Prof G Markets: Arm’s AI Rally, Lyft’s Earnings Mistake, and Airbnb’s Trading Premium

Scott breaks down why Airbnb’s stock fell despite strong earnings, and explains why he’s considering selling some of his largest holding. He then discusses Lyft’s earnings report typo and shares a similar personal story. Finally, he takes a look at Arm’s stock and questions whether its rally is owed to AI hype or AI washing. Learn more about your ad choices. Visit podcastchoices.com/adchoices

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

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• 0:59Scott Galloway?

  This week's number 882. That's how many private jets flew into Las Vegas over Super Bowl weekend. Ed, trust me on this one, the next time you're on a flight and the flight attendant asks if you'd like headphones, say yes and ask him how he knew your name was Phones.

• 1:27Scott Galloway?

  Welcome to Prof G Markets. Today, we're discussing Airbnb's earnings, Lyft's earnings report typo, and ARMY's AI hype. You're still thinking about the joke? You didn't even hear what we're discussing, Ed. Here with the news is Prof G Media Analyst and frequent flyer, Ed Elson. Ed, what did you think? Well, first off, first off, Ed, how are you? How are you?

• 1:52Ed Elson?

  I'm very well. I'm a little jealous of you right now. I'm looking at your

• 1:55Scott Galloway?

  Biceps?

• 1:56Ed Elson?

  Sunburn and your background.

• 1:57Scott Galloway?

  Oh, no, man. Okay, got it.

• 1:58Ed Elson?

  Drinking, what is that? A Mai Tai? What are you drinking?

• 2:00Scott Galloway?

  I'm drinking a Tiger beer and a chocolate shake, which makes no fucking sense. I panicked. The guy came up and said, what do you want to eat? Ordered chicken fried rice, a chocolate shake, and a Tiger beer, which either means I have just the right chemistry going on or I'm going to have volcano-like diarrhea. I don't. I don't know what's going on here.

• 2:19Ed Elson?

  On a scale of one to 10, how drunk are you right now?

• 2:21Scott Galloway?

  How drunk am I? I'm not drunk. I've actually, unfortunately, I drink a lot of alcohol, but it's not easy for me to be inebriated, which is a curse because I have to drink a shit ton of alcohol because I don't drink for taste. I drink to feel better about myself and the world. And unfortunately, that requires a lot of the devil water. And so, actually, I went in for my physical and he's like, everything's great except for how much alcohol you drink. I'm like, well, tell me something I don't know, Dr. Shithead, Captain Obvious. So, yeah, but no, two tiger beers don't do much for me.

• 2:58Ed Elson?

  Fair enough.

• 2:59Scott Galloway?

  What did you think of our conversation with Demeterin?

• 3:01Ed Elson?

  I thought one of the most interesting things he said was that the thing he's most focused on this year, from a valuation perspective, is the elections. And what he said was that the elections will drive the market this year more than people think they will. I think we do a really good job of avoiding politics on this podcast. I think we're generally pretty apolitical, or at least we try to be. But I'm thinking now that maybe this year we should actually be incorporating politics more into this podcast and more into our analysis than we have done in the past. Because it's possible that in our mission to avoid politics, we actually might be creating some blind spots for ourselves. And the reality he points out with those comments is actually markets and politics are intrinsically linked.

• 3:45Scott Galloway?

  I've been reflecting on a couple of things you said. One, that the biggest story that people are talking about is that the second largest economy is basically imploding and that the stock market there has lost 40% of its value. And you said something that struck me, that just blew me away, that Nvidia is now worth about the same as all of the Chinese companies listed on the Hong Kong Stock Exchange. That's just, that's just dramatic. My first job on TV, I don't know if you know this, Ed, but I've been on TV quite a bit.

• 4:11Ed Elson?

  You've been on CNN Plus. It's different.

• 4:13Scott Galloway?

  Those are fighting words.

• 4:16Ed Elson?

  That's true. CNBC, that counts. True.

• 4:19Scott Galloway?

  By the way, I've also been on Fox probably 100 plus times. I like the people over at Fox. Sue me. Anyways, but my first kind of gig on TV was I was a contributing editor for Bloomberg. I used to come on and talk about technology and economy and it seemed for like six months, and this was back in the early part of the millennium, everyone was talking about Greek sovereign debt and how they were in danger of default. And if Greek debt defaulted, it was going to create this contagion and the whole world was going to, you know, go into enormous depression. And it was such ridiculous bullshit. The entire Greek economy represented 2% of GDP of Europe. And yet, no one is talking about the fact that the second largest economy has a real estate crisis unfolding. Supposedly, every publicly traded real estate company

• 5:01Scott Galloway?

  is effectively default. And if you look at the amount of leverage on real estate in China, it's three and a half times what the leverage was on US real estate before the Great Financial Recession. I thought that was super fascinating. The other, the other thing he said that kind of reframed things. The thing I like about Aswath is I have no idea what his politics are, which I find really refreshing. And I have very much a bias against Tesla and Musk. And I think everybody that listens to this thing knows that, even though I try to call balls and strikes. And he said something very interesting about the Delaware Treasury Court's decision to reject the compensation. He's like, look, it was the number that scared everybody. But if you go back to when they made the actual award, because the company only had about a $50 billion market cap, the actual options award, probably the value

• 5:45Scott Galloway?

  of it at that point, which is how we should be evaluating it in terms of size, probably was nowhere near $50 billion. And I just, that's the right frame to look at it. It's simple, but it just makes a ton of sense.

