Pod Insights The Prof G Pod with Scott Galloway Prof G Markets: Fourth Quarter Review — with Aswath Damodaran About this episode Aswath Damodaran returns to the show to discuss the Magnificent Seven and how to look under the radar for the next generation of big companies. He breaks down the consolidating streaming industry and explains why he’s never owned Netflix. He also shares why he recently added Tesla to his portfolio, and why he calls it his corporate teenager. Finally, he offers some advice on navigating the Chinese market.
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Transcript 11,260 words · 9 speakers
Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.
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1:00 Scott Galloway? This week's number 10. Viewers of the AFC wildcard game between the Kansas City Chiefs and the Miami Dolphins, offered exclusively on streaming, were on average 10 years younger than the typical NFL audience. Ed, I am worried about Taylor Swift endorsing Joe Biden for president. As you know what, Ed? She always picks the wrong guy. That's good.
1:33 Scott Galloway? Welcome to Prop G Markets. Today, we're discussing fourth quarter earnings season with our hero, Aswath Damodaran, professor of finance at NYU Stern School of Business. But first, here with the news is Prop G Media Analyst Ed Elson. Ed, what is the good word?
1:51 Ed Elson? I'm very well, Scott. I see you have showed up in pajamas today, is that right?
1:55 Scott Galloway? Pajamas?
1:55 Ed Elson? You look like you're wearing pajamas.
1:58 Scott Galloway? This is, um, it's not Brunel Akutinelli, it's John Verbedis. I look like I'm in pajamas?
2:02 Ed Elson? It's just the same.
2:04 Scott Galloway? This is high fashion. This is what old people wear when they make a lot of money, Ed. Jesus, I'm, you've made me very self-conscious. I feel like a 17-year-old girl on Instagram right now.
2:14 Ed Elson? Oh my gosh. No, this is what? Fuck that. What are you wearing? Hold on. Okay.
2:19 Scott Galloway? Black. That's original. Let me guess, sandals that say, I live in Brooklyn?
2:24 Ed Elson? Yeah. Yeah, exactly. Yeah, okay.
2:26 Scott Galloway? Get to the news.
2:27 Ed Elson? Let's start with our weekly review of market vitals.
2:36 Ed Elson? The S and P 500 rose, the dollar was stable, Bitcoin climbed, and the yield on 10-year Treasuries was flat. Shifting to the headlines. For the first time in 20 years, Mexico surpassed China as the leading source of imports to the United States. That shift in trade patterns is primarily owed to a 20% drop off in imports from China in 2023. Novo Nordisk is acquiring the syringe maker Catalent for $16.5 billion. As part of the deal, Novo Nordisk will acquire three syringe filling sites to increase its GLP-1 drug manufacturing capacity. Disney, Fox, and Warner Brothers Discovery are launching a joint sports streaming service in the US this fall.
3:17 Ed Elson? Each of the companies will own a third of the streamer, which will host content from major leagues as it attempts to attract cord cutting consumers. Disney is taking a $1.5 billion equity stake in Epic Games in its largest leap into the gaming world to date. The company also crushed expectations for fourth quarter earnings and the stock rose more than 10%. Shares in Snap tanked more than 35% after the company reported fourth quarter earnings that missed revenue estimates. A day earlier, the company laid off more than 500 employees. That's about 10% of its global workforce. And finally, WeWork founder Adam Newman is attempting to buy back his bankrupt company via his new real estate startup, Flow Global.
4:00 Ed Elson? Flow has already raised $350 million from Andreessen Horowitz, but Dan Loeb's third point will also help finance the transaction if it goes through. Lot there, Scott. What are your thoughts?
4:10 Scott Galloway? So Mexico surpassing China, we predicted that and I think Mexico is going to boom. I think Mexico is arguably the biggest beneficiary of this increased tension between China and the US. We get a lot of the great taste of China, lower, lower wages, pretty flexible supply chain with Mexico, but without, without the calories of the geopolitical tension. We have a really good relationship with Mexico. I think Mexico is. I don't know. I, I, Mexico's always been my favorite place to vacation. I love Mexican people. I think Mexico City is amazing. Playa del Carmen, not just Tulum, but the Mayacoba is my favorite place to vacation. I just think Mexico is a wonderful culture, wonderful food, wonderful people.
4:55 Scott Galloway? And I think the economy, I'm just happy to see how well or apparently well the economy seems to be doing. It's also while we are turning back women's rights to old Spain, they just legalize and guaranteed access to family planning. Anyways, me gusto Mexico, Eduardo. Me, I'm a son big fan del Mexico. So Nova Nordisk, we should have listened to our other analyst, Mia Slavero, as she came up with Catalent and said, we should buy stock. And I think it's up 60% since she made that prediction. And it was seems obvious, but it wasn't obvious at the time. It's like, well, don't look at Nova Nordisk. The stock's already up, the word's out. Look at their suppliers.
5:37 Scott Galloway? Good for Mia. Good for, good for Catalent. Disney, Fox, Warner Brothers, Discovery. I still think if you were teaching an economics class, by the way, you know, I was a graduate student instructor in macro and microeconomics. That's how I put myself through business school, given that I got a C in economics undergrad. They decided to make me a graduate student instructor, and I taught for a woman named Christina Romer, who I think went on to be the chief economic advisor for Clinton, I think. Anyways, but this would be, I think the streaming market is just a fascinating example of how economics plays out. And that is overinvestment, driving down margins. One player pulls out ahead and the market is, begins to shrink. The cable bundle begins to shrink at the new entrant of a cheap capital competitor in streaming. And it forces
6:21 Scott Galloway? consolidation and cost cutting. And just, you could, you could kind of walk through the history of media, the cable bundle melting, and then the emergence of streaming, what's happened in streaming. It's just a, I think it's a fascinating study. So these guys combining forces, I mean, if you think about it, if you got, I mean Netflix, I hate to say this, Netflix is the axis powers. They're Germany. And a powerful force that you're fighting against makes strange bedfellows. I mean, it wasn't that long ago, Ed. That the Russians, the British and the Americans came together and got along to try and push back on the Axis powers because they've woken up and realized they're not each other's enemies, they're competitors, but their enemy is Netflix was kind of running away with it. And they realize sports is still something people will tune in live
7:06 Scott Galloway? for such that they will endure advertising and these companies have great relationships with advertisers. And they're just going to make it sort of a default that you have to, if I understand their vision, if you're into sports, you kind of have to probably sign up for this because they're going to bring it all, right? Or most of it, or a lot of it. So I think it's a, I think it's a really smart move. Do you have any thoughts on either Novo Nordisk or Mexico or Disney?
