Pod Insights Prof G Markets The Corporate Lifecycle + The Market’s Fallen Heroes — ft. Aswath Damodaran About this episode Aswath Damodaran returns to the show to discuss how companies age and why “growth for the sake of growth” can be a problem for companies as they get older. He looks at where Intel stands in the lifecycle and explains how it can return to a healthier age. He also breaks down how he thinks Starbucks and Lululemon could revamp their businesses. Finally, he explains why being geographically diversified doesn’t necessarily protect you from risk.
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Transcript 9,051 words · 11 speakers
Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.
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0:59 Scott Galloway? Today's number 100. That's how many times the word fuck is said in Deadpool versus Wolverine. True story, Ed. My favorite male escort, Patrick, has a side hustle as a magician. He calls himself Hocus Pocus.
1:22 Scott Galloway? Ah, that makes me happy. That makes me happy.
1:25 Ed Elson? That was it. That was it. That took you 20 minutes to get out of your system.
1:31 Scott Galloway? Ed, how are you? How are you? Any magic tricks? By the way, I heard you had a girlfriend. If you want to lose her, just start talking about your magic a lot. And also pay with a Discover card and show up with a Hyundai. Those are my go-tos, Ed.
1:44 Ed Elson? Oh, my God.
1:45 Scott Galloway? You don't need, you will not need to practice safe. That's practicing safe sex.
1:50 Ed Elson? I think every episode is going to start off with some girlfriend advice from you at this point.
1:54 Scott Galloway? I'm very excited. I, you know, if you're talking to a guy that's, that's been married and divorced a couple of times and, uh, and, uh, he should be rich, but is paying a ton of alimony. Um, I have somewhere between 200 and 400 children because I was a sperm donor in college.
2:10 Ed Elson? Do you know the number, by the way?
2:11 Scott Galloway? No, so true story. You can actually, I paid for my junior in college, you know, leaving the best part of me behind four times a week at a clinic. And I literally paid for my junior year. And get this, this is a true story. So I went in to the sperm clinic with two friends of mine that were world-class water polo players and they were these blonde gods and they were also much smarter than me. And they give you an IQ test, they take pictures of you, you do a personality survey. And I thought, I am never gonna get called compared to these guys. I remember the Monty and Jeff. And I started getting called three or four times a week and they didn't get called very much. And this is a critical thinking test. There's no joke here. This is true. Why do
2:55 Scott Galloway? you think, so I said, why am I getting called in so much? And they said, you have the chocolate and peanut butter of sperm donation. This isn't a joke. What do you think that chocolate and peanut butter of sperm donation is? And I'll give you a hint, it was in West Los Angeles.
3:08 Ed Elson? I would have said not drinking, but I know that you drank a ton.
3:12 Scott Galloway? Oh, no, no, no, no, no. I lied about that.
3:15 Ed Elson? Oh, you lied about the substance abuse.
3:17 Scott Galloway? I lied about the substance abuse. So I don't think you'll be able to figure this out, but I was tall. That's the number one requirement, tall. And I was Jewish. And I guess there was a lot of Jewish parents who liked the idea of having Jewish swimmers.
3:30 Ed Elson? Interesting.
3:31 Scott Galloway? Also, this is probably more detailed than you wanted. I had my first test for venereal disease, which I had not had before. And Ed, let me just say it is not pleasant. And this little weird guy gave me the VD test and I passed out. And I woke up to a semicircle of people from the clinic and I thought to myself, they're not going to want my fainty sperm now. But anyways.
3:56 Ed Elson? How did we get here, Ed? I'm pretty sure you brought it up independently. And by the way, the question was, how many kids do you know how many kids you really have? And you didn't answer it. Do you know?
4:05 Scott Galloway? That's it. My, again, more truth here. My mom made me stop because she said, you realize your son could end up marrying his sister accidentally. You don't know how many kids you have in West LA. And I hadn't thought of that. And I'm like, okay, I'll stop. But there is a website now. It was a totally unregulated industry. Now there's, I guess, a website. And if you go to it, you type in your name, they find the clinic you donated at, and they'll send you certified mail and you sign it. And if you sign it, an email goes out to all of the children, your biological children, with your contact information. And I would do it, but here's the problem. You really don't know if it's two people or 400 people that are going through premature hair loss. I mean, so I'm scared to do it. But I think if I were to.
4:49 Scott Galloway? I think finally, when the ass cancer shows up, I might do it because I think it might be interesting to throw a big party for everybody. But at one point, every athlete or every male athlete at UCLA was making money as a sperm donor.
5:00 Ed Elson? Did you make good money?
5:01 Scott Galloway? I made, I started at 30 bucks. And when I started getting called a lot, I left him a note saying 40 bucks a shot or I take the gift of life somewhere else. That was one of my first big negotiations.
