Pod Insights The Prof G Pod with Scott Galloway Prof G Markets: Peloton’s Management Shake-up, SoftBank’s Vision Funds, and Walmart’s Banking Play About this episode This week on Prof G Markets, Scott checks in on Peloton’s stock in light of a few executive departures, and shares his thoughts on what it would mean if Masayoshi Son launched a third vision fund after two previous failures. Scott then explains why Walmart is moving into the personal finance space.
Peloton
Vision Funds
Walmart
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Transcript Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.
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1:18 Scott Galloway? This week's number: $23 billion. That's the loss reported by SoftBank last quarter. So get this, SoftBank lost the value of Kia Motors. A fantastic automobile that's not only a great value and surprisingly fun to drive, but also birth control. Roll up in a Kia, no sex for you. That's good.
1:51 Scott Galloway? Welcome to Prop G Markets. Today, we're discussing Peloton's management shakeup, SoftBank's vision funds, and Walmart's banking play. Here with the news is Prop G Media Analyst Ed Elson. Ed, what's going on? Not much. I drank the wine you gave me last night. It's pretty good. That's right. That's the most adult thing you could say. I gave the wine, you drank all of it? I gave you like six bottles? I drank one bottle with my mates. I'll send you a selfie next time. I like that. What's going on? Talk about the business news, you alcohol. What's going on? So let's start with our weekly review of market vitals.
2:32 Ed Elson? The S and P tumbled in response to higher than expected inflation data. Tuesday was the stock market's worst day since June 2020. The dollar held stable and remains very strong. Bitcoin fell in line with the stock market on the inflation news. That's more evidence that Bitcoin may not be a great hedge against inflation after all. And finally, the yield on 10-year U.S. Treasury soared on Tuesday. It's also a reaction to high inflation. Shifting to the headlines. The Ethereum merge, which we discussed last week, was a success. The blockchain platform is now operating on a proof-of-stake model instead of a proof-of-work
3:11 Ed Elson? or mining model, and that will reduce its energy consumption by 99.9%. The Consumer Price Index, or CPI, increased 0.1% between July and August, a slight gain after coming in flat the month before. But when you look at the details, the numbers are a lot more concerning. Food prices were up 0.8% month over month, and the so-called core CPI, which is everything except food and energy, was up 0.6%. So why was the overall number relatively low? Energy. Energy prices decreased 5%, but almost everything else has gotten more expensive, and that's why the market threw up on the news. So Scott, what are your thoughts on this?
3:56 Scott Galloway? My favorite description of our economy right now is our friend Todd Benson described it as the Elvis economy that's being so pumped full of steroids. It's being given pills to wake up, it's being given pills to go to sleep, that it's just fat and sick. And that we haven't let the markets take over, we're trying to constantly manipulate it with these doctors and Fed chairman and interest rate policy. Not to say that I am a Keynesian, I do think you do need some government intervention around this stuff, but it just feels as if the economy feels like a, I don't know, a rock star who's going to have a stroke while taking a dump. That's good economics!
4:33 Speaker 03 You're a good audience, ladies and gentlemen. Thank you very much.
4:35 Scott Galloway? Anyways, these numbers sound little, but when you compound them over a year, they start to get scary. So I think you can expect the markets to really throw up if we don't start to see a decrease or a moderation in inflation over the next two or three months.
4:51 Ed Elson? Last week, Peloton announced major changes to its leadership. Two of the company's co-founders, John Foley and Hisa Kushi, are stepping down from their respective positions as chairman and chief legal officer. This is yet another shakeup in a difficult year for Peloton. It recently posted a $1.2 billion quarterly loss on a nearly 30% drop in revenue. And it also announced plans to cut 3,600 jobs. The stock has also gotten crushed this year. It's down more than 90% from its pandemic high of almost $50 billion. And it's now trading well below its IPO price. Now, Scott, I know you have a lot of opinions on Peloton.
5:35 Ed Elson? You once suggested Nike or Apple should acquire it, but let's start with a more general question here. So in your experience, what does a management shakeup usually mean for a company and its shareholders?
