TIP838: Google, Reddit, Amazon – Are Our Biggest Winners Still a Buy? w/ Daniel Mahncke & Shawn O’Malley

After looking at companies that tanked in recent months in the last episode, Daniel Mahncke and Shawn O’Malley now take a look at the best-performing stocks of the pitches of the last two years. Google, Amazon, and Reddit are companies that generated great returns for the Intrinsic Value Portfolio, but there were also companies on the watchlist that turned into multibaggers in the past year. Daniel and Shawn discuss the patterns of the stocks that gained most in value, what one can learn from that, and how they think about selling and holding positions that went up past their fair value estimate. IN THIS EPISODE YOU’LL LEARN: (00:00:00) Intro (00:03:51) About Google’s stock rise and valuation (00:15:32) How the massive capex changes the Mag7 (00:29:08) Why Amazon might be more attractive than Google (00:40:48) Why Daniel and Shawn decided to sell some Reddit (01:03:07) Why Remitly wasn’t added to the Portfolio (01:11:57) How TSMC, Dell, and Comfort Systems became multibaggers (01:24:09) What the future holds for the AI trade Disclaimer: Slight discrepancies in the timestamps may occur due to podcast platform differences. BOOKS AND RESOURCES Join the exclusive ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Intrinsic Value Mastermind Community⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Track ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Intrinsic Value Portfolio⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Learn more about how to join us in NYC for our ⁠⁠⁠⁠⁠Intrinsic Value Conference⁠⁠⁠⁠⁠. Portfolio Review ⁠⁠⁠⁠Submit Tool⁠⁠⁠⁠. Pitch on ⁠⁠Google.⁠⁠ Pitch on ⁠⁠Reddit. Pitch on ⁠⁠Crocs. Pitch on ⁠⁠Amazon⁠⁠. Pitch on ⁠⁠Remitly⁠⁠. Pitch on TSMC. Pitch on Dell. Pitch on Comfort Systems. Related ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠books⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ mentioned in the podcast. Ad-free episodes on our ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Premium Feed⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. NEW TO THE SHOW? Get smarter about valuing businesses through ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Intrinsic Value Newsletter⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Check out ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Investor’s Podcast Starter Packs⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Follow our official social media accounts: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠X⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ | ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠LinkedIn⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ | ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Facebook⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Try our tool for picking stock winners and managing our portfolios: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠TIP Finance⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Enjoy exclusive perks from our ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠favorite Apps and Services⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Learn how to better start, manage, and grow your business with the ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠best business podcasts⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. SPONSORS Support our free podcast by supporting our ⁠⁠⁠⁠⁠sponsors⁠⁠⁠⁠⁠: ⁠Plaud⁠ ⁠Plus500⁠ ⁠Netsuite⁠ ⁠Scribe⁠ References to any third-party products, services, or advertisers do not constitute endorsements, and The Investor’s Podcast Network is not responsible for any claims made by them. Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm

• 0:00Speaker 00

  You're listening to TIP.

• 0:03Speaker 01

  Welcome back to the Investors Podcast. Today's episode is number 838 and after we just did an episode covering stocks that tanked, since we covered all of them, today will be a much more pleasant episode for us because it's actually about our winners. So the plan is to analyze why they worked out so well and also what we can learn from them to find even more of them going forward.

• 0:23Speaker 02

  Yeah, that does sound a lot more enjoyable for us. And, you know, I did like looking at the stocks that didn't do well. I think you tend to learn more from those situations, but nevertheless, I would obviously love to identify some of the patterns among our winners so we can find more companies like them, hopefully. And it'll also be interesting to see whether we still consider these companies to be good investments at today's prices.

• 0:48Speaker 01

  I also plan to cover some companies that we pitched and then didn't end up buying and that still skyrocket after, unfortunately. So to some extent, I won't even let us go through this episode without at least pointing out some of our missions. And I gotta say, to be fair, I consider almost all of those companies to be quite expensive today. So I don't know if it was actually a mistake to not make them part of our portfolio.

• 1:11Speaker 02

  Okay, well, we'll get into all that today.

• 1:17Speaker 00

  Since 2014, with more than 200 million downloads, we have interviewed the world's best investors, studied deeply the principles of value investing and uncovered many compelling investment opportunities. We focus on understanding businesses and intrinsic value, investing accordingly and sharing everything we learn with you. This show is not investment advice. It's intended for informational and entertainment purposes only. All opinions expressed by hosts and guests are solely their own and they may have investments in the securities discussed. Now for your hosts, Sean O'Malley and Daniel Manca.

• 2:03Speaker 01

  In case you're listening to this episode and you have no idea what portfolio we're talking about here on the show, my co-host Kyle and I alternate on pitching you Sean our favorite new stock ideas each week with the obvious goal in mind of finding the great businesses for our intrinsic value portfolio. And while it's a paper portfolio on the surface, every position of the portfolio is covered by at least one of us hosts through our personal portfolio. And I would say it's always almost a significant position. So we do not just buy one share so that we can say that we invested. We actually have sizable positions in our personal portfolios. So we also regularly share them, at least in our mastermind group, so that members probably can attest to the fact that we have skin in the game whenever it comes to the companies that we cover here.

• 2:47Speaker 02

  Yeah, for me, Uber, Google and Adobe are all very, very significant positions in my portfolio. And I believe you're pretty heavily invested in MercadoLibre, Amazon, but also Reddit and some other names too.

• 3:00Speaker 01

  Yeah, especially the last one was one that you pitched to me. Otherwise, you can still already tell that there is a bias towards the company for which one has done the research. You know, it's always easier if, you know, I pitched Mally and I've done 40 hours of research on that name, plus probably a whole lot more hours along the time that I just have a bit more conviction in that name than you can ever have or that Kyle can have. And obviously in a perfect world, we could all study all the businesses to the same extent, but unfortunately that's not realistic. So yeah, I would say with the formalities of the way, where do you want to start today's episode?

• 3:33Speaker 02

  I got one more formality left for you, actually. I don't want to pass on any opportunity to shamelessly mention our New York City Intrinsic Value Conference on September 19th. Tickets should still be available at theintrinsicvalueconference.com. So just to say that again, that's theintrinsicvalueconference.com. And so if you want to join us and a whole bunch of other value investors in New York, just go to that website. But how about we start with our largest portfolio holding and also one of the most successful investments we've made and very proud of Alphabet? I think there's a lot to say about this one and unfortunately mostly positive things to say.

• 4:14Speaker 01

  It's somewhat funny that Google has been our largest holding from pretty much the beginning of this journey. And yet it's probably also the company we spend least amount of time talking about. And it might be because, you know, everybody talks about Google. There's so much to say about it, but there's also so many people talking about it that we don't really feel the need to say that much about it. And if we do, we oftentimes do with people close to us or the two of us off the record. But then again, thoughts and perceptions can differ. So it might actually be worth talking a bit about this name, especially when we look at the current earnings and, you know, the entire cycle that AI is in and the hyperscalers. I want to listen back to the Google pitch that you made more than a year ago by now. It's remarkable how the narrative of that company have shifted.

• 4:57Speaker 01

  You know, it's one of the biggest in the world and you would feel that probably for those companies, the market is the most efficient. Turns out there can be quite a lot of stuff happening over just a year time. Back when you pitched Google, the big question was whether search would be disrupted and whether the DOJ antitrust investigations could potentially even split up the company, which I feel is something that nobody talks about anymore to some extent because it's done, but also because you just don't have the same fear again, that any one of the big hyperscalers or ecosystem companies will be disrupted. And again, like those concerns pushed the stock down to as low as $150 per share about one and a half years ago. Unfortunately, you made the wise decision of buying a lot of stock for the portfolio back then between about $150 and $190, went up a bit after averaging up.

• 5:42Speaker 01

  So we sit on again now of almost 100%.

• 5:46Speaker 02

  It is funny because when I first covered Alphabet, if you go back and listen to that episode, I definitely was not pounding the table and calling it a screaming buy. I did a very basic, some of the parts valuation model and it sort of suggested that it was fairly valued at between $180 and $200 per share. And I really just felt like there was more potential upside though, that you couldn't necessarily cover through a valuation model. And well, that's basically what has happened. At the time, OpenAI's ChatGPT dominated the LLM race and barely anyone had ever heard of Claude and Gemini was certainly seen as being way behind.

• 6:29Speaker 02

  And a lot of people were convinced Google search was dead. And I saw that all over Fintwit and Reddit and it did feel like for the first time in my life, Google search was facing a real credible threat. And the way people were searching for information was potentially changing dramatically. And half a year later though, Google's Gemini was then seen as the leading LLM and Google used its dominance over search to incorporate AI into Google search. And so one of the big concerns was that even if people came to Google still for queries, queries that were answered by Gemini or AI overviews powered by Gemini, that might not be worth as much as traditional Google search in terms of advertising monetization.