• 5:57Ed Elson?

  Definitely. Well, shall we get into our market vitals?

• 6:00Scott Galloway?

  No, let's talk about my chocolate shake. Yeah, go.

• 6:05Ed Elson?

  Let's start with our weekly review of market vitals.

• 6:14Ed Elson?

  The S and P 500 fell, the dollar rose, Bitcoin crossed $50,000 for the first time since 2021, and the yield on 10-year treasuries was volatile. Shifting to the headlines. Inflation slowed to 3.1% in January, but that was higher than economists' predictions of 2.9%. The S and P and Dow fell sharply on that news, but rate cuts are still expected in 2024. Carl Icahn has built a near 10% stake in JetBlue. He said the stock was, quote, "undervalued" and "represented an attractive investment opportunity." JetBlue shares rose more than 18% after that announcement. Diamondback Energy is acquiring Endeavour Energy Resources for about $26 billion.

• 6:58Ed Elson?

  That's the latest deal in the consolidating energy industry. The combined company will be the third-largest oil and gas producer in the Permian Basin, and Diamondback shares rose 10% on that announcement. And finally, Jeff Bezos sold $4 billion in Amazon shares last week. The sales followed an announcement from Bezos that he's moving from Seattle to Miami, where he could save more than $600 million in taxes. Scott, thoughts?

• 7:24Scott Galloway?

  So inflation, my understanding is that it was shelter costs that were the largest contributor to the uptick, and everyone freaked out, and the market, I think, was down 400 points or something because they thought, maybe those rate cuts, the punchbowl won't be back as soon as we'd hoped. The only thing we know, the best contraindicator in history, is survey economists, and if they all agree on something, go the other way. 100% economists, and they'd never had total unanimity around anything, predicted recession for 2023, and guess what, it never showed up. And in this instance, they've been talking about, is it three cuts, or is it five cuts? And, you know, the only thing we know is it's not going to be what they predict. And the market just freaked out when it was like, oh, you know, our data's off with a rate cut, or our data might be off with a rate cut. But I still, when I looked into the data...

• 8:08Scott Galloway?

  It didn't really look as if inflation was spiking. Carl Icahn, what struck me is 200 million bucks isn't a lot of money. Carl did something interesting a few years ago. He returned everyone investors' money and said, I'm sick of managing other people's money. I'm just going to do my own. But $200 million, unless it was Carl Icahn, probably wouldn't get much news. That's not a large investment. JetBlue, I'm fascinated by this. I think JetBlue is a great brand. I think they're the best product in the domestic market. As you know, I fly a lot and the stock has been a real underperformer. The merger got called off and then boom, he comes in 22%. I mean, you know, this is a classic activist play.

• 8:49Scott Galloway?

  I'd be curious to know, and I don't know if you've read his deck, what does he think they need to be doing that they're not doing?

• 8:55Ed Elson?

  Yeah, he hasn't, he hasn't said anything about this and so that we can only speculate. All he's done is submitted the filing and he said, it's an attractive investment, but he hasn't said anything about strategy or what he plans to do. But it feels like the merger with Spirit, which was canceled and which we discussed on a previous episode, it feels like that must have played some part in the investment thesis here. And I'm wondering if you have any thoughts on how it would have played a part, like specifically, in what way would JetBlue failing to acquire Spirit make it an attractive investment?

• 9:30Scott Galloway?

  Well, because I think the stock got cut. So at some point, everything's attractive and at some point, everything's unattractive. And I think this stock has been a veritable underperformer. And so I think he's coming in and saying, okay, he may just be coming in and saying, we can all agree that the stock is undervalued and I'm going to come in on the board and I'm going to decide whether the CEO needs to be replaced, we need to cut costs, you know, we need to be acquired, whatever it might be. You come in with a series, I mean, having been an activist, what I generally found is you have a thesis and then you show up and you get on the board and you find out that you're not as smart as you thought and they're not as dumb as you'd hoped. And typically, your ideas aren't

• 10:10Scott Galloway?

  I don't know. The idea that every activist has had that's been super successful over the last 12 or 24 months is cut costs. You guys, you guys are acting like a reckless teenager and the growth economy has been the gift of kids on giving, but you should cut costs. Whether it was the activist play at Salesforce or an activist banging around at Disney, they've all said, look, you just need, you need to get more serious about cost cutting. And that's not, that's powerful, but it's not necessarily that novel.

• 10:37Ed Elson?

