million left in it. And what company wants to go through all the headaches of a merger, all the expenses of a merger and find out at the end that there was only $4 million?

Andrew Walker (37:59):
It costs more to do the merger than they’re actually getting in some of these cases. So nobody wants to go through that. So right now, every private company is hanging up the phone if a SPAC sponsor calls them, because they’re saying, “I’m going to go through all this headache and at the end of the day, there’s not going to be anything left in trust and my stock’s going to trade like absolutely bonkers.” They’re just hanging up the phone on them. We can talk about the exceptions to those rules if you want, but people will say, “Oh, these SPACs $200 million in trust. There’s lots of targets.” No credible target wants to take your money because they know there’s no money once push comes to shove.

Trey Lockerbie (38:29):
Now, I know Rangeley was big on the Planet SPAC that has essentially busted from the start. Is this what we saw there with redemptions? Is that what’s happened in that case as well?

Andrew Walker (38:39):
Yeah. Planet, that’s more my partner, Chris. Chris has a really good relationship with Nicole and Planet is a really interesting company. I can’t claim to be a full expert there, I’d have to defer to him, but I think what happened there is look, Planet is different because they had a super credible sponsor. I believe actually his SPACs have done the best of anyone. Super credible sponsor, super interesting company. We should talk about the financing a second because I think financing is a real key to SPACs going forward. But what happened is that merger completed. And I think the stock was at 11 and people were really excited and it completed in like September, October.

Andrew Walker (39:11):
And then since it completed, every growth company in the world has fallen like 50% and Planet I think has been falling along with them. That is again, it’s a unique case where it’s a real company with real sponsors. I just think if you were a 30X revenue company over the summer, you’re a 15X revenue company today, and I think they just got caught up in that trade.

Trey Lockerbie (39:30):
Let’s talk about the financing issue you brought up with SPACs, what’s happening there?

Andrew Walker (39:35):
I mentioned how, if you’re a SPAC and you’ve got $200 million in trust, you go merge with someone and at the end of the day, you’re going to deliver two to four million. I think the only way SPACs are getting deals done going forward, and actually there was a SPAC that called off a deals day, I’ll talk about in a second, but the only way SPACs are getting deals done right now is if they’ve got a sponsor, who’s going to commit a serious, serious check to the company. So we talked about Pershing Square Tontine last time, which unfortunately that deal was blocked by the SCC, but they’ve always had an advantage where Bill Ackman’s fund is going to write a billion dollar check into whatever deal they get announced.

Andrew Walker (40:07):
So if you go public through Persian square Tontine, even if everyone redeems, Bill Ackman has written a billion dollar check, there is a pot of gold at the end of that rainbow. I just mentioned TREB, which merged with System1, 99% of shareholders were redeemed, but they were backed by Cannae Holdings, which is Bill Foley’s kind like quasi hedge fund merchant bank and Cannae backstops a ton of these redemptions. So if it wasn’t for that backstop, the company would’ve only delivered five million in cash on the back end, but because of the backstop, they still got hundreds of millions of dollars.

Andrew Walker (40:34):
So I think for a lot of these companies, the trick is having a sponsor who’s going to put a check and put his money where his mouth is. And MBAC, which had a merger that got called off this morning, it got called off because too many shares were redeemed. And I believe in the press release, they said, “Hey, we’re going to go try and find another SPAC deal because if your deal fails, you still have a little bit of time left to go try and find another SPAC deal. And they even said, “We’re going to try and find another deal, and in our next deal, we’re going to have so much committed financing that even if everyone redeems, we’ll be able to get the thing going through.

Andrew Walker (41:02):
So I think like for SPACs to get deals done now, committed financing is the name of the game. But a lot of the SPACs sponsors who raise money at the height of the boom, they just don’t have access to that much committed financing, not a lot of people can write $200 million checks to cover redemptions.

Trey Lockerbie (41:17):
All right. So are we talking now that SPACs are totally dead in the water or are you still seeing some interesting opportunities in this back world?

Andrew Walker (41:25):
I think there are two really interesting places for SPACs right now. The first is, I mentioned go buy a SPAC below trust and you’re going to get cash or above cash like returns with that added optionality where if they announced the Trump DWAC merger, the stock could go parabolic. A couple I like on those lines, IPOD and IPOF, which are both some of Chamath SPACs. I’m sure everybody knows who Chamath is, they trade as we talk around 990 per share, trust is 10, so they trade for about a 1% discount. And they’ve got till October to announce a deal.

