Rihard Jarc (03:21):

And then you have a Google Cloud, which is again really important, especially looking at the company down the line. And then you have other revenue, which basically is revenue from fees, from Google Play Store, hardware revenue like Fitbit, Nest, Pixel, phone, and also really important, YouTube’s non-advertising revenue. YouTube Premium, which is a subscription service, you pay to not get ads. The revenue from that segment is in Google other revenue.

Rihard Jarc (03:51):

And then when it comes to the last segment I would say it’s other Bets, but in terms of revenue, it’s not really that important yet.

Clay Finck (04:00):

Google stock has been a top performer since the COVID pandemic hit. Their total revenue grew from a whopping 182 billion in 2020 to 257 billion in 2021, a 41% increase year over year, which is pretty remarkable for how big of a company they already are.

Clay Finck (04:18):

What were some of the biggest drivers in this massive growth, especially higher growth compared to a lot of the other big companies that are out there. So what were the biggest drivers of this growth? And do you expect them to be able to sustain these revenues or is it a temporary COVID push? I’m curious what your thoughts are around that.

Rihard Jarc (04:37):

In the last two years definitely the biggest push in terms of accelerating the business was definitely the pandemic, and it influenced Google in two ways. First of all, the users, they got more engaged online because we were in lockdowns, nobody was really doing anything so you got more engaged online. And Google with YouTube is one of the main focuses of what you’re doing.

Rihard Jarc (05:02):

And then also in terms of from the business side, if businesses wanted to reach their clients the only way to do it was online. So the advertising went even more to online. And another I would say big tailwind for Google, at least for last year, was also the iOS change. So the Apple privacy change, which makes basically it’s much harder for companies like Facebook or Snapchat or these other companies to efficiently target the users.

Rihard Jarc (05:30):

And because of this, Google got even more advertisers to join their platform. And then also if we look at the cloud business, for example, the cloud adoption has been a tailwind for many years now. And again, it received an additional bump if you will in the last two years because also companies are now transitioning even more from on-premise architecture and software to the cloud.

Rihard Jarc (05:55):

And this is again, a big beneficiary of all this is Google. When you ask if it’s sustainable, at least in terms of this revenue growth, I would say when it comes to advertising we already see the slowdown happening in the first half of this year. Mostly because of microeconomic conditions, the war, stuff like that.

Rihard Jarc (06:13):

But at the same time it’s also tougher. We have tougher comps, because you said they grew over 40%. I think the advertising revenue will come back to some normalized levels while the cloud business I still think will be a big tailwind and a big driver of growth. So we could see in the last report, it’s growing over 40% still and there are no really signs of this adoption slowing down.

Clay Finck (06:39):

Since a lot of Google’s revenue is from their search business, I think it’s important to understand the business model there. What is it that makes Google’s search engine so valuable to advertisers? Why would a business want to advertise on Google rather than other platforms such as Facebook or another option?

Rihard Jarc (06:59):

When it comes to advertising it always comes down to return on advertising spend, this is the thing that all advertisers look at. So how much am I getting from my ads dollars? But I think to show an example, I think it’s really useful, you have to look at also the use cases of why you would use Google. For example, I used to run a software company. We were focused on developers. So we were an API company selling a SaaS service and our target clients were developers. And because we were selling a niche service for document data extraction. And if we wanted to reach this client we couldn’t use Facebook or any other of these services because it’s a really niche environment and a niche thing that we targeted, and it was much more effective to just target the Search.

Rihard Jarc (07:45):

So if somebody is looking for document data extraction then you can pop up and the efficiency of this advertisement is much better. I think it’s important to understand that if you’re a big company, Google is probably your primary source of advertising because it’s much more effective to target. On the other hand, if you’re spelling a B2C product, so to end clients, something like a Facebook or other platforms are effective as well because it’s easier to reach the users.

