Pod Insights The Prof G Pod with Scott Galloway Prof G Markets: Arm’s IPO, Instacart’s Valuation, and Salesforce’s Year of Efficiency About this episode This week on Prof G Markets, Scott shares his thoughts on Arm’s imminent IPO and what it will mean for the company’s largest shareholder, Softbank. He then takes a look at Instacart’s business model and valuation as it waits in the wings to go public as well. Finally, Scott discusses the biggest learnings from Salesforce’s latest earnings.
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Transcript Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.
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1:33 Scott Galloway? This week's number one. Gen Z's number one most searched term on Spotify is, get this, sad. As a result, Spotify created a playlist called Bummer Summer. No joke. I have a child that is Gen Z, and when I ground him, I force him to go outside and socialize.
2:03 Scott Galloway? Welcome to PropG Markets. Today, we're discussing ARMs IPO, Instacart's S1 filing, and Salesforce's earnings. Here with the news is PropG Media Analyst, Ed Elson. Ed, I have this new sensation. I am happy to see you.
2:20 Ed Elson? It's great to hear. I've been so sad without you. It's been, life's been meaningless and dull for all of August. I'm glad you're back.
2:27 Scott Galloway? I get it. I understand. I think everyone can empathize with that.
2:30 Ed Elson? Are you going to keep doing this, this whole take an entire month off of work thing?
2:35 Scott Galloway? Yeah, I've done it for a few years.
2:36 Ed Elson? You don't get anxious that you're not working?
2:38 Scott Galloway? Yeah, I get restless. I try to do some writing. I'm actually really good at doing nothing. It's like a core competence, but I like to at least have some deadlines and try and do some stuff. I think I did less this August than I have done, I don't know, since I was in college, where I did, I was outstanding at doing nothing in college, but now I'm glad to be back at work.
2:59 Ed Elson? Any exotic experiences?
3:01 Scott Galloway? Not really. We were in Colorado and then we were in Antucket. Nothing that interesting. I was in Mykonos. So how was Mykonos for you?
3:08 Ed Elson? It was epic.
3:08 Scott Galloway? Epic? What does that mean?
3:10 Ed Elson? Seven days of not drinking and not partying, just hanging out, wholesome fun.
3:18 Scott Galloway? What? What happened?
3:21 Ed Elson? It was all a blur. It was great.
3:22 Scott Galloway? The only thing I know for certain was that dude, never mind. Break down the news, Ed. Save me from myself here.
3:29 Ed Elson? All right, let's start with our weekly review of market vitals.
3:39 Ed Elson? The S and P was down, the dollar rose, Bitcoin dropped, and the yield on 10-year Treasuries climbed. Shifting to the headlines. China expanded a ban on government worker use of iPhones due to cybersecurity concerns. The country is one of Apple's largest markets, accounting for 19% of its revenue. Shares fell as much as 7%, wiping out more than $200 billion in market value. Warner Brothers Discovery slashed its full-year adjusted earnings guidance by $500 million. The company says that cut is owed to the writers' strike. Meanwhile, CNN is launching 24/7 live news on the Max streaming app. CNN Max will arrive just more than a year after CNN Plus was shut down.
4:23 Ed Elson? And finally, Lionel Messi's Inter Miami debut drove 110,000 new signups in one day to MLS Season Pass, which Apple has exclusive rights to distribute. Apple CEO Tim Cook credited Messi on the last earnings call for his contribution to Apple TV's subscriber growth. Scott, I actually saw Messi play at the Red Bull Arena a couple of weeks ago. Do you have any thoughts on this?