  The other thing to remember is that he has done this before with TWA, which he acquired like a 20% stake in in 1985. And then he built up that stake over time and then eventually he cashed out on it. But at the same time, he ran the company into the ground. I mean, when he sold the company, it had hundreds of millions of dollars in debt and then pretty soon after it filed for bankruptcy. And he's that, that LBO was sort of the quintessential corporate raider example that people look to in history. And it feels like a lot of people might start arguing that he could be about to do the same with JetBlue. That is, he's not actually going to grow the airline and grow the business. He's just going to

• 11:21Ed Elson?

  use it as a financial vehicle to enrich himself.

• 11:25Scott Galloway?

  Well, but there's some, there's some gating factors here. I think what you're talking about with TWA was he got control and then he convinced a bunch of creditors to loan him a shit ton of money. He then made distributions to himself. So he made a ton of money, took his money off the table. A lot of times private equity will go in and buy a company, create some operational efficiencies, maybe it does a little bit better the next year. And the first thing they do is they go and they issue a ton of debt and they take their money out again. So anything that happens from that point forward, they've either gotten all their money out or they've already made money. And so it's kind of financial engineering and a lot of people think these companies just come in, pile it up with debt, take their money out and then put the company under huge strain. You know, sometimes reduce the pensions, don't invest, whatever it might be. That's the argument against private equity that they come in and they basically suck the corpus

• 12:10Scott Galloway?

  dry. They feed on it and then they move on to the next corpus and leave just kind of the wreckage behind them.

• 12:15Ed Elson?

  Which feels fair for this, for this situation, for the TWA situation.

• 12:19Scott Galloway?

  I mean, there's instances where private equity comes in and literally ruins a company. But the difference here with JetBlue is that he doesn't own, he doesn't have a control stake. And even if he gets a board seat, they're not going to let him just lever up the company and walk away with his back. They're not going to do that. They're, I don't know what the market cap on it is, but 200 million, I would, I wouldn't, I would imagine is not a control stake, so.

• 12:43Ed Elson?

  Yeah, two and a half billion dollar market cap.

• 12:45Scott Galloway?

  Yeah, so he owns, he owns about, right now with 200 million, he owns about.

• 12:48Ed Elson?

  10%.

• 12:49Scott Galloway?

  He'll probably, I would imagine, get a board seat, but he's not going to be able to say, okay, everybody, let's issue a bunch of debt, distribute it out to us and then, you know, turn it over to someone else to try and figure this shit out with. It's a terrible cap structure. I don't think he's going to do that.

• 13:04Ed Elson?

  Diamondback?

• 13:05Scott Galloway?

  Consolidation like crazy. There's obviously huge efficiency here. These company's stocks have run up, so they're, you know, they're looking for, they're looking for, you know, ways to add more efficiency, which is Latin for scale and layoffs. And I think, you know, these guys just see size matters. It kind of goes back to what Demodaran said, that the biggest players are kind of running away with it. And the number four and five players are saying, hey, let's get together and be the number two. My sense is as these fields get a little bit more, I don't know what the term is, mined or, you know, basically over, overfished, if you will, that the costs of extraction are probably getting greater. I don't know. The honest answer is I don't, this is, this is one market I, I don't know a lot about.

• 13:50Scott Galloway?

  Do you have any thoughts?

• 13:51Ed Elson?

  I mean, the last time we talked about the energy sector, Exxon was buying Pioneer for $60 billion. Later that month, Chevron bought Hess for 53 billion. Occidental bought Crown Rock for 11 billion. APA bought Callon for 5 billion. And now here we are again. So yeah, massive consolidation. It's looks like it's just a flat out race for market share. And as yeah, as Athwa said, the small guy loses, the big guy wins. How do you get bigger? Well, the fastest way to do that is you just bulk up and buy.

• 14:22Scott Galloway?

  It just makes a ton of sense. The question is, at what point does the result increase prices to the consumer? And does the FTC or the DOJ need to step in? I don't know if they're anywhere near that that breaking point. Bezos, you know, I wish one of these guys would just move to Florida and say, I did it for tax reasons. He said that he wanted to be closer to his dad. I mean, which is really sweet, but it's not true. I don't even know his dad and I don't know his relationship with his dad, but it just, and what do you know? He sold a shit ton of stock about 30 days after establishing residency in Florida. Look, I like that Florida and Texas and other low tax states are putting pressure on high tax states. I like, competition is a good thing.

• 15:06Scott Galloway?

  Massachusetts, California, the northeastern states and California need to have pressure placed on their leadership that in my opinion are spending, are spending a shit ton of money and creating a really bad product. If you go into parts of LA and you see the homeless problem or San Francisco, and then you have to pay 13% taxes on top of federal taxes. It's like, okay, California right now feels expensive, but bad. And if they continue to hemorrhage people, and also this is true of Washington state, they're making up a large part of their tax base. They're going to have to think about cost cuts or how they make the state more attractive. What always struck me about Manhattan was even with 13% additional taxes, it was worth it. That Manhattan is so singular, I think Manhattan is actually a very well run city.

• 15:52Scott Galloway?