5:46 Scott Galloway? It means things aren't going well. What's often interesting is that a lot of times when the CEO is, leaves or is fired, the stock goes up. In this case, it's a little bit different because this company has been Vietnam minus the charm. And by the way, I'm not actually comparing it to a war. It's a metaphor. It's an exaggeration. But they were the pandemic darling and they've just been getting the shit kicked out of them. And everything is headed in the wrong direction, supply chain problems. You know, not only are there kind of macro trends that they are exogenous factors that are out of their control, specifically the pandemic ending and people getting back into the gym, but a lot of these wounds are self-inflicted. A lot of the supply chain just isn't, just isn't working. They're going to absolutely need to right-size the company.
6:31 Scott Galloway? They're going to need to cut costs. But a management shakeup was actually due here. And I can't imagine.
6:48 Scott Galloway? That John and his sow aren't happy to be out of there. And people all aspire to be a CEO, or a lot of people aspire to be a CEO. It's hands down the most difficult business or the most difficult role I have ever witnessed. And when I first started going on public company boards 20 years ago, I saw my role as to question the CEO and play gotcha in board meetings and why aren't we doing this? And then what you realize is that the CEO's inbox is never empty. They're managing up their board, they're managing sideways shareholders, they're trying to manage down their employees and at the same time, build a business that appeals to consumers. It is a very difficult job. And now what I do on boards is I just try to be supportive. But generally speaking, there's two board meetings. There's a board meeting, you're all in together, including the CEO, and there's a second
7:33 Scott Galloway? board meeting, which usually takes place in the hallway of the parking lot, where the two or three people who have the biggest stakes or are kind of considered the wisest or most sage board members get together and say, hey, how do you think Bob is doing? And that's where kind of the beginning of the end starts. With this one, we don't know if this was John's idea or the board came to him and said, we think you should step down. He could have said no, because he has sort of a near controlling stake. So at a minimum, he agreed to this. And my guess is, he just wants a reprieve for what has to be just the seventh circle of hell right now. And that is trying to manage Peloton and explain to investors what's gone on here. What's interesting is, it was worth 50 billion and now it's worth, I don't know, closer
8:17 Scott Galloway? to five, but that's still a big company. That's still a company worth a lot. What will be interesting is to see if they can, again, pivot into more services or get their supply chain figured out. If he's willing to step down, I gotta believe he's willing to have his company acquired. So I would be, I just wouldn't be surprised, and again, I've been predicting this for a couple of years now, if they got acquired.
8:38 Ed Elson? Yeah, what do you think they can do? I mean, they have, I think, a great product. They have a very strong loyal community. They have all these celebrity instructors who have massive influence. Where could Peloton go from here?
8:54 Scott Galloway? When your revenue's off 30% quarter on quarter and you're burning a half a billion dollars a quarter in cash. All roads lead to the same place immediately, and that is you have to cut costs like crazy. My guess is they're going to close stores. My guess is they're going to narrow their product line, although I don't think they have that many products. And they're going to have to lay off a lot of people and cut back marketing. But a lot of times what happens is when you, before you sell your company, you clean it up to make it, you know, you pretty it up or put a bow on it to try and make it more acquirable. If it's a $5 billion market cap now, or it's $4 billion now, someone would have to pay six or seven. You're like Nike, Apple, or Amazon, it feels to me at this price, it'd just make a lot of sense.
9:35 Scott Galloway? And quite fair, I just, I'd be shocked if all three of those companies haven't reached out to Peloton and the controlling shareholders said, no, call us back, I'm not going to sell on the cheap. Because you anchor off the highs, and this is something that people should learn, and that is, I look at my portfolio every day, and I know how much my stocks are worth. And I anchor off the high. I feel like that's the normal state of the world. That's where the world, you know, rests at its natural state of equilibrium, when it's at its high. And so when I'm down, I'm like, oh my gosh, I'm 30% off the high. Well, no, maybe you're doing really well, and over the last five years, you've doubled your money. Maybe the stocks you have have gone up. So you always have to look back at perspective, because if you're only going to be satisfied with the high,
10:19 Scott Galloway? you're going to be satisfied one day, unless it just keeps making new highs. And the same thing happens when you're the CEO of a company, is you anchor off the high. If Peloton had just grown much more slowly and was now worth $5 billion, the folks at Peloton would be like, wow, that's amazing, we're worth $5 billion. The problem is when it goes to 50, and you're like, oh shit, we're down 90%. So it really is a function of perspective. But I think that's a decent metaphor for your own life. You're always going to anchor off your highest earnings, where your stock's been highest. Just pull back and go, okay, but where is it over the last three or five years? And usually in the market, most of your stuff, if you have a long-term perspective, will be up.