7:30 Ed Elson? I guess on Novo Nordisk, the thing I found most interesting was Eli Lilly's response to that acquisition because as you know, Eli Lilly is a top competitor to Novo Nordisk. They develop their own GLP-1 drugs like Manjaro and Zepbound and all these other drugs. And one of their biggest contract manufacturers is Catalent. And so last week on their earnings call, they pointed out that they're actually pretty worried about this deal because I guess their concern is that Novo Nordisk could come in and actually shut down certain operations at Catalent and ultimately that would restrict supply to Eli Lilly. So I guess that would be my question to you. Could you see something like that playing out? And do you think that would be grounds for antitrust enforcement?
8:14 Scott Galloway? If that's an actual threat, I'm surprised that maybe this, maybe this hasn't happened yet, but upon the review, the CFIUS review or whatever it is, or the antitrust review from EU regulators, Marguerite Bestier's EU Competitiveness Commission, they might demand that you are going to continue to sell this to different suppliers. On a personal level, when I, when I shove that needle of testosterone into my ass such that I look like you're, you know, such that I look younger than you, which we get a lot of comments on, I don't think it's very sophisticated technology. I think, I would think that these things wouldn't be incredibly difficult to produce. But I don't know. I don't know. And then again, I'm shoving a lot of things up my ass.
8:59 Scott Galloway? Common household items, you know, things that plug in. Anyways, crushed up Cialis. That's really insightful. Yeah, yeah. Anyways, where were we? All right, let's look back here. Okay, Disney, let's talk about Disney. Let's talk about Snow White. Disney's taking a one and a half billion dollar equity, taking Epic Games. I'm an investor in Epic Games, and it's one of my biggest investments that I've ever made. I wonder what this will do to the valuation. I invested at a valuation of 23 billion three years ago, like at the beginning of the pandemic. I thought it was going to boom. And I think it did, but I think its valuation is probably just north of there. It's not the home run I'd hoped for. I'm hoping it goes public in the next year or two years, or who knows, it might get taken out, but great company.
9:40 Scott Galloway? And I'm happy that Disney, which is one of our stocks picks for 2024, is doing well. Snap, I really like Evan Spiegel. I like the product. I think they're the least mendacious of the social media platforms. I think Evan takes his responsibility to children pretty seriously. You know, it's more of a messaging app than a social media platform. They are subject to the same kind of structural shift that Aswath Damodaran is going to talk about, and that is it just pays to be big. And in this environment, there probably isn't room for all these social players. And I think a lot of the oxygen is being sucked out of the room for Snap. And it's not, it's not even a consumer or a product failure. It's, it's the ad stack.
10:20 Scott Galloway? And essentially, through leveraging AI and its massive amount of engineers, and also their technical talent, and the vision of Mark Zuckerberg, Meta has been able to use AI to figure out a way to make advertising more effective. And when Apple implemented their opt-in mandate for tracking, which was supposed to kneecap Meta, Mark Zuckerberg set about using AI to figure out different ways to target people, and it ends up now, according to things I've read. That advertiser ROI is actually up from pre pandemic levels, which means that people love to advertise on Meta. You could literally target, if you're an auto insurance company,
10:59 Scott Galloway? 16 year olds, new driver's license recipients in Short Hills, New Jersey. That's how, just how staggering the targeting was because of their tools, their technology, and their total reckless abandon towards privacy. But anyways, Snap is just, it's, it's kind of the number three or number four player, which is an ugly place to be in messaging and in social. And I think it's just, I think that's coming to bear right now. I've said for a long time that Snap should be acquired. It needs a bigger platform. WeWork, I think Adam Newman should just disappear because when you go through bankruptcy, you have to have it approved by the court administrator. And they typically don't look very kindly
11:42 Scott Galloway? on someone who's made a shit ton of money and then the company tanks and they come back to buy the company for scraps. Generally speaking, they don't like that. I also, I'm just shocked that Andreessen invested alongside of this guy because when you're in the business, when you have multiple billions under management, you can go into distressed companies, but you typically don't like to go after or partner with damaged people because you're already rich. You're going to get richer. The way you fuck it all up is by making a really stupid mistake in retrospect or in hindsight. So these guys are not looking to make as much money as they are looking to not to lose reputational value. If they were to back him and he was to do WeWork again, and then it was again to not work out. I mean, the investors would correctly go, what were you thinking partnering with this guy? There's
12:26 Scott Galloway? never been a furnace of capital like Adam Newman.
12:30 Ed Elson? To your point, you know, we discussed that investment last year. It was a $350 million investment at a billion dollar valuation, which was the biggest check Andreessen Horowitz had ever written. And it turns out the vision for this company is WeWork is bankrupt, so let's just buy them out. And to me, that says this is not a company. To me, that says this is a checking account for Adam Newman to personally go out and just buy whatever he wants. And in this case, it's his failed passion project. It feels like there does come a point where
13:07 Ed Elson? Eventually, your LPs are going to come back and say, actually, we've had enough of this. I wouldn't be surprised if we start hearing stories about how this firm is actually struggling to raise, raise their next fund.