4:46 Scott Galloway? So we'll go in reverse order. American soccer, the MLS, whatever they call it, everyone's waiting for tomorrow to be today, and a lot of people think the league will never reach the same heights as other leagues in Europe. But I just think it's wonderful. I think it's a win for him, it's a win for the MLS, it's a win for his family because they get to hang out in Miami. And just the power of celebrity and social media, you know, celebrity just continues to be something that's very monetizable. So I'm nothing really there, other than it's fascinating and fun. Best news I haven't had in a while. In terms of China, we're in a, you know, we're in a full-blown shooting match, trading war now with China, where Montana bans TikTok, and we're talking about banning TikTok. And this was an attempt to say, okay, the most valuable company in the world that's
5:30 Scott Galloway? headquartered in the US actually has more employees in China, and it's also the second largest consumer market for your phones, just beyond the US. So Apple's been largely protected by Xi, I think, in the CCP because they see the company is just so integral to their growth, and I think they have a great relationship with them, their supply chain. I just gotta think there's literally millions of people who are directly or indirectly get their living in China from Apple. But I think they've decided, look, we need to send a signal that every time they punch us and, you know, fuck with us, specifically ByteDance. We're gonna fuck with them, but this is a full on kind of non-shooting, non-shooting war, if you will. And it's a shame because, I mean, there's few things that could lift
6:15 Scott Galloway? more people out of poverty than China and the US getting along. Because the cocaine and champagne of our incredible consumption culture, their emerging economy, their manufacturing and supply chain prowess with our innovation and intellectual property creativity, you know, we could kind of just, we could create just a ton of shareholder value, a ton of jobs that would absolutely lift both boats and lift all boats globally. War is expensive, and this is, this is the type of war that, you know, it's felt a thousand different ways where it's, you know, the cost of something, costs are gonna go up, and that means fewer people, I mean, it's a standard of living for everyone across the world is gonna go
6:58 Scott Galloway? down when we have trade wars like this. At the same time, I think China has definitely kind of outed itself. It's not our enemy, but they used to be our competitor, and now I would see them squarely as our adversary. And I think what will be really interesting is how they respond if we do, in fact, get close to a TikTok ban. Let's move on to Warner Brothers Discovery. So this notion, and it's just hilarious, that it's the writer's strike is the reason why they've lost $500 million. This is David's, I mean, here's the real story. I'm David Zaslove. I wanted to live in Hollywood and have a Porsche and get invited to the Academy Awards, and I was willing to do a stupid deal and overpay and bail out AT&T, who did even a stupid deal and overpaid even more. And now I'm
7:41 Scott Galloway? gonna blame my melting ice cube of a shitty business, specifically cable television, where the ad rates continue to fall and advertising revenues continue to fall. I'm gonna blame it on the writer's strike. And I don't doubt that the writer's strike hurt these guys. And what's interesting is that the notion that Netflix is on the same quote-unquote side of the table as Time Warner and Disney is just ridiculous, because I believe every day the writer's strike goes on, it does hurt Time Warner, it does hurt Disney, because they can't go to the upfronts and sell advertising because they have no new programming. Whereas Netflix, who gets a great deal of programming internationally, 10,000 people producing content in just Madrid alone, and a content queue that is just so dramatically
8:22 Scott Galloway? deep, I think Netflix loves this strike. Their cash hoard, their cash pile, has grown so fast because they have this kind of reduction in content production, that they're going to do additional share buybacks, and the stock is up. So it's just hilarious that Time Warner and Disney, at least initially, are pretending to be on the same side as Netflix. If I were Netflix, I would just come up with all these reasons, thoughtful reasons around why we shouldn't end the strike. Netflix comes out of this a big winner, Time Warner a big loser, but that half a billion dollar loss, it's just, to be in ad-supported cable is just a shitty business. I think where the model is headed, is, I read something super interesting. The guy who started Five Hour Energy is now a multi-billionaire,
9:05 Scott Galloway? is going and buying these regional sports networks, and essentially firing everybody and using AI to produce minimum viable content at a fraction of the cost. I think you're gonna see a lot of that. I mean, here at Prop G, we're talking about using AI to expand it to different languages at what would have been several thousand dollars an episode to get an actor to read and try and exhibit the sort of good looks and charm of Scott and Ed, respectively. Now with AI, our crack tech team here has found the right technology where we can do this for much lower costs. And if it works, we're going to do it in Portuguese. And anyways, that to me is kind of the new model of media, ground up using