11:16 Ed Elson? SoftBank's founder Masayoshi Son is considering launching a third Vision Fund. Considering his track record, this is surprising. SoftBank's first Vision Fund lost more than $10 billion on investments in WeWork. The second fund, which was intended to be more cautious, is down about 20% now. Last month, Son said he was, quote, "embarrassed and remorseful about the performance of his funds." And the final red flag is this: SoftBank plans to lay off 20% of its Vision Fund staff. So, Scott, why would Son start a new fund?
11:54 Scott Galloway? Because he can. I don't know. It strikes me that the smart thing to do would be to lay off 100% of its Vision Fund staff. I just think this thing's been a train wreck. I think Masayoshi Son and Kathy Wood are the most overrated investors in history. The deck that was circulating explaining the Vision Fund would have a slide on processing power, and then a slide on the internet, and then the next slide would say "Cure Loneliness." It was as if a 15-year-old who had done their first hit of mushroom chocolates decided to pull together some sort of weird investment document. I mean, it just made no sense whatsoever. And if you look at their track record and the amount of crazy amounts of capital they've put to work in things that weren't working,
12:38 Scott Galloway? I just don't, I absolutely don't understand how SoftBank has lasted this long. If you look at where they've been successful, it's been in the boring stuff, and they're clearly... SoftBank has operated the Cortelco business pretty well. But it does strike me as strange that the Vision Fund is still a thing.
12:55 Ed Elson? So, just some stats here. At the end of Q2, SoftBank's total portfolio, companies that went up in value, there were 35 of them, and the number of public and private companies that were marked down was 284. And they've had just a huge history of investments gone wrong. WeWork, it had a private valuation of 47 billion, now worth 3 billion. Greensill Capital was insolvent, Cetera went bankrupt. And as you referenced earlier, SoftBank lost $23 billion as of Q2. And $17 billion of that was owed to the Vision Fund. That's 74% of their total losses.
13:36 Ed Elson? So I guess my question is, who's going to trust Sun to manage their capital here? I mean, do you know anyone in your circles who has confidence in him?
13:46 Scott Galloway? I don't know anyone that invested in SoftBank. They do get a lot of access because everybody wants a big, deep-pocketed player as a VC company. They have had some wins, they've had some big wins. But I can't imagine a lot of institutions would want to be part of Vision 3. But who knows, maybe because they have a global brand? Maybe if they were to focus on certain types of investments. How might the Vision Fund survive? It gets anchored by an investment from, wait for it, SoftBank, who has more than $50 billion on its balance sheet. Or maybe, actually no, 60 billion now having sold down its stake in Alibaba. So, you know, it's great to be wealthy. You can be a hedge fund manager and never go out of business
14:28 Scott Galloway? as long as you, as the founder, keep putting your own money in.
14:32 Ed Elson? Do you think that this is maybe a signal that there's going to be a turning point in the startup ecosystem? I mean, VC funding is down almost 40% from the end of last year. Deal flows down 20%. Is this sort of a signal of a bottom and we're going to see a revival?
14:49 Scott Galloway? No, I just think the deceleration is getting started. Because even if you look at that number, you said, okay, global VC funding is down almost 40%. It's probably still up if you go back five years. VC funding is still really robust. They have raised a lot of money. What you're going to see is it's essentially the weak will get cleared off the deck. And not even the weak, but the new ones. The thing about alternative investments, if you're in that business, is it's so much a matter of timing and luck. And that is, you're like a plane taking off and you need to get a certain level of altitude because eventually you're going to hit an air pocket. If you hit an air pocket at 50 feet and it takes you down 80 feet, you're dead. But once you get to 30,000 feet,
15:31 Scott Galloway? if you're fortunate enough to invest into a productive or a bull cycle, and you have some big wins and you get more than a billion, one, two billion, three billion dollars, and you have multiple funds, more than one fund that shows a positive return. If Fund Three is awful, it's okay because you're already raising Fund Four based on the track record of Funds One and Two. So, so much of it is about when you start. And if you can get good returns out of the gates and start raising more than one fund. But we're going to see an enormous pullback from venture capital investing because the asset classes overperformed. They started chasing crazy stuff with too much capital, which took returns way down. In sum, a lot of investors will pull in their horns and reallocate out of venture capital.