  But there's certain parts of California that aren't. Now, having said that, what bothers me about this, I like the competition. What bothers me is that this has nothing to do with competition. This is an individual who's built 60 or 80 billion dollars in wealth. And now, in order to monetize it, wants to move to a low tax state. There is something inherently wrong about that. And what I would suggest, and I think the solution here is pretty obvious, and that is the tax treatment we apply to options. So if Bezos had options that were 10 billion dollars in the money, and they were vesting over four years, and he moved in his third year, regardless of when he monetizes or sells those shares, three quarters, or seven and a half billion of that gain would be

• 16:34Scott Galloway?

  taxed at Washington rates, and that revenue would go back to Washington. I think the same should be true of his stock holdings. And that is, if he's made 60 or 80 billion dollars in equity value from Amazon stock, and he's leveraged the great University of Washington school system, the great community colleges there, the Seattle Tacoma Airport, the hospital system, the elementary school system, the roads, the culture, the fact that a ton of people in tech move to Seattle, he needs to pay for it. He benefited from it. It built a huge wealth for him. He needs to pay the piper. Now, if he were to move to Florida, and his Amazon stock were to go from 80 to 100 billion in wealth, that incremental 20, fine, it should be taxed at the 0% state tax rate

• 17:19Scott Galloway?

  that is Florida. But the 80 billion in wealth that was created by him, and in large part by the incredible infrastructure investments made by the state of Washington and taxpayers, he needs to pay them back. So I think we're looking at some point, hopefully, at some sort of cross-border tax agreement. For example, there's now a minimum tax on corporations, right? We said to Ireland, enough of this shit. You letting people come over there and pay 8% taxes, we're not going to build amazing companies here so you can build better schools in Ireland, or, you know, dress up the Guinness Brewery. Is that wrong, Ed? Did I immediately assume the Irish are, you know, do nothing but drink beer? Is that, is that wrong? I think we need something domestically.

• 18:02Scott Galloway?

  If you build a great company in California, I can't stand these entrepreneurs, these VCs who move to Miami and pretend they give a flying fuck about the Miami ecosystem. And just want to monetize their gains in whatever it is they built in California or in Washington. And it's fine if they want to move somewhere else, they should have, enjoy the tax rates from that moment forward. But the value accreted to that point, they should pay the piper.

• 18:31Scott Galloway?

  We'll be right back after the break with a look at Airbnb's earnings.

• 18:46Scott Galloway?

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• 19:28Scott Galloway?

  a renter and now owning a home feels a lot better with Built. You can download the Built app and join the membership for where you live at joinbuilt.com/profg. That's J-O-I-N-B-I-L-T.com/profg. Use our link so they know we sent you.

• 19:46Scott Galloway?

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• 20:53Scott Galloway?

  Support for the show comes from Vanta. As AI adoption grows, so does your company's security risks and requirements. New frameworks, audits, and vendors keep piling on, but your team isn't getting any bigger. Most compliance tools promise automation, but you're really stuck doing all the work by hand, chasing screenshots, validating controls, and playing catch-up when audit season comes around again. Vanta works differently. The Regentic Trust platform is built to scale with you, not slow you down. With over 1,400 automated tests across 400-plus integrations, Vanta collects evidence and monitors your controls year-round, cutting your audit prep by 82%. Plus, you can access the Vanta agent everywhere you work, whether your team is in Vanta every day or living in tools including Claude or Cursor. Want proof?

• 21:38Scott Galloway?

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• 22:05Ed Elson?

  We're back with Prof G Markets. Airbnb reported better than expected earnings for the fourth quarter with revenue up 17% from a year earlier. The number of nights and experiences booked were up 12%, also surpassing expectations. Because of a one-time expense related to a previously announced tax settlement, the company reported a net loss of $350 million for the quarter compared to net income of $320 million a year ago. It also stated that bookings growth would moderate this quarter and the stock fell more than 4%. Scott, on last week's show, you predicted that Airbnb's stock would pop after the earnings. What do you make of these results?

• 22:46Scott Galloway?

  Actually, Ed, I predicted that they would have a monster earnings beat. I don't think I predicted that the stock would pop, but anyways.

• 22:51Ed Elson?

  Well, no, no, hold on, let's play the tape.

• 22:55Scott Galloway?

  So Airbnb's earnings, I believe, are on Tuesday, and I think they're going to beat their earnings, and I think you're going to see a pop in the stock.

• 23:03Scott Galloway?

  It's impossible to predict the stock price. I said-

• 23:06Ed Elson?

  Was this a monster earnings beat?

• 23:07Scott Galloway?

  I think this was a strong beat. I don't think it was a monster beat. But it was a beat. I mean, it was pretty, it was a significant beat. Let me put it this way. 498 of the Fortune 500 CEOs would pray for this beat. What was interesting is, I don't know if you follow the stock after hours, it went up 8% immediately, and then by the end of the day, it was down, or the after hours was down 4%, I think it ended up, as we sit here today on Thursday, I don't know what time it is there, it's midnight, all right, no, it's 12:41 here, AM here in the Maldives. God, that's the chocolate shake speaking. I don't know what time it is. The stock is up nine bucks today. It's about, I think it's at its, yeah, it's at its 52-week high. It just hit, it just hit a new 52-week high.