9:46 Scott Galloway? technology to do stuff kind of that's not as good, but 90% as good for 2%, 10% of the price. So what I think is gonna happen, what I think is gonna happen, is that we're gonna go good bank, bad bank. And that is, there's gonna be consolidation. I think it'll start at Viacom. I think Sherry Redstone has to find a strategy here. And Paramount Plus, actually... Does have a story, but what happens is in all of these earnings calls at Time Warner, Disney, Viacom, is they talk about subscriber growth and they can kind of explain, you know, they can say, look, we're growing our streaming things. That's the future. It's really expensive. But I think the market will say, all right, we'll give you the benefit of the doubt. At least it's growing. And then they spend the rest of the earnings call apologizing for
10:31 Scott Galloway? the decline in business at their traditional cash cows that is cable. I think what they're going to do is spin those assets into new co. There'll be consolidation. Someone will come in and buy up all of these assets, whether it's the Cartoon Network or, or, you know, the Learning Channel or the Food Network, just all of these things and cut costs and stop this consensual hallucination that these things are ever going to grow again and try and cut costs faster than the decline in revenues. Because the thing about these businesses, they usually go out of business more slowly than you think. I mean, Disney, Iger has basically said FX and ABC, he's put them in the front of the lawn and said, best offer, you know, no reasonable offer refused. Because what happens in these multi-headed hydras with
11:15 Scott Galloway? different companies or different business models is that people or investors hate conglomerates. And they'll look at these things and they'll find the shittiest business, which is the ad-supported cable businesses, and they'll assign that multiple of that value to the entire thing. When Peacock or Paramount Plus or HBO should trade at much higher multiples. So the, I believe that Paramount, Time Warner, Disney could probably shed these cable assets or sell them for a dollar. And within a year, their stocks would be higher than they are now, even without those cash flows, or if they could strike a good deal to get, you know, monetize or securitize those cash flows in the sale, because their story would just be cleaner. I think the CNN launching a 24/7 live news on the Mac streaming app is actually
11:58 Scott Galloway? the beginning of a very innovative idea. And that is if I were CNN, I would become like Intel Inside. And that I would say, okay, I have a newsroom. I have the best newsroom in the world. And if Netflix, UNetflix, or Apple TV, or Amazon, pay us X dollars. In exchange for that, you can put a little CNN logo on your app, or on your service, or on your platform. And at any point, someone can just click on it and click business, politics, culture, and get, you know, a 10, 15, 20 minute loop that's updated twice a day during a normal day, 12 times a day during the insurrection. Because the thing that kills these things is the cost of having 16 hours a day of programming. And what they really should do is people don't want all that programming.
12:41 Scott Galloway? CNN should say, we're going to bring you the best news in the world because we have the best newsroom in the world. But for two, five, 100, 300 million dollars a year, Apple TV plus, you can have access to just plug and play news. So, and I think this is a start. I think having the ability to be on HBO Max and just click a button and have over the top, tighter, commercial-free news, I think that makes a lot of sense. I think it's smart and I think that's, if you will, how CNN creates a lot of value.
13:13 Ed Elson? We'll be right back after the break with a look at Arm's IPO.
13:23 Scott Galloway? Support for the show comes from Superhuman. The pace of modern work can be relentless. You're getting a constant influx of messages from a ton of different apps. You haven't closed all your browser tabs in a year. Everything seems urgent and staying on top of it all feels like an impossible task. Superhuman Go is an AI chat that's always there when you need it, already aware of what you're doing and doesn't ask you to start from zero. Superhuman Go, from the makers of Grammarly, help you be the best version of yourself at work. It handles the repetitive stuff so you can focus on the work that only you can do. Whether you need to summarize an endless email thread or prep for a meeting that's happening in five minutes, Superhuman Go works inside the tools and sites you already use, your browser, inbox, docs, and your project tools.
14:04 Scott Galloway? And its AI chat is available on the side of your browser and it's always ready. No new tabs, no switching apps, no losing your place. This is AI that works with you, not on top of you, so that you have the time and brain space to solve the problems that matter. Check it out, find out more at superhuman.com.
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15:43 Ed Elson? We're back with Prof G Markets. The biggest IPO of the past two years is just around the corner. Last week, British chipmaker ARM, spelt A R M, kicked off its roadshow and revealed it will go public at a target valuation of $52 billion. For context, other companies of that size include Chipotle, Lululemon and Dell. ARM specializes in smartphone processor designs. Its clients include Apple, Google, Nvidia and Samsung, and each of those companies have agreed to buy shares at the IPO. Its largest shareholder, though, is SoftBank, Japanese investment firm run by Masayoshi Son. We'll get to SoftBank's involvement in this deal in a moment, but first, Scott, you predicted that the IPO
16:26 Ed Elson? market would pick back up in the second half of this year. It looks like you were right. We've seen a slight pickup recently. There were 15 US IPOs in July, 11 in August. That's up from 2022. Do you have any initial thoughts on either ARM as a business or on this IPO?
