Podcast Summary
Discussing Stock Picks and the Importance of Perspective: Value investor Stig Brodersen shares his pick of Alphabet (Google) for Q3 2020, emphasizing its unique business model and potential downside protection. The group discusses the importance of acknowledging mistakes and moving on in investing.
During this episode of The Investors Podcast, the group discussed various stock picks and provided valuable feedback on each other's choices. Stig Brodersen brought up his pick of Alphabet (Google) for the third quarter of 2020, which he had previously pitched in November 2018. Despite the high valuations of FAANG stocks, Stig argued that Alphabet is a different type of tech company with potential downside protection. He also shared his personal experience as a value investor and the importance of acknowledging when one is wrong and moving on. Additionally, Stig highlighted Google's recent trend of providing more detailed business unit information, which could unlock more value for investors. Overall, the discussion emphasized the importance of considering various perspectives and assessing the strengths and weaknesses of different investment ideas.
Google's revenue streams diversify: Google's search dominance remains strong but revenue is increasingly from YouTube and Google Cloud. Each contributes around 10%, with YouTube seeing impressive growth. Google's vast data processing abilities give it an edge and the company has proven 'corona proofed'.
Google's revenue composition has shifted in recent years, with search now accounting for only 58% of the total revenue. YouTube and Google Cloud are significant contributors, each bringing in 10% and 7% of the revenue respectively. YouTube has seen impressive growth, with a 33% increase in Q1 and 43% growth in Google Cloud. Google's dominance in the online advertising market, particularly through search, remains strong with over 90% market share. However, the company's vast amount of data and ability to process it effectively is a significant moat, giving Google an edge over competitors in many fields. Despite the economic downturn caused by the pandemic, Google has proven to be "corona proofed," with online advertising experiencing minimal decline compared to offline marketing. Overall, Google's diverse revenue streams and competitive advantages position the company well for future growth.
Google's long-term concerns: Optionality and competition: Investors should consider Google's limited optionality for new businesses and the potential competition from Amazon and other tech giants in AI development.
While Google, under Alphabet, is well-positioned in the tech industry, with strongholds in search, YouTube, and Google Cloud, there are concerns for the longer term. Nicheep raised concerns about Google's optionality factor, with the company's ability to come up with new businesses seemingly limited to self-driving technology. He also mentioned the threat of Amazon stealing Google's most lucrative search keywords and the potential for competitors to surpass Google in AI development, as was the case with Sun and open-source technologies. Jason Brett clarified that the competition isn't about TensorFlow being inferior, but rather Google's business model of pushing TensorFlow through Google Cloud, which may not always be the most cost-effective solution for developers. Overall, while Google remains a strong investment, these concerns are worth considering for the future.
Google's focus on advanced technology over user needs challenges them in the cloud market: Google's pursuit of advanced technology in cloud and driverless cars may slow progress and face competition, but their business model and data advantage could keep them competitive.
Google's focus on advanced technology over user needs has been a challenge for them in the cloud market, as companies like Amazon Web Services identify and offer features that cater more directly to their customers. In the realm of driverless car technology, Google's decision to aim for level 5 self-driving technology from the beginning has resulted in slower progress compared to companies like Tesla, which have taken a more gradual approach. Additionally, Google's early advantage in this field is being eroded as more companies enter the market. While Google's business model continues to thrive with its dominant market position and high margins, the parabolic growth chart raises concerns about its valuation. Ultimately, the success of Google in these areas will depend on its ability to effectively leverage data and adapt to the evolving competitive landscape.
Google's challenges for investors: High valuation and corporate governance: Investors should consider waiting for a better price point before investing in Google due to its high valuation and carefully assess its corporate governance structure where control lies with a few key individuals and non-voting shares.
According to the speaker, Google is considered one of the best businesses in the world, but there are two challenges that investors need to be aware of. The first challenge is the high valuation, and the speaker suggests waiting for a better price point before investing. The second challenge is the corporate governance structure, where the control lies with a few key individuals and non-voting shares. The speaker recommends considering these factors carefully before investing in Google. Additionally, the speaker emphasizes the importance of being part of a community of like-minded investors to help accelerate learning and portfolio returns. The speaker also promotes AT&T Business as a reliable partner for businesses and Yahoo Finance as a valuable tool for staying informed about market trends and news.
Caution and Opportunity in FAANG Stocks: Despite Amazon's momentum, Google's diverse revenue streams and long-term mission offer potential buying opportunities. Projecting growth rates for tech companies requires a nuanced approach.
The speaker is expressing caution about the momentum of FAANG companies, specifically Amazon, and is looking for potential buying opportunities due to potential market corrections. He believes that Google, despite its late entry into e-commerce, still has potential to compete and generate revenue through various streams like YouTube and cloud. He also emphasizes the importance of considering long-term considerations, such as Google's mission to improve users' lives and its ability to adapt to changing macroeconomic environments. Additionally, he acknowledges the challenges in projecting growth rates for companies like Google and encourages a nuanced approach to valuation. Overall, the speaker is expressing a thoughtful and strategic perspective on the tech industry and individual companies within it.