Rihard Jarc (08:12):

But again, I also think Google is maybe more targeted toward intent than other platforms. Just for example, if you’re on Instagram or Facebook, the main goal of the ad is persuade you to buy something that you really didn’t thought of buying. While on Google, especially on Search, you are looking for something specific. And if it’s an advertising but it’s actually what you were looking for, it’s very helpful for you as well as for the advertiser.

Clay Finck (08:37):

This is a question that just came to mind as you were answering that question, it relates to the advertising. Is the CPMs anything you look at? I know when Google first started I’m sure the CPMs were dirt cheap. You could buy ads for pennies on the dollar.

Clay Finck (08:52):

Are we seeing the CPMs still go up over time as more and more people are using Google all over the world, and that advertising real estate is becoming more valuable in the advertiser’s eyes? So I’m curious what your thoughts are around the CPM numbers.

Rihard Jarc (09:06):

Yeah, CPM of course is really important, and yes, they are going up. So the more you narrow down the search the more costly they become, because everybody’s targeting, at least in terms of your competitors, if you’re an advertiser, we’re all doing the same thing.

Rihard Jarc (09:22):

So it’s really this auction type of environment where it really depends also on the market conditions. I remember when the pandemic started, CPM rates dropped drastically because people were pulling advertising away or at least stopping to some extent because they were unsure of the macroeconomic environment and what the pandemic is going to bring. So you could really target the users for less dollars.

Rihard Jarc (09:43):

And now when you have more competition, the harder it gets and the more costly it is. But still if you look at return on advertising spent, it’s still I think for Google on average it’s 200%. So it means for every dollar you invest you get $2. And Facebook I think the latest is around 150%. These metrics change all the time so it really depends on what industry you are in and what you’re targeting.

Clay Finck (10:09):

Yeah, you mentioned the Ukraine war and the macroeconomic conditions. It seems like the advertising space would definitely be susceptible to those macro forces, but in the long term it’s a trend that almost seems inevitable having that valuable digital real estate.

Clay Finck (10:25):

Now, when I was looking into Google’s stock I noticed that there are two tickers, which you don’t see that very often with companies. There’s G-O-O-G and G-O-O-G-L. So these two stocks that fall under the Google’s company, Alphabet, why are there two tickers and which should investors be focusing on?

Rihard Jarc (10:45):

There are two tickers, the G-O-O-G is basically stock that doesn’t have voting rights, and the G-O-O-G-L has voting rights. So this is the main difference between these two stocks. And the reason is because you see the strength for years now that founders want to keep voting power so that investors, shareholders only get financial benefits but they don’t get so much to say in terms of the company. Because you want the company to look long term, not just short term orientation towards quarterly goals.

Rihard Jarc (11:16):

But also interesting for Google maybe they have another trench of shares which is not publicly traded. So they’re super voting shares. And there it’s like 10 to one ratio in terms of one share having 10 voting rights. So they have even three trenches of shares.

Rihard Jarc (11:32):

And maybe because you ask what should investor focus? Honestly, if you’re not some kind of activist with [inaudible 00:11:38] on your head, it’s not really important which one you choose. There’s always the arbitrage going on so you’re probably going to see a small premium on G-O-G-L because they have voting rights. But in terms of if you’re a normal investor, passive investor, whatever, it doesn’t really matter.

Clay Finck (11:55):

Yeah, I just quickly pulled up the share prices on both. When I was preparing for the interview I did notice that there was a bit of a spread between the two, but now today, the class C share, which is G-O-O-G sits at 23,25. And the class A share, the other one, 23,29. So it’s really practically the same. And I’ve heard Bill Nygren, he’s been on our show before, I’ve heard him mention that you’re able to pick up the one without the voting shares often for cheaper than the other one.

Clay Finck (12:23):

For me, the voting rights still make a big difference to me. You’re investing in a company, you oftentimes trust the management judgment. They know the business a lot better than you do. And whatever kind of voting power, however they want to use those votes is all good with me.