• 7:13Speaker 02

  So the pendulum did swing pretty dramatically, which for anyone who wants to talk about efficient markets, it is hard for me to fathom how a company can have its value swing by the order of magnitude of trillions within a calendar year and then say Mr. Market isn't susceptible to over-exaggerating to the upside or to the downside based on the narrative of the day. And ironically today, you would probably argue that Anthropic has taken the lead in cutting edge LLMs and their business is actually better positioned for success than OpenAI, in my opinion, because I think they wisely chose to focus on serving business customers

• 7:54Speaker 02

  being a B2B business, whereas ChatGPT got tons of users quickly, but serving answers to hundreds of millions of people using LLMs is a really tough business to be in because the compute is just so expensive, right? I mean, the cost to answer the types of basic questions that everyday people ask is significantly less for traditional Google search to be able to answer in a satisfactory way than for LLMs. So for OpenAI to try and appeal to the masses and just waste a ton of expensive computing power on things like spaghetti recipes or whatever people look up, I think that has gotten them in real trouble, especially in this world where there does seem to be a shortage of chips and data centers and computing power.

• 8:40Speaker 01

  And then I would actually argue that investors now fear that L L Ms will actually be commoditized at some point, especially now that you have all these Chinese L L Ms coming out. And it also seems that, you know, at some point, Chat G P T has the best model, then it's Claude, then it's Gemini. There's such a, you know, change. And even now, the Chinese L L Ms are not only cheaper, they're almost as good. Do you just feel there's no sustainable advantage? I think that's probably the market narrative right now.

• 9:05Speaker 02

  I think that's the problem with the B to C approach, right? Is for the masses, L L Ms will be commoditized. I say that with, you know, reasonable amount of confidence. Obviously, nobody knows exactly, but yeah, what I think will happen is you're just going to ask an A I agent to do something for you, but you don't really care about the underlying tech answering your question. It'll all mostly be the same and work pretty well. And it'll be similar to me that in the same way that there's just not really a huge difference between having Verizon or A T and T, right? I'm not hugely concerned about which cellular provider, they both just work. And so I continue to think that really all the money is in serving businesses with the

• 9:50Speaker 02

  best A I products. And really think about how many different enterprises brush up against Alphabet's product suite from Gmail to Google Drive. I think that positions them very, very well. But anyways, Chinese competition fears has not yet shown up in Google's stock, I wouldn't say, because the market has found a new appreciation, not only for Gemini, but also for Google's cloud business, which has benefited hugely from this entire A I race. And I certainly didn't capture all these different variables in my model last year. And yet it seemed very unlikely to me that Google would just stand on the sidelines while L L Ms disrupt its core search business.

• 10:33Speaker 02

  And directionally, I felt like it was their game to lose. And sure, they could end up losing it, they could blockbuster it. But if you can buy maybe the best business in the history of capitalism for less than 20 times earnings, when they are facing competitive threads, but they have sort of the advantage to be able to, as long as they don't mess it up, they should be okay. I'm happy to make that bet all day. So I'd like to think I invoked a little bit of Charlie Munger and bought a fantastic business at a fair price. And that's how I thought about it at the time. And I don't know, maybe in hindsight, it was probably more than a fair price. It was a pretty generous price from the market.

• 11:14Speaker 01

  It's nice to know that sometimes investing can be just that simple. Although I would also say that back then, the narrative was quite brutal. So it was not an easy thing, you know, as you did to just say, hey, I have the guts to invest in Google and I go against pretty much the entire market back then. And I actually want to draw a parallel here to our Biggest Losers episode, where we also shared, you know, the takeaway of never blindly trusting any valuation models that we do. And actually, you can probably scratch the blindly, because even if you study all the assumptions, the model can still be completely wrong. We've had that happen, you know, all the time. And all it needs basically is, you know, a bit of a macro headwind that you didn't expect, or maybe an unexpected change in terms of the micro, could be the margins, could be whatever. And ultimately, I think it's fair to say that valuation models almost always reflect

• 11:59Speaker 01

  varying degrees of the status quo. You know, it's sort of, you know, business as usual, and then you make some smaller changes to that. And the same also goes for the upside, you know, if growth is suddenly much faster than anticipated, we had those businesses in our portfolio, your business as usual model will massively underestimate the present value of the stock. And again, we'll talk about some companies today where, in my opinion, the main reason for the positive returns has been that the market basically did a 180 on its view of pretty much the same fundamentals, and then just reassessed the company's multiple. And of course, you know, you could argue, and there are some people doing that, that the same happened to Google, where it basically went from trading at a price to operating cash flow in the mid teens to, you know, the 30s.

• 12:40Speaker 01

  And yet you can already see that that alone cannot explain the doubling of the stock. If you lay out the price to operating cash flow over the growth in operating cash flows, you see a strong correlation because the multiple expanded, yes. But at the same time, operating cash flow growth went from a low of 0% in 2022, which sort of just shows you again how much of a bear market it has actually been, to almost 40% today. And it basically grew in pretty much a straight line, 10% a year, you know, 0%, 10, 20, 30, and today we had 40%. And I should add that operating cash flows in this quarter have been abnormally high just due to the impact of the SpaceX IPO, because Google had an equity stake. We all know SpaceX went public, went quite well in the beginning, not so much by now,

• 13:24Speaker 01

  but still obviously was a huge impact on Google's earnings. And it says that the current multiple is 20, again, only for the stake in SpaceX. If you adjust for that, it's quite a lot higher than 20.

• 13:36Speaker 02

  Despite that, we are still pretty comfortable owning Google at these higher valuations. And obviously, we use Google and Alphabet interchangeably. And I think it's perfectly possible that we might see a pullback here at some point, but it could just as well be that Google keeps chugging along, compounding its intrinsic value for a long, long time to come. That that's certainly the hope if you zoom out long enough.

• 14:00Speaker 01

  I just said that investing can be easy and simple, but it can also be just such a difficult game. And we basically make the argument right now to buy a great business at a fair price and then sort of let the upside take care of itself, which is what a lot of, you know, value investors suggest you to do. But then again, Adobe was supposed to be a great business at a fair price, and it declined another 50% from there, right? So what is actually a good price? What is a fair price? I would say that half the SaaS universe was supposedly a great business at a fair price, until the market then decided, you know, today I will decide those are no longer the best business in the world, we no longer pay 40, 50 times earnings for those. Although, to be fair, I would say that with the benefit of hindsight, which is, you know,

• 14:42Speaker 01

  something that you always have to account for in today's episode, getting Google at a forward P E of 18 times was probably more than just a fair price. And I guess the first lesson is that paying up for quality shouldn't be an excuse to pay 30 times earnings for relatively mature business. Of course, if it's growing a lot, that's a different thing, no matter how great the quality might actually be, or even just seem. And as long as it stays reasonable, I like to refer to the saying, great businesses surprise you to the upside, mediocre businesses surprise you to the downside. And that's one thing that we saw with a lot of the companies that we covered over the last year. Now, we could probably start an hour long debate on what's a reasonable valuation, and we probably still not get to an answer. But how about instead of doing that, we just talk a bit more about Google's latest

• 15:27Speaker 01

  results, because I think there's a lot to discuss. I mean, the stock went down 8% the following day, though I personally think the earnings were quite spectacular.

• 15:34Speaker 02

  In a word, they were breathtaking. Alphabet just defies all laws of economic gravity. The law of large numbers just seems not to apply to them, apparently. The market, though, seems to be more focused on the potential downside of this capex spending, overbuilding data center capacity. And I do see that as being a pretty valid concern, right? If we're being honest, the Alphabet that investors have the chance to buy today is a very different company profile than the company that existed two years ago. And so I don't mean that simply because of all the changes with A I, but from a financial

• 16:15Speaker 02

  lens, the capital intensity of Alphabet has changed profoundly as they commit to spending tens of billions of dollars for years to comment. All that will eventually show up as depreciation costs on the income statement, to say nothing of the interest costs that'll come from the debt that they're taking on to finance all this spending.

• 16:36Speaker 01

  Yeah, the question is what the R I, the original investment will be on all of those investments. And I guess you can probably say that's a trillion dollar question here, literally. I would still argue that Google probably has a unique advantage in terms of L L Ms, for example, because we talked about Adobe's A I distribution advantage just a couple of days ago. And Google obviously has one of the biggest distribution advantages in the world. I mean, just A I overviews is a fantastic example of that.

• 17:03Speaker 02

  Absolutely so. And, you know, you have this kind of perfect storm of caution around A I, generally caution around the capex spending, and then also some caution from the market with Google trading at a relatively rich valuation, right? It's certainly not as cheap as it was when we first bought it a year and a half ago. And it, just looking at the numbers, Google is now trading at a price to free cash flow per share of over 70 times. And that's mainly because capex investments of over $200 billion annualized are eating away a significant chunk of cash flows. And so free cash flow is just operating cash flow minus capex.