Value investors under pressure to be more aggressive: Value investors are grappling with the challenge of investing in high-growth companies with reasonable assumptions, as they face pressure to keep up with exceptional growth rates in the tech sector. The low-interest-rate environment is driving investors towards these stocks, but there's a risk of being punished if valuations prove unsustainable.
Value investors, traditionally known for their conservative approach, are facing pressure to be more aggressive in their investments due to the exceptional growth rates of certain companies, particularly in the tech sector. Stig Brodersen and Preston Pysh shared their experiences of missing out on significant growth in the past and the challenge of valuing these high-growth companies with reasonable assumptions. Toby Whelan, a deep value investor, weighed in on the shift in value investing and the importance of free cash flow in evaluating companies like Tesla, despite its valuation concerns. The consensus was that these companies have strong underlying businesses, but the question remains whether their valuations can sustain the growth. The current low-interest-rate environment is driving investors towards high-growth stocks, but there is a risk of being punished if interest rates rise and valuations prove unsustainable.
ETrade's Strong Business Model and Financial Health Make it an Attractive Investment Opportunity: ETrade generates revenue through interest income, commissions, and fees, with potential for growth through innovation and customer retention. Strong financials and focus on trading make it a solid choice in finance sector, but competition and disruption from new players should be monitored.
E Trade (ETFC) is a compelling investment opportunity due to its strong business model, healthy financials, and expected growth in the volatile market conditions. The company generates revenue through interest income, commissions, and fees and service charges. While interest income and commissions may face challenges due to low interest rates and disruptions respectively, the potential for higher fees through innovation and customer retention is a promising area. Despite the risks, the speaker is confident in E Trade's ability to maintain and expand its margins and revenue. Additionally, the speaker believes that E Trade's focus on trading and its strong balance sheet make it a solid choice in the finance sector. However, it's important to note that the potential impact of increasing competition and disruption from new players, such as Robinhood, should be closely monitored. Overall, E Trade's solid financials, potential for growth, and focus on the trading realm make it an attractive investment option in the current market conditions.
E*TRADE's relationship with employee stock auctions and RSUs makes it a preferred vendor and creates stickiness: E*TRADE's strong business model, potential for buyout or merger, and low costs compared to competitors make it an intriguing investment opportunity
E*TRADE's strong relationship with companies offering employee stock auctions and RSUs makes it a preferred vendor with large volumes, creating a high level of stickiness. This, along with its smaller size compared to other large caps, makes it a prime candidate for a buyout. However, the potential merger with Morgan Stanley could also impact the situation. It's important to note that E*TRADE may not be exempt from selling order books to high-frequency traders like Robinhood. Despite the potential for a buyout or merger, the company remains a solid business with a strong balance sheet and low costs compared to competitors. The recent dip in price presents an interesting opportunity for investors, as the bid from Morgan Stanley could result in a good return if it goes through, or continued growth if it doesn't.
Berkshire Hathaway's Compelling Investment Opportunities: Despite underperformance, Berkshire Hathaway's cheap valuation, strong management, and recent successful Apple investment make it a compelling opportunity. Its insurance subsidiary, GEICO, is a low-risk option. The estimated return is 9%-10% based on free cash flows and current price.
Despite Berkshire Hathaway's underperformance in the market for the past 15 years, its cheap valuation, strong management, and recent successful investment in Apple make it a compelling investment opportunity. Warren Buffett's acquisition of Apple, which now accounts for almost half of Berkshire Hathaway's book value, is considered the greatest trade ever made in the market. Buffett's age and the potential risks in the insurance industry, particularly in the context of the global economy, are valid concerns. However, the conservatively managed GEICO, an insurance subsidiary of Berkshire Hathaway, is seen as a low-risk option due to its focus on protecting shareholders and managing risks. The estimated return on investment for Berkshire Hathaway, based on free cash flows and current price, is already at 9% to 10% without considering look-through earnings. Overall, Berkshire Hathaway's strong management, proven track record, and diversified portfolio make it a potentially lucrative investment despite the potential risks.
Investing in an Iflex stretch studio franchise and Buffett's Berkshire Hathaway performance: Consider investing in an Iflex stretch studio franchise for affordable professional stretching services, while Buffett's Berkshire Hathaway has performed similarly to the S&P 500 but outperforms with diversified investments and cash holdings.
There's a prime opportunity to invest in an Iflex stretch studio franchise, which offers professional assisted stretching at an affordable price. With over 200 licenses already awarded, this rapidly growing health and wellness business is backed by the founders of The Joint Chiropractic. Meanwhile, in finance, Buffett's Berkshire Hathaway has had similar performance to the S&P 500 since 2009, but Buffett is not getting enough credit for his diversified investments. Despite having a significant position in Apple, Buffett is outperforming with this investment, and his cash holdings are also being put to use. When it comes to financial advice, trustworthy sources like NerdWallet can help you make smarter decisions. Additionally, Public.com offers a high yield cash account with a competitive interest rate, making it a worthwhile option for earning on your cash savings.