Clay Finck (12:36):

You mentioned earlier the Google’s other Bets line of business, and they’re almost famous for this even though it’s not a huge revenue generator for them. What’s included in this other Bets line of business? And do you or should we expect something to come out of this?

Rihard Jarc (12:53):

Yes, as you mentioned, other Bets, it’s a well-known let’s say segment of their business because that is where the famous moonshot factory called X is. These are these crazy ideas that Google employees have and that they mature and develop like a startup incubator if you will.

Rihard Jarc (13:11):

And what came out of this X factory, the most important part right now I would say is Waymo. So this is Google’s autonomous self-driving system. They also have other venture capital investments and private equity investments there, and also [inaudible 00:13:28] life science, which is a research organization devoted to the study of life science.

Rihard Jarc (13:33):

So it’s really I would say a combination of different moonshots, but the one that graduated so far is Waymo. If we should expect something from it, I would say the short run definitely not. But in the long run, Waymo definitely has potential especially when the industry gets more ready for this autonomous vehicles and stuff like that. I see that maybe business as a potential impactful one for a company of a size of Google.

Rihard Jarc (14:02):

And I think it’s cool and it’s good for Google to have this kind of laboratory if you will, because they can discover some algorithms, AI stuff that can really help them then on other fronts. It’s a fun segment, but in terms of investors which are valuing the company right now, I don’t think they give it much focus.

Clay Finck (14:21):

That is interesting that they have that Waymo investment in that other Bets line of business. I think that shows that they’re an innovative company and they’re always looking for those potential you call it moonshot-type bets where they put down a little bit of money up-front, call it… Like a billion dollars isn’t too much money for them, but it’s something that could pay off and give them just a massive revenue stream in the future.

Clay Finck (14:43):

I believe they purchased YouTube for $1 billion and now YouTube produces $28 billion in annual revenue. So that’s just one example of a moonshot Bet that could definitely play out for them, and it’s nice to see as an investor that they’re looking for those types of opportunities. And when I dive deeper into Google’s revenue lines, I broke down the revenue by business segment.

Clay Finck (15:05):

The Search line is definitely the primary driver of their revenue. The total revenue for Google’s 257 billion from 2021. The Search business was over 50% of the revenue, 148 billion. YouTube was at 28 billion, Google Network 31 billion, Google Cloud 19 billion. And the remainder came from some of their other lines of business.

Clay Finck (15:28):

As a growth investor how do you project growth for a company like Google, and what do you expect as far as growth rates? Are you looking at the growth rates in the past and giving conservative growth rates going forward, or how do you think about that for Google?

Rihard Jarc (15:42):

When it comes to let’s say the more mature business which is Search, Networks, you probably want to see it grow at least in line with the industry. I think the current estimates for Kegar for the ad industry for the next five years is around 12%. Really looking for in terms of annual growth is this let’s say 10 to maybe 20% growth, let’s say a more long term environment. But then when it comes to segments like Cloud, there you really want to see growth. Because Google is still, if you look at the cloud space in general, they’re still catching up to AVS from Amazon and Azure from Microsoft, which are much bigger.

Rihard Jarc (16:21):

So they came a bit late to the show and now they’re trying to solidify them as the third spot and maybe even get some market share, and that’s why you want to see the growth rate of Cloud being higher. So more in line with industry, which is over 30%, and also be higher than what AVS and Azure are doing.

Rihard Jarc (16:39):

It really depends on the segment, and I would say that let’s say for this year we can expect a slower growth at least in the first half of the year. And then I expect growth to pick up at the end of the year back also when it comes to their main business.

Rihard Jarc (16:53):

And YouTube, another important let’s say heart of the story as well. There you also want to see a bit higher growth than the industry because it still has so much potential to capture audience, and it has the potential to really increase engagement and time spent on the platform.