• 17:44Speaker 02

  So as they blow up this spending on data centers, that means that their free cash flow, the money that's basically left over for them to potentially distribute to shareholders is significantly reduced. So maybe that multiple is artificially inflated at 70 times free cash flow, or to the point a moment ago about the capital intensity of Alphabet changing. Maybe this is the new normal, where Alphabet is nothing close to the asset light software search business it once was. And for them to continue growing, they have to invest massive amounts in physical projects in the real world, right?

• 18:28Speaker 02

  They now own a whole lot of data centers directly and indirectly. And that, again, changes the company's profile from being an internet company, a software company, to a company that does things in the real world. And so that is a big change for them. And this divergence between cash flows and earnings is also a pretty good indicator of what's happening right now to Google, but also basically all of big tech and the hyperscalers, where we're watching them transform into different types of businesses. And we don't know what the implications of that will be for markets.

• 19:06Speaker 01

  And for context, your management is guiding for capex of about $200 billion this year, and estimates are actually as high as $300 billion for next year. I don't know if we will actually see that. I think it's realistic that we might be in the middle. So talking 250, 260 billion, but still, I mean, those are incredible numbers. And if you just do some quick math here, Alphabet is running at roughly $475 billion in revenue, and then operating margin of 34, 35% in 2026. So just the current depreciation and amortization is a little less than $60 billion, which would be about 12% of revenue. If we now assume that the capex numbers that I mentioned above are true, so we will actually talk about 200 billion this year, and then 300 billion for next year, and the capex split

• 19:50Speaker 01

  of servers and chips is about 2/3 servers and 1/3 chips, which is what you usually tend to see with these hyperscalers. And that's also what matters because of the average useful life, that's where you look at that, then you could see margins go down to as low as 20% in 2030. Obviously, that also depends on the revenue growth that accompanies the capex spend, and the assumptions that we make here are quite bearish. I mean, 300 billion capex is quite a lot of money. But whatever that number will actually be, investors want to see returns sooner rather than later. I think that's what the market is telling us, especially in the last couple of days. And in the last few years, Google spent tens of billions of dollars each quarter to buy back shares, which led to a buyback yield of about 4%. And just last year, we sort of looked for these companies that turned

• 20:34Speaker 01

  into share cannibals, and it looked like Google might become that. Today, I would say that's probably not what we're going to see from Google. I mean, that part of the shareholder return is something that we'll no longer see with Google. Instead, Google has already raised more than $50 billion in long-term debt and announced it will issue about $85 billion in new shares this year. So a lot of the stock that was bought back in the last few years is now issued again to fund capex, to fund data centers, to fund AI research.

• 21:03Speaker 02

  They raised money from Berkshire Hathaway, from Warren Buffett, right? Berkshire made a pretty significant equity investment into Alphabet to implicitly fund all this new capex. So yeah, I mean, getting to the more positive news behind the earnings release, I would say that Google's cloud growth is just absolutely off the charts. Growth went from low 30s% year over year to more than 80% in the last quarter. And so the most insane number is without a doubt, though, the backlog, which is now standing at half a trillion dollars, growing 375% year over year, almost four times year over year. And

• 21:47Speaker 02

  according to Google, about 50% of that backlog is expected to be recognized within the next 24 months. So that's a lot of pending unearned revenue. And so even with about 40% of that backlog coming from Anthropic, that is obviously a concentration risk. But the point is, there is a lot of real demand supporting a huge amount of business for Google Cloud. And these are very much not just numbers on paper.

• 22:19Speaker 01

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• 25:26Speaker 01

  All right, back to the show. When I looked at the backlogs of all these companies, Oracle too, just a couple of months ago, and especially a year ago, I wasn't quite sure if we will actually ever see that money being spent and, you know, going to, for example, Google or Oracle. But now I think I'm pretty confident that will be the case. I just don't see an end. And especially if you just look at a 24-month timeframe, I'm pretty confident Google will get that money. And then it's just absolutely insane looking at the size of that backlog. I would say the only downside, and probably also why the market sold off the stock on these earnings, is that Google, for the first time since IPO, reported a quarter of negative cash flows, which is why Google needs to raise all the debt and that equity to still fund capex investments. Because for the first time in a long time, even the cash flows

• 26:10Speaker 01

  of Google are not enough to fund their new investment cycles, which is insane to say and think about. You know, if this happened a year ago, again, I think I would have been more cautious about that than today, because the numbers clearly show that the demand is actually there and that these investments are paying off. And if I can bet on arguably the best company in the world, and, you know, incredible tailwinds that we certainly see, I think I can continue to sleep well with, you know, Google being the largest position in our portfolio, even though it's not a value play at today's valuations. I have to say, though, and this might also sound counterintuitive at first, I wouldn't buy Google shares at today's prices, considering the other opportunities. And I know some would probably argue that if you wouldn't buy a stock today, you probably should sell

• 26:55Speaker 01

  it if it's already a position in your portfolio. I would personally disagree with that. I think when you have these high-quality compounds in your portfolio, I would just let them run and sort of just, you know, give them the benefit of the doubt for all the returns that they generated from you. And this kind of goes back to our discussion at the beginning of the episode. You know, great companies tend to surprise you to the upside. So I'm personally okay with holding a stock that is valued, let's say, optimistically. If the stock declines in the short term, you know, that's fine with me, given that I intend to own it for the long term anyway, and we're sitting on 100% returns. And if there's a positive surprise that makes the stock fairly valued again, which could argue maybe it's a bit over that today, say they have significantly faster growth or maybe less margin pressure than I thought and the market thought, you're still invested to benefit

• 27:40Speaker 01

  from all of that.

• 27:41Speaker 02

  Look, you gotta let your winnows run, right? That's one of the biggest lessons we've learned from studying great investors. And look at how long Buffett has let Coke and Geico run for, right? I think we were joking before the call, Daniel, you were saying, if you had invested in Coke at the time that Buffett did, there are probably dozens of times that you might have felt compelled to sell, because you get these moments where the stock looks expensive, the narrative changes. But at the end of the day, Coke has just, if you zoom out enough, just kept doing its thing, kept climbing higher and higher and higher. And it's a great business accordingly. But how about we jump to our other Mag 7 name in the portfolio? So Amazon has been a holding since February

• 28:23Speaker 02

  of this year. We bought it in the 190 range per share, and it has corrected over the last few weeks. So returns are a little lower than they were when Amazon was trading at as high as $270 per share. So it might be premature to call this one of our biggest winners, but a 35% return in five months is definitely not anything too shabby. And I still want to bring it up just so we have another chance to compare it against Google, too, especially since you just mentioned that you probably wouldn't add to Google here. So do you feel differently about Amazon after it's run up a bit?

• 29:03Speaker 01

  Well, we should say that we record this when basically Amazon and also Reddit just reported earnings. And Amazon's earnings reaction is pretty good. They will open probably 15% up today. So I just want to say that I think Amazon's prices are a lot more attractive than Google. Now being up 15%, you know, a bit of that leeway is gone. But still, I would say that it's probably, if you ask me, a better opportunity right now to deploy capital. But it's also already 10% of our intrinsic value portfolio. And I probably wouldn't make it a larger bet just considering that. But if you would hand me a dollar today and you would tell me, well, it has to go to either Google or Amazon, I would go for Amazon.

• 29:43Speaker 02

  The story for them both is definitely similar in some ways. Google is guiding for $200 billion in capex. And Amazon is also guiding for roughly $200 billion in capex, too. Google has raised more than $50 billion of long-term debt this year. And Amazon has actually raised close to $90 billion. And so for context, when we're talking about $200 billion in capex spend, that is roughly the size of the economy of Greece. Entire European country. You got two companies in the US spending twice that amount, or, you know, between the two of them, twice that amount.

• 30:27Speaker 02

  And like Google, Amazon's Q2 free cash flow has also turned negative. Which, again, for companies doing hundreds of billions of dollars in revenue and producing massive amounts of operating cash flow for many, many years. It was definitely not something I had on my radar that their free cash flow would go negative. Because they're making such massive capital expenditures.

• 30:52Speaker 01

  Well, at least Amazon shareholders are used to negative free cash flow. You know, Google shareholders can say the same. And I actually think that if you just look at the earnings report of Amazon and you compare it to Google, and you could also compare it to Meta. I don't really see the same threat by, you know, the market's judgment of whether that's a good earnings result or not. If I look at Amazon's earnings, I personally like them and I can understand why their stock is up 15%. But I also like Google and I also, to some extent, like Meta. So I feel like the market is just judging them differently right now. I believe it's primarily that Google has a high valuation, so it's seen differently than Amazon. But Meta is just in a bad spot generally with the market. And just to get to Amazon's earnings, you also have to make similar adjustments to their earnings.