16:14 Ed Elson? More pain for founders. We'll be right back after a quick break with a look at an interesting new player in the banking space: Walmart.
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18:45 Ed Elson? We're back with Prof G Markets. When you think of a bank, you might think of an ATM, a local branch in your town, or a famous institution like JP Morgan. You probably would not think of Walmart. However, the biggest retailer in the world recently announced it will launch checking accounts and debit cards in partnership with One Finance, an independent company that is majority-owned by Walmart. Walmart plans to eventually offer other products, such as loans and investing, and soon become a one-stop-shop for all consumer banking needs. Scott, why is Walmart doing this?
19:20 Scott Galloway? Just as I think every senator wakes up in the morning and goes to the mirror and says hello. Mr. Or Madam President, I think every company wakes up that's over, call it, $200 billion or $300 billion in market capitalization and says, hello, global operating system. And that is, they want to be the primary interface between you and a variety of services. And if you think about what's so powerful about Apple, they have the billion wealthiest people on the planet kind of ingrained or have adopted the iOS operating system. Amazon is your operating system for e-commerce. The operating system for finance or for banking has been ATMs and branches. That operating system feels clunky and out of date for anyone under the age of 40. What Walmart says is,
20:03 Scott Galloway? we have an operating system called our stores. We have 1.6 million employees. We have more than 200 million customers who come into this operating system called a store. 90% of the US population, get this, Ed, live within a 10-minute drive of a Walmart. So they're using that operating system or that interface with those hundreds of millions of consumers, with 200 million consumers in America to be exact, to get into adjacent products, just as Apple said, we're going to get into finance, just as Amazon said, we're going to get into video or streaming networks. Walmart is getting into healthcare, they're opening clinics, and they're also getting into finance.
20:39 Ed Elson? Yeah. Do you feel like it's a similar situation to Amazon where it's, they're not doing it because they want to, but because they have to? They have to enter a new space in order to grow their revenues and grow the top line?
20:50 Scott Galloway? So there's a difference. Walmart trades at a much lower multiple on earnings as Apple or Amazon, meaning the growth expectations for Walmart aren't as great. Now, that's bad to have a stock that's lower than the other guys with an equivalent amount of revenue or profits, but it's good in the sense that you don't have the same gun to your head to grow 20% a year. They just need to grow kind of high single digits. So I don't know if they have to do this, but it makes a lot of sense for them. Over half of Walmart shoppers have annual income less than $50,000 a year, and I bet a large proportion of those folks don't have a bank. So offering a convenient, friendly bank where maybe they start to rack
21:30 Scott Galloway? up rewards or coupons or dollars off for shopping at Walmart will probably be successful. The stock is effectively flat over the last two years. Amazon is off 14% and the S&P 500 is up 19%. But Walmart is also one of the best-run companies in the world. Doug McMillan is an outstanding CEO. But what's strange about it is like, imagine JP Morgan getting into selling consumables or consumer goods or groceries. That would feel strange. This feels more natural. But finance is an incredible area of opportunity because so many people, middle and lower income, are unbanked. So I think that these big guys smell blood in the water. And if they can
22:11 Scott Galloway? get someone to shop more at Walmart, or they can get them to be on their Android or iOS interface more, it'll take the value of their entire ecosystem up.
22:21 Ed Elson? Do you think Jamie Dimon and David Solomon, all these big bank executives, see this and get worried?