5:12 Scott Galloway? And so I used to make 40 bucks, 40 bucks in 1985 or whatever it was, three times a week, 120 bucks a week. That was real.
5:18 Ed Elson? That's serious.
5:19 Scott Galloway? That was real cabbage for me, so it was good. And that's why my right forearm is the size of my thigh.
5:24 Ed Elson? Today, we're speaking with Aswath Damodaran.
5:26 Scott Galloway? Tell us about the markets, Ed. Tell us about the markets.
5:29 Ed Elson? You have to transition us somehow into an introduction to our extremely wise and important scholar who's coming on.
5:39 Scott Galloway? Okay, so anyways, welcome to Profitey Markets, where probably half our, half our listeners I'm related to. Today, we're speaking with Aswath Damodaran, the Kerschner Family Chair and Finance Education Professor of Finance at NY Stern School of Business, where he teaches corporate finance evaluation. He's also known as the Dean of Evaluation. And in his latest book, The Corporate Life Cycle, is out this week. Most of you do not need an introduction from Professor Damodaran. He is considered probably one of the 10 most iconic, famous, best teachers in the world of graduate education. Aswath is asked every year to go to this gathering of other profs and teach them how to teach. And he's won best professor amongst the 190 faculty about seven times.
6:22 Scott Galloway? You know how many times I've won that award, Ed?
6:25 Ed Elson? How many?
6:25 Scott Galloway? Less than one. I've won it zero. I've won it zero times. Anyways, let's get to the markets.
6:33 Ed Elson? Professor Aswath Damodaran, thank you for joining us.
6:36 Aswath Damodaran? Well, thank you for having me.
6:37 Ed Elson? So let's start with your book, The Corporate Life Cycle. What is the corporate life cycle and why is it something investors should understand?
6:45 Aswath Damodaran? Well, for the same reason that we all wrestle with the question of aging. I'm, I'm, I'm old enough that I see my kids wrestling with middle age and, you know, it's, as human beings, aging is something that we can't stop, but we constantly try to reverse. And companies, I think, go through the same process. Companies don't like to age. They want to be young growth companies for the rest of their lives. But like human beings, they age and they fight aging and they're aided by an ecosystem. Telling them that they can be young again, bankers, consultants, selling them stuff, saying they can be young again. I think more money is wasted by companies refusing to act their age than any other single action that companies did.
7:30 Aswath Damodaran? And part of the reason I wrote the book is to get companies comfortable with the fact that as they age, they've got to change how they run as companies and how we invest in them as companies.
7:39 Ed Elson? How do you tell what stage in the life cycle a company is at?
7:44 Aswath Damodaran? The bludgeon is to actually just use corporate age. So you can say a 25-year company is a young company, but that kind of misses the point. Ultimately, the best indicators for aging is to look at your operating metrics, your revenue growth, your margins. Young companies tend to have high revenue growth. They often have negative margins. They have a business model that's evolving. Mature companies tend to have more stable revenue growth, lower revenue growth. They tend to have more positive margins and more stable margins. So looking at revenue growth and margins can often give you an indication.
8:16 Ed Elson? So the stages that you've outlined, there's startup, young growth, high growth, mature growth, mature, stable, and then decline. I think the assumption that I would make, and that it sounds like by the idea of companies wanting to be young again, is that it's bad to be old. Is that true?
8:35 Aswath Damodaran? That's the message we send them, right? I mean, if you think about it, who do we glorify? In business schools and, you know, in business stories, we glorify empire builders, we glorify growth companies. I mean, when was the last time you saw a movie about a CEO who made his company or her company smaller? The nature of business is we glorify empire builders, we glorify growth for the sake of growth. And that can sometimes become a problem as you age as a company, because people keep expecting you to deliver that growth you used to deliver as a younger company. And you often end up overreaching when you try to do that.
9:11 Scott Galloway? Do you think there's any, we've been talking a lot about Intel today. Do you think that the corporate life cycle or Any reviews on this relate to Intel?
9:22 Aswath Damodaran? Yeah, I think that's I was going to bring up Intel because you think about semiconductor companies in general. Thirty years ago, if I said semiconductor company, you'd automatically jump to the conclusion, young growth company, and you'd have been right. The semiconductor business has aged. It's a mature business, been a mature business now for more than a decade. But within the business, you can see the variance. You've got Nvidia and Intel, both in the same business, very different stages of the life cycle. Nvidia, obviously, is a mature growth company. And in fact, it's a mature growth company with an immense amount of growth because it found a new lease on life. Intel has made this transition where it's no longer even a middle-aged company. I think it's approaching old age,
10:04 Aswath Damodaran? and investors are treating it as such. Now, is it reversible? Corporate life cycles can sometimes you can reverse aging. At least you can stall aging. But the next year or two is going to be a big test of whether Intel can actually pull that off.