• 31:35Speaker 01

  Because Amazon benefited from a $17 billion markup on its stake in Anthropic, just like Google had the SpaceX equity. So when you see it trade at, you know, price to operating cash flow of 12 or 13, that seems lower than it actually is. After adjustments, Amazon would trade closer to 17 or 18 times. But I would still say that's materially lower than Google. And if you ask me, pretty attractive for a company of that quality. And obviously, it's not just about the metrics. It's not enough to just look at a P/E or price to operating cash flow. I just look at Amazon's business and I see so many opportunities. Amazon has literally built one of the largest chip businesses in the world in the last couple of years. And barely anyone has even noticed. And according to Andy Jassy, the CEO of Amazon nowadays, that business has a $20 billion annual run rate.

• 32:20Speaker 01

  And if they were to sell chips externally, it could even be double than that or closer to 50 billion, which is just insane when you think about it. And when we think about decreasing capex and making compute more efficient, then few things are better and more important than building your own chips. Instead of paying Nvidia hundreds of billions and the biggest margins that we currently see in the US. And if you combine that with, you know, AWS, which has also had phenomenal growth and one of the fastest that we've seen for a long, long time. And then all the marketplace data and all the other businesses that it operates. I just can't help myself. I think Amazon is one of the most vertically integrated players at still a reasonable valuation.

• 33:00Speaker 02

  It feels like Amazon is one of the few players in the market that is connected to the AI race. But also not really likely to be hurt by it. They sort of benefit from an asymmetry there. If AI is as successful as hoped, Amazon will certainly benefit from it massively through Amazon Web Services. Its chip business, just internal use, making the company more efficient. And then also maybe AI agents drive even more e-commerce sales. E-commerce is only like 20% of all retail spending in the US. A lot of people still go to brick and mortar stores.

• 33:42Speaker 02

  And AI could be a tailwind for driving more online shopping. And if AI can't generate the returns investors hope for, for Amazon, they just cut back on this capex. And you still own the same high-quality business as before, with cash flows being invested probably elsewhere or maybe returned to shareholders. And so I also remember an episode you did with Clay a while ago. And it was actually his last episode here on the podcast. And you two talked about MercadoLibre and Amazon, and especially the opportunity that comes from automation. And so e-commerce has gotten a reputation for being a tough business, which is probably fair, given that it's nothing but retail at its core.

• 34:27Speaker 02

  And the reason players like Amazon and Melli, though, are so successful is that they've been building high-margin businesses around their e-commerce operations and the consumer subscriptions that are connected to it. So think Amazon Prime. And so some of the other layers that they've moved into are obviously cloud computing, payments, banking, advertising, video streaming. And then also, of course, my favorite, Whole Foods. But your argument is that automation could make the core business much more profitable. Is that how you think about it?

• 35:05Speaker 01

  Yeah, more profitable, more efficient. I think if you just look at the numbers today, the core business is already growing faster than it has in the past. And also more profitable than it has in the past. And knowing Amazon and, you know, its scale economy, its shared model, I could imagine they pass the cost benefits on to consumers. But even then, you will have a better and healthier business overall. And I think it just shows up in other parts of the business that, you know, then again, strengthen the flywheel, which is something that we talk about with, you know, every company that, in our opinion, has a flywheel. And the big opportunity in automation primarily comes from the fact that Amazon is the world's largest company by revenue. So every incremental point of retail margin lands on a revenue base of more than $700 billion.

• 35:47Speaker 01

  We just compared, you know, Google, which is at $475 billion, which is also insane. And still, Amazon is significantly bigger. And the labor in the warehouses is one of the biggest cost factor by far. And that's why Amazon has been integrating robots into its fulfillment operations for more than a decade now. But it leads to me, it seems like now we're at a point where new buildings are designed around automation and robots are becoming increasingly capable. And I think they will have an even bigger impact than in the past on the efficiency and the cost basis of Amazon. I don't expect, for the record, you know, for this to have a material impact in the next two or three years. But over the next decade, I believe this can save tens of billions of dollars in costs, potentially even more than that.

• 36:30Speaker 01

  And all of this is a long-winded way of saying, I like both Amazon and Google a lot. And it's mainly because both of them feel like they would benefit massively from AI. But if AI should be a disappointment in whatever way that would be, they still would be fine. And they still would be two of the best businesses in the world.

• 36:47Speaker 02

  I guess you could say, just strictly from looking at the stock, since Amazon has benefited less from the AI hype cycle. There's probably less for the stock to lose in terms of giving up gains. And we just spent the last 10 minutes explaining this. But you could also take a shortcut and just look at the performance of the last 12 months. Google is up 75%, Amazon is up 0.5% at the time of recording. So it does feel like one has a lot more room to catch up.

• 37:18Speaker 01

  Yeah, I think there might be a couple more percentage points after today's earnings, but still. And, you know, another company that just reported earnings and it's quite volatile is Reddit. It's one of the few companies where we actually took some profits when we felt like the stock had risen too much. And I gotta say, our timing there has been quite good. You initially pitched the stock at about $85 per share. And if it wasn't for me, I gotta take that one, you probably would have made it a larger position than just 2% of the portfolio at the time. Nowadays, it is a much larger position. Unfortunately, I was never a user, so I just needed a bit more time to be convinced by the investment case. Long story short, four months after we bought the stock, it was up already 140%.

• 38:01Speaker 01

  And we decided to take some profits off the table at that price.

• 38:04Speaker 02

  I only hold it against you a little bit there, Daniel, that we didn't make more money on that one. But no, I'm kidding. As you said, I think trimming the position was a good call because the stock came down quite a lot, which we used as an opportunity to actually then buy back more. So we currently are sitting on a realized gain of about 140% and an unrealized gain of about 60% on the shares that we bought back after we had trimmed the position. So it's been one heck of a roller coaster ride, but so far, so good. And I'm conflicted because we've been talking about letting our winners run. But when valuations get extreme, I also don't have any shame in taking some chips off the table. And I also factor in the quality of the company too, right? With Alphabet,

• 38:49Speaker 02

  even if the valuation is stretched, it's such a good business, so diversified. I'm pretty happy to let it run. Wouldn't have the same confidence in Reddit, even if it is still a good business. And so the thing is, the market did not love their Q2 earnings. And while a lot of the numbers were phenomenal, the number of logged in visitors to their app and website only grew 7% year over year, which is not a lot for a company that is growing revenue by 60%. So it's great that revenue is doing so well because they're more effectively monetizing their user base with ads and earning more per user. But that is not sustainable for forever. And for a company trading at 40x

• 39:33Speaker 02

  earnings, come on, you gotta do, you gotta do better than 7% growth and logged in users, because ultimately, that is what underpins their earnings power going forward. How many people are using the platform on a consistent basis? And so I don't want to be too pessimistic right off the get go here, but I was pretty disappointed to see that. And rather than speak candidly about the issue with investors, they opted to just hide it, right? Their management didn't acknowledge this point, and they are now deciding to stop reporting logged in user metrics going forward. So right as this metric that I think is very important might be turning against them, they're

• 40:18Speaker 02

  office getting things. Unfortunately, we've seen Netflix do something similar a few times. And anyways, that's my post earnings rant, hot off the press. And so that's why I'm probably more open to taking gains with Reddit than I would have been even just a month ago. But we're supposed to be talking about why Reddit has worked out so well.

• 40:42Speaker 01

  I feel like we want to have all the lessons that we can learn from these positions. And I think actually this earnings that we just got, I mean, we should say earnings just came out and now we're recording this. I think it's an important lesson because it also shows you, well, you can have the rule that you just don't sell your winners. But stocks are different, companies are different. You can do that for Google, because Google is a much more mature business. It's way more diversified. Things will not change as quickly. For Reddit, though, if your stock is up 150% after just a couple of months, and you know, the company and the stock are way more volatile, it just makes sense to not act the same way as if you would on Google. And again, I feel like this earnings report has shown that again. What's quite interesting is that if you now go on Fintrid, or just online, a lot of people like the earnings of Reddit quite a lot, and I barely see anything

• 41:27Speaker 01

  negative about it, which goes to your point that management is not talking about some of the very important facts, because you immediately messaged me, and I reached out to you, and we said, well, what's going on with US users? Why are they so weak? And also, what's happening to the locked in users, which is one of the most important points. You want more people inside the Reddit ecosystem, because we know that AI overviews and all of that have a quite significant impact on the user behavior. And I think it's important to point those things out. I would also say that I'm still quite bullish on the company. If you just look at the earnings numbers and the revenue growth, despite users not growing that fast, it shows you how under monetized this platform actually is. And I think they have a whole lot of room to keep growing that on a user base that's

• 42:11Speaker 01

  still 300 million people, right? So I would say let's not get too far ahead of ourselves here. And let's actually start with how you think about the quality of the business, even after this earnings report. What's still there? Why are we invested? Why did it work out so well?