13:17 Scott Galloway? There's some nuance here. Andreessen has had some home runs and they're smart people. They have a great reputation. Quite frankly, I don't think they're going to have any trouble raising money because hedge funds and VCs are basically in the business of creating this illusion of scarcity. Oh, Andreessen Horowitz is smarter than me. It's hard to get in. I'm going to get in only if I'm in institution or I have a minimum of $100 million. They still get really strong deal flow. So I don't, I'd love to see the, the performance. To be clear, my understanding is their investment in flow carbon, they were going into the apartment space. Now, buying apartments, single family residences and apartment buildings is a really good business. And I would bet if they bought these apartments pre-COVID or whenever it was he announced this thing two years ago,
14:00 Scott Galloway? I bet they're up on that. The issue is, why do you invest in Andreessen Horowitz to invest in residential real estate? Regardless of whatever spin or bullshit spin the great carnival barker Adam Newman is placing on it, that makes no sense.
14:16 Ed Elson? We'll be right back after the break with our conversation with Aswath Damodaran.
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18:09 Ed Elson? We're back with Prof G Markets. Fourth quarter earnings season is well underway and full year results for 2023 are now coming into view. So for our quarterly review, we're checking in with Professor Aswath Damodaran, the Kerschner Family Chair in Finance Education and Professor of Finance at NYU's Stern School of Business. Aswath, thank you so much for joining us.
18:30 Aswath Damodaran? Thank you for having me.
18:31 Ed Elson? So about a year ago, you came on this podcast and you said that you thought Meta was undervalued. That was in December of 2022. The company had just reported a decline in ad sales. It was dealing with what looked like a crisis in the digital ad market and the stock was trading at $120 per share. Fast forward to today, Meta just reported earnings, revenue up 25%, expenses down 8%, net income more than tripled, and now the stock is trading at $470 per share. That's a 300% increase from the time you joined us. As you look back on this past year, what has struck you most about this stock?
19:16 Aswath Damodaran? You know, what struck me about this stock and the other six of the MAG7, I guess that's a new name we've decided to attach them, I would have called them the Seven Samurai, to be quite honest, because I think they're like the Kurosawa movie, they've saved the market last year. I think what's striking about those seven companies is they've delivered results that kind of bellied the worries that people had going into 2023 about these big tech companies were twofold. One is, do they have pricing power? We'd never really tested that out with these big companies. And the second is, how will they do if the economy slows down? Because the concern at the start of 2023 is there's going to be a recession, how deep is it going to be?
19:59 Aswath Damodaran? And what we discovered in 2023 was how much pricing power these companies have. I mean, I can't track what the ad rates are on Meta, but you can track them on Google, the click-through rates, and they went up strongly in 2023. The price increases that came through showed you the pricing power these companies have. And the other thing that came through is, these companies seem to be delivering products and services that people cannot live without. That might be a reflection on where we are as a society, that we cannot live. Without our Facebook and Google and Apple devices, but I think collectively what you got in 2023 was operating results that kind of put people's minds to rest about these companies.
20:43 Ed Elson? The other big news for Meta shareholders is this dividend. So the company announced it's going to issue a dividend of 50 cents per share, starting March 26th. In addition, it's also purchasing $50 billion in share buybacks. And the thing that I was thinking about when I saw this was related to one of your big investing themes, which is this idea of the corporate life cycle, the idea that companies are like humans, they age over time, and as they age, they develop these new characteristics. Now, for companies entering what you call the midlife crisis, one of those characteristics is they start issuing dividends. I think that's interesting as it accords to Meta, which we've always
21:25 Ed Elson? sort of thought of as this growth company. Has Meta entered, or is it entering its midlife crisis at this point?
21:32 Aswath Damodaran? I think Meta and Go, in fact, if you look at all these big tech companies are closer to middle age than to their glory years. And they've been closer to middle age now for two or three years. Paying dividends is actually not the sign of the crisis. Paying dividends is actually a sensible way of dealing with middle age. What would be a crisis is if Meta went out and said, we're going to acquire a $100 billion company because we want to grow again. That would be the equivalent of having the middle age crisis of you going out and buying a Ferrari with money you really don't have, simply because you think that'll make you young again. So paying dividends actually might be the right thing to do to let markets know, guys, if you're expecting us to deliver 20% growth and the kind of
22:14 Aswath Damodaran? growth we delivered in the past, that's, that might happen in a quarter or two, but we're on a much slower growth path. It's as much as changing your investor base. And I think these companies are working on getting an investor base that can live with the limitations that come with middle age. So that might explain why Meta did what they did. And I think it's actually healthy.
22:37 Scott Galloway? Continuing along the metaphor of a midlife crisis. Wasn't the venture into headsets of Meta and Apple, isn't that the equivalent of a yellow, canary yellow teatop Corvette?
22:47 Aswath Damodaran? I mean, I would not use, you know, I, I, I'm too old for those glasses. They make me dizzy, but maybe 25 year olds like it, but they're never going to be central to a business. I mean, Google, remember the Google glasses that came out 10 years ago and how quickly Google abandoned that? I think this is what happens when geeks decide what the best products will be. I'm sure there are people at Apple and Facebook or and Meta who've, who've invested a significant amount of time coming up neat little devices. I don't think this device is going to open up tens of billions. So I think for Apple, this is like the money they spend on Apple plus. I love watching Apple plus. I, I like the amount of money they spend on their shows, but this is not about making
23:32 Aswath Damodaran? money for Apple. And I think the same thing can be said about these VR glasses. It's really about keeping people in the ecosystem, but it's going to be a niche product. It's not a product that's going to make or break them.
23:43 Scott Galloway? And their valuation right now, Apple?
