Disclaimer:
Just a quick reminder, this podcast may contain general advice, but it doesn’t take into account your personal circumstances, needs, or objectives. The scenarios and stocks mentioned in this podcast are for illustrative purposes only, and do not constitute a recommendation to buy, hold, or sell any financial products. Read the relevant PDS, assess whether that information is appropriate for you, and consider speaking to a financial advisor before making investment decisions. Past performance is no indicator of future performance.
Steve Johnson:
Hello everyone and welcome to episode 11 of Stocks Neat. I’m Steve Johnson, the Chief Investment Officer here at Forager Funds Management, and back in the recording studio with me is Gareth Brown, who is Portfolio Manager of our International Fund here. Hi Gareth and welcome back.
Gareth Brown:
Hi Steve. Hi everyone.
Steve Johnson:
And the best news is we’re both back drinking whiskey. You’ve had your couple of months of annual cleansing and I’ve run my marathon, so we’re going to enjoy a nice whiskey today.
Gareth Brown:
I’m still very much not drinking regularly, but I do have a whiskey night coming up in a couple of days so it’s important to ramp back up. This is my first whiskey in three months, I think.
Steve Johnson:
Successful few months for you and a successful marathon for me down in Melbourne as well. Beautiful morning down there and good races all around. What have you brought along?
Gareth Brown:
Yeah, this is an Oban. I guess it’s Oban, Oban. Not sure. It is from the West Coast of Scotland. Obviously you bought this one rather than me, but they market this as a West Highlands whiskey even though it is on the coast. I’ve never had this before so I’m looking forward to it. It’s a blended … Sorry, it’s a single malt whiskey. It’s come from the Diageo stable. I think it’s going to be fairly smooth and easy drinking, but it will have some of that peatiness. I will expect some of that peatiness that you get from the West Coast whiskeys, probably somewhere in the middle. Looking forward to it.
Steve Johnson:
Going to be an interesting one. Today we’re going to try that whiskey and we’re going to have a chat about the school of hard truths as I’m calling it, some goings on at Twitter and I guess implications for the rest of us as well and particularly in the investing world. Then talk about a few specific investments out there. It’s been a bit of a horror week for giant tech stocks. Going to have a chat about what has been a 20 year success story maybe coming to an end for the likes of Google, Facebook, and even Microsoft with the share price down this week, which we haven’t seen for a very long time. Let’s get stuck into it, Gareth. There was a widely derided letter that was circulating on Twitter this week from Twitter employees to Elon Musk who earlier in the week had threatened to fire 75% of the staff once he got control of the company. And maybe just explain what this letter was about first and then we’ll talk a bit about what was widely derided.
Gareth Brown:
It’s a neat way to wrap up this whole ridiculous Musk Twitter takeover saga. It’s finally coming to a close. Look, we’ve made money out of this situation. We have-
Steve Johnson:
We are shareholders for people that haven’t been following this saga along the way with us on the podcast.
Gareth Brown:
It’s money that we had no right to make. I mean, Musk has really saved us here and thanks Elon for that. And I do give us points for not giving in to the urge to sell over the last few months. We’ve followed the case very closely. We felt on the balance of probabilities, we were going to make money from where the stock had been trading and that has proven the case. But long term the investment was a mistake.
Steve Johnson:
It’s probably been the widest range of takeover share prices that I’ve seen. They usually either break or they succeed.
Gareth Brown:
For a big deal like this.
Steve Johnson:
For a big deal like this. I mean, it traded at … So his bid was-
Gareth Brown:
420.
Steve Johnson:
420.
Gareth Brown:
It’s traded into the low 30s, hasn’t it?
Steve Johnson:
Traded into the low 30s and now back very close to that takeover price and expected to close in the next couple of days, so.
Gareth Brown:
It has come at a time when our gaps have been very high because there’s been a lot of funding come out of that market. It’s partly a market story as well as a ridiculous story of comedy gold. Look, it really was comedy gold. It’s been hard to laugh some days because we’ve been shareholders and we’ve seen the stock go up and down. As we’re recording this today, we’re one day out from Musk handing a cheque over to shareholders.
Steve Johnson:
We may still look like idiots by the time people are listening, but it looks highly likely.