• 42:25Speaker 02

  Well, we just talked about Google and Amazon being perhaps two of the best businesses to ever exist. So we don't need to repeat all that. But that's pretty hard for Reddit to follow up. Reddit, I would say, on the other hand, was actually for a long time seen as being a Snapchat 2.0, just sort of a dirty word. And yeah, I say that after Snapchat received basically the worst rating from us of any company we've ever covered on this podcast. So we definitely understand the weight of that comparison. But the idea was that it looked like a social media platform with a lot of users, but no real way to monetize them. Reddit came out around the same time as Facebook. For a

• 43:08Speaker 02

  long, long time, Reddit didn't generate any money, really not until just the last like seven or eight years, did they start generating significant amounts of revenue. So it's interesting to contrast the two. And I think in part, this is because of what does make Reddit special, which is that users are pseudonymous. And so that means they have much less data on you than Facebook would. And so intuitively, that would make you think it's much harder to monetize via advertising, because you don't know the users as well as on Facebook or Instagram. But that also doesn't really matter in some cases. If you're interested in researching the best drill to use and renovating your house,

• 43:50Speaker 02

  and you go on to Reddit to research that, then that's really all Reddit needs to know, because then they can serve you an ad for the best drills to use while you maybe peruse conversations about home renos in a DIY subreddit.

• 44:04Speaker 01

  It sounds pretty straightforward, and there are a lot of companies that took a lot of time until they actually figured out their business model. But what you just said about, you know, them taking such a long time wasn't part what made me doubt the business at first, because it was founded in 2005. It wasn't profitable until very recently. So there was a long time where they just couldn't make the business model work. I would say, though, part of that is that the two founders sold the company very early on to a media conglomerate that didn't really care about Reddit at all. And the founders only came back in, in 2015. So you might say that the company is only really operating this model now for 10 years. And then it took a lot of time to sort of rebuild the infrastructure and deliver the best possible user experience for all the people on Reddit. And only then could

• 44:49Speaker 01

  they actually start thinking about, how do we make advertising work? How do we monetize the entire platform? And I would say, since then, it's growing like a weed.

• 44:57Speaker 02

  And it's highly profitable. In my picture, I estimated that Reddit might be able to hit a 30% operating margin by the end of the decade. That was what I thought was a reasonably ambitious goal. Well, instead, they did that by the end of last year. So I way underestimated what they could achieve. And that's just another illustration of why financial models are only part of the investment process. You really have to be confident in the quality of the business more qualitatively. And that was where I felt of didn't exactly know where margins would go. And they certainly exceeded my expectations. But I did know that they probably had a lot of room to

• 45:41Speaker 02

  grow. And great businesses surprise you to the upside.

• 45:45Speaker 01

  That's what we figured out this episode and basically over the entire last year.

• 45:50Speaker 02

  That's right. And Reddit comes, though, with a much wider range of possible outcomes. And ironically, Google is part of the reason for that. So Reddit does have some dependency risk on Google. We hear about it on every Reddit earnings call. The analysts love to ask about it. And it's because a lot of their traffic does come from Google search. So a bit more than half of daily Reddit users visit the website via Google search. So they start on Google search, they search something, the best brownies in town, and then they go and find a local subreddit or whatever it is that gives them recommendations. And they're not necessarily logged into the app, though. They

• 46:33Speaker 02

  don't necessarily have accounts. So that's why we were talking before about the importance of logged in users, people who have accounts and are recurrently coming back versus people who just Googled something, Google suggested a Reddit thread for them to check out, and then that's how they ended up on Reddit. So really, the entire debate of how LLMs will change the legacy Google search model, how people will have their queries answered, that's all fundamentally very, very relevant to Reddit. And so maybe some listeners are surprised to hear that. But Reddit is truly one of the best places on the internet to get answers from real people. And Google is,

• 47:14Speaker 02

  of course, in the business of delivering the best answers to people who are searching for queries. So there's a natural relationship between them, and it kind of ebbs and flows.

• 47:26Speaker 01

  It certainly took me time to actually believe just the impact that Reddit has on the internet, basically, now also on LLMs. And I guess this is something that we should generally mention, because of the topic focus and the search-driven nature of subreddits, the daily active users and also the monthly active users are structurally lower, of course, than for apps like Instagram or TikTok, right? I think the numbers are about 9% for Reddit, meaning 9% of people who log in once a month actually log in daily. And that number is about 35% for TikTok, and it's about 50% for Instagram, so significantly higher. And users who use the app obviously log in much more frequently too. So they're also worth, according to the company, roughly three times more than

• 48:09Speaker 01

  locked out users. So driving more people to download the app and use that as an entry is one of the big tasks for Reddit in the future. And again, like, why is the stock reacting so negatively to the news today? Well, because this is exactly what we're not seeing. And you can get a lot of money out of these users that only use Reddit, you know, once in a lifetime, but it can only go on for so long. So in the end, you need people actually using your app. And I personally can say I never do that. Even now that I'm using Reddit more often, it's always through Google. And most of the time, if I just see an AI overview, I don't click on Reddit, because I feel like if I have more questions, I will just answer Gemini to, you know, elaborate on what's going on. And

• 48:52Speaker 01

  so only by getting more people on the app, that's how you eliminate the Google dependency and also improve the ARPU, the average revenue per user, which all of these companies want to do.

• 49:02Speaker 02

  And now you see why I was ranting about Reddit's logged in users at the start of this segment.

• 49:09Speaker 01

  Well, another thing that Reddit has just announced, or at least debated, in order to reduce the dependency is not to renew their data licensing deal with Google, because Google currently pays Reddit $60 million a year to use their data for their LLM results.

• 49:26Speaker 01

  I already found that shockingly low back when you pitched Reddit to me about a year ago. And I think they should get multiples of that, which for a company of their size would be a whole lot of money. So I'm actually glad that they play their cards right here. But I gotta say too, on this earnings call, you didn't get any update on when we can actually consider money coming in through those licensing deals, or if that will even happen in the future.

• 49:51Speaker 02

  And now that companies like Alphabet in particular are starting to make money from AI and LLMs. I would think that the price that they're willing to pay for good data would increase. So yeah, you could probably argue that Reddit's corpus of human interaction from over the last 20 years. Actually, just last night, I was reading through a Reddit thread from 16 years ago. That was still relevant and interesting to me today. So that's the cool thing about Reddit. And yeah, that deal was signed in 2024. And back then, nobody knew how AI overviews on Google would affect web traffic, right?

• 50:32Speaker 02

  It could have been that they convert at similar rates to a classic Google search. But now, two years in, Google has a billion Gemini users. And click through rates for original sources plunged by roughly 60%. Because users can find exactly what they're looking for answered in the AI overview, as you kind of alluded to, Daniel. And instead of going to the underlying website for additional information, let's just do a follow-up question to the AI and get a custom tailored answer. So Google is almost in a way siphoning traffic from websites and kind of maybe cannibalizing itself in some way by, and then funneling people into Gemini chats.

• 51:18Speaker 01

  Even for Google, this has been a debate for quite some time, whether they are cannibalizing themselves. Because these AI overviews can perhaps not be monetized in the same way than, you know, classical search traffic. But now we know that the company is saying that's not the case. They can monetize it in the same way. So now the focus is sort of shifting to companies like Reddit and saying, well, Google is not affected, but maybe you are. And if AI and LLMs weren't already as far as they are in terms of adoption. I think this could have even turned into a more fundamental question. But I think we are past that point now where, you know, even though Reddit is responsible for about 5% to 10%

• 51:56Speaker 01

  of the raw training data for LLMs, and as much as 40% of real-time search citations in AI-driven answer engines. So without that data, you could probably say that LLMs would have a problem. And still, because of where we are today, I don't think even if Reddit says, I'm not licensing my data anymore. Those LLMs would actually have a problem. I think we're just past that point. And the best thing you can hope for is that they get a significantly better deal than just getting $60 million. So again, you're the expert on Reddit. What do you say? Is it still a buy at today's prices, especially after it has come down about 20% after earnings? Or should we actually consider selling part of our stake?

• 52:36Speaker 02

  I'm happy to sit on it for the moment. Reddit has grown so fast that actually the valuation looks a whole lot more reasonable than it did when we first took some profits in the position and when I first looked at it. So I definitely wouldn't say that we need to sell. I still believe in Reddit's growth prospects and its value as a platform in a world that's increasingly dominated by AI content. Because I think a lot of people don't want to just have conversations back and forth with Gemini and AI overview. They want to talk to real people. They want to hear insights from real people who have used products or shared similar life experiences. And then that is what Reddit is great for.

• 53:19Speaker 02

  And Steve Huffman, the CEO of Reddit, said something on the latest earnings call that I thought was interesting. But it said, it takes a lot of people some time to get Reddit. I think you're an example of this, Daniel. But once they get it, they get it. So you might have to go to Reddit a few times, log in, try different things. It might take you a while. Hopefully, one day it clicks and you see what makes the platform so special. But anyways, I'm definitely not falling over myself to buy more shares after that last earnings call. And it's burned into my memory, actually. If anyone wants to see an equity research analyst absolutely lay into a management team,

• 53:58Speaker 02

  go listen to Reddit's Q2 2026 earnings call and jump to the 31 minute and 30 second mark.