23:44 Aswath Damodaran? I think Apple is the company that's been in middle age longest and you've got to give them credit. They're one of the healthiest middle aged companies I've seen. And part of the reason is Tim Cook has kind of kept the company disciplined. I mean, I tell people to imagine how many investment bankers and consultants must be lined up outside one infinity loop, trying to get Apple to do stupid things. You know, during the last 10 years, I would, people suggest that Apple should buy, you know, Tesla, Apple should buy Netflix, Apple should buy pretty much every company on the face of the earth. And guess what? Apple has not had one big acquisition in 10 years. That is incredible self-discipline for a company, 200 billion plus in cash.
24:26 Aswath Damodaran? And I think that that's slow growth. I mean, the, the reason people get fooled on Apple is when you get an iPhone upgrade that works, you can get a blip in the growth rate. When you get an iPhone upgrade that falls flat, the growth rate goes away. So with Apple in the last 12 years, I've seen investors overreact and say it's back to being a growth company and push up the price too much. And then reacted the other direction, said, oh my god, this is the end for Apple. I mean, I've always viewed Apple in the last 10 years as a 5% to 10% revenue growth company that delivers sky-high margins, the greatest cash machine in history. That hasn't changed.
25:07 Aswath Damodaran? But again, I think we have to be realistic about what you can expect as growth in the company. Much as services is helping Apple, this remains a smartphone company. And if you're an Apple investor, that's what you should be keeping tabs on, is if that smartphone business starts to come apart, then the Apple valuation is at risk. Right now, there seems to be nothing on the horizon that'll stop the smartphones from doing what they're doing. But if that business ever got threatened, that's a bulk of Apple's value right there. I mean, I actually valued all seven companies yesterday, and Apple, I think, comes in at 7% over. They're all within single digits, except for two companies. One is Microsoft, and the other is Nvidia.
25:51 Aswath Damodaran? Microsoft comes in at about 14% above value, and Nvidia comes in at 55% above value. And of course, those are the two companies that have had the AI buzz hit their value the most. So I know the rest of the companies are surprisingly close to the price, given the numbers they've delivered. So I think one of the reactions people have when stocks go up as much as these seven have gone up is they must be overvalued. And that's what I expected to see when I started valuing them, that they're actually pretty close to value for the most part. None of them come in as undervalued. They're fully valued, perhaps a little bit overvalued. But barring Microsoft and Nvidia, none of them is overvalued enough that you're going
26:34 Aswath Damodaran? to say, this is crazy, we're going to have to sell off.
26:37 Ed Elson? Could you speak more to the Microsoft valuation? I mean, we talk about the idea of... Being sexy and young versus old and middle aged, it feels like it's totally flipped this year for Microsoft. And it's got one of the highest multiples in, out of all the big tech companies right now. I think it's at thirty seven times earnings. You've got Apple at twenty nine, Google at twenty five. Could you speak more to how the market is pricing Microsoft and what those expectations of growth actually are?
27:05 Aswath Damodaran? So when we talk about the AI buzz and how companies can benefit, there are two companies that I think are closest to creating value. Nvidia is already there. It makes the chips, the architecture that delivers AI. Microsoft is the other company that's closest to delivering some kind of business model that delivers revenues and profits from AI. Now, subscription model, I'm not sure what the end game here is with that partnership with OpenAI, but they have a platform in place that they already have for Office 365 and LinkedIn that they could very quickly extend into an AI platform. So in many ways, investors are looking at that and rightly saying, this is a company where AI is real.
27:47 Aswath Damodaran? It's going to deliver, unlike many companies where AI is just a word that's thrown in. They're actually a company that's positioned to deliver revenues and profits from AI. I do think investors are underestimating the, the costs associated with building this platform and overestimating how quickly will people jump on the platform. But I think, you know, one of the reasons Microsoft has seen that jump in prices precisely because, you know, it's become one of the few vehicles you have to actually get a tangible benefit from AI.
28:20 Scott Galloway? Is there a next generation? I mean, it feels as if the magnificent seven or the seven samurais, you've labeled them, suck so much oxygen out of the media ecosystem. Is there a next generation of companies?
28:34 Aswath Damodaran? Yeah, in fact, I was looking at the, even the mag seven started as the Fang stocks in the middle of the last decade. Then we added Apple and Microsoft, they became Fang Am. Netflix seems to have dropped out and we added. If we keep in hindsight, adding on the biggest winners in the last three years, the only thing we can say is ten years from now, going to look back, there'll be another group of ten companies, maybe two of these seven might show up there, but they might not. We'll have another acronym and they will, it's, it's always been true in equity markets. This isn't just the last decade. I mean, there's a, there's a very interesting study by Arizona professor Hendrik Besenbinder,
29:13 Aswath Damodaran? where he looked at all US stocks between 1926 and 2019. And he showed that 22% of the market cap created over almost a century, 22% came from five stocks. This has always been the case that a few big winners take the market. The only problem is the winners run out of oxygen. When you get to 2 trillion, two and a half, 3 trillion, which is what these companies have, it becomes difficult to deliver growth on that scale. So I do think that the names will change. There'll be another group of winners. If you ask me who they are, if I knew, you know, I'd be jumping on to those stocks.
29:54 Aswath Damodaran? We can try to guess, but I don't think that any of these seven companies will be in that next acronym list that we see 10 years from now and we look back and say, those are amazing companies.
30:05 Scott Galloway? But is there just below that, just under the surface, when you do your valuations, kind of the, not the samurai, but the warrior class, I don't know what we would term it, whether it's an Uber or an Airbnb, you know, there's a bunch of companies that are still growing, that should benefit from the same cost reduction power, pricing power. Is there anything that stands out to you that, who do you think, if you were to say, this is probably the next, the next one that gets the tickets to the executive washroom when they decide it's now the mag, you know, the amazing eight, who would be your candidates?
30:37 Aswath Damodaran? No, I'd look for companies, you're right. What you're looking for are companies that have those networking benefits. It could be an Uber, it could be a Palantir, it could be, it's going to be some, you know, a company in the space of data slash software, where there is a clear networking benefit. So if you're looking under the radars, where the next winners are going to be, that's where I'd focus. What's not going to show up on that list are great manufacturing companies. And I think that is the great shift away from the 20th to the 21st century. The big winners of the 20th century were big companies that scaled up over time. Here you can have companies come out of nowhere, scale up tenfold over a period of five years because they're building on platforms that are less capital intensive.