Gareth Brown:
It’s a giant cheque. And I hope that this happens literally, not just figuratively, I’d love to see him hand over one of those giant novelty checks with $44 billion on it. There’s all sorts of things like that happening in the background. Amid those plans that were discussed, I think it came out in Bloomberg that he has told his private shareholders that he plans to get rid of 75% of the workforce. A bunch of the Twitter staff got together and wrote a letter, an angry letter to him and to the board and to the world at large. And it’s really just a list of demands. Classic Gen Z antics, really. They’re in a situation where they have zero leverage over the situation and yet they’ve written a letter here where they’ve used the term, “We demand” eight times in a short letter. “We demand the preservation of the current head count” even though real Silicon Valley entities that are making lots of profits are currently considering or actually cutting staff. “We demand that if you do do cutoffs, they look like this. They are very much non-racist cutoffs and the right people are being cut,” whatever that means. That non-resident foreign workers are treated fairly in the process. Not unreasonable stuff, although to not lay off a foreign worker means that you do have to lay off resident American workers and just, “We demand the right to work remotely. We demand our options packages are sacrosanct.” Look, I’m sure this letter looked great from the safe space of the Twitter headquarters, but that ax has been really looking at Twitter for a long time and that company has needed to ax people because there’s a whole bunch of money being spent there in a non-commercial way. They have formally been funded by a disparate group of powerless shareholders and they’ve been able to just do what they need to do.
They now are under one shareholder or one controlling shareholder, and I think their pitch needs to be a lot sharper than that. It needs to focus on the dollars and the cents, and a bunch of them are going to get fired anyway. As we record this, Musk turned up in the Twitter headquarters a few hours ago and he has assured them the number’s not 75%, but there will be big cuts there and it’s important that he manages that, so there’s not a stampede of the wrong kind of people out the door, but I think they’re in for some big layoffs.
Steve Johnson:
Yeah, and I think the derision on Twitter and elsewhere is really just about the sense of entitlement for the people that are working for this business that has never, ever made a profit, as far as I’m aware, has been burning cash for a very long period of time. And especially the people that are on Twitter, typically very critical of the fact that not much has changed. The product is not dramatically different from what it was five years ago. The workforce is up fourfold and there’s not one mention of the profitability of the company or what they think they can do better down the track here. It’s all just, “You need to protect us and look after us.”
And I do think that is emblematic of the wider Silicon Valley set and space over the past 10 years. I graduated from university at the late stages of the financial services deregulation of the ’80s and ’90s, and I actually think there are a lot of parallels with finance in that period in the tech space in terms of that sense of self worth that people have and the sense of entitlement that people have and the idea that it’s their creative genius that has created all of this wealth rather than a lot of right place at the right time.
Gareth Brown:
We are the pointy end of capitalism unleashed on the world and there’s no downside to what we do. It’s clearly a distorted view of reality if not completely incorrect.
Steve Johnson:
Yeah, and I do think as well, you are bringing up kids and probably have a better idea of this than me as they go through the school system, but there are generations of people coming through that the idea that you might be wrong or that you might be bad at something or that you can fail at something is not something that they’ve had to deal with consistently throughout life. And especially in that tech space where you’ve walked into a world of unlimited capital and money being thrown at people and all of these options being issued and-
Gareth Brown:
Everyone gets a trophy, right?
Steve Johnson:
Everyone gets a trophy. That skill in life I think is a really important one that as a society we are sort of losing that ability to say, you know what? Actually just recognizing what’s happening is important. Sometimes there are bad consequences and you can learn from it and you can get through it and you can get fired from your job and it can make you a better person down the track, not necessarily a worse person.
Gareth Brown:
I think Silicon Valley, because of the immense … They’ve added real value to the world and also just the immense cash that’s come at that part of the world, it’s been easier to paper over problems than to deal with them, right? You’re growing so fast, you are trying to add to headcount anyway, that the idea of firing staff that are not producing, it’s something you can just ignore, right? Where you need the cold reality of a downturn typically to get a management team to focus on that. And I think that’s where we’re at. We’re probably at now. We’ll probably talk about Meta maybe not having quite reached that point, but we’re seeing cuts in the smaller peripheral companies in Silicon Valley. We’re seeing the bigger, more profitable companies really consider it and look at it. And I think that it’s probably coming in time.