Clay Finck (17:12):

I was thinking a lot about YouTube. I don’t have YouTube Premium, you can get YouTube Premium and not see any ads from my understanding. And I go to YouTube and just get bombarded with advertisements. Like I mentioned in my previous question, YouTube’s revenue today is 28 billion. You can purchase YouTube Premium for $12 a month, so I’m almost curious how they’ll be able to fully recognize the full value of YouTube into the future and strategically plan in a thoughtful way how they can fully monetize this platform.

Clay Finck (17:45):

So I’m almost curious if $12 a month is undercharging compared to the ad revenue they could be receiving. So what do you think about YouTube, how that might develop over the next 10 years or so?

Rihard Jarc (17:56):

I think Google with YouTube hit the nail on the head when it comes to the strategy, because you can see just recent quarter, the streaming industry, especially Netflix for example, they have now issues because they have this subscription only type of model, where people, once they start… When you have content they’re all happy, they’re all spending, and once you don’t have this next wonder, this next hit from a content perspective, they churn. And they churn right away, because they pay some amount, even if it’s $10, $15, whatever, they like to churn.

Rihard Jarc (18:30):

And what’s really good about the free model with advertisement is that users won’t churn. If you have bad content or not so catchy content, whatever, they will engage less but you won’t lose them as a user. You will still keep them, and once you have better content, they’ll again be more engaged on the platform.

Rihard Jarc (18:47):

So you really want to have this, I think the whole industry will go into this mix in terms of having a subscription where you don’t have to see ads. And then also a model where it’s free and it’s only advertisement [inaudible 00:19:00].

Rihard Jarc (19:00):

And even on the subscription side, I think you will have ads when there are really viral videos or something like that right? So when you’re watching something live, I don’t know, Super Bowl or whatever, or if you are watching a really well-known podcast, whatever, even if you pay they might still give you one ad maybe.

Rihard Jarc (19:17):

I think the industry will develop in this way, because in the end of the day I think people will get back used to ads like it’s on classic cable television. Because the model just worked for years and we won’t pay for every subscription service and have 100 of them. So I think YouTube is going the right direction. And I also think when it comes to the younger audience they’re taking share, them and TikTok for example right now are taking share away from streamers.

Rihard Jarc (19:45):

People are watching YouTube and TikTok because they want to be entertained instead of watching a movie maybe on Netflix or Disney, whatever. I think the monetization will also come from… Higher monetization from people spending even more time on service like YouTube.

Clay Finck (20:01):

Yeah, you kind of alluded to this, but the beauty of YouTube I think relative to Netflix is that YouTube’s users create the content for them while Netflix continually has to invest in creating new content. And people are complaining, oh they’re not creating enough content, or, this content’s not good enough for us, we’re going to go off to HBO. It seems like YouTube, similar to the Search business, just as a much stronger mode than some of these other technology companies.

Clay Finck (20:25):

Now a question I’ve really wanted to ask you is related to artificial intelligence. There’s been a ton of talk over the years about AI and artificial intelligence. Elon Musk has been very vocal about AI and its potential implications on humanity as a whole. So where do you think Google sits on the AI front and are they one of the top players in this industry?

Rihard Jarc (20:49):

Awesome question. I think they’re right at the top, and I think a lot of people don’t know this because they just see the Search. Again, from my previous role as the CEO of a software company, you get to see how many of these APIs Google provides, whether it’s an API for character recognition, for image recognition, for building AI models, they’re right at the forefront of if you’re looking for a service to help you with your software, you definitely look at Google’s product.

Rihard Jarc (21:19):

And the main advantage they have against many other players is that they have a big data set with AI and machine learning especially, which is really important in AI. You need big sets of data for learning the algorithms. And they’re the ones having these huge sets of data, whether it comes of text or images or stuff like that.

Rihard Jarc (21:41):

Even natural language processing, you’re talking about Google Translate. Remember how Google Translate used to suck at the early days? And now it’s like people are using it for… Even lawyers for legal writing. So you really see the progression in this data set of years and years that was built from also people, even from the capture when you have to confirm you are not a robot and you click all those images. This is again, you are helping Google learn. You’re helping the AI model of Google learn.