22:26 Scott Galloway? I think they're always worried because they're good CEOs. And as Andy Grove said, only the paranoid survive. But JP Morgan has done really well. And the nice thing about these businesses is that the majority of their expenses can be dialed up or dialed down. Specifically, they can hire and fire people. There's not huge infrastructure payments here. JP Morgan has more because they have actual bank branches. But Goldman Sachs, who just announced they're laying off people, that's just a standard part of the cycle in investment banking. But they also do a lot of backend stuff. My understanding is that JP Morgan and Goldman work with a lot of these players. So for example, the Apple credit card is a joint venture with Goldman Sachs. I don't understand why, but Goldman is involved, as is Mastercard. So these companies have great technology, they have great leadership,
23:09 Scott Galloway? they have great brands, and they always seem to be involved in a lot of this type of innovation. So sure, are they worried? Absolutely. But their stocks and their companies continue to perform.
23:20 Ed Elson? Okay, let's check in on your predictions. So last week, I asked you what you thought would happen with Rent the Runway's earnings report. And your response was one word: pain. Pain was sort of right. The company beat earnings expectations. But it also announced it will lay off nearly a quarter of its workforce and reported an 8% drop in subscriptions from the previous quarter. Do you have any thoughts here?
23:46 Scott Galloway? Well, yeah, the stock went public at 21 bucks a share, and it's now trading at just over $3. So it's off 85%. The forecast is what I think took their stock down. It's flat. They're forecasting flat revenue for this quarter. New subscriber signups are slowing, and more subscribers are canceling or holding their accounts. So what do you have? You have a company whose current business model doesn't work in some. They're losing a shit ton of money, and they're not growing that fast. And a lot of people are churning out. So this is a company that probably goes below two bucks a share, which will give it a market cap, I think, with cash of somewhere between 100 and 200 million. And someone like an Urban Outfitters comes in and takes them out for 150 million.
24:31 Scott Galloway? I mean, at some point, this company is going to have an enterprise value of almost zero. I think they have quite a bit of cash on hand. I wouldn't be surprised if they lay off another 30 to 50% of their staff because whoever acquires them is going to want them to do the dirty work of rightsizing the business. What's the team focused on this weekend?
24:45 Ed Elson? All eyes are on Jerome Powell this Thursday when the Fed meets to determine the next interest rate hike. Economists are expecting an increase of 75 basis points, but after last week's disappointing inflation print, some are expecting it to be as high as 100. Scott, any predictions?
25:04 Scott Galloway? My prediction is there's been a ton of activity and rhetoric and controversy around TikTok. And the clip that I keep seeing is Josh Hawley or Senator Hawley questioning Vanessa Pappas, the CEO of, I think it's TikTok America, saying, can you guarantee that no engineer in China is a member of the Chinese Communist Party? And she just refused to answer the question.
25:29 Speaker 04 Senator, I'm saying nobody that's sitting on this panel could tell you a political affiliation of any individual.
25:34 Speaker 05 I'm not interested about anybody's opinion. I'm asking you a factual question. Are there members of the Chinese Communist Party employed by TikTok and ByteDance? Yes or no?
25:43 Speaker 04 I wouldn't be able to tell you the political affiliation of any individual. What I can tell you is that...
25:48 Scott Galloway? She came across very Zuckerbergian, very slippery. It felt like, oh, my God, Meta Part Two. And my prediction is that in the next 90 days, we either see a dramatic change in ownership, meaning a very large investor. And when I say a change in ownership, I mean a change in ownership to an American entity, or we see an outright acquisition. I think something that would solve all problems for TikTok would be if Microsoft acquired it. And there's so much money on the line here. And the heat is getting ratcheted up so quickly that I think the shareholders at ByteDance are going to say, OK, we're willing to cash in and make someone else the largest shareholder here in exchange for creating some distinction between... The CCP and an unbelievable product because this company is probably worth 500 billion
26:33 Scott Galloway? to a trillion dollars right now. If that doesn't happen, if that doesn't happen, in my view, that reflects that the CCP is already having influence on this company and not letting them pursue a sale. And I think you're going to see regulation. Okay, that's all for this episode. Our producers are Claire Miller and Jason Stavert. Special thanks to Catherine Dillon and the Prop G Media team. If you like what you heard, please follow, download and subscribe. Thank you for listening to Prop G Markets from the Vox Media Podcast Network. We will catch you next week.
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