Steve Johnson:
Yeah, and it’s actually a really, really important part of long term productivity growth, that people, that are resources that are being wasted, are allocated to things where they add more value to the world. And as a society, we therefore produce more and people come up with great ideas because they start new businesses and that process is a very, very important part of the capitalist system and of productivity growth over time. And we have lost sight a little bit of what has created the standard of living that we’ve got, I think in terms of that continuous improvement. It’s maybe too much of an analogy, but this whole Liz Truss Tory party situation in the UK-
Gareth Brown:
Unbelievable, isn’t it?
Steve Johnson:
There are parallels with this globally, but this idea that you can promise people that, “Oh, we’re going to slash taxes and we’re not going to put through the corporate tax rate increase and people that are on high tax rates are going to pay less, and by the way, the economy’s going to grow like crazy and we’re all going to be fine and you don’t need to worry about the budget.”
Gareth Brown:
There’s a whole bunch of economists saying at the country level you actually can do that. It’s even more … I don’t have the tools to argue with them, but the carrot there is you can actually, you’ve got an army of people that’ll say this is the right thing to do. At a company level, it’s definitely not. At a country level, people are arguing it might be.
Steve Johnson:
Well, whether it is or it’s not, people will vote for it. You tell people you’re going to give them money and it’s all going to be fine and people will vote for it. And I think we need to recognize the consequences of big decisions like that, of not having enough tax revenue to fund what you want the government to do. It’s just an unsustainable arrangement and we can’t keep pretending that it’s somehow going to just work itself out because it’s not. And you can keep pushing it down the track, but one day it’s going to come home to roost.
Gareth Brown:
I have no idea who to attribute this very old quote to, but someone once said that citizens are always in favor of general thrift and particular expenditure. And I like that because it’s the way government works. The special interest groups are always after some particular expenditure. We’re all happy to tighten belts outside areas that affect us. It sort of explains a lot of the way the political system works, I think.
Steve Johnson:
Yeah. Really interesting times ahead for the tech space. I just copied and pasted a little bit out of that Malcolm Gladwell book, Outliers. He’s got a chapter in there about effectively just the right time, right place ingredient to success that you can have everything else, but if you’re not in the right environment, you’re highly unlikely to be successful. And he talks about the 75 richest people in human history as far back as ancient Egypt and accounting for inflation and everything else. 14 of them were born within nine years of one another. Rockefeller, J.P. Morgan, that whole era of people. Then you’ve got another bunch of people, Bill Gates, Bill Joy from Sun Microsystems.
Gareth Brown:
Larry Ellison.
Steve Johnson:
Larry Ellison.
Gareth Brown:
Steve Jobs. I think they were all born in ’57, is that right?
Steve Johnson:
That is correct. 1950-
Gareth Brown:
- Anyhow, they were all born around the same period. Then you’ve got another batch with the Google founders, Zuck a little bit younger, but there’s a whole bunch in sort of internet wealth rather than computing wealth.
Steve Johnson:
If you have been working in that sector, it’s been a great career choice. Fantastically well done and good for you, but you’ve just been in a wonderful place and it’s important to recognize that. And it leads on to what I wanted to talk about here with regards to investing. I mean, our industry’s is as guilty of it as anyone else’s, right?
Gareth Brown:
Absolutely.
Steve Johnson:
The successes are all your own doing and the failures are all someone else’s fault. But when it actually comes to making rational investing decisions, I think accepting the world and reality for what it is rather than the way you want it to be, is one of the most difficult things to do, but also one of the most important.
Gareth Brown:
Yep. It’s an ongoing battle.
Steve Johnson:
Yeah, and it’s hard. It’s hard because every bone in your body wants to be right and changing your mind is difficult. And sometimes accepting that maybe interest rates are not going to be zero forever and that your life is going to have to work and your asset portfolio’s going to have to work and you’re going to have to pay your mortgage on a 6% mortgage rate. I talk to so many people at the moment that are, “Well, interest rates have to go back down and by the time I refinance my mortgage in two or three years’ time, interest rates are going to be lower.” And that may happen, but it’s not the course that we’re on at the moment.