• 23:51Scott Galloway?

  Anyways, the stock is, the stock is rocketing, and I think it goes to a lot of the themes we were talking about with Demeter and big leader in its space, asset light, the use of AI, they're not building their own AI, but they bought a small AI company. It strikes me that travel is literally tailor-made for AI. Anyway, this company is, is kind of firing on all 12,000 cylinders as a multiple of revenues, though. And I talked to the good folks at Goldman, they said, look, this thing is expensive, and I wonder, I mean, I own Airbnb, and I'm trying to figure out if I should be at some point- Taking some chips off the table here because it's starting, I don't know. Every time I sell a stock, it goes up 20 or 30%. So maybe if I just think about it enough, it'll go up.

• 24:34Scott Galloway?

  But like Airbnb is now trading at enterprise value EBITDA, Alphabet 18, Meta 20, Booking 16 times, Expedia 10 times, Airbnb 30 times. So it's definitely feeling like it's getting pretty fully valued.

• 24:50Ed Elson?

  I was going to ask if you have any thoughts on why the stock initially dipped 4%? Because as you say, it was a beat. I mean, from my research, what I've seen is that some analysts may have been concerned about the room night guidance. The shareholder letter said, quote, "Expect the growth rate of nights booked in Q1 2024 to moderate relative to Q4 2023." But that's kind of it. I'm just wondering, from your perspective, as a pretty significant shareholder in this company, is that the kind of guidance that actually gets you concerned? That actually is a sell signal to you? Because it, I mean, people sold.

• 25:33Scott Galloway?

  Yeah, but you gotta look at it, you gotta look at the track record or the tone. And that is Brian Chesky does what every good CEO does, and that is he sandbags. And that is he always tempers expectations and the stock goes down a little bit such that he can, you want a surprise to the upside. You don't want to, in relationships specifically with your investors and also, quite frankly, any relationship, you don't want to over promise. And so I find the best CEOs, like the CFO of Apple would always play down their earnings, like, yeah, we got lucky this quarter, but next quarter it's going to be really hard. They would always say that. Because what you want to do is any surprise, almost any surprise should be a good one. And, and that is, people don't mind relationships that are hard. What people mind is really negative surprises.

• 26:16Scott Galloway?

  I think what good CEOs do is they really temper expectations such that every quarter analysts are sort of saying, congrats on the beat. And if you look at I think 12 of the last 14 quarters Airbnb has beat estimates, which either means they're bad at making estimates, or the gestalt across senior management and their investor relations is we're going to temper our forward guidance. It's also really difficult to diagnose short term movements unless there's an obvious thing like you have a typo and your margins or something. But I'm still kind of a demoter and disciple. I think that valuation, bottoms of valuation is still like gravity. And that is you could ignore gravity for a while.

• 26:59Scott Galloway?

  Michael Jordan looks like he can literally ignore gravity, but even Michael Jordan has to come down to earth at some point. And over the long term, most companies eventually start trading like their peers. And the only thing I'm looking at, the only reason I'm even considering pairing back my stake here is that 30 EV to EBITDA number.

• 27:28Ed Elson?

  Lyft shares soared more than 60%, hitting a 52 week high. But that was based on a mistake in its earnings report. According to the initial release, adjusted earnings margins were expected to increase by 500 basis points in 2024. Turns out that was a typo. The CFO clarified on the earnings call, it's actually only expected to increase 50 basis points, not 500. The stock retreated on that correction, but was still up more than 30% above its previous closing price. Scott, this was kind of wild to me. Have you ever seen anything like this before?

• 28:02Scott Galloway?

  Oh, I've lived it before. So I don't know if you know this, Ed, but I started a company called Red Envelope back in the 90s. And we took the company public and I was chairman. And then Mike Moritz, who's arguably the most successful venture capitalist in history, came on as our investor and then he took my job as chairman. And then my partner, Ian Chaplin, who is a technologist and kind of the substance of our partnership, if you will, did an analysis of the technology of the company because there were some glitches when he was trying to order stuff. And he basically wrote up an email and sent it to the board and said, I've reviewed all the technology. And as far as I can tell, we have the shittiest tech stack of any e-commerce company of our size. The only justification

• 28:47Scott Galloway?

  or rationale I can see for these purchases we've made is that they all seem to be companies backed by Sequoia Capital. And our CTO, what do you know, came from Webvan, another Sequoia-backed company. And of course, the board just went apeshit that they were accusing Mike of this. And, you know, Mike was the billionaire in the room. And so I immediately responded saying, this is a total, you know, a total abdication of your duties as a fiduciary and a board member that you're using Red Envelope as a dumping ground for the failed products of your portfolio companies. And two days later, I was kicked off the board. And I decided to run a full-scale proxy fight to replace the entire board of Red Envelope. And in election, what happens

• 29:29Scott Galloway?