Rihard Jarc (22:10):

They’re definitely at the top but you don’t see it yet in terms of revenues and stuff like that. But once this world gets more into visual, AR, voice, these APIs and algorithms will be very important. And also you mentioned Elon Musk. He’s building that robot which has the potential to change the world because of their autonomous vehicle. Again, Waymo has similar.

Rihard Jarc (22:35):

Elon mentioned that if you’re building an autonomous vehicle you basically build a robot, and it’s ready also to be copied for other tasks. And similar, you can imagine if Waymo is building this then it’s very similar.

Rihard Jarc (22:48):

I think we will enter the age of AI and it will really change and influence and make things more effective for a lot of industries, and Google will be definitely there.

Clay Finck (23:00):

Yeah, I cannot even begin to imagine the power and market capitalization of some of these big AI type companies later on in our lifetimes. You and I are both very young so we’ll have many years to see how this all develops. I pulled up Google’s stock on our TIP finance tool, and today Google’s enterprise value is only 1.54 trillion relative to just the moat the company has, how much they’ve grown over the years. It just seems like something worth looking into, at least for me.

Clay Finck (23:32):

And I think another topic worth mentioning is that their cash pile today sits at around 134 billion, which is almost 9% of the company’s market cap. I know this is a good problem to have, but doesn’t this seem a little bit excessive? Why would they want to hold so much more cash than they’d need rather than purchasing share buybacks or reinvesting more back into the company?

Rihard Jarc (23:57):

This big cash piling has been happening I think since 2011, 2012 from the big tech companies. And it feels like everybody wants to have a big cash piles and then they feel safe and have this competitive advantage that if they want to buy something they can. But they can’t buy anything that big because anti-trust won’t allow it anymore, so those days are over.

Rihard Jarc (24:21):

But at the same time I think it is important for the company to have a big enough cash pile to get ready for the next big spend cycle. Because right now for the last 10 or 15 years, the world was developing in this mobile age. And if this really shifts towards a new computing platform or something like that, they have to have the let’s say war chest to be able to spend, acquire companies, stuff like that.

Rihard Jarc (24:47):

Could they return this capital and be fine? Of course they could, because they still generate free cash-flow, enough of free cash-flow to have this cash pile in two years, almost two years. But in a way it does provide the company and its management the ability to make a big move if the tech environment changes in some direction and something new emerges that could be very interesting in the future.

Clay Finck (25:10):

Like I mentioned, Google seems to be trading at an attractive valuation when compared to historical measures. The normalized PE looks to be just under 20, the only other time in the past five years it has traded at that low of a multiple was in March, 2020, which we all know was in hindsight fire sale type prices. What are your thoughts on the valuation of Google?

Rihard Jarc (25:34):

Yeah, so right now I think this broad selloff of technology is something that investors are focused on the short term, so they’re basically selling everything that is in this technology space because it’s perceived as risky. But Google at, as you said, 20 times earnings in my view is not really expensive. I would much rather own Google at 20 times earnings than Coca-Cola at almost 30 times earnings, and no disrespect to Coca-Cola or Warren Buffet or whoever. But when it comes to what is perceived as some safe haven if you will, you have a monopolistic player owning Search, having YouTube, having Cloud, having all these important aspects of the world that without Google the world can function.

Rihard Jarc (26:19):

So it’s like a utility in a way. So yeah, I agree. The valuation is really absurd in terms of how low it is. If it can go lower, of course the market is always short term. It can move either direction. But I think for long term investors this is an interesting valuation, if you will.

Clay Finck (26:38):

Let’s talk a little bit about the risks for Google. Do you foresee any risks at all outside of say macroeconomic factors that are really just outside of investors’ hands?

Rihard Jarc (26:49):

Yeah, so from let’s say the internal risks, I would say that it’s really essential for them to keep Google Cloud strong at all costs, must gain share, must be deferred or they must have an important cloud business. Because the way the world is changing right now and the new transit are emerging, cloud computing is definitely one of the most important for the next 10 to 15 years because everybody is moving into this processing era.