31:22 Aswath Damodaran? So I do own Uber. I don't own Palantir. That's one of the few companies where I look at the companies. I just don't have enough of a sense of what they do. And it's by design, where the company is secretive about what they do, and they can never perhaps be open about what they do. But I think the next layer of companies are going to come from this group of, you know, software slash data companies that can scale up quickly.
31:48 Ed Elson? You recently said that there are two companies that you find quite attractive right now from a valuation perspective. One is Apple, which we've just mentioned, and the other was Tesla, which I was surprised to hear. Could you explain your thoughts on Tesla's valuation?
32:05 Aswath Damodaran? Well, Tesla gets attractive whenever it does, or let's put it this way, whenever it and its CEO do things that make it unattractive. So in a sense, we've had a period where Tesla's been on an extended down run. It's lost the narrative. Part of the reason it lost the narrative was because when it cut car prices, which I think actually makes sense in the long term, people got focused, they're cutting prices, that must be a sign of weakness. And of course, added to the fact that electric cars are going through maybe a period of adjustment where we say maybe they're not as great as we thought they were. I think the stock price has given up 30%, 35% from
32:46 Aswath Damodaran? its recent highs. So I'd valued in November at 180. It was at 200, it went up to 250. Now it's, you know, it got back down to 180. And Tesla is one of those companies where I am willing to buy at fair value, simply because I think there are, there's enough option added, things that might happen in the company. There are 15 things in the fire. Who knows which will pay off. But even if one or two of those things pay off, I get the icing on the cake. So from that perspective, Tesla's, I own all seven companies, but Tesla's the only one I added in the last couple of weeks. The rest of the companies come from
33:24 Aswath Damodaran? 2014, 2016, 2018, 2022. So at different points in time. But Tesla, I added, and I've always called it my corporate teenager. Which is, I added with open eyes, I know it's going to do things that frustrate me. It's the nature of the company. It's the nature of how it's run. But in spite of all of that, you know, it's, it, the, the potential there for value is dramatic. And to me, that's, that's what, what making a bet on.
33:56 Scott Galloway? I think what you're talking about, this transition from the 19th to the 20th century, that the thing that strikes me as a term I would use is asset light. So don't own the car, own the software, own Uber. Don't own the apartment, own the software, own Airbnb. Meta and Alphabet don't own a newsroom or content creation. Own the thick layer of software on top of the content creation. Nvidia, which just shocked me, they don't own, they don't own the actual chip manufacturers. If you think about other companies that bring that sort of asset light model. Um, I just got off the phone with the vice chairman of Shein. And that strikes me as actually, it might be the first asset light. They don't own any of their factories. And they don't own any of their distribution.
34:40 Scott Galloway? They're just software connecting agile supply chain with consumers. A, do you buy that thesis that that's where the extraordinary returns are is asset light companies? And have you identified any others that are quote unquote, fit this asset light model?
34:54 Aswath Damodaran? I would look for one more thing in addition to being asset light. I think one of the problems that ride sharing has had, which is a asset light model, is it's an asset light model with no stickiness, which is its customers don't have any loyalty. The drivers can drive for any ride sharing company. So in fact, Uber reporting profits finally is, in a sense, the waking up of finally ride sharing is starting to build a business model, but it took them a while. So the most successful asset light models are not just asset light, but they also come with something else that makes it sticky, adds to the fact that, you know, they can actually make money without customers walking away to another asset light model that competes with them.
35:38 Aswath Damodaran? So Airbnb and Uber are still struggling establishing that business model that can deliver profits on scale. But I think eventually they'll get there because they will remove all the alternatives. And that's part of the problem here is the it's very difficult to compete against these scaled up enterprises, even if they're losing money. That would be the qualifier I would add is for, you know, the last decade was all about scaling up. Nobody cared about business models and we built some really bad businesses, really bad big businesses, which is in a sense the worst possible combination because now when you fail, you fail with a hundred billion dollars in market cap. And I think 2022 kind of brought risk capital back to some of its senses.
36:22 Aswath Damodaran? They're not as willing to throw money at young startups simply because they can scale up. And that to me is a healthy thing. So the next decade, I think you're going to see scaling models with more attention to building business models on the side that I can act that can actually deliver profits. Because I don't think you're going to be able to access risk capital like you did in the last decade and keep a bad model going with tens of billions of dollars of additional capital thrown at it.
36:48 Ed Elson? I just want to pivot us to streaming, which we've been discussing a lot lately on this podcast. And the big news this week is that Disney, Fox and Warner Brothers Discovery are all teaming up to launch this new joint sports streaming venture. It feels as if we're making this slow return back to the cable era, where we're seeing all this consolidation across the industry. I mean, as we've seen in the news, Paramount Global is in play, Warner Brothers is looking at acquiring it. And now you have three of the largest entertainment companies bundling all of their linear sports channels into one destination. And so I'm wondering from, as you look at the streaming industry at a, at a high level, do you think the future of streaming looks more like streaming as we've known it? Or does it look more like cable?
37:33 Aswath Damodaran? So we know that streaming has broken the traditional way of delivering content and entertainment, but we know streaming as constructed now is not going to make money. I mean, that's why if you look at the entertainment space, there isn't a single healthy company. In there because they're all struggling with this. So we know consolidation is coming. So if by like cable, you mean we're going to end up with three big streaming services that we pay big chunks of money for. I think we're getting there already. I'm paying twenty three dollars a month for Netflix. And if you noticed, Amazon Prime is toes in the water. It's going to be three dollars. And Amazon and Apple, I'm not sure what their streaming services will look like,
38:16 Aswath Damodaran? whether they ever intend those services to make money. But the companies that are dependent on streaming, I wouldn't be surprised if at the end of this, you know, you see a consolidation because otherwise they end up falling to the wayside. They don't have enough content to get people going. So I do think we're going to see consolidation. I wouldn't be surprised if you're paying fifty dollars a piece for each streaming service and ending up with pretty much. And this has always been the troublesome part of what Silicon Valley sold us about innovation. They said, you innovate, we disrupt. You're going to pay a lot less as a consumer because of it. And early on, that looked like it was a great sales pitch. I mean, remember Uber and Lyft came out, you're spending a lot less on car service than you were on taxis. You said, that's amazing.