  is you go to the annual meeting, and it's like an election. And they vote for my slate or the existing slate. And I called all the shareholders, made my case, this guy doesn't know what he's doing, da, da, da, and dereliction of duty. I owned 8% of the company, I think. And we ended up with a total of 12% voted for my slate. And my proxy solicitor said the additional 4% we got was probably a mistake. The form is complicated, so people didn't realize they were voting for you. So basically, I had not only been kicked out of the band I started, but every shareholder thought, okay, this, this guy's crazy. We're sticking with Moritz and, and this, this crew. That was, I think arguably, that was

• 30:10Scott Galloway?

  probably the lowest moment I've ever had professionally. And then about two months later in an earnings call, the CEO, who was a total incompetent, she announced on an earnings call that they had overestimated gross margins, which is really important in a retail company, that they had overestimated gross margins by 1,000 basis points. And their gross margins weren't 48 points, but 38. And I think the stock went from 12 to 7 at the open of the market the next day. And right then, I thought, okay, I don't know if it's this next annual board meeting, but I've won. I'm going to get back on the board and I'm going to sweep out these.

• 30:48Scott Galloway?

  These, these fucking sycophants. Anyways, and so I have direct experience with a management team. This was a typo. This was a clerical error that sent the stock on a temporary wild ride. Mine was kind of intrinsic incompetence, supported by what I call kind of reckless directors. If I sound bitter 20 years later, I am, Ed. I am.

• 31:12Ed Elson?

  Yeah. Cause I mean, there could be many people at Lyft who feel the same way that this is structural incompetence from within management.

• 31:25Scott Galloway?

  Yeah, but this was a typo. This was somebody making a mistake.

• 31:28Ed Elson?

  But surely it was, was it not, was it not at Red Envelope?

• 31:31Scott Galloway?

  No, this was.

• 31:32Ed Elson?

  And I'm sure they amended it afterwards.

• 31:33Scott Galloway?

  Yeah, but to overestimate margins by, by a thousand basis points, that's, that's, that's management. That's not somebody, that's not someone adding a zero. Management said, our gross margins are 48 points earlier in the quarter. And then they had to come on and go, oh no, that was a mistake. We calculated it incorrectly. So it was the CFO and the CEO and nobody asking it. I mean, this is just, just total incompetence on the part of the management team. It's not somebody in IR putting out the wrong number in a press release. I wouldn't be surprised if there's some shareholder lawsuits here, but I don't know how many people made or lost money in the aftermarket. I don't, it'll be interesting to see what happens here. The, the more specific news are quite frankly, the more important

• 32:17Scott Galloway?

  news other than, than hearing about my unresolved anger issues is Lyft had a great quarter. And it's really surprising to me because I would have thought that Lyft would just be slowly but surely getting crushed by Uber and they're not. They appear to have benefited from the same kind of secular trends or wind in their sails that Uber's benefiting from. And I, it's not, I've always kind of liked Lyft. They're sort of the, I don't know, you know, we try harder. We're Avis, whatever it is, but good for them. A good quarter.

• 32:48Ed Elson?

  Yeah. It was, it was a great quarter. Gross bookings up 17%, ridership up 10%, trips per rider up 15%. And the CEO went, went on CNBC and he, the first thing he said was, my bad. Um, I thought was pretty funny, but then he also made the point that actually. The thing that should get investors more confident about the company is the fact that they responded to it so quickly and they immediately made it clear to investors that this was a typo, they explained it, they apologized. This is the first time I've seen something like this. But as I think about it, I'm honestly surprised it doesn't

• 33:30Ed Elson?

  happen more often. I mean, it was literally one number. And I realized after that, it's like, I take every single number and every single word in these earnings report as truth, unless they're fucking around with adjusted earnings. But the numbers themselves, I automatically believe because they're basically always right. So I'm wondering from your experience running companies, how do companies prevent mistakes like this from happening in their earnings reports? How are they so good at, just across the board, at reporting their earnings and not submitting typos?

• 34:06Scott Galloway?

  One word, fear. My first job out of UCLA was Morgan Stanley. And basically, the kind of entire culture was, here's a prospectus, and you're going to read it frontwards and backwards. And if there's any mistakes in there, we're going to fire you. I mean, that was basically the kind of implicit agreement, that if you read the word base rental payment, in a paragraph later, it said base rental payments, which one is it? And then go through and find every time they say base rental payment and make sure that it's singular or plural. And every time there's a number in there, look at wherever that number was, that, you know, the true interest cost, make sure it foots

• 34:51Scott Galloway?

  to where you set it on page 13. Now, there's tools now. I mean, just basic tools around, you know, control search, whatever the fuck it is we use now. But, I mean, I took a lot from investment banking. One, it's a terrible job, full of sad people who are stuck there because they're making so much money, they can't go do anything else. It's a terribly sad group of people. And two, what I got out of it was an incredible attention to detail. It was, everything has to be perfect. And quite frankly, that has served me really well through my career. But it's fear, it's whoever puts out those press releases, someone got fired here. They, they may not know it, but they're going to be fired. Maybe, maybe they, it's okay, get through it, whatever. They're, they're, they're out.

• 35:35Scott Galloway?