16:43 Scott Galloway? So, I mean, there's two things. The first thing is indisputable. It's a great business. Their chips power 99% of the world's smartphones. Seventy percent of the world's population uses an ARM-based product. Their chips aren't just in smartphones, they're in other things. Smart speakers, TVs, surveillance cameras, thermostats. And they also see growth in cloud computing. They receive royalty payments for chips, which have incredible margins. Licensing is thirty-seven percent of their revenue, royalty is sixty-three percent of their revenue. This also comes down to valuation, and that is, there has never been a drunken sailor like SoftBank in terms of just throwing cash at the wallet with crazy valuations.
17:24 Scott Galloway? And they're supposedly targeting an IPO price range of forty-seven to about fifty-one bucks a share, which would give it eighteen times its trailing twelve-month revenue. And Nvidia trades at thirty-seven, but I would argue Nvidia is radically overvalued. So what would be interesting is, is if SoftBank gets their money back or makes money. Because at some point, this is an amazing company, but at some point, it was a bad investment.
17:50 Ed Elson? The context here is that SoftBank, which is the Japanese investment firm we've talked about a lot on this show, largely because of how poorly they perform. They own around ninety percent of the company. And last month, they valued the company at sixty-four billion dollars, which is around thirty percent higher than the expected valuation at the IPO. You were talking about that mismatch in valuation, the fact that they're going to go into the public markets, thirty percent lower. What are your thoughts on that?
18:18 Scott Galloway? Well, you know, it sucks to be a grown-up. They gotta get money back to their investors, they have to fund stuff, they're not meant to be, you know, they're not... They're in the moving business, not in the storage business. And that is, they need to move shares at some point out and recognize valuation for them. And the market has just changed dramatically. In addition, I would argue Masayoshi Son is the worst investor in history. He got incredibly lucky on his stake in Alibaba, and let's be honest, that was luck. And then everyone assumed, oh, he must be a genius. And he began to prove that he's a terrible investor over and over and over again. And that the people who invested...
18:57 Scott Galloway? In SoftBank, I mean, it's just, show me a company that just makes no fucking sense, but raised money at a billion dollar valuation and there's a one in two chance it was funded by SoftBank. It just, this craziness infected all aspects of the organization. So I doubt they'll get their money back. It feels like, at least not for a while.
19:17 Ed Elson? So just the history of SoftBank's involvement in ARM. They acquired ARM back in 2016. They acquired it for $32 billion. And then they immediately sold 25% of that stake to their own Vision Fund, which is SoftBank's tech-focused venture fund, basically. And just a side note, when they, when they made that trade, Master Sun told analysts, "You can say, quote, you can say almost with confidence that it will grow 5X in five years." That obviously didn't happen. But something strange is that last month, SoftBank bought back that stake from its own Vision Fund unit. That's where we saw this $64 billion valuation. My question
19:58 Ed Elson? to you, have you seen that before? Why would SoftBank be transferring its stake in a company between different units and essentially buying it back from the Vision Fund? What's the point in that?
20:10 Scott Galloway? There might be something administrative here around tax treatment, or a change in strategy and one asset makes more sense than the other. What it also might be is a purposeful head fake to the markets. And that is, they want to send a signal that smart people value this company at $64 billion. The last two rounds that we worked were nothing, in my opinion, but jazz hands to say, "Oh, no. This company's worth 35 or 40 billion because smart people are investing capital at this valuation and you dumb shit retail investor should value it at 55 because here's the momentum." I think that's probably what happened here, is it wants to send a signal to the market, it wants to send a mark. In addition, They might be out raising money.