• 54:06Speaker 01

  Actually, let's just play it here because I really like the question that he proposed to the management team. I don't like the answer too much. So you can have your own picture and we just play it here.

• 54:18Speaker 03

  Steve, I don't want to belabor this point, but your stock is down sharply because there is just a sense from investors that you have a, I don't want to just to be blunt, a user problem, especially in the US. That users are, you know, it's only a slight tick down, but they're ticked down despite all of the investments you've made over the last year. And I certainly hear you on the weekly improvement, but people are looking at the daily and saying, you know, the logged out traffic is going to be under pressure because as search shifts to AI, you're not going to get referrals and that it's going to be harder to get people to go from logged out to logged in. And that's sort of symptomatic of what you're seeing. And so you're buying back a lot of stock. You don't seem concerned or you and Jen seem very confident.

• 55:02Speaker 03

  You and Jen, Andrew all seem very confident. I guess what gives you so much confidence that you're going to grow to, you know, 100 million logged in users in the US and 1 billion globally versus the slight tick down this quarter? Because there's obviously a big disconnect and it's obviously impacting your stock. And then just the second piece of that to follow up on Ron's question. Do you see any world where you're not licensing data to Google and OpenAI next year?

• 55:30Speaker 04

  Okay, thanks, Rich. So look, let me start with the end first. We are confident because our product work is working. Reddit is communities and conversation. Communities are universal. And so we think we have in the US, content for everyone. And it's a matter of revealing that. And we're making progress towards that end. Moving new user retention in the app significantly in a quarter is something that we're very proud of. And that sort of improvement in retention drives growth and that is work that we're in control of. Yes, search is, external search is volatile, particularly logged out web.

• 56:14Speaker 04

  But that's not where our business lives. And we will make sure that we get as much value from that traffic as we can. So that's where we've been driving conversions from web to app and that's become more effective as well. So long-term, we are as confident as ever that we're going to get to those milestones that we've set. But the work does take time and we do have a lot of work to do in the product. But driving that direct growth is in our control and we're seeing some progress there.

• 56:44Speaker 01

  Let's take a quick break and hear from today's sponsors.

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• 59:02Speaker 02

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• 59:47Speaker 02

  Back to the show.

• 59:48Speaker 01

  All right, let's talk about some companies that we covered, but we didn't buy in the end. And many actually benefited from the same tailwind, which, and that won't come as a surprise to most here, is AI related. But before we get to them, I want to talk about a company that I pitched in, I think it was early August of last year. And of course, it's a payment company. So I knew it would be very difficult to make the case for adding it to the intrinsic value portfolio, because for all the people who don't know, Sean doesn't like payment companies that much. But this one is even worse because it's a remittance company. And you feel like remittance especially is a race to the bottom, and you might be right about that.

• 1:00:29Speaker 01

  We've talked about a couple of payments companies by now, and I think your view is quite similar, but it differs in one key aspect, because you believe we will ultimately pay no fees for moving money at all, primarily to crypto and stable coins in particular, but also some other things. And I know I'm simplifying your view on that topic here, but I believe there will always be regulation and a middleman, and stable coins will probably be used by those middlemen to simplify the process and bring down prices and won't eliminate them. And when I say always, I mean, for a very long time, obviously not actually always. And we just had a discussion before the recording

• 1:01:10Speaker 01

  today, where you said that even companies like Visa and Mastercard, you believe will be disrupted at some point, which I think that's one of the most contrarian takes that you can, you can give us. But I'm all for it. Anyway, I want to talk about not Visa and Mastercard, I want to talk about Remitly. And I think I went into the stock at about $12 to $13, which it reached after my pitch. And I bought a quite sizable position for my personal portfolio. And since it's gone up about 80 to 90%, and the pattern is pretty similar to Reddit, which is why I want to discuss it today as one of our winning stocks, even though it's not part of the intrinsic value portfolio. I think it makes sense to cover it, just so we can sort of double down on those patterns that we see.

• 1:01:55Speaker 01

  And the similarity is that the margin level that I expected Remitly to hit in 2028, potentially even 2029, has already been achieved in the last two quarters, where net income has inflected materially. And the company showed it can operate highly profitably.

• 1:02:13Speaker 02

  Companies like Remitly and Reddit do show you that you really have to understand the earnings power of a business. If you don't know exactly what we mean, we say earnings power, I would encourage you to go Google it, go read up on it, because it is such an important topic. And, you know, looking at Remitly, I remember at the end of last year, the company guided down their EBITDA margins, you know, EBITDA is a proxy for operating earnings. They guided it down from 16% to 12%. And then the stock sold off pretty dramatically, as you can imagine. So if you look at it now, that margin is at 22%, and they pulled off that turnaround just in a

• 1:02:52Speaker 02

  single quarter. So I have no doubt that the management team probably always knew about the margin potential, hence the earnings power point that I made a moment ago. And it feels like they decided, though, hey, we got to show investors what this company is capable of as soon as we focus more on profitability and margins. And apparently, that is all it takes. It's one of the quickest margin turnarounds I've ever seen, maybe besides Reddit.

• 1:03:25Speaker 01

  It was impressive for sure. And I can't say that I expected an intra-quarter turnaround like that. And it's not like Remitly stopped investing. I mean, their major expense, as we also covered back then, is marketing. And Remitly has an incredible return on that marketing spend. I think it's about 6X after just a few years of an acquired customer. So you don't want them to stop spending on ads. And they primarily saved on wages and investments beyond marketing. But I don't really want to talk about the business today. If you're interested in that, feel free to listen back to the episode, which I also will link to in the show notes. I would like to focus on why we didn't buy it for the intrinsic value portfolio, because I think that might help understanding our strategy and approach a bit better, because we cover so many companies. Some make it into the portfolio, some don't,

• 1:04:10Speaker 01

  but they still make it into our personal accounts. And I just want to give a bit of background on why that is. And I could see how it's confusing to not include a company in the intrinsic value portfolio, but to make it especially sizable bad in your personal portfolio. And Sean's doubts about payments companies are obviously only a small part of the reason. We've never vetoed, I think, someone out of an idea that they pitched to this show, at least not yet. So if either of us has a strong conviction for adding a company, we generally do that.

• 1:04:39Speaker 02

  Well, just to say again, I mean, that's why we have that rule, that every position has to be owned by at least one of us. And so if I don't want to own Remitly, and Kyle doesn't either, then we can theoretically still add it to the intrinsic value portfolio, as long as you have a meaningful stake in it, Daniel. And so it wouldn't be a full position if we don't have consensus among the three of us, but it could be a 1% or 2% tracking position.

• 1:05:06Speaker 01

  As we handled it with Reddit, after I unwisely didn't want to make it a full position immediately, because again, I lacked the vision that you saw. And by the way, if you're interested in the behind the scenes and how we make decisions for the portfolio, we do have the plan to livestream some of our portfolio talks in the future on our YouTube channel. So I will also link to that in the show notes. And then you might get a bit of a better glimpse of how those discussions go, and who's more bullish on a certain company, and who's less bullish, and how we all factor that in.

• 1:05:36Speaker 02

  Yeah, make sure you hit subscribe, so you get notified when, when we go live. And yeah, that policy we have, it can, it can definitely cut both ways.

• 1:05:45Speaker 01

  You know, you're getting pretty good at this social media game, immediately pointing out that people should subscribe. But yeah, I mean, as you said, it can go both ways. I didn't push on adding Remitly. I mean, it was primarily for two reasons. So the first one is time horizon. This podcast is going out twice a week. Back then, it used to be only once per week. And we are primarily focused on pitching new companies each time, not reviewing old ones, all portfolio holdings, which to some extent is what we're doing today. And that also means that we can't really buy value plays that need daily or at least weekly reviewing and will be sold after a couple of weeks or months, simply because it's so much harder to keep people updated. There's so many companies that we constantly get in questions about, and they are not even in our portfolio. So it was just a bit too much to handle.

• 1:06:30Speaker 01

  And that's why we settled for primarily adding companies that we see as having sustainable modes, that we can hold for many, many years. And I don't expect Remitly to be that sort of company, although I would say that I hope to own for as long as possible in my personal account. And a good example for whether it might not end up being the case is that they just went through some major and unexpected business changes. And while I think the right thing to do and the right decision, those things just wouldn't happen at, you know, Google, Amazon, or Netflix, those sorts of companies.

• 1:07:01Speaker 02

  Yeah, it sounds like you might be referring to the CEO stepping down?