10:18 Scott Galloway? But do you think at these levels, I mean, there's some amazing stats, right? Just in 2020, it was worth more than AMD and Nvidia, and now Nvidia is worth 29 times what Intel's worth. Is at some point, it feels like almost any company is a buy. I got to think Intel has very strong relationships with corporate customers, the the chip sack, it's going to get, you know, multi-billion dollar sort of infusion of free money. Do you think at some point, and is that point now, it becomes a buy?
10:44 Aswath Damodaran? I think it depends on, I mean, I I need to dig in more and how much I trust the management team at Intel to be able to deliver on it. But I think they have the pieces for, if not a rebirth, a revamp. I mean, they have an engineering and a technology team that is on par with any of the other companies. They have a history of customer relationships they can use. If they can build on their strengths and get some focus going, I think they can go back to at least being middle-aged, if not high-growth. And that's all you need as an investor to make money on the company. But the one thing that worries me when you have companies that hit these stages is managers sometimes try to overreach.
11:25 Aswath Damodaran? They'll try to do a big acquisition, a big shift in operations into a new business. And that's where I think we end up losing money as investors if you have a management team that overreaches. When you have companies like Intel, you're very much at the mercy of whether the management team can be trusted to do the right things to get it back on track.
11:47 Scott Galloway? So just to follow up on that, I love this notion of, you know, baby boomers wanting to be young again, so injecting themselves with fillers and botox and becoming this sort of free company and just refusing to age, if you will. And when I've been on boards of public companies, there's more of a tendency to want to be bold and do a hail mary as opposed to what I think is usually, more often than not, the answer. And I want to include Nike in this analysis because I think it's going through a similar kind of midlife crisis. But usually, unfortunately, the answer is much less aspirational, and that is cut costs and lay off people and recognize we're just no longer as youthful as we used to be. Any thoughts about cost cutting versus sort of acquisitions or big, bold moves?
12:32 Scott Galloway? And if at all, it relates to Nike as well as Intel?
12:34 Aswath Damodaran? I don't think it has to be an either or. I think you've got to start with reducing costs because you've got to send a message to markets that you're still healthy, that you can find a way back. But if you're aspiring to get some growth back, you've got to build on your strengths. I mean, I'll give you two examples, I think, of companies that were able to do it. In 2013, if you'd asked me about Microsoft as a company, my reaction is the two-hit wonder, right? Office and Windows, they haven't done anything since. And they found a way back. And Scott, if you remember, I was pretty negative in the New York Times a few years ago. And I think the New York Times is a company that, among the publishing companies, has found a way back, if not to high growth, a state where they are healthy, they're able
13:18 Aswath Damodaran? to deliver profits and growth. So I think that there is a way back, but it's got to, it requires patience. You can't be, you know, you can't try to do this overnight. It requires building on the strengths you have as a company. And doing it organically. I think that when you try to grow through acquisitions, you're going to end up overpaying upfront to enter into new businesses. So more organic, more patience and built around strengths if you're trying to find a way back to steady state.
13:49 Ed Elson? Where does the massive increase in AI investment among the big tech companies fit into this corporate lifecycle conversation, specifically Google, Microsoft, Meta, Amazon? And one distinction I'd like to point out, earlier you mentioned this idea that Nvidia has a new lease on life, which is a lot more positive than saying that maybe Nvidia is getting Botox or a facelift. But it's not totally clear what the distinction is until you're looking at it in hindsight. So yeah, what does the AI capex investment movement mean to you in terms of this conversation?
14:27 Aswath Damodaran? I think Nvidia is the only company that's earned its new lease on life already. And the reason I call it a new lease on life is they didn't jump into AI after everybody else recognized was a big market. They got in ahead of the fact. And that's something I think that you find in common among companies that find a new lease on life. They're not jumping into a space where there are other companies already kind of big and involved. They're jumping into a space ahead of the game. I think the problem, I think the other big tech companies have is they're jumping into a space where everybody else is in that space. I do think they have some advantages in AI, but I do think that they're going to have to fight it out.
15:09 Aswath Damodaran? So there, I think we'll have to wait and see whether, in fact, this will give them the capacity to push their growth back up. I am skeptical. When I value the Mag7 now, I give them growth rates in the high single digits. None of these companies are 30, 40, 50% other than Nvidia, which I think still has that AI growth. The other six companies, I think of as solid companies, good growth, closer to middle age than young growth. And I don't think AI is going to change that trajectory. And so that's why I think the market is, you know, needs to discriminate between companies investing in AI, between those companies who are ahead of the game from those companies are playing the me too game.
15:52 Ed Elson? So would it be fair to say that you believe that this massive AI investment from these companies will ultimately lose money for investors?