20:52 Scott Galloway? And when you're raising money, the potential investors want to look at your returns. And your returns are based on marks. And you get to mark your assets at the most recent valuation. I'm on the board right now of a company and we just closed a round. And I found, I said, this is ridiculous that we're raising, trying to raise at this valuation. Let's raise at a more sane valuation, even if it's a down round and go raise more money because the company needs capital and I think things are going to get worse. And what was clear is that the previous investor, who was the largest shareholder, would rather raise less money and would rather participate himself at a higher valuation
21:32 Scott Galloway? so he can mark his book and his stake at a higher valuation, even if that valuation doesn't make any fucking sense. So he can then try and fly to Riyadh and say, I'm up 22%, not 11%, and you should invest more money. So you really have to look. These related party transactions are fake marks. The only marks you can trust are marks where a round is led by fresh capital that is new capital into the company. And they can get it wrong, but at least they think that is what the company is worth and that they're going to get a return on that investment.
22:17 Ed Elson? So there's another company that's about to IPO and that's Instacart. They just filed their S1 and they're in a similar situation. So in 2021, they raised $265 million at a $39 billion valuation. But last year, they ran into some trouble and they slashed that valuation first down to 24 billion and then to 10 billion. Now, they haven't disclosed any price targets for this IPO, but this firm, Merit Tech Capital, did a nice analysis and they found that at a roughly 20x multiple on EBITDA, and that's around where most of these grocery delivery stocks trade at, the enterprise value would be 15 billion. Point being, it's likely going to be another massive reduction from the $39 billion valuation they received in 2021.
23:01 Ed Elson? Do you have any thoughts on Instacart's valuation journey?
23:05 Scott Galloway? We're going to see a lot of this. Again, this is a great company, a pandemic darling, they execute well.
23:12 Scott Galloway? There's no reason, in my opinion, unless you enjoy it, for anyone to go into a grocery store. I think other than gas stations, grocery stores may be the worst retail. And they have innovated and they save people time. We've always said that the fastest way to build a unicorn is to build a time machine. This is a time machine. It saves people time. It's not worth $39 billion. It got out in front of its skis. What's interesting here, and I've been in this situation several times, is the unnatural acts that are spawned by down rounds. So, an example, when you invest in a company and you're the last money in, you're paying a higher valuation, all right? I'm in the C round. The A round was done at a valuation of 10 million, the B round 50 million, the C round 150 million. And
23:54 Scott Galloway? that's bad. You're paying more, right? But the good news is you get something called a liquidity preference, meaning that if you invest 10 million bucks, or let's call it 25 million bucks, in the C round at a valuation of 150 million, and then things don't go as well, and the company gets sold for 30 million to another private company, the last investors get their full 25 million back before anyone else gets anything, and it waterfalls back until all the preps have been met, and then the common shareholders start to participate, perry-pussy with everybody else. That is a wonderful thing to have. Now, what happens is, is if a company's going public, and this happened to be a red envelope, at a lower valuation than what investors invested in the last round, they're kind of pissed off, and they're thinking, "Well, actually, we'd rather you sell it to somebody
24:39 Scott Galloway? else, and then we'll get 100 cents on the dollar instead of 70 cents on the dollar." But the previous investors wanted to go public, and so there's some arm wrestling and some wrangling and sometimes some dealing. But generally speaking, what I say to entrepreneurs is be careful about raising money at a really big valuation, because granted, most investors, "I'm looking at an investment right now," and we're arguing over valuation. I'm like, "All right, you have to prove to me or show me how I'm going to get 5X on this if it goes well." So, okay, be careful what you ask for. If you raise money at 150 million dollar valuation, keep in mind, those investors are expecting you to have a liquidity event in three to seven years at 750 million. And if you don't- What stage is this company that you're looking at?
25:22 Scott Galloway? Is a growth-stage company. So, it's a company that's doing- It's a small VC-backed company in a business very similar to L2, so I understand it. The company's killing it. The founder's great. It just feels, smells and looks like L2. And I'm like, okay. You want to raise money at a $30 million valuation? How does this get worth 150 million with dilution of employees? How's it going to be worth 200 million? Because if it's not, your last round of investors, unless this goes south, are going to tell you to just stick with it and aren't going to be open to conversations around an IPO or an acquisition until you get there. And I imagine there's a lot of that here because what happens when you go public is all of those liquidity preferences disappear and every share becomes the same.