Rihard Jarc (27:15):

We will process multiple amounts of data. Everything is going to be in the cloud, the metaverse concepts, et cetera. So it’s an important pillar for their growth when you look at Google in the next five to 10 years. That’s why I think it’s important for them to continue to spend and continue to keep this segment strong and not lose market share to other players.

Rihard Jarc (27:35):

And then secondly, I think it’s also important for them when we talked about this metaverse concept, it’s maybe a far fetched thing or maybe it’s not. But right now we saw that all technology companies, at least the big ones, agreed that AR, VR, metaverse is and could be the potential next smart platform or computing platform if you will.

Rihard Jarc (27:56):

And Google’s risk is that they also need to take their share of the pie in this segment, that they don’t miss out on it. Either that’s hardware or if it’s software or if it’s Android, they need to be also with this trend. I think these two things are risks.

Rihard Jarc (28:16):

So if you see Cloud slowing down and if you see this world going in this AR way and Google is not part of it. Because if I may just add, if you imagine you have some kind of smart glasses on and you will search for something, you will probably look at it and say it, you won’t type it anymore. So the search engine needs to adapt in image and speech, so this is maybe where Google Search could become less relevant if they don’t evolve.

Clay Finck (28:46):

That’s fascinating. With all of the fan companies something that’s always in the back of my mind is the regulatory risks since Google’s one of those companies that obviously has what appears to be a monopoly in the search business, and it could maybe even argue it for YouTube as well.

Clay Finck (29:02):

Is there any sort of regulatory risk that they just get too big and I don’t know, maybe they split up the company or get some sort of regulatory pushback that really affects them as a company?

Rihard Jarc (29:15):

Yeah, there are always risks in terms of regulatory when it comes to these big companies, but you have to think about two things. First of all, the US is already and will be even more in competition with China when it comes to technology companies in the future. You don’t want to hamstring or wound your most important companies because then the influence of the world could change when it comes to technology. This is one point.

Rihard Jarc (29:41):

And the second I would say is for investors, yeah, of course. For long term it does limit your upside if the company’s… If Google is broken down. But in terms of the short term return, I would argue that if they split YouTube and some other segments, investors could potentially even have higher returns because of the market valuing segments of their business higher than what they are right now. That’s the way I look at it. I don’t believe they will break the companies up.

Rihard Jarc (30:09):

They will probably introduce more and more regulation. At the same time, if you put more regulation it’s even harder for smaller companies to compete with bigger ones because it’s new barriers to entry with all the regulation.

Clay Finck (30:21):

Very interesting. Now, it seems like every investor is expecting a recession to hit over the next year or two. So I’m curious what your overall thoughts are on the market. Are you a buyer of stocks like Google today or are you more so on the sidelines waiting for things to shake out with rising interest rates and rising inflation and everything else that’s happening in the macro?

Rihard Jarc (30:45):

Look, when it comes to the macro environment, obviously right now we are in an increasing environment in terms of the stock market, short term volatility. I haven’t seen this kind of movement in, I don’t know if I ever saw it honestly, maybe in the hardest points of the pandemic probably.

Rihard Jarc (31:02):

But I still don’t believe we are going to this recession or crash if you will. A recession means that two quarters were negative GDP growth, and does that mean that also the stock market must crash? I’m not so sure.

Rihard Jarc (31:15):

So that doesn’t mean that if growth is minus 1% the stock market has to crash of itself. But at the same time I do acknowledge there is that if the fed goes too strong too fast, it could really give a big blow to the economy. Especially because I think their policy efforts aren’t really addressing the real problem, which is supply driven.

Rihard Jarc (31:36):

So they’re influencing the demand side, but the demand side, it is strong. But at the same time the biggest problem is the supply side right now. I’m not in a camp where I believe a recession is imminent. I also don’t know if we ever had that time where everybody was calling for a recession and then it actually happened. I think it was the other way around where nobody expected it and then it happened. And that’s why it’s called a shock.