16:02 Aswath Damodaran? Not necessarily, but it won't create, I mean, to create value, you got to earn well above your cost of capital. These are kind of, I mean, on these investments, I think that, you know, my, my gut is that they're going to end up earning their cost of capital, which is not a bad thing. It'll mean that they'll grow and they'll earn a reasonable return, but they're not going to earn the 30, 35, 40% returns they earn on the businesses they're in. I mean, let's take Alphabet, right? The only business they're in where they earn substantially more than their cost of capital is that search box. Everything else they've done since, at best, they break even. And my guess is that's what AI is going to look like for them as well. So for these businesses, it's not going to necessarily be a bad business,
16:44 Aswath Damodaran? but it might be closer to neutral than a good business. And I think the markets eventually will come to that recognition as well.
16:51 Scott Galloway? So Aswath, we're both old enough to remember the dot com craze and how it unwound it. And it wasn't that, it wasn't a seminal technology. It wasn't that it wasn't going to change the face of business. It just wasn't happening as fast as the valuations indicated. And because no one, clearly there was going to be a fallout, we got increasingly complex to pick between Amazon, pets.com and Overstock. It seems obvious now, but it wasn't obvious back then. So everyone digressed to the safe play, which was the infrastructure bet of Cisco. And people say there's big differences that the earnings growth has accelerated almost as fast as the stock price with Nvidia. But I can't help but draw the same analogy
17:36 Scott Galloway? that when you see $20 billion in front end revenue that has inspired a $2 to $3 trillion increase in market capitalization, you'll get 100, 150 times revenues. And you're seeing the same sort of, we don't know how to pick the winners on the front end in AI. So let's digress to the infrastructure plays. I mean, it literally feels as if a similar bubble is inflating again. And then, you know, as we know, Cisco lost 90% of its value. From the most valuable company in the world in two years, Nvidia is Cisco 1.1. Your thoughts?
18:09 Aswath Damodaran? And Cisco's never rediscovered its mojo, right? It became a mature business. It's a good business, but it's not a business that people get excited about. And I have a feeling that Nvidia and the cloud business in general that supports AI is eventually going to become a boring, you know, kind of. And I think we are overreaching in terms of market cap on Nvidia in particular, because people are looking for something to put money on in AI. And this seems to be the most tangible thing to do because unlike the dot com boom, where you actually had companies that whether you like them or not, were offering product and services. I cannot think of very many companies that are offering AI. Where in terms of getting ahead of the game, getting way ahead of the game
18:51 Aswath Damodaran? in terms of betting on something where you haven't seen tangible evidence of a market being created for those products and services. So I agree with you. I think we overreached and I've argued all year that Nvidia is overvalued, even though I, you know, I own some Nvidia still, but I bought it in 2018. I'm okay with that. But I think it is, you know, investors are tend to be lazy. They want something that they can hang their hat on right now. And right now it's the big tech companies with their cloud businesses and Nvidia with the chip business. But I think at some stage, if you want to pick the real winner in this business, you're going to find a company that makes money on AI by selling products and services. And I can't think of any that come to mind now.
19:33 Aswath Damodaran? And that's troublesome because we're investing hundreds of billions of dollars in an architecture with no idea of how that's going to play out for companies that use their architecture to try to make money.
19:46 Ed Elson? Yeah, it's almost like we're more excited to invest in AI than we ought to actually use it. Same is true of crypto. But you mentioned there are no companies making AI products. The one company I had pushed back on with that statement is OpenAI. You know, they are supplying APIs for enterprises, a lot of startups and a lot of big tech companies, but also around half of their revenue is from their consumer product, ChatGPT.
20:13 Aswath Damodaran? That is true, but they're a strange creature. I'm not sure what they are, right? I mean, are they?
20:18 Ed Elson? That was gonna be my question. What is it?
20:20 Aswath Damodaran? Public, they're private, they're for-profit, non-profit. I mean, it's a corporate governance nightmare in many ways. If it's a business, then it's really not being... I mean, you saw that play out last year with, at the very top of OpenAI, with Sam being pushed out and coming back in. So this is the vanguard of the AI product services business. It's not exactly a play that you and I can make as investors, because I'm not sure what it is, right? Microsoft is indirectly benefited from its connections to OpenAI. But, you know, it's not quite a company in the same sense that Amazon was a company. So if OpenAI is the only company out there,
21:05 Aswath Damodaran? which actually has tangible evidence of we can sell products and services and make money on it, I'd like it to be a cleaner play where I can say, "Okay, let's see what your numbers actually look like, what your corporate governance looks like." And right now, I don't see it yet.
21:19 Ed Elson? If you had to place it somewhere in the life cycle of OpenAI, could you place it?
21:25 Aswath Damodaran? Right now, it's more option than anything else. You're buying a huge option that if it pays off, is going to get a lot of upside. So it's a young, young, young business, if you think of it as a business. And even though it's making money, it's not... You know, the business model is going to obviously shift over time. So it's very early in the life cycle. And given how it's structured, I'm not sure how you advance it across the life cycle without changing its structure. I don't see it continuing to do what it's doing now and become bigger, because, you know, something's going to break.