26:04 Scott Galloway? So anyone who's underwater or invested at a large valuation would rather them keep going and not do the IPO unless they're fatigued and they just want to get their money out and they want some liquidity and the company will be worth more and have the currency and the capital to grow the business. And the early investors are dying for everyone to convert to one class of stock because then all those liquidity preferences ahead of them dissolve and go away. So there ends up being a lot of arguments and very pointed conversations and transigence in the boardroom. When we were going public at Red Envelope, the last investor had invested at a higher valuation than the IPO and they wouldn't approve the IPO. Until finally it became clear like, we have no other options. And keep in mind, it's lower than you'd like, but it's going to end up being zero
26:49 Scott Galloway? if we don't raise capital at some point. The capital markets are friendly, so you're going to get, you know, would you rather get 70 or 80 cents on the dollar or 30 in two years? If we don't maintain momentum, have the currency for acquisitions and the capital to fund the business. This is going to be a really interesting one because while they're trying to position as technology, it sort of is, but where I think they get most of their money is from advertising on the platform. And what's interesting... Is that the margins that drive grocery and even Amazon are not actual the sale of groceries. It's the equivalent of shopper marketing. So what do we mean by that? You buy diapers, there's like no margin on it.
27:31 Scott Galloway? The store doesn't make much money, but what they make money on is Pampers will set up a cardboard cutout end cap and they pay the store to try and gain market share. Picture of a cute baby, cut out of Tom Brady and a Bud Light end cap. They actually shopper marketing or in-store marketing is actually a bigger business than brand-based marketing or advertising, which was shocking to me. And Amazon makes just a shit ton of money going to Pepsi and saying, when someone types in or searches for Coca-Cola on the Amazon platform, would you like a Pepsi ad to come up? It's just an amazing business and my understanding is the same is true of Instacart. I mean, just some stats on them. They, they have grown eight straight quarters, their revenue, their GAAP profitable for the last five quarters. This is a good business. Online grocery, the category is growing.
28:14 Scott Galloway? It represented 12% of the grocery market and that's up from 3%. We were really slow in the US to get there and it was obvious it was going to happen at some point. They've got about a 2.6% share of the overall US grocery market and 22% online. And their gross margins exceed that of Amazon and Walmart at 75% versus 48 and 24 at Amazon and Walmart respectively. But again, a great business, growing. It just got out over its skis as a lot of companies did in terms of, in terms of valuation. It looks like it's going to go out at 15 billion. So what is that? That's a haircut of 50 or 60 at, you know, I mean, at some point they had a $40 billion valuation. I mean, that's a 60-point haircut. And the analogy I would use is the grocery stores are sort of the cable companies of
28:59 Scott Galloway? the 90s. And that is, you know, they don't make money selling content, they make money advertising against it. So think of the groceries, think of the produce, think of the meat, think of. The cereal as content and then they they run commercials against that content. Seventy two percent of Instacart's revenue came from transactions and 28% from advertising. But that's probably misleading because I would bet the margins on that 28%
29:22 Ed Elson? Massive.
29:22 Scott Galloway? Are 90%.
29:23 Ed Elson? And it's and it's it's they've shifted that revenue. So that's been growing. I'm not sure what the original number was, but they've been focusing a lot more on advertising because of those the difference in margins.
29:35 Scott Galloway? And just look at an analog here. Amazon's advertising sales are growing faster than AWS revenue. The Amazon Media Group, which sell ads on the platform, brought in 11 billion in Q2. Let me think about that. 11 billion in one quarter of 22%, while AWS revenue increased 12%. And the margins on that those revenues must be enormous. So Instacart is, you know, is not in the business of grocery. It's in the business of selling you groceries such that it can sell ads against that content of produce and meat.
30:09 Ed Elson? We'll be right back after the break with takeaways from Salesforce's latest earnings.
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32:06 Ed Elson? We're back with Prof G Markets. For the past year, Salesforce has been through the wringer. In December, the co-CEO Brett Taylor resigned. The next month, they laid off 10% of the staff. And just weeks later, they were targeted by activist investment firm Elliot Management. Elliot's demands were simple: focus on profits and cut costs dramatically. Well, it appears Salesforce has listened. The company's Q2 earnings report showed that quarterly net income rose from $68 million to $1.3 billion. That's nearly a 20-fold increase. Salesforce also reported a 31.6% operating margin and raised its annual margin guidance to 30%.