Rihard Jarc (31:57):

In terms of if I’m buying Google or not, I already have a big position in Google. And the way I look at it, if it falls let’s say to 18 or under 18 times P, I would probably definitely look at to add to it. But on the other side, when I see an inflation report that shows stabilization month over a month, I will probably look at something like a Google two add.

Rihard Jarc (32:20):

So if it falls to some really crazy levels, definitely a candidate to add. And at the same time when we see inflation peak, I think it’s also the time where you can with more confidence go and say, “Yeah, I’m going to buy something like this.”

Rihard Jarc (32:35):

But if you’re a long term investor and you’re buying right now, I don’t think you’re… It’s so small of a chance that you won’t make a good return on a company like Google, but that’s just my opinion.

Clay Finck (32:46):

Before we close out the episode, I saw you tweeting about Airbnb. And this is a company that I think’s really intriguing. It could be one of those major tech players in the future. And it’s a company that’s share price has really hung in there pretty well relative to a lot of the other high growth names.

Clay Finck (33:04):

Airbnb recently released earnings, so I’m curious what your thoughts are on the company. And if you have any big takeaways on their earnings report.

Rihard Jarc (33:12):

Yeah, so Airbnb is obviously another company that I own in my portfolio and it has quite a substantial size. And the reason why I see the company as really interesting is it operates in such a big industry and it doesn’t have competition from big tech. So it’s one of those rare areas where no Google, no Amazon, no Facebook, no Apple is your competitor.

Rihard Jarc (33:34):

And they dominate this industry, and this industry is huge and it’s still growing. That’s probably the number one take why I love it in general. But when you talk about the company, I think Brian Chesky is a great CEO. He’s really executing. He understands what he’s doing, and their competitors are lacking this ideas, technologies, tech and stuff like that. Really competitors are years away with no real innovation.

Rihard Jarc (34:02):

And when it comes to their current earnings, they reported really great results, 70% revenue growth. And what was even more interesting for me was that they have 16% less workers than they had before the pandemic, and they still grew over 80%. And even when they got the questions, oh, but inflation, wages are going to rise, stuff like that. They said, “Yeah. Okay, but we have like 6,500 I think employees, we can scale and don’t need to add much more employees.” So it’s really a scalable platform, so I can really see them scale and not have millions of people working for them. And that means in the future good operating margin.

Rihard Jarc (34:42):

You can expect high operating margin. And also when you look at their marketing, 90% of their traffic comes direct. So they’re not paying for marketing. They’re paying for marketing in terms of PR, which is great, because they’re building these brands. But for performance marketing they’re not paying.

Rihard Jarc (35:00):

So you have a company that needs low employees and doesn’t need to spend on marketing, and it’s just scale. You can expect in the future with a big industry, no strong competitors, you can expect it to grow and have great margins at the same time. And yeah, it’s a founder driven company. Again, I really believe that founder driven companies work better. And the longer, especially when they’re in their early innings of development.

Clay Finck (35:26):

Yeah, some of the things I’ve learned about Airbnb over the years, I’m not someone that follows it super closely like you do. But early on, people would always say Airbnb is totally disrupting the hotel industry. But with all the fees they charge, it makes a lot more sense for someone to do the longer term stays. So if I’m going on a vacation and many other people are going with me and we’re staying 10 days somewhere, it might be a lot more economical to go through Airbnb because the per night stay is lower, because the cleaning fees and all the other fees get distributed over 10 nights.

Clay Finck (36:00):

Whereas with the hotel, it might be much more economical if I’m just staying somewhere one or two nights. So that’s one thing I think is important to understand with Airbnb. I’m not sure if you agree with that assessment or not. And I’m curious if they have a really strong moat around their business. I know there are other companies like VRBO, I’m not sure what market share these other players have. So I’m curious what your thoughts are on those ideas.