22:03 Ed Elson? We'll be right back.
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23:44 Ed Elson? We're back with Profi Markets.
23:46 Scott Galloway? Aswath, we were on stage at Stern and I was busting into my, like, I hate Meta app. And you pointed out that distinctive, their kind of adventures in VR and the Oculus not working and Apple kind of attempting to kneecap them, that they still sat on this cash volcano. And you made sort of a bullish call on it. At that point, the stock was at 80 and I think now it's somewhere in the 600s. Can you think of any other company that is in a similar position that's been unfairly punished that you look at and say, look, the fundamentals, there's a mismatch between perception and just the underlying fundamentals?
24:29 Aswath Damodaran? You know, one reason I want to take a closer look at Intel is I think that the amount of punishment that has been meted out to Intel, and I'm glad we let off with Intel, seems disproportionate to what has happened already on the ground. I mean, I think that's what we're looking for. And I think in this market, it's tough to find companies, we get disproportionately punished because the market's been doing so well for so long. So maybe it's healthy that we're having an overall market correction because you're going to get a chance to look at companies that you think have been beaten up and not given credit. And I think with Meta, it was particularly, I think, distinct because it went from being
25:11 Aswath Damodaran? a superstar company to a company that where people looked at and said, this company can't do anything right. It's amazing how much shifted. That was, I think, uncommon to see that much of a shift happen over such a short period. Usually it takes a much longer stretch to go from being a young growth or a high-growth company that's viewed as a start to being a dog. But for Meta, it happened over the course of a few months. And I think that's what made it so interesting. I think it, you know, it's, I can't think of another company right now where I can say, I mean, I could take companies like Zoom and Peloton, but I think a lot of the punishment there is well-deserved. I don't think it's punishment to look at.
25:53 Aswath Damodaran? So that's, I mean, Peloton is a company that essentially overreached, and I think it might have destroyed itself in the process. So I think that, and I can't think of a name right now that would match up to Meta, but I would be looking at some of the more beaten-up stocks. At least in the high growth sector to see if any of them are worth saving.
26:15 Scott Galloway? It's not high growth, but I would put it in the camp of potentially Intel and Nike. And that is, have you done any work on Starbucks?
26:22 Aswath Damodaran? Yes. And Starbucks is a company that's had four attempts at rebirth in the last, even the last two decades, right? It's a company that overreaches and somebody comes in and corrects it, overreaches again. And I think that right now, one of the challenges at Starbucks is they've created a business model that works really well, which is the online ordering, but it's wreaking havoc with what made them a successful company in a previous life form. I think they need to figure out a business model that's built more around the fact that a lot of people prefer to get their stuff online. I don't go into Starbucks, order and sit there to drink anymore. Almost every time I order at Starbucks, it's online.
27:07 Aswath Damodaran? But I think they might need to rethink whether they need these expensive Starbucks outlets with the seating for fifty in fifty places in every city, when half the people there are coming and picking up stuff. I mean, this seems like an investment with very little return. But that's going to create a transition and maybe we're again overreacting to the fact that right now, things are not working the way they should. But they're under stress right now because the activists have clearly targeted them. They're going to be under pressure and here the cutting costs is going to be the first phase of what they need to do to show that they can go back to profitability.
27:47 Aswath Damodaran? But I think they need to shift business models and if they can, I mean, it's still the dominant company in the space and I don't see the dominance going away. But I think the key is can they shift the business model to reflect how people buy their products right now?
28:03 Ed Elson? I'm wondering what makes a good rebirth. I mean, you mentioned Starbucks has been trying. You've got Howard Schultz coming back in twice. He's been the CEO three separate times. It's not really working. And then I look at Meta, which as you mentioned, had this downfall and it has had this rebirth. And even you look at Mark Zuckerberg, who has gone from wearing suits and being criticized for looking like a lizard at congressional hearings and is now a cool surfer, wearing baggy T-shirts and a necklace, and it appears to work. And it is, you know, his. Rebrand has coincided with the rebirth of the stock.
28:44 Aswath Damodaran? And don't forget the UFC fights that he's promised me to get into as well, right?
28:48 Ed Elson? Exactly.