32:46 Ed Elson? CEO Marc Benioff had aimed to hit this milestone in 2025 and said that reaching it this year was, quote, "nothing short of a miracle." Salesforce shares jumped 6% on the news. Scott, reactions to that?
33:00 Scott Galloway? So 2023 was supposed to be, or has been coined, the year of efficiencies. And there's sort of bad, better, best. So the bad of this is Elon Musk, who laid off 80% of his force. And that's not the bad part of it. It's that he also incurred a 60% revenue decline. And then there's better, and that is Meta has cut costs dramatically. And here's the thing. Cost cutting is a lot of fun from a shareholder standpoint if there's costs to be cut. And when you stuff so many calories down the esophagus of a growth company that it develops fat everywhere. You can do one of two things to add the same amount of earnings. Say the operating margins are 20 points, which is very healthy operating margins. You can either grow your top line by 5 billion or cut costs 1 billion.
33:45 Scott Galloway? Same effect to your earnings. So when you actually come to the conclusion that we're a little bit overweight, maybe even obese here, and we're going to go on a diet, and it's not fun, and there's so much pattern recognition and expectation that we're going to keep investing, keep hiring, keep spending, keep growing. The, the cost cutting can be just incredibly powerful, especially if it doesn't have an impact on frontline sales. So as we predicted last year, and we're, and we're sticking to this prediction. I think in Q4 of this year, you're going to see record earnings across big tech because they've discovered the great taste of cost cutting without the calories of losing revenue growth. Cause there appeared to be just thousands, if not tens of thousands of people doing almost no fucking work. And then this is kind of the perfect activist play.
34:30 Scott Galloway? And Salesforce is really sort of embodies the best of this year of efficiency. And it also is sort of a testament to the power and the importance that activists play in the ecosystem. Elliot came in, Elliot needs a company where they can put billions of dollars to work because they raised a shit ton of money because of their success. And they look at Salesforce and like, great company, great leadership. You've just spent too much money and you're drunk and you gotta tighten the ship. And to a certain extent, I don't want to say it's a favor to Benny off, but it creates cloud cover for him to make really difficult decisions. And what they found is these difficult decisions were difficult from a personal standpoint, difficult from a cultural standpoint that's never known anything but growth and investment.
35:12 Scott Galloway? But oh my gosh, was this a spring waiting to be sprung? And that is, does not appear to have affected their growth. So if you can maintain growth and cut costs at the same time, oh my God, champagne and cocaine for earnings as evidenced by the fact that earnings went up 20 fold. And this is perfect for Elliot. Elliot doesn't have to fire the CEO. They don't have to stick around a long time. They just go in and say, you obviously have room to cut costs. Mark says, I get it. He does it. Elliot makes a shit ton of money. The stock. Recovers and Benny Offa seen as the CEO is kind of taking them through the, you know, the haunted forest here and come out the other end. Fine. So I think this is, you know, this is where you say the market is a wonderful thing and capitalism works.
35:56 Scott Galloway? But this is an activist play that appears to be working out for all parties. And while everyone's focused on Meta's cost cutting, the, I think the real example of kind of where it worked out for everybody, obviously, except for the people who got laid off. But my guess is they're going to be just fine in an economy that has historically low unemployment. You know, this is kind of, this felt like win, win, win across the board.
36:18 Ed Elson? So you mentioned this idea of cutting costs without having to sacrifice anything on the top line on your revenue, which is true of some companies. It's currently true of Salesforce. We are seeing revenue growth, but you know, we'll see if that lasts over the next few quarters. But if you look at the entire SaaS ecosystem, it's, it's sort of a different story. So they're all pursuing the same strategy, which is cut costs, focus on profitability. Three years ago, SaaS companies were averaging around 5% in free cash flow margins. That number is up to 13%, but it does appear that it has come at a sacrifice to revenue growth. So in 2020, in that same period, average revenue growth across SaaS firms was 22%.
37:02 Ed Elson? That number is now down to 15%. So is there an argument to be made here that maybe these software and SaaS companies are over correcting, that they're playing too defensive in terms of pursuing profitability? And maybe they should be taking risks and investing in new technologies and finding new growth opportunities so that they can expand revenue in the top line?