39:01 Aswath Damodaran? I keep tabs on what I spend on car service now. And it's very quickly approaching or, you know, expanding what I'd have spent with the status quo. And I do think you're also going to see changes in the way content is made and delivered. This make fifty shows every week thing is not working. So you're going to start to see, and Netflix has already started on this in terms of trying to produce less shows. And you're going to see that across the board on these consolidated streaming services. Sports, of course, is a different game because you get live content delivered to you through sports. And I think finally ESPN has tried, is breaking away from its golden handcuffs that cable
39:45 Aswath Damodaran? put on it, which is, which kept it paralyzed. For a decade when they should have been moving. So I think it is part of that next phase in streaming. It's I don't think the sports streaming service is, and I've read somewhere that this was going to be a challenge to Netflix. It's it's just it's going to be a service that people get in addition to Netflix and Disney Plus, not instead of. So I think that from that perspective, it just is going to add to the cost of the average customer who might have been paying $2.99 for the small cable service that they used to watch their college network. Now they'll be asked to pay $21 to get college games they don't watch.
40:24 Scott Galloway? Talking about Disney and Warner Brothers. My sense is, I mean, it is it is literally a tale of two cities. If you look at Netflix and some of the companies we've been looking at, they're priced as if they're kind of going to the moon and getting to discover new markets and be able to dominate those new markets the way they're dominating existing markets. Now, look at Disney and I look at Warner Brothers Discovery. And to me, they look as if they're priced as if they're sooner rather than later going to go out of business. It feels as if they're almost trading at distressed prices. And again, while the media loves to talk about the high flyers, there's also opportunity in sort of running into the fire. Do you think there's opportunity or what do you think of the valuation right now on Disney and Warner Brothers Discovery?
41:04 Aswath Damodaran? I think that's clearly value. And in fact, I would add Paramount to that makes part of the reason Paramount is in place precisely for that reason. I mean, the scariest resource here is content. Now, everything else is technology. Without the content, there is nothing on the platform. And the reality is Warner Brothers and Disney still know how to make good content much better than Netflix and Amazon Prime can. And that's that's a reality we can't change. I think the problem with both companies, and here I would fault the management of the companies, is they've lost the narrative. The stories become so muddled that investors are not sure what where Disney is going as a company.
41:47 Aswath Damodaran? And I think Iger is, I think is trying hard to put a narrative out there. But I mean, he's fighting through a lot of noise with activist investors challenging him. But I think, you know, when, if these companies can establish a narrative of this is where we're going, this is what we're going to try to do, I think you're going to see a price recovery. And if I were to buy an entertainment, and I told you I own the Mag7, the one Fangam stock I've never owned is Netflix. I've never understood the business model. I can understand the allure of growth, but I can understand the Disney business model better than the Netflix business model. So from that perspective, if I have an entertainment company in my portfolio, I'd rather it be Disney
42:31 Aswath Damodaran? than Netflix at this point in time.
42:33 Ed Elson? I'm wondering if you have any thoughts on YouTube, which we've been discussing a lot lately, and its role in the streaming industry, and just some of the headline statistics that we've been finding fascinating. As a percentage of TV viewing time, YouTube is the number one streaming platform in the US and in many other countries around the world. It's more popular than Netflix. And then last week, we just saw this news that YouTube TV surpassed eight million subscribers, which makes it the fourth largest paid TV operator in the US. It feels as if this platform doesn't get that much attention in these conversations. I'm wondering if you agree and whether you think the market might be underpricing that asset when it comes to Google's valuation.
43:16 Aswath Damodaran? This has always been an alphabet problem, right? I mean, this is, this is a company that I've always struggled with, why has it been so difficult for them to monetize and deliver value on all of the other stuff? I mean, think of how much of our lives are spent on, on Google platforms. My wife is a schoolteacher. Google Classroom basically runs the class for her. Right, we use Google Drives, I mean, NYU runs on essentially a Google front. So this is a company that's everywhere, but still seems to make money on just the search box and still seems to drive it. So here again, I think it's a failure on the part of Google management to essentially,
44:00 Aswath Damodaran? they're so caught up in that other more techie stuff, the electric car, they want to push the high-tech stuff. This is low-tech in many ways. YouTube is not cutting-edge in terms of technology, but it is in fact the closest to a great business that Google has outside the search box. So I think that part of the problem here is the reason investors don't notice YouTube is when was the last time Google management actually came in and put YouTube front and center when they did an earnings report, right? So stop talking about what I call the seven dwarfs, those little other tech startups that you have within Alphabet.
44:41 Aswath Damodaran? Those bets are still bets, seven, eight, nine years after you created this moniker of Alphabet to reflect the fact that it's multiple businesses. And start hyping YouTube. It is a great business model, and if they paid attention to it, it is the first business model that can actually supplement their search box revenues and start delivering, you know, real value for them. So this is a case of management not paying enough heed to what should be a promising business and investors in a sense going along with management.
45:15 Ed Elson? Is AI a seven dwarf to you?
45:17 Aswath Damodaran? At least the way Google plays it. This is the history of Google. You can have businesses that other companies seem to take advantage of, but for whatever reason, and again, I don't know what it is about the company, within Google, all these great potential businesses stay great potential businesses. They never seem to deliver on their potential. And Microsoft has eaten Google's lunch on the AI space, at least so far. Maybe Google will catch up, but I'll wait. It hasn't happened yet.