Rihard Jarc (36:26):

When you talk about hotels or Airbnb, I think it’s important to understand also, especially in the pandemic, this showed really well, that people now don’t want to travel only to dense cities. And in dense cities, yeah, you have hotels, but in the high season people will go to the hotels, they will be fully booked. And people will also book Airbnb because you want to go to that place.

Rihard Jarc (36:49):

But now people also expanded their travel to non-urban areas where a lot of the time there aren’t big hotels for people to be there, and that’s why Airbnb is so great because they have supply in basically every corner of the world. And at the same time, people, we can see it, especially the younger audience, want a more genuine experience. You want to experience with some locals, go surfing, go this thrilling experience because you’re working all the time and you want to relax but also have this moments where you will remember it when you’re old.

Rihard Jarc (37:26):

So if you want this experience, hotels are okay but you’re not really going to get it. So that’s why I think the moat is there in terms of people actually want this.

Rihard Jarc (37:36):

And you mentioned long term stays. In the pandemic this expanded even more, and now you can really see people living this nomadic life where they work and live from different places in the world. And I think that’s great, because the world got more… We got more online and you don’t need to travel all the time to be with your workers and your coworkers, but you can actually be in a villa at the beach work for at least some days and then come back.

Rihard Jarc (38:04):

And I think Airbnb is perfectly suited for this because it’s also flexible. The thing I’m waiting for is this. So far, 10, 15 years, 20 years, we had this search type of looking for travel. You would type in, I want to go to, I don’t know, Bali, whatever. You said I want to go there and it shows you this accommodations. And I think it should be, and the way Airbnb is also looking at it, it should be a bit different in a way that what do I want to experience and then you can suggest me where these places are?

Rihard Jarc (38:38):

Because people want to experience new places. And maybe it’s even cheaper for me to get a better experience than in Bali on some other islands that I didn’t know about. I really think this social experience will come to Airbnb and I also think they have great potential when it comes to it.

Rihard Jarc (38:54):

I think down the line we will talk about Airbnb influencers, where some people are traveling all the time, sharing their experiences. And then other people go to the similar places. So they have this platform that can expand to multiple offerings besides the accommodation part, and I don’t think that other players like VRBO, Expedia, Booking have this flexibility and even want it, they’re driven by CEOs that want short term results, want to squeeze every margin because their investors want this, and they can’t really invest and go that far as Airbnb can.

Clay Finck (39:31):

Yeah, I think it’s a fascinating investment opportunity. I agree that it has just a ton of potential ahead for it and it’s exciting that it’s founder led, has Brian Chesky as the founder and CEO.

Clay Finck (39:42):

Rihard, I really appreciate you joining me today to chat about these exciting investment opportunities. Before I let you go, I wanted to give you the opportunity to let our audience know where they can go to get connected with you.

Rihard Jarc (39:55):

Yeah, thanks again, Clay. Thanks for inviting me. It was a pleasure to be on. People can subscribe to my newsletter, it’s on substack called Uncover Alpha and they can also follow me on Twitter where I post interesting thoughts. And on the newsletter I post analysis and other opinions about interesting companies.

Clay Finck (40:15):

Fantastic, I’ll link that in the show notes. Thank you, Rihard.

Rihard Jarc (40:18):

Thank you, Clay.

Clay Finck (40:20):

All right, I hope you enjoyed today’s episode. Please go ahead and follow us on your favorite podcast app so you can get these episodes delivered automatically. If you’ve been enjoying the podcast, we would really appreciate it if you left us a rating or review on the podcast app you’re on.

Clay Finck (40:35):

This will really help us in the search algorithm so others can discover the show as well. And if you haven’t already done so, be sure to check out our website, theinvestorspodcast.com. There you’ll find all of our episodes, some educational resources, as well as our TIP finance tool that Robert and I use to manage our own stock portfolios.

Clay Finck (40:54):

And with that, we’ll see you again next time.

Outro (40:56):

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Outro (41:11):

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