37:27 Scott Galloway? Well, so the question comes down to this, is that decline in revenue growth a function of a lack of investment? Or the fact that the economy has just slowed down, things have gotten more competitive. And the kind of crazy big gulp Grande Venti ayahuasca trip that every small company was on with cheap capital, that that is always a big part of a customer base for a SaaS company. There just aren't as many of them, signing up more and more people for the Salesforce platform or what have you, or the Snowflake, or you know, name it. And so SaaS, just the SaaS market, which grew exponentially, that that growth is slowing down regardless of how much money they threw at it.
38:06 Scott Galloway? I would argue that the incremental or the cuts in expenditure did not have, at least in the SaaS market, is not the culprit. The culprit is the larger economy and the macro environment. And had they continued to make those investments, their growth wouldn't have been much greater. It's just their bottom line would have been much, much smaller. So my gut and the data I've seen is that these cost cuts were prudent and have had actually very little impact in what the top line growth would have been otherwise.
38:40 Ed Elson? All right. Thank you, Scott. Let's take a look at the week ahead. We'll see inflation data from the Consumer Price Index and the Producer Price Index. And separately, another strike is brewing. Hundred fifty thousand members of the United Auto Workers are set to walk out later this week if a new contract agreement cannot be reached with Detroit automakers. That includes Stellantis, General Motors, and Ford. Do you have any predictions this week, Scott?
39:05 Scott Galloway? Yeah, I'm sort of into this idea of consolidation and good bank, bad bank across cable TV assets. And that is if you look at Viacom, if you look at Time Warner, if you look at Disney, they all have good businesses and growing businesses. Their streaming platforms are too expensive, but there's a good story there. Like Paramount Plus is actually an interesting streaming network that's growing. Disney Plus is losing too much money, but will have, you know, is a very solid value proposition. HBO is, you know, an incredible story. There needs to be recognition that cable TV assets are no longer teenagers that are going to keep growing, that they're in fact, you know, Nana and Pop Pop and need to be made comfortable.
39:49 Scott Galloway? These things are dying and they need to be managed for cash flow, not starved of investment, but stop the hallucination that these things are ever going to reignite growth again. So my prediction is you're going to see. One or more players shed their assets into a different hold code to clean up their story and also for consolidation and scale. There needs to be a bunch of these things wrapped together. So there's one sales rep in Chuck Lizavaki selling ads on the Cartoon Network or what have you and un-muck or, you know, unfuck the story that is media companies now that have growth, but also have declining assets in the same portfolio.
40:28 Ed Elson? I know you've had conversations with a bunch of big players in media recently. Do you have any inside scoop from those executives?
40:36 Scott Galloway? I think everyone's landing at the same place that some, they have to do something that whether it's the strike, whether it's the war between Charter and Disney right now, the model is just broken. And the place it'll probably start will be Viacom. Sheri Redstone has seen her stock, I think, off. I think it's lost three quarters of its value in the last five years. She's got to do something. And that's where it'll probably start. But I think all of them are going to start shedding their cable assets or donating them or, I mean, these assets are now getting cheap enough where they become distressed assets, where, where private equity will probably start getting their pencils out and looking at them. And I think that's going to happen in the next 12 to 24 months. This episode was produced by Claire Miller and engineered by Benjamin Spencer. Our executive
41:20 Scott Galloway? producers are Jason Stavers and Catherine Dillon. Miel Silvario is our research lead and Drew Burrows is our technical director. Thank you for listening to Prop Team Markets on the Vox Media Podcast Network. Join us Wednesday for office hours and we'll be back with a fresh take on markets every Monday.
42:16 Scott Galloway? Gotta let the engine heat up. You don't remember this because you're 14. But my dad, literally, when we would go somewhere and it was cold, he'd say, "Oh, go start the car and get the engine heated up." And he would go into the garage.
42:27 Speaker 04 Just Scottish accent.
42:28 Scott Galloway? Turn on the car. Turn on the car and let it run for 10 minutes before we could actually drive. That was the technology that I had to do. I had a Plymouth Fury III. That bitch was so sexy. Got like literally four miles to the gallon or four gallons to the mile. And roll up windows, like no power steering. You like get a workout trying to just turn the thing. And oh my God, it had a V8. Hello ladies. That was a muscle car.
42:52 Speaker 04 We're gonna work on your Scottish accent as well.
42:54 Scott Galloway? There you go.
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