28:49 Aswath Damodaran? I think that what made Metas and Metas return to grace so quick was the fact that you've got to give Mark Zuckerberg credit. When, when the market punished him, as it did after he, you know, the big hundred billion dollar we're going to spend in the metaverse, he listened. Notice that he, he doesn't have that talk about metaverse and spending. He doesn't lead with the, we're going to spend hundred billion dollars. He leads with the fact we see a productive business, we're going to try to make money. That's something he learned from his mistake and very few CEOs learn that quickly. And I think part of the reason the market was so quick to give him grace
29:30 Aswath Damodaran? was because if you look at the earnings calls after that horrendous call where the price collapsed, he very quickly, you know, he might still be doing exactly what he was doing before. But he's at least thought about the fact, what did the markets not like about it? What do I need to do differently? And that's, that's just an adaptability to Mark Zuckerberg that I did not think he had. And I think that's what the market is rewarding. So that might be one of the things is you need adaptability. And that's why Howard Schultz might not be the person to try to save Starbucks. Because you need somebody who's adaptable, who's willing to take what originally made Starbucks and say, that's not working anymore.
30:12 Aswath Damodaran? Maybe we have to try things differently, a break from the past. And that break from the past might require a new person at the top.
30:20 Scott Galloway? The way I see it is the markets, I'm curious if you buy the thesis, they're bifurcating. And anything that's reasonably good in the, in tech is fully valued, if not overvalued. And I wonder if on the other side, all of those capital flows into the magnitudes of seven has presented opportunities for kind of fallen heroes or orphaned iconic companies. We talked about Nike. We talked about Starbucks, Intel. Another one I've been looking at that was a high flyer for so long and a best performing stock in its category and has been cut in half is Lululemon. Do you have any thoughts on Lulu?
30:51 Aswath Damodaran? I think that that is an incredibly competitive business now. I mean, it's a business space where they own the business, but now it's kind of, you know, everybody's entering. I think they still have a market that's large. I wouldn't call it a niche market. It's too big to be a niche market, but they are trying. But their growth in that market is fairly limited because that market itself. So if you look at the basic apparel market, they're trying to expand out of the market to get more growth, but that expansion has to be geographical to parts of the world where they're not as well recognized, Asia, parts of Europe, or into new product lines where they're not established yet. You know, footwear, maybe the mirror thing wasn't going very far.
31:35 Aswath Damodaran? I think they tried that, you know? But basically they're trying both products and geography. I, you know, I like them as a company, you know? But I think that if I were an investor, I would do it with realistic expectations of what they can deliver. Their margins are already pretty high, so it's not going to be easy to improve margins, especially because their pricing power is fairly restricted with the competition. But I don't think they're going to go back to being a 20% growth company. That's not happening, but they can at least have that solid growth, maintain margins part of it, you know? And for investors leaving Nike might not be a bad place to go, you know? Because Nike's got its own share of issues. You may say, I don't want to deal with those.
32:20 Aswath Damodaran? Lulu might be the, might be the fallback strategy if you want an apparel company in your, in your mix.
32:26 Scott Galloway? And another name we always love to talk about Tesla. And I would almost describe it as half meme stock, half company. Because whenever I want to talk about valuation with anyone, they claim it's an energy company or they talk about. You know, autonomous driving.
32:43 Aswath Damodaran? Don't forget the robo Tesla bots.
32:45 Scott Galloway? Feels like it's sleight of hand. Look over here. Weapons of mass distraction because if we're going to have an honest conversation around what this company actually is, there's no way we can justify the valuation. And yet it'll explode up for what appears to me to be no reason at all. Any thoughts on where Tesla is right now?
32:59 Aswath Damodaran? I think the problem with Tesla is I think there's a core story. That's a good story. I mean, this is the company that's brought electric cars from a side story, something that people thought would never be more than this tiny slice of the market to the center of the market has changed the conversation of the market. I think if they played their cards right and had a narrative that was disciplined about what they are as a company, because I think there are strands of truth to all of these side stories, right? I mean, they are ahead of the game in terms of automated driving and maybe there's a business there or in terms of robots. But they need some discipline in their storytelling. And the one word that I would not use to describe Tesla over its entire lifetime is
33:41 Aswath Damodaran? discipline. I mean, this is a company that I call my corporate teenager because it absolutely lacks discipline. The story is all over the place and which gets played out in the market price. It's either boom or bust. It goes to a thousand dollars, drops to $200. So I think that we need some story discipline here. And for that story discipline to happen, maybe Elon needs to kind of concede that he has too many other things that he is interested in, that he needs somebody who becomes the Tesla narrative setter, who becomes the one who tells markets where the company is going. Because too many distractions, I mean, some of those distractions push up the price, but I think they also cause distractions within the company. What are we working on? What's our next phase?
34:27 Aswath Damodaran? And I think at this stage, when you're a half a trillion dollar company or a $700 billion company, you can't afford to have those distractions. You need some focus. And I think that's, you know, that would be my advice if anybody's willing to take advice in that company. Find some focus, find a narrative that actually is well thought through that you stick with, you know? You could learn from Bezos and Amazon because Jeff Bezos built that company because he had a narrative, he stuck with that narrative, he acted consistently. And he made Amazon one of the great companies in the world. And I think Tesla can do it, but it does need that focus.