45:48 Ed Elson? We'll be right back.
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48:15 Ed Elson? We're back with Prof G Markets.
48:16 Scott Galloway? Let's pull the lens back. You know, I think the S and P or Nasdaq is trading at about 20 or 22 times earnings. Chinese stocks are trading at five times earnings. They've shed 40% of their value in the last three years.
48:30 Aswath Damodaran? It's amazing that it's not made more news that they've collapsed and they've collapsed. And the two things, one, it's not made the news and it's the first market crisis in a large market that hasn't had ripple effects across the world. I know whether it's a delayed reaction. The second largest equity market in the world lost two and a half trillion dollars worth of market cap and people don't seem to be noticing. So Chinese companies have been marked down and I think for, you know, I was talking about corporate governance in my class yesterday and was talking about alternative corporate governance systems.
49:11 Aswath Damodaran? You've got the shareholder based system of the US, you have the Kairitsos of Japan, and you have the Chinese corporate governance system, which has nothing to do with shareholders and the power rests with management, with Beijing being in the room with every company's management. And I said, look, when times are good, corporate governance systems look great. The way you test a corporate governance system is not when times are good, but when times are bad. When China was growing 10, 11, 12% a year in real terms, the weaknesses of that, of their governance system kind of got hidden. But that buffer is gone and I think what you've seen, and it's not just in the last
49:52 Aswath Damodaran? year or two, start, I mean, I start, I go back to when Beijing cracked down on the big Chinese tech companies, Tencent, Alibaba. They claimed to do it because they cared about consumers. If you think Beijing cares about consumers, then you're being naive. I mean, this is a government that cares about one thing and one thing alone, which is control. And I think what you're seeing playing out in the Chinese market is people recognizing how little power they have in companies, how opaque these companies are. And how much you don't know in big publicly traded Chinese companies. And I think that fear factor is driving prices down. And I don't blame investors because you really don't know what you're getting with a Chinese company.
50:37 Aswath Damodaran? Now, it's not the old Buffett description of you buying a share of a business. You're definitely not buying a share of a business when you buy shares in any big Chinese company. You're a capital provider and that's how they treat you. You gave us the capital. We'll do what we want with this capital and don't you dare push back.
50:55 Scott Galloway? But at some point, is it a buy or is it is it similar to? I mean, basically, you said in terms of small versus big stocks. It's not a cyclical thing. It's a structural shift. Are you saying the same thing that with poor? And I'm a huge fan of corporate governance, but you're saying at no price are these things a buy?
51:11 Aswath Damodaran? Selective buy, I would say, you know, I'd pick my I would pick my battles here. Not all Chinese companies are you're not as equally exposed. I would avoid the Chinese companies with significant amounts of debt because that's where the opacity comes out of Chinese companies is how much do you owe? Are you really in good financial position? I'd avoid Chinese companies with significant real estate holdings because there the pricing adjustments are going to play out. But they're really good Chinese businesses. I like Tencent as a company. I like it as a company because it's built an amazing platform, a platform that people use for everything. And I think at today's prices, I would buy Tencent, but I wouldn't buy Chinese equities
51:54 Aswath Damodaran? in a bag because I can get a lot of crap with the good stuff. So if you're going to go into the Chinese market, do it selectively. Pick companies that you that you understand what they do, what their business is. Don't pick these opaque companies which claim to make a lot of money, but you're not sure what the business is. And I think that you can get some good investments to add on, but do it with open eyes, which is you're never going to have much shareholder power of these companies ever.
52:18 Ed Elson? I feel like this is a good segue to talk about Elon Musk's compensation package that was, as we know, recently voided $56 billion. I'm wondering what you make of that news from a valuation perspective? Because, you know, the stock fell around 3% after that news broke. It's that isn't huge, but it's still material. Does that whole corporate governance fiasco change your perspective on the valuation of Tesla?
52:43 Aswath Damodaran? Corporate governance has never been Tesla's strong point, right? All you had to do is look at Tesla's board to know that this was never a board that was going to challenge Elon Musk. And that's part of the reason I told you that I called it my corporate teenager. This is a company where there's no check or balance on the CEO. So I think by itself, the ruling doesn't change my perspective on Tesla. It's always been a horrifically bad company on corporate governance. It stays horrifically bad. I must confess, I was surprised by the ruling because it was based on the fact that the board of directors was not independent. And if I use that criterion, I would challenge you to find me more than 50 companies in the S and P 500 with truly independent boards.
53:28 Aswath Damodaran? I would challenge you to take the Disney board and show me it's independent, right? It's got, you know, people are not insiders. That doesn't make it independent. My definition of independent is that you actually ask questions, challenge the management. And that's not something you find in most companies. So that'll be the test is, is this selective to Tesla? Or is this something that, you know, I think part of the reason that decision came down is in hindsight, it's an incredibly huge compensation package, right? It was tied to the price going up, but it was devised when the company was at a $50 billion market gap, at a $650 billion market gap, that pay package ballooned out to $50 billion.
54:11 Aswath Damodaran? You're effectively giving away a big chunk of the company. So I think that played a role. It's just the magnitude, even though it's hindsight bias, I think played a role. But then the independent vote became the excuse for that's why. I'll wager if this compensation package were 50 million or even a billion, the Delaware courts would probably have let it go. So it's a combination of seeing that exposed big compensation package and then looking for a justification, say, that's too big, we have to stop it.
54:41 Scott Galloway? Talk to us about, I mean, we're talking about structural change. I've always maintained that with the liquidity you can now get in the private markets, with the benefit of not having the types, type of public scrutiny and reporting requirements that a public company is mandated, that we might see a structural decline in just the sheer number of companies going public in a longer duration before they go public, if at all. Do you think there's a structural shift? And also in 2024, do you think the IPO market comes back? And are you excited about any of these companies lining up to go public? A Reddit, a Turo, or a Shein?