• 1:07:06Speaker 01

  He's still informed about the company. That's not too bad. And yeah, that was part of it. And it did go well. I think he primarily did it because he genuinely felt like the new CEO would do a better job considering the current size of the company, because again, it's sort of going from a small cap to a mid-cap by now. But it was also surprising, I got to say that. And they also introduced new products just briefly before that, that are aimed more at the micro and small businesses. And you could argue that it's generally a good thing, but I sort of like the sole focus on remittances. And I hope they will keep that as their primary focus, because there's a whole lot of competition in the enterprise space, right? Micro businesses and solo entrepreneurs are different, but it's a first step to go into this SMB space,

• 1:07:49Speaker 01

  small and medium businesses. And there are just a lot of companies competing for the same customers there. But anyway, the point is, things change quickly, and a thesis can break pretty fast. And that makes things a lot more difficult for us publicly in the format that we currently have. And just another good example for that situation that actually costs us money is Crocs. It's a company that I covered last year. And despite my aversion to fashion retail, which is to me what payments is to you, Crocs seemed very attractive at $70 per share. So we established a position betting on, you know, the massive cash flows, the buybacks, and also the low, single-digit multiple that it had back in the day. And this was more of a trade than a long-term investment, I think that's fair to say.

• 1:08:32Speaker 01

  And technically, it worked out quite well. The stock has almost doubled by now. Unfortunately, we sold too early. And despite making an eyes, I think it was a 40 to 50% gain, we left some cash on the table. And that was primarily because we lacked time to keep track of these smaller positions. And at the same time, making those trades larger positions just adds more downside risk, since they definitely come with a wider range of possible outcomes. And we talked often about, oh, you shouldn't look at these valuation models and just take the fair value for granted. But what they show you is the range of outcomes. Sometimes we cover a company and the fair price in a bear case is $7, and in a bull case, it's 70. And that just shows you, you never really know.

• 1:09:14Speaker 02

  Yeah, positions like Crocs are also why we decided to do more episodes where we spend time revisiting businesses that are already in our portfolio or on our watch list as opposed to covering new businesses only. And so, I mean, we've looked at over 90 businesses now, and we have a very long watch list to work with. But we can only turn that into a competitive advantage if we actually keep up to date on these companies. So that's our challenge. And that's obviously even more important for the portfolio positions. Last year, we spent a lot of time allocating all of the capital in the portfolio. So we had fewer positions. But now, we own 15 or 16 companies, and it just takes more time to keep track of them.

• 1:09:57Speaker 02

  And speaking about companies that were on the watch list, where a revisit might have paid off well, how about we talk about a group of companies that were the best performers among the companies we covered, but didn't invest in for one reason or another. And just because we put a company in the too hard pile, clearly does not mean that the stocks can't still perform very well. And at first, they do all seem different. But one way or another, they're all connected by the fact that they're beneficiaries of this AI trade. So if we start with TSMC, Taiwan Semiconductor, that's a company you pitched in May of last year, and it's been a double.

• 1:10:40Speaker 01

  At first glance, it is a bummer, I gotta say that, that we didn't invest in. It's actually just an oversight on our part, because I did recommend adding a position in TSMC at the end of the episode, and technically you agreed. But apparently, we just forgot about it, which might be because your agreement also came with a four-minute monologue of the risks, which might be, again, why we didn't end up following up on it. And I got to say, though, you know, when we look back at the companies and their performance, we only talk about at most one-year returns, you know, and those don't say anything about how this will play out in the long term. So your concerns were basically all about the terminal value, and they are as valid today as they were a year ago. And I thought about summarizing

• 1:11:24Speaker 01

  them all here, but how about we just give you a listen. So this is Sean from about a year ago.

• 1:11:30Speaker 02

  I'm not going to bury the lead. Up front, I'll say, I think I can get around to doing that. But then, just for the sake of just putting everything out there, I will maybe say some of my concerns. And obviously, we've, we've talked a lot about the China stuff. And to some extent, people who know me might say it's somewhat intellectually inconsistent for me to endorse Taiwan in investment in Taiwan here, because at various points said that I tried to avoid Chinese companies, and not necessarily because I think that they're going to, you know, there's eminently going to be a war between the US and China. But there just seems like there's a lower threshold there, where, you know, you could have some

• 1:12:12Speaker 02

  kind of fallout in relations, where I could imagine a scenario where the US and China aren't maybe at war, but there's some sort of sanctions being levied, where even if these Chinese companies are undervalued, at least from an American's perspective, you could still be penalized. And there could be some sort of sanctions that make it difficult, if not illegal, for you to own, you know, maybe not, not even all Chinese companies, but specific tech companies, for example, like if you're investing in Alibaba or Tencent. And so that, for me, is really the concern with China is, not that they say anything bad about these companies, or to even bet that there's going to be a war between the US and China, but just to say that there could be a lower threshold where the US government,

• 1:12:52Speaker 02

  as for me, as an American, makes it painful for me to invest in these companies. And with Taiwan, I look at it differently, because I don't think the US is going to sanction investing in Taiwan. And so truly, it would have to almost be the worst-case scenario. So I see the risk-reward as a little bit different, and where I see the risk is actually being a little bit greater with Chinese companies, where you have the risk of a war, but also you have the lower threshold of just some sort of like targeted sanctions that could impact you as specifically an American investor. What really kind of puzzles me with this investment, or gives me pause, is to think about the fact that, for anyone

• 1:13:34Speaker 02

  who's read The Innovator's Dilemma by Clayton Christensen, I think the semiconductor industry is literally the example that they use of the fastest-changing industry. And this is something Buffett has always talked about, of when an industry is so fast-changing, you know, even the widest moats can disappear on relatively short timeframes. If you're investing in a company on a 50-year time horizon, then, you know, a fast-changing industry that, like, this semiconductor is literally the textbook example of perhaps the most dynamic industry in the world, where, you know, competitive advantages can be the most short-lived.

• 1:14:14Speaker 02

  That really gives me some, almost more anxiety than the geopolitical situation with TSMC. Okay, I don't know how to underwrite the quality of their moat.

• 1:14:26Speaker 01

  The valuation back then was quite attractive. If you had a business basically growing revenue north of 30%, margins that look like a software company, and it was trading at just 20x earnings.

• 1:14:36Speaker 02

  From a business perspective, without all the macro risks, it is a great business. And maybe we should actually give a brief pitch on what makes TSMC special in the semiconductor space, the computer chip space. There's pretty much no chip or tech company that is not a customer of TSMC. Whenever Apple, Nvidia, AMD, or Broadcom designed their chips, they send those designs to TSMC, and then they're the ones to manufacture them. And really, nobody else, there's no competitors that come close to their level of efficiency and output. And I think you called what they have a Lollapalooza moat back then, where competitive

• 1:15:19Speaker 02

  advantages stack on top of each other. And the process technology lead that they have caused them to basically be the first to every new node. And that experience with the tech and the process also leads to much higher yields, which is an important thing in semiconductors. So basically, a higher success rate when manufacturing chips, that's what that means. And because this implies that TSMC can actually deliver on the orders that come in, the entire tech industry favors ordering from them.

• 1:15:53Speaker 01

  And just like announced in our pitch last year, TSMC is working on diversifying operations internationally. So TSMC has committed, I think it's close to $300 billion for factories in the US, Japan, and Germany, with the vast majority of that money, I think about $260 billion, going to the US and towards factories that can actually generate or produce those new nodes. And part of the truth about the TSMC story, though, is that the entire industry went up that much. Even Intel, which, you know, as a company that was known over recent years for pretty bad operations, has seen one of the craziest stock rises over the last few years. I mean, the one-year performance of Intel's stock is almost 300%. Although

• 1:16:35Speaker 01

  that changes weekly nowadays, and, you know, perhaps when you listen to this, it's no longer the case. But my point is, the fact that TSMC doubled says more about the markets right now and the state of AI than about the long-term outlook for that company. And I'm definitely not bearish on it. I think TSMC was one of the highest-quality companies that I personally looked at, and I very much regret not at least building a position in my personal portfolio. That said, the doubts you had, I would say, still are valid, not only on the political side, but you also brought up the semiconductor industry generally, and how historically, it has not been a great place to invest in. Although you could argue that TSMC sort of changed the game. I mean, the central claim in The Innovator's Dilemma

• 1:17:18Speaker 01

  has been that incumbents fail because they listen to their best customers, and they chase higher margins up market, and that basically leaves space for new technology to enter the market at a lower end. And those nodes are worse than, you know, the metrics that matter to premium buyers, but they're cheaper, and they're good enough for at least a part of this underserved segment. And then, over time, and we all know the story, the entrant improves, and then it moves up market. And this happened to Intel, for example. They optimized for these high-margin CPUs, and it's a vertically-integrated model. And then Intel just dismissed the lower power and the low-margin mobile chips. Famously, they also passed on the iPhone, for example, which, in hindsight, you can say is probably

• 1:18:03Speaker 01

  one of the worst moves that you could have done. And they had other architecture, and especially TSMC's founding model disrupted. And for everybody who doesn't know what the founding model is, I don't want to go into the details here. Again, we'll link to all the companies' pitches that we discussed today in the show notes. But it doesn't look like TSMC is making the same mistake anytime soon. It still produces the lower-end nodes. And as I mentioned in my pitch back then, those old, fully-depreciated fabs are even more profitable relative to the revenue share than the bleeding edge. So there's no undefended low ground, which a disruptor could use for an entry here.