35:03 Scott Galloway? Stay with us.
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36:45 Ed Elson? We're back with Prof G Markets.
36:47 Scott Galloway? Pulling back and looking at the markets more holistically, the US market, which trades at a premium to almost every other market because of liquidity, because of our culture, our agility, the fact that, you know, it wasn't an accident that the hottest thing is basically owned and operated by American companies, AI. How do you compare the US market to other markets?
37:08 Aswath Damodaran? I mean, US equities now are almost 50% of global, of all equities globally. It was, I think, 37 or 38% just a few years ago. The biggest loser has been China. China's dropped off. It's still the second largest market, but India's starting to move up the ranks. The most expensive market in the world right now, in terms of multiples of earnings, is actually India. More expensive than the US, but the US is right below it. In terms of performance this year, it's been a no brainer. The US has carried global equities. If you think about the total increase in market gap in equities, it's almost entirely come from the US, which is part of the reason when you see a drop in the market, it's going to be more in the US than everywhere else, because we're more to give up.
37:52 Ed Elson? I just want to stay on the US for a moment. You wrote on your blog, Musings on Markets, about this thing you describe as country risk and how country risk varies across different geographies. Could you give us a review of what country risk is and also where the US stands right now from a risk perspective?
38:13 Aswath Damodaran? Country risk basically reflects what you worry about as an investor, either as a company or as an individual investor. When you put your money in equity in a country, whether it's in Brazil or whether it's China. And I think that it's fundamental to thinking about investing. And the reason you have to do it is even if you're a purely US investor, is US companies get a significant amount of their revenues from outside the US. So if you're investing in Nvidia, whether you like it or not, you got to worry about China risk. Why? Because those chips get made by TSMC. And I don't want to go through worst case scenarios, but you can see how China risk can affect your value of the value of Nvidia and as an investor indirectly your money.
38:57 Aswath Damodaran? So I think we all need to be aware of the rest of the globe because we're all connected. I mean, you saw this already in the last few days. The sell off in markets started in Japan and spilled over into the US. And you see the spreading. This is something we've seen with every crisis in the last few years. Effectively, there's high correlation across markets. Country risk captures the fact that if bad things happen in the US, it gets multiplied in parts of the world which are more risky. A three percent drop in the US would play out as a five percent drop in Brazil. Again, it's that multiplication of risk. With my country, what I try to capture in that country risk effect is how much of a multiplier
39:38 Aswath Damodaran? effect on risk am I going to have if I invest in a company that's gets all its revenues in Brazil or all its revenues in China? What goes into country risk is everything. It's economic risk, it's political risk, it's, I mean, every aspect of risk plays out there. In fact, in that post, I also looked at war and violence around the world, corruption around the world, because those are all things that affect you as an investor. And by affecting as an investor, affect the value of your investments. So it's a snapshot in time, things change, you know. Every time I put that country risk profile out, there are people who push back and say, I disagree with you. And I said, of course you do, you know, because things change, even, you know, even as I
40:20 Aswath Damodaran? print that, I have to worry about, hey, how much can happen the next week that could change those country risk agreements?
40:26 Ed Elson? It's kind of paradoxical what you just described, which is, you know, if the US has sort of embedded itself in every country and every market around the world, you would think that if you're investing in Brazil, you're protecting yourself from the US. But what you're describing is that actually, because they're so connected, issues in the US can amplify in Brazil. And I guess my question, my follow-up question would be, so then what's the takeaway? If, if, if the answer is that, you know, we're all connected, then what even is the the benefit in trying to protect yourself from country risk?
41:01 Aswath Damodaran? The takeaway is that it's, there's no safe place to be. I mean, you know, if you go back 40 years, if you're an Indian investor or Brazilian investor, you know how you protected yourself? You moved your money into the US. If you're a US investor, you were asked to invest in other countries to get geographical diversification. That doesn't work anymore. You take every crisis in the last, you know, last 20 years, 2020 COVID crisis, the 2008, what tends to happen is when markets go into crisis, they all seem to go into crisis at the same time. Being geographically diversified doesn't protect you from risk because it ripples through your entire portfolio. So I think we sold people really well on globalization.
41:44 Aswath Damodaran? But this is one of the downsides of globalization. Everyone, everyone's problem becomes everybody else's problem. It's going to play out as crises that roll through on a regular basis. It's part of investing now. You've got to incorporate into your investment philosophy that this is the way the world is, that you're going to have every two or three or four years, a crisis that originates somewhere else in the world that spills over into your global portfolio.
42:11 Ed Elson? I used to think that the only downside of the US stock market is that you're missing out on the rest of the world, and it's not really much of a downside. But from what you're saying, it sounds like actually the US stock market is the world's stock market. There is no downside.