Investing in Berkshire Hathaway and Dominion Energy: Berkshire Hathaway and Dominion Energy offer stable returns with growth potential, but investment size depends on individual circumstances and opportunities. Berkshire Hathaway's diversity and strong management make it a safe bet, while Dominion Energy's infrastructure ownership and Buffett-style investing approach add value.
Investing in companies like Berkshire Hathaway and Dominion Energy, even with a significant portion of one's portfolio, can provide a steady and relatively safe return with potential for growth. Berkshire Hathaway, with its diverse holdings and strong management, is seen as a reasonably safe bet for investors. However, the size of the investment depends on individual circumstances and other opportunities. Dominion Energy, despite having a large portion of assets in retail and being negatively impacted by historic low natural gas prices, is seen as a good value due to its infrastructure ownership and Buffett-style investing approach. On the other hand, Brookfield Property REIT, with its large exposure to retail assets, presents concerns regarding corporate governance and the impact of the retail downturn. However, its strong financial position and long-term leases in office space offer some stability. Ultimately, the decision to invest and the size of the investment depends on each individual's risk tolerance, portfolio composition, and investment goals.
Brookfield Property Partners' Unique Township Development Strategy: Despite concerns over high leverage, fees, and complex corporate structure, Brookfield Property Partners' unique township development strategy sets it apart from other REITs, potentially offering undervalued investment opportunities.
Brookfield Property Partners stands out among REITs due to its township development strategy, which involves creating self-contained communities around their properties and sometimes selling them. However, the company's high leverage (13.8x debt to EBITDA) and increasing debt levels, along with high fees charged by its parent company, Brookfield Asset Management, raise concerns. The fees, including base fees, equity enhancement fees, and incentive distribution fees, eat into investors' returns. Additionally, the complex corporate structure of Brookfield can make it challenging to understand the ownership structure and potential conflicts of interest. The company's heavy discussion in the value investing community and its recent share buyback efforts suggest potential undervaluation, but the risks associated with its leverage, fees, and corporate structure make it a complex investment decision. Ultimately, the net asset values listed on the balance sheet may not accurately reflect the true value of the assets moving forward.
Real estate valuations may be overstated due to economic climate and potential vacancies: The current economic climate and potential vacancies may result in overstated real estate valuations for smaller businesses and leaseholders, while the tech sector's dominance and large-scale printing of money create challenges for those outside the sector.
The valuations of real estate properties, particularly for smaller businesses and leaseholders, may be overstated due to the current economic climate and potential vacancies. The tech sector's dominance in the market and the resulting large-scale printing of money have led to a concentration of wealth in a few companies, leaving smaller businesses struggling. Space may be considered a luxury, but new buildings need to generate significant cash before seeing returns. The complexity of corporate governance and balance sheets adds to the difficulty of understanding the underlying assets. While some argue that space is the new luxury, the uncertainty of cash flow and potential impairment on valuations are concerns for value investors. The market's current trend of running away from real estate investments presents an opportunity for those who are willing to delve deeper and consider the risks involved.
Understanding Stock Dilution: Stock dilution can impact investors by altering ownership and potentially raising capital, but its effects depend on the company's growth stage and market reaction.
Stock dilution, or the issuance of new shares by a company, is a complex phenomenon that can have both positive and negative effects on investors. While it may seem detrimental as it dilutes the ownership of existing shareholders, it also allows companies to raise capital and bring in new investors with valuable expertise. Valuation models typically focus on per-share metrics, but the impact of dilution depends on the specific circumstances, including the company's stage of growth and the market's reaction to the capital raise. In some cases, such as during times of industry downturns, issuing shares might be necessary to secure loans and avoid bankruptcy. Ultimately, understanding the context and implications of stock dilution is crucial for making informed investment decisions.
Understanding a company's free cash flow: Free cash flow is essential for a company's valuation and future prospects. Companies without positive free cash flow may need to take on debt or sell assets to fund operations, impacting financial health. Tools like TIP Finance can help with intrinsic value calculations, momentum investing, and finding good value picks.
A company's ability to generate free cash flow is a crucial factor in understanding its valuation and future prospects. If a company doesn't have positive free cash flow, it may need to consider taking on debt or selling assets to fund its operations, which could impact its financial health. During the discussion, the example of Tesla was brought up as a case study of a company with intangible factors driving its stock price, making it difficult to predict with certainty. As a reward for asking a great question about Tremec, the listeners will receive a free subscription to TIP Finance, a tool that can help with intrinsic value calculations, momentum investing, and finding good value picks. Overall, the importance of free cash flow and the use of tools like TIP Finance were the key takeaways from this episode of The Investors Podcast.