• 1:18:39Speaker 02

  And as long as the fundamentals are driven by chips manufactured for the AI industry, I would say the risk of getting disrupted via the lower end does seem less likely. There's no good enough when it comes to customers like Apple or Nvidia who are desperate for top-end performance, and are going to pay almost anything for the frontier. And so Jensen Huang publicly said, he'll pay whatever TSMC charges. And since we try to look at all those companies through the lens of finding some kind of patterns and learning from this experience, are there any lessons that you would pass along from us not investing in TSMC?

• 1:19:18Speaker 01

  I'm generally not the type of person who thinks, gosh, I wish I had invested in Bitcoin in 2014. It just wasn't on my radar and it also didn't fit my style. So I likely wouldn't have held it through the volatility anyway. I think this is a strength, you know, not mourning successes. You had no claim on making in the first place. With investments like TSMC, it's a bit different because we literally said, let's make it a position. So I'd probably argue that we made the mistake of looking at it a bit too binary, as in there are terminal risks. But if we make it a 2% position, we would survive the worst case if it should actually come to that. And we would still capture enough upside if it ends up being, you know, a three X and let's say two or three years.

• 1:20:01Speaker 01

  And beyond that, I mean, the worst case between China and Taiwan would not only hurt TSMC or Chinese equities, but basically all US big tech would take a massive hit as well as all other companies.

• 1:20:15Speaker 02

  I think that's fair. And how about we go to another company that that covers AI through maybe a different angle? Dell is less shiny since it doesn't build the chips or the AI models, but they do provide the infrastructure for it all, the data centers. So it's not a pure play because half of their revenues comes from this legacy PC segment, or at least that was the case in the past year, but now it has shifted slightly. And the infrastructure part of the business has actually grown to 60%, primarily driven by 70% revenue growth in that segment year over year. So maybe you can give a brief overview of the Dell thesis and how it played out and just how wrong we were.

• 1:21:01Speaker 01

  Yeah, I mean, sure. So as you mentioned, there are two parts of this business. You have the legacy PC business and then you have the infrastructure business. And the PC business is quite mature and also commoditized with, you know, low margins of about six to 7%. And the reason I pitched the Dell stock was because they started to get into these AI data center contracts. And those contracts went from essentially zero in the first half of 2024 to about $15 billion guided for the year, with another $14 billion of backlog behind it. And that guidance looked quite conservative even back then. So the investment case was you could buy a company for, I think back then it was 12 times earnings.

• 1:21:43Speaker 01

  It pays a high yield through dividends and buybacks, and it might receive tens of billions of dollars in data center contracts for the months to come. And that's essentially what has played out. So the reason we didn't buy was that these data center contracts, they come at low to mid-single digit margins. So while volume is massive and will still drive profits through some operating leverage, the impact wouldn't be massive. And most importantly, I just didn't think it would be sustainable. And I believe at least on that part, we are right about it. I mean, the gross margin continuously declined from 28% in 2020 to just 19% today. And we're not talking about the net margins. This is gross margins.

• 1:22:25Speaker 02

  I would say we misjudged the market though. We thought the market wouldn't be too excited about that, given the margin outlook, but apparently in the broader AI mania, that just doesn't matter all that much. And so as you said, the sheer scale of the volume and operating expense leverage still caused earnings per share and profits to grow substantially. And that is enough for the market today to assign a much higher multiple to Dell than just a year ago. So the current forward PE is 22 times earnings and the average of the last eight years is eight and a half times. So pretty wide gap in that historical multiple versus today.

• 1:23:08Speaker 02

  And so in one of the latest earnings calls, management actually said that the AI servers have mid-single digit operating margins, which is close to the assumptions you actually use in your model last year, Daniel. So I suspect Dell will have a hard time once we're on the other side of the massive data center builds. And really what the market is doing is is being very forward looking. So all it takes is the pace of new data center construction to slow down and the market multiple will probably revert back toward its historical levels, which for context, its current PE is 30 times. And so the median of the last 10 years again is just 10 times. So I can't help but think that we'll see this multiple contract and revert towards

• 1:23:53Speaker 02

  historical levels sooner or later, and maybe perhaps sooner.

• 1:24:00Speaker 01

  It's not impossible that it will go on for a while, but I certainly wouldn't like to bet on it either. And in this case, it really does seem to me that the industry overall is sort of damned to be in the low margin position, squeezed between companies like Nvidia and then all the data center clients, which to some extent are also the hyperscalers. And you might remember that we talked about how in the short term, multiple compression or expansion is the most important driver of returns in our episode on Wednesday. And what we could see to the downside then, we can certainly also see to the upside in companies like Dell or actually the next company that we'll talk about, which is Comfort Systems. And it's kind of funny because both Dell and also Comfort Systems, probably even more Dell,

• 1:24:43Speaker 01

  they were pretty boring pitches. I still remember us sitting and discussing Dell and thinking, gosh, this is one of the least inspiring companies that we have yet looked at. And now those are the companies that just completely crushed it.

• 1:24:57Speaker 02

  I was really shocked when you told me just how well Comfort Systems has done in the last year because I haven't really been tracking it that closely after we set it aside. But then I realized, of course, it has to do with AI. And so for context, Comfort Systems is a serial acquirer, kind of a Berkshire Hathaway style decentralized holding company, which takes the approach of buying small regional contracting businesses and then allows them to keep running things while they handle the back office and the capital allocation. And so it was really a mature looking business if you were simply looking at organic growth. However, even in early 2025, you could actually already see that there were some early signs of

• 1:25:42Speaker 02

  these AI data centers and semiconductor factories becoming a bigger and bigger share of the company's business because Comfort Systems is actually uniquely specialized in being able to provide HVAC services to complex centers like data centers. So I don't think I have any regrets, not because I don't like making money, but more because the factors shaping this business are so macro. And I of course have very little confidence in my ability to predict the future and especially not with something like AI. So clearly I did misjudge the stage of the cycle that we were in as I tried to be cautious, right?

• 1:26:23Speaker 02

  I wanted to to really hedge against the possibility that we were nearing the end of the AI spending cycle, which it seems like we absolutely have not. And if that had occurred and when it does eventually occur, Comfort Systems will take a double hit from revenue growth declining. And then the multiple declining too as a response to that. So I didn't think it was cheap at a 25 times multiple, but I can't lie. Looking at the price today, it does feel a little surreal. I did my fair value estimate at around $320 per share. And, you know, I probably said with a margin of safety, I would be happy to buy shares at maybe 290 or below.

• 1:27:05Speaker 02

  And the stock is trading at $1,700 today, Daniel.

• 1:27:11Speaker 01

  Well, I gotta admit, it's fun to look back at some of those old episodes. And for the record, our track record is generally quite good. I mean, most of the price targets from a year ago are more or less on point today, which also is due to the fact that we're only talking about a year difference. But looking at Comfort System is just funny. I mean, to quote the investment decision from back then, between $320 and $340, you're probably just going to get an average return and any price much higher than that risks earning a below average return. Well, 15 months later and a 5X later, it's safe to say that shareholders did quite well. And again, ultimately investing is a game of probabilities.

• 1:27:52Speaker 01

  And to make use of one of the most quoted sentences in the investing world, in the short term, the market is a voting machine and in the long run, it's a weighing machine. Perhaps stocks like TSMC grow into the valuation over time and they won't see a major downturn in the meantime. But I wouldn't want to bet on that today. And for a company like Dell, quite sure it will return to lower multiples and prices eventually.

• 1:28:18Speaker 02

  I would probably guess that Comfort Systems has gotten a little ahead of itself too, but I don't want to be wrong twice now. But just to repeat our motto from the beginning, great companies surprise to the upside and mediocre companies surprise to the downside. And just because the price goes up does not necessarily make a mediocre company a great one long term because they will return to their mean eventually.

• 1:28:45Speaker 01

  Wise words and maybe the perfect end to today's episode. There are some other good companies that we could have potentially talked about today, but I feel like these probably did a good job covering our general thoughts and also teaching us some lessons that is, you know, the main goal of an episode like today. And then all I have to do is to leave you guys with a quote. And I closed the last episode, I believe with Peter Lynch. And since this is sort of a two-part series, I decided to go with Lynch again. And he said, all you need for a lifetime of successful investing is a few big winners. And the pluses from those will overwhelm the minuses from the stocks that don't work out. So those big winners definitely take more time than a year.

• 1:29:27Speaker 01

  We're talking about these, you know, 50 and 100 backers, but I'm sure we will find those eventually. And hopefully you all will be part of that. And for that, I'll see you all in the next episode.

• 1:29:37Speaker 00

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• 1:30:21Speaker 00

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