  What IR does is they go through these press releases and they go word by word and say, can we say that? And double check this number again, because the markets will move on it. So the fact that they missed this is really unusual. But what happens is unless people like the CFO take responsibility, the problem when there's a lot of people responsible for it is no one is accountable. And you need to assign one person and say, you're quality control for this press release. And that person needs to be nervous. Otherwise, everyone assumes everyone else has done the checking. And it's amazing how many really big errors can slip through when there's no one who has kind of end game accountability.

• 36:18Ed Elson?

  Is this a genuine red flag for investors? Should you be seeing this and thinking, oh my God, they don't have their shit together because they got this wrong? Or is it, you know, a one-off clerical error? Because that, that seems to be the question here. It's like they had a great quarter, but then it's marred by this issue. And it's, it's, it's unclear to what extent you should be waiting that. How big of a fuck up is it really?

• 36:44Scott Galloway?

  It's a yellow card. And that is, it's a warning and it makes them look bad. They get a second yellow card, it's a red card, right? So as long as this is an isolated incident, and you can bet they're going to be all over this shit the next few quarters. As long as it doesn't come across as a pattern, it's a bad look. And a weird way, and I hate to say this, it might've actually brought more attention to their good quarter, where this really, where this really would have been bad. Kind of an automatic red card is if they had overestimated, if they'd made the clerical error in the midst of a really bad earnings report. Cause in a weird way, what this did was bring more attention to the report, to the earnings, which were very strong.

• 37:27Scott Galloway?

  If if this error had happened in the midst of a shitty miss, oh, God, that would have been ugly. The CFO might, he might have, his job might have been on the line, but all is forgiven when the stock is up and you're reporting a good earnings. Having said that, you gotta bet they're gonna go over this shit with a fine tooth and comb for the next several quarters.

• 37:48Ed Elson?

  And by the way, we probably would not be reporting Lyft earnings on this podcast if this fuck up hadn't happened.

• 37:54Scott Galloway?

  A hundred percent.

• 37:55Ed Elson?

  The data is, and we'll move on after this, but the data is Lyft has 25% market share on the US rideshare market. Yet it's 4% of Uber's market cap. Lyft is a $6 billion company. Uber is a $160 billion company. So Uber is kind of the elephant in the room here. The other thing is they authorized a $7 billion share buyback. And that sent the stock up another 14%. It's now sitting at a record high. Do you have any thoughts on that and what it says about Uber, who is also having basically just had its best year ever?

• 38:33Scott Galloway?

  This feels like an absolute hard turn to profitability. A well-run company, firing on all cylinders, iconic. I think Uber is just a phenomenon. I think it's incredible that I can be almost anywhere in the world. I had this amazing Uber experience. I landed in Cannes. I immediately pulled up an Uber and this, this icon of a chopper came up. And I'm like, well, what the fuck? And I hit that. And they said Uber chopper into Cannes, you know, 120 euro. And I'm like, okay, hit it again. And it said, Francois, we'll meet you at, you know, baggage claim four. And this guy who looked like he was 11

• 39:13Scott Galloway?

  in a pilot's uniform, it looked like he was dressed up for Halloween as a pilot, came up and said, Monsieur Galloin. I'm like, yeah. And he put me in a lawnmower that had a whirly, like a blade attached to it. And I'm not exaggerating. We flew across the Cote d'Azur and landed on the Palais. And I got out of the fucking helicopter. I'm like, I am James Bond, Bond James Bond. It just was amazing. I thought Uber is just incredible. Anyways, obviously that was a marketing employee, but I love, I'm fascinated. When I order an Uber, I love seeing where the car is. I'm like, good, he's three blocks away now. Now he's two and a half blocks. I just, it's fascinating. I think they do a great job.

• 39:53Ed Elson?

  We'll be right back after the break with a look at last week's hottest stock.

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• 42:17Ed Elson?

  We're back with Prof G Markets. Chip designer ARM reported earnings more than a week ago and the stock has been on a tear. After posting better than expected earnings, shares jumped nearly 50%. By the next week, though, the stock was still rallying. At its peak, ARM was trading at triple its IPO price from September and it's now settled at double where it was before the earnings report. Scott, what do you make of this?

• 42:44Scott Galloway?

  It feels like, is this AI washing? Or is this the next shoot a drop or the next rocket to explode and what has been kind of the AI Nvidia-inspired, you know, massive updraft in market capitalization? So its revenue was up 14%. It also has a very asset-light business model, which we love. And it has, I mean, check this out, gross margins of 96%. That's like, I don't know, software or Coca-Cola-like margins. And its revenue for the full year, ending in March, or its revenue forecast in March, represents a 19% increase over year over year. And it's now trying to bill itself, it's moved away from smartphones and it's trying to bill itself as an ad company.

• 43:24Scott Galloway?

  That's the only thing that scares me a little bit, is again, AI washing. It gets two-thirds of its revenue from other sectors. One of those sectors is AI. This is a company that's obviously doing well. The thing that scares me about it is Nvidia trades at a forward earnings of 37 and ARM trades at 90. And its year-on-year revenue growth is 14% versus 206 at Nvidia. It just strikes me as it's drafting off the AI hype and it feels like, quite frankly, I hate, it feels a little bit overvalued to me. What do you think?