And even as investors, right? I think the discount rate that you’re thinking about and the required rate of return and the types of businesses that are going to do well in this environment, I think there’s a lot of people that made a lot of money for 10 years, 2010 to 2020, as interest rates were falling. Maybe you even stretched that back to 2000 really when all of this long-term trend started, finding it very difficult to accept that the world might be different from here on in. And yeah, I think that’s just one example at a macro level of accepting that the world might not be the one that you want it to be.
Gareth Brown:
There’s a few of those hits happening at the same time, just to add. Clearly the interest rate thing is happening. I think the globalisation, nationalisation waves, we’ve really shifted there in the last decade from a globalising world to one where we’re like, “Okay, I’ve got to worry about sourcing supply. I can’t just use the principles of comparative advantage to outsource to the cheapest place in the world. I need to actually worry about supply.” Then the other one is that political piece, which I’ve got no explanation for it, but let’s say a trend towards more dictatorial regimes in many parts of the world. People might argue about America and even Australia at times. But I’m thinking places like Turkey, China, important countries in the global sphere that have really, yeah … I mean, I don’t know whether it’s just been revealed to us a bit more how the things work or whether it has been a proper dictatorial takeover. But yeah, there’s a trend there that’s not good. And it ties in with the anti-globalisation movement as well.
Steve Johnson:
Yeah, and for us living in Western society, the prospect of war has been something that we’ve never really had to even contemplate or think about, our generation anyway. I think people that grew up in the ’50s and ’60s through that Cold War era at least had the fear a lot stronger than we’ve had it. But it’s back on the cards, it’s not out of the question that we end up with something even much more significant than what’s going on in Ukraine and Russia.
Gareth Brown:
Including in our backyard, right?
Steve Johnson:
Let’s drink some whiskey on that note. All things positive.
Gareth Brown:
Yeah, no point saving it, is there? Cheers.
Steve Johnson:
I haven’t had a whiskey for a while and it always takes a bit of drinking to get used to drinking whiskey.
Gareth Brown:
It’s 43%. It’s a little bit punchier than most commercial whiskeys. It’s got a little smokiness, but it’s not overpowering.
Steve Johnson:
It wasn’t as much as I was expecting. I was expecting more of a peaty flavor to it, but.
Gareth Brown:
It’s about right. And I find that very warming on the stomach. I haven’t eaten anything for a while. Maybe that’s just that. Yeah, it’s definitely got that. This would be nice in a winter over a log fire out in the mountains.
Steve Johnson:
Good one.
Gareth Brown:
How much does this cost?
Steve Johnson:
Well, I had to sign up of course, to the Vintage Sellers Membership Club to get it down. I think it was 150 down to 122. It was expensive.
Gareth Brown:
It’s probably low hundreds out of the CBD.
Steve Johnson:
I’d say that’s about right. That’s 14 years old, that one though. They tend to cost a bit more than that 10 years old.
Gareth Brown:
That’s very enjoyable. And I don’t feel that needs water or anything. I feel that’s right in the … It’s made nicely.
Steve Johnson:
Do you have anything to wrap up on that last topic? What are we trying to say here? If you’re working in tech, recognize that your industry’s shrinking and your job’s at risk?
Gareth Brown:
Yes, and there’s lessons and analogies for the wider world there, which is sometimes things change because they’re unsustainable, sometimes they change for other reasons. Those pivots, it can be devastating if you miss them. And arguably there’s an element of that in our portfolio over the last 12 months. But it doesn’t mean that it’s back to the races next week, right?
Steve Johnson:
Yeah, which brings us to the next topic of conversation. I’ve put the headline here, The Great Tech Wreck Spreads to the Untouchables. There’s been a big tech part of the market that had held up really well. We’ll talk about Meta separately because it wasn’t one of them, but Google, owned by Alphabet, so we’ll call it Alphabet, which owns Google and YouTube and bunch of other assets, and Microsoft had really been two of the standout stalwarts. And I don’t just mean that in the tech sector, I mean for the stock market as a whole. Big, growing cash generative businesses that both put out pretty disappointing updates last week, share prices were already down probably 30% from the peak into that, were down another six or 7%, both of them on the day. Like Meta six months ago, now trading at some pretty interesting multiples. Is this a pivot point for the big guys out there?