Andrew Walker (41:56):
So if they don’t announce a deal in the next October is what, that’s seven or eight months from now, you’re going to make 1% over seven or eight months. Not the best return in the world. Everyone should consult financial advisor, I’m not financial advice, but unless you think like JP Morgan is committing fraud on these trust accounts or something, you’re going to make that 1%. So that’s your downside. And you’re upside is look at every SPAC that Chamath has launched. Most of them go parabolic once he announced, because he knows how to find buzzy targets. The I POF has been rumored to merge with Discord, which I think would go crazy if he did it.

Andrew Walker (42:25):
There are plenty of other buzzy SPACs out there. What if you’re invested in the SPAC that merges with Starlink, if that came public or something, or SpaceX or something? And so I think you get lots of optionality. So IPOD, IPOF, I could see something buzzy happening there. SoftBank has a SPAC, SFVA that trades 2% below trust, it has until January to find a deal. So a little bit less than a year for a 2% return, if they don’t announce a buzzy deal, and who knows if they announce a buzzy deal. And then CONX is Charlie Ergen of Dish Network, Dish TV Fame, that’s his SPAC. It trades about 2% below trust and that’s got till October.

Andrew Walker (43:00):
So again, seven or eight months, 2% return if he doesn’t announce a deal, if he does announce a good deal, and Charlie Ergen is famous, famous for being a good negotiator, good at M&A and all that. If he announces a super buzzy deal, who knows what happens to the stock? So I like those. And then on the other side, I don’t have a particular example, but I’ve been looking a lot at de-SPACs. So these are companies that have already gone public through a merger and the beta for companies that went public through a SPAC right now is one, they all just trade straight down together.

Andrew Walker (43:29):
And I think you can find lots of interesting examples. So I recently wrote up XL Fleet was one of the buzzy electric vehicle SPACs, that trades for $2 per share right now, they’ve got about $2.40 per share in cash on their balance sheet. So that’s trading below cash. There’s a lot of other SPACs that trade for very, very low multiples. I think those could be interesting. They’re screaming for an activist to come in there and liquidate or sell the company. And then the other area, so ironSource, IS, is an interesting one. It’s a real company. They came public through a SPAC, they’re growing like crazy.

Andrew Walker (44:00):
This year, they’re going to grow 60% with 35% EBITDA margins. It trades for about 10X forward sales, so it’s not the cheapest thing in the world, but it is a real growth company backed by, it went public through Thoma Bravo’s SPAC, which Thoma Bravo was the best private equity software investor in the world. They put in like $500 million into the SPAC at deal price, that’s $10 per share to get the deal done. So they wrote a half billion dollar check at 10, real company, real growthy, it’s trading at $7 per share right now.

Andrew Walker (44:28):
Again, I’m not an expert in the space, but that type of thing where you’ve got a real sponsor who put tons of money into it, knows the space well, and the stock’s trading well below it, I think that’s a great place to look for opportunity.

Trey Lockerbie (44:40):
Well, this is why I love talking with you, Andrew, because you’re just full of these amazing ideas, and you’ve given us a lot of homework. I’m going to go study all these things and check them out. For those who don’t know, you write an amazing blog with a lot of these ideas featured there. So why don’t you go ahead and give people a handoff where they can read about this stuff, follow along with what you’re up to and any other resources you want to share.

Andrew Walker (44:59):
My blog is yetanothervalueblog.substack.com. And we’ve mentioned a ton of the stuff I’ve done on there. I had to write up on XL Fleet. And then if I can do a competitor, I also have Yet Another Value Podcast. A lot of the guys you’ve had on here come on and talk about their best and most convicted idea. It’s an hour, just deep dive into a stock idea. And it’s not for everyone, but for people who love stock ideas, it’s good stuff.

Trey Lockerbie (45:23):
Thank you so much, Andrew. Let’s check back in, especially see how this merger goes with Discovery and some of these other back opportunities. Super interesting, would love to catch up with you sometimes soon. Thanks again.

Andrew Walker (45:33):
Hey, I’d love to come back on. Thanks so much, Trey.

Trey Lockerbie (45:35):
All right, everybody. That’s all we had for you this time. If you’re loving the show, please go ahead and follow us on your favorite podcast app. You can always reach out to us, you can find me @treylockerbie on Twitter. And if you want to dig into some of these ideas, there’s really no better place to start than the TIP Finance tool. Simply Google TIP Finance, it should pop right up, and go have fun. With that, we will see you again next time.

Outro (45:55):
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