• 44:01Ed Elson?

  Totally overvalued. I mean, yeah, the revenue increased 14%. That's pretty good. That's around what Google did last quarter, which we discussed a couple of weeks ago. It's close, but not quite to what Airbnb did, which we just discussed. Airbnb was up 17% and those stocks didn't move that much. In fact, they initially declined. This stock is up 100%.

• 44:27Ed Elson?

  Hundred percent, which is crazy. I think there are two explanations. One is that the float is very small. So SoftBank owns around ninety percent of this company, which means that less than ten percent of the shares are actually trading on the open market. And as we've discussed before, if you have a lower float, that means greater volatility. But two is the point you mentioned, which is the AI washing. This company mentioned AI thirty times on the earnings call and thirty times in the shareholder letter. They said, quote, AI on ARM is everywhere. So it basically turned into an AI Nvidia type stock overnight. And the question is, as you bring up, is it actually an AI company? Or like, to what extent is it an AI company?

• 45:11Ed Elson?

  And I'm with you that this is AI washing because AI runs on these things called graphics processing units. So these chips or GPUs. But ARM doesn't make GPUs. It makes CPUs, which are designed for smartphones and in some cases, data centers. They're not designed specifically for AI. Now, what they can do is play an assisting role in AI compute. You know, what you can do with a CPU is you can attach it to a GPU to boost the processing power. But it's not going to be handling the bulk of the AI compute. I don't think that you can look at that ninety times forward earnings and say, yeah, that's justified,

• 45:50Ed Elson?

  especially when you compare it to Nvidia. I mean, even look at Nvidia's revenue. Nvidia's revenue is up two hundred percent year over year. That's a company that's directly benefiting from AI. And then you look at this company, it's up fourteen percent. I mean, it's performing the same as any other tech company. So I think this is a great demonstration of AI hype gone kind of haywire. I wouldn't be that surprised if we started seeing a lot of short interest on this stock. And I wouldn't be surprised if a year from now, the stock's down fifty, sixty, seventy percent from where it is now. It just looks a little insane.

• 46:26Scott Galloway?

  Uh, yeah. So you're going to learn the hardware as I did. It's dangerous to make specific predictions around stock prices. But because the market, the market is just a very unpredictable girlfriend or boyfriend. Like, if it's expensive relative to Nvidia. Then it just feels like we're in crazy town because Nvidia, the thing that Aswath pointed out about Nvidia that just struck me is he said that when he looks at the valuation and the earnings expectation to justify the current stock price of Nvidia, investors are assuming that there is another market as big as AI that Nvidia will dominate the same way it dominates AI. In other words, Nvidia's stock represents, has the expectation

• 47:11Scott Galloway?

  built into its current price that there's another AI boom in an entirely unrelated technology that Nvidia will also own. And so Nvidia itself appears dramatically, or let's just say fully valued, and ARM looks expensive relative to Nvidia.

• 47:30Ed Elson?

  Yeah, ARM would need four AI booms to justify the current price.

• 47:35Scott Galloway?

  But here's the thing, The Economist in 1998 perfectly called the dot com implosion. The problem is they called it in like 97 or 98, and all of these stocks went up 40 or 60% after that. It is very hard to call the top, and momentum and hype are really powerful drugs. So, you know, I wouldn't get near this thing, but at the same time, I wouldn't want to short it because these kinds of companies can just trade up irrationally. They can just, people can just say, oh, AI is the future, let's just play it out. It's central to AI, it's a key supplier, let's just buy. But I agree with you, if the thing does get cut in half, we're gonna say, well, of course it did.

• 48:19Ed Elson?

  Yeah. Let's take a look at the week ahead. We'll see earnings from Walmart, Home Depot, Warner Brothers Discovery, and of course Nvidia. We'll also see the minutes from the Federal Reserve's January meeting. Scott, do you have any predictions?

• 48:35Scott Galloway?

  Yeah, my prediction is that Warner Brothers is gonna surprise to the upside, Warner Brothers Discovery. I think some of those cost cuts are gonna pay off. I think they're starting to get the narrative back around CNN. I think CNN will start to show an updraft because we're going into an election season and all of the Terrifying news coming out about these old men running for president and all the tumult in the world. I mean, it's the perfect scenario for CNN. War everywhere in an election year. And in addition, I think that Zasloff has shown himself to be a really determined cost cutter. The stock has gone down, I think it's sub $10.

• 49:16Scott Galloway?

  I think it's going to show a decent quarter because Netflix is essentially giving them cloud cover to raise prices and for pricing power. So anyways, my prediction is that Warner Brothers Discovery is going to show similar to Disney and Netflix's surprisingly strong earnings. This episode was produced by Claire Miller and engineered by Benjamin Spencer. Our executive producers are Jason Stavros and Catherine Dillon. Mia Severio is our research lead and Drew Burrows is our technical director. Thank you for listening to Prop G Markets from the Vox Media Podcast Network. Join us on Wednesday for office hours and we'll be back with a fresh take on markets every Monday.

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