55:16 Aswath Damodaran? I think it's more cyclical than a long-term trend. The last decade, you're absolutely right. Companies could stay private and they could raise immense amounts of capital. I mean, think of how long Uber was rumored to go public and kept raising billions of dollars from private investors. That's because the last decade was, was a decade. If you graph out risk capital over time, and you can graph it on lots of different ways, there's venture capital money, but basically capital invested in companies that are very risky, often not listed. The last decade was an aberration. You had insane amounts of money of risk capital floating around, which meant that companies had buffer before they went public. That risk capital has dried up.
56:00 Aswath Damodaran? Even after the, even though stock markets are up, risk capital is still on the sidelines. You can talk to young startups, they're still struggling to raise, raise VC. It's not coming back the way it was last decade. So I do think you're going to see company, more companies go public earlier now than they did the last decade. Am I excited? I'm the company I'm going, I would like to see the most as a public company is OpenAI. And I want to see what this company can be if it were actually a company. Because people informally are saying it's worth 80 billion, it's worth 100 billion, it's worth 120 billion. I mean, so I'd like to see some of the companies, the AI space hit the market. If nothing else, to see what kinds of products and services we're talking about.
56:44 Aswath Damodaran? Are they viable? Is there actually a business model here? So I do think we're going to see more IPOs hit the market. And I don't think you're going to see the seven, eight, nine years to market and the tens of billions of dollars cash burned before you go public that you saw in the last decade.
57:00 Ed Elson? As you look ahead to 2024? Is there anything that you're paying more attention to or that you're specifically focused on?
57:08 Aswath Damodaran? The elections, right? This is going to be a year where political risk is going to be front and center. There's no way around it now. So we're going to see, and same thing happened in 2016 with Brexit in the UK. I mean, it's the elections are going to drive the market this year more than we think they will. And the closer you get to November in the US, I don't know, UK, I think is in September, October, sometime like that, you're going to see more volatility attached to political risk.
57:40 Scott Galloway? So just to wrap up here, Aswath, I think that stock picking and valuation is this invaluable exercise. I think it's a great way to learn business and sort of damage the muscle such that it grows back stronger. But when I think about everything you've said, the fact that seven stocks were responsible for the majority of the gains, isn't this all just sort of a lesson in that young people and maybe, you know, people my age, we shouldn't be trying to find the diamond in the rough, we should be buying all the rough or not the needle, but buy the whole haystack. That isn't really the best advice for investors to go into low cost ETF and index funds because isn't stock picking a bit of a fool's errand?
58:23 Aswath Damodaran? And I think the reasons, I mean, I agree with you, but the reason stock picking will hang in there is people say, if I'd picked these seven, think of how much money I'd have had. It's almost like you can show them all the numbers, but the allure of if I can pick the next-
58:36 Scott Galloway? Playing the lottery.
58:37 Aswath Damodaran? Yeah, it's like the lottery. In fact, I looked to see what would have happened over the last 15 years. If you'd taken a hundred dollars and invested in everything but the mag seven. So in other words, you just removed those seven, you'd have run about 25% below what you'd have had on the overall market. So when people, you know, point at index funds, say, you're crazy, you're putting money in an index fund. One of the great things about being in an index fund is these seven companies will definitely be in there. So given a choice between picking stocks and missing out. And picking an index fund and buying in, I think, given the way the world is evolving, you're seeing an even stronger argument for indexing and going back to living the
59:22 Aswath Damodaran? rest of your life than you would have 20, 30, 40 years ago.
59:25 Scott Galloway? Going back to living the rest of your life, I love that. Aswath Damodaran is the Kirchner Family Chair of Finance Education and Professor of Finance at NYU Stern School of Business, where he teaches corporate finance and valuation. He joins us from his home in San Diego. And let me just add another lesson I've learned from him, and I hope our viewers glean, the most impressive influential people present the shortest biographies. Aswath, thanks for your time.
59:50 Aswath Damodaran? Thank you.
1:00:00 Ed Elson? All right, let's take a look at the week ahead. We'll see earnings from Airbnb, Shopify, and Coinbase. We'll also see the latest inflation data for January from the Consumer and Producer Price Indices. Scott, do you have any predictions for us?
1:00:14 Scott Galloway? I do, and I'm talking my own book, but typically I own Airbnb, Apple, Amazon. I own some Oddity, the kind of AI-driven beauty company, and I write covered calls against them. So that is as a means of hedging and producing income the way you'd produce income or rental income on an apartment complex. If Airbnb is at 148, I'll write call options at 155, and I sort of collect rent on it. Now, if it accelerates to 160, I have to pay off, I have to pay more for those to buy back those options than I got for writing them. But I think of it as a means of kind of hedging the stock and creating some additional income. And you don't get hurt too badly, because if the thing goes to 300 overnight for some
1:00:58 Scott Galloway? reason, like it turns into a meme stock, you have, your underlying stock goes up in value, you just sort of net it out, you give up all your gains. Anyways, this week or recently, I am not writing covered calls against Airbnb, a big holding of mine, because I think Airbnb is going to be the latest company that benefits from disciplined operations and keeping its costs flat or even decreasing, and a substantial increase in revenues. Specifically, I think young people, and this is a bad thing, have somewhat given up or delayed their hopes of buying a home and are spending it on travel. So Airbnb's earnings, I believe, are on Tuesday, and I think they're going to beat their earnings, and I think you're going to see a pop in the stock.
1:01:41 Scott Galloway? This episode was produced by Claire Miller and engineered by Benjamin Spencer. Our executive producers are Jason Stavers and Catherine Dillon. Mia Slavero is our research lead and Drew Burrows is our technical director. Thank you for listening to Prop G Markets from the Vox Media Podcast Network. Join us on Wednesday for office hours and we'll be back with a fresh take on markets every Monday.
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