42:27 Aswath Damodaran? The S and P 500 is not a US equity index anymore, right? At least if you think about US equity indexes, companies that make their money operate in the US. The S and P 500 is a global equity index. I mean, the only thing is the accident of history. These are companies that are incorporated in the US. I mean, multinationals are basically the dominant force of the world. They're global companies. And the fact that they're, you know, that you have, you know, Vale Incorporated traded in Brazil doesn't take away from the fact that it's a global iron ore mining company. So I think that that's basically what you see as, as an investor. So you can be in the S and P 500, you've got a global portfolio there, right there.
43:11 Aswath Damodaran? And you just have to recognize that it is going to be affected by global movements, not just by the US economy.
43:17 Ed Elson? Last time we spoke, you said the number one thing you would be watching for this year in terms of markets' impact was the presidential election. So let's switch us to our favorite topic, US politics. Any thoughts on the race so far and how it has impacted the markets?
43:35 Aswath Damodaran? I think part of the volatility you're seeing in markets reflects the fact that we're getting closer to November and closer to the election. I think you are going to see, and here's the potential downside of heading into an election is everything is going to be politics, right? You know, right now, I would not, I can't even imagine how much pressure Jerome Powell is in. To do something eight weeks ahead of the election. In fact, I know I heard people throw out that the Fed should lower the Fed funds rate by one and a half percent. I think that would be insane to do that would be a signal of complete panic. It would be the worst thing for markets. But unfortunately, when you get this close to an election,
44:19 Aswath Damodaran? the things that governments and central banks do will be driven by the fact that even election coming up. So my concern is not so much the uncertainty about who will win the election, but what it creates in terms of bad policy choices in the weeks leading up. Because people feel under so much pressure to do something or the other. So, you know, I would hope that the Fed doesn't act, you know, suddenly to do something because they're being forced to do it. And if they do act, that it's driven by information they have or economics. But no, I'm a realist. I think that this is the season of politics and politics is going to drive a lot of decisions, you see.
45:03 Scott Galloway? And just as we wrap up here, Aswath, you've been in and around higher ed. You're obviously considered one of the premier teachers in higher ed globally. I've been waiting and calling for disruption in higher ed for a decade. And I've been wrong for a decade. And I, I still can't get over the fact that kids have to pay $7,000 to take my class. I can understand them paying 7,000 for your class. But, you know, 300 kids, 7,000, 2.1 million, 170 grand a night. That to me just, just wreaked of disruption. And yet it hasn't happened. I'd just love to get your thoughts on the state of higher ed right now.
45:43 Aswath Damodaran? I think two reasons. One is inertia, which is we've spent a century telling people that an education requires a four-year university degree. And that basically means that a 19-year-old goes to his parents and says, "Look, I don't want to go to university. I think I gave you an equivalent education by taking online classes." Many parents are going to say, "No way, you're going to go to college because that's what we've been saving money for." So that's the inertia part is, is I think there are 45 to 50-year-olds to whom an education is a college education that takes four years.
46:18 Aswath Damodaran? The second, I think, is we have a financing system for higher ed that I think encourages this madness. You know, you've got student loans and you've got, you know, aid systems basically saying, look, we'll put off the day of reckoning. And that's a dangerous thing because you're saying, you know, you're telling somebody going to a four year college. Look, you'll make a lot of money in the future with a college degree. What does it matter? We loan you the money right now. And that's a, that's a bomb waiting to go off in terms of student loans, you know, accumulating over time. So I think that, that we're delaying this, this adjustment that needs to happen. It's not healthy because that bubble is only going to get bigger. No, and like you, I've been not just, you know,
47:03 Aswath Damodaran? calling for the disruption of higher education. I've been actively trying to act like a disruptor of higher education. But at the margin, I'm just nibbling. I'm not just taking bites out of the substance. But I think it will happen. But I think what might cause it to happen is a financial bubble blowing, those student loans ultimately becoming so large that they just blow up on you. And that's a terrible thing to happen, to have to have a financial crisis be the reason why higher education gets disrupted. But maybe that's the only way it'll happen.
47:37 Ed Elson? Professor Aswath Damodaran is the Koshner Family Chair in Finance Education and Professor of Finance at NYU Stern School of Business, where he teaches corporate finance and valuation. His latest book, which he told us he's not trying to sell, that he doesn't want us to plug, but we're going to plug it anyway. His latest book, The Corporate Lifecycle, is available right now. Aswath, thank you so much for joining us once again.
47:59 Aswath Damodaran? Thank you.
48:03 Ed Elson? This episode was produced by Claire Miller and engineered by Benjamin Spencer. Our associate producer is Alison Weiss. Our executive producer is Catherine Dillon. Mia Silverio is our research lead and Drew Burrows is our technical director. Thank you for listening to Prof you Markets from the Vox Media Podcast Network. If you liked what you heard, give us a follow and join us for a fresh take on markets on Monday.
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