Gareth Brown:
Let’s set the scene here by talking about these giant companies because I think it’s important. Everyone’s been sitting here saying trees don’t grow to the sky. That’s right. They don’t. But these things have grown a lot further and bigger than I think anyone maybe other than Bezos could have predicted 20 years ago. They have had a scale advantage working for them without the usual offsetting diseconomies of scale. They’ve been able to grow faster than most smaller businesses for a long, long time. We’re talking high teens, obviously their growth rates started out at 50 plus percent, but they didn’t plateau as quickly as you would’ve thought. They’ve been growing at high teens, mid-teens rates for a long time. And in every quarter you’d read the report just going, “How does a business this big continue doing this?”
Steve Johnson:
And it was interesting the reason and the way that happened. Because I do think that is a model to keep in mind for future regime changes. But everyone’s mental model was the global advertising industry is a hundred billion dollars. It was sort of roughly that number. I think digital is going to eventually be half of that and I think Google’s going to be 10% of the half. You’re going to be 5% of a hundred billion. Two things have happened, they’ve hoovered up much more than anyone ever thought. And that’s kept happening. And not only from their own assets, but they’re actually taking a share of every … Because they’ve got the tools for people to do digital marketing, they’re picking up a portion of what everyone is doing on their own assets as well. But then they grew the market, they enabled a lot of businesses to pay for advertising that previously were at most in the White Pages or the Yellow Pages, that are now spending money on Google AdWords. And just the whole pie here has grown.
Gareth Brown:
Because of targeted, right? I mean, we’ve discussed this before, but you don’t have to advertise to a national audience or to a … You are able to segment and segment and segment it smaller and smaller and target, so therefore smaller players can get involved in it. Sorry, I had thought I’d turned my phone off. Smaller and smaller players found advertising economical, right?
Steve Johnson:
Yeah. People made the wrong conclusion. Trees don’t grow to the sky too early. They grew a long way into the sky. But that principle is still right. There’s only so much GDP out there in the world and no business can ever be more than the total amount of GDP in the world. And at some point you need to start approaching GDP growth at best. At best.
Gareth Brown:
Or improving GDP growth. The inverse version. The version what we talked about with marketing, which we haven’t really seen, right?
Steve Johnson:
Yeah.
Gareth Brown:
Anyhow, so then we all learned that trees do apparently grow much further into the sky than we thought possible. Then I think really last quarter and this quarter in particular have sort of given everyone a rude reawakening, let’s say.
Steve Johnson:
I mean, we’ve been talking, this has been the hardest period to forecast sustainable earnings of pretty much any business that I’ve ever experienced because we’ve just had this two-year period of fantasy land, COVID lockdowns, some businesses benefited, some businesses didn’t. Is it going back to where it was? Is it going to be bigger, smaller than where it was in 2019? How much of what’s happening out there with these giant advertising businesses is okay, the tree’s actually grown as far as it can grow versus, okay, we just accelerated a whole heap of growth here and now we need to digest that and then the growth is going to come back?
Gareth Brown:
I’m going to use words here, but in short, I don’t know the answer to that, and I’m guessing like everyone else. But I think understanding that COVID impact is important. Really any business that saw a massive boom in demand through COVID, we’ve seen a reversal back to trend. I can’t think of a standout. I mean, there may be one or two. In short, if you started with 2019 results as your starting point and then apply the growth rate and to give me my 2023 revenues, it will be more accurate than if you use the 2020 or 2021 results as your starting point. And that sort of tells you something weird’s happened, right? The economies of the world haven’t necessarily collapsed. A lot of it’s shifted from say services to goods. That’s been a big beneficiary for some of the Silicon Valley companies in particular, I’d say.
The Googles of the world, they tend to be more focused on goods and definitely Amazon more focused on goods than services. We’ve got a switch back now, that’s creating a hangover effect. That’s sort of one thing that’s going on in the background. Secondly, we’re having an economic slowdown. Interest rates are rising, everyone’s deliberately trying to cool their economies. These are businesses that have been growing structurally for let’s say 20 years, and that’s been able to, because they’re growing structurally so rapidly, you don’t see the cyclicality that’s in there. It overpowers it. As these things get bigger and bigger, they’re going to get more and more cyclical because like everything else, right? Then the third factor there is natural maturity. And I think all three of those things are at play at once and they’re all coming to bear at once. It’s a really difficult thing to predict, I think.
Steve Johnson:
Yeah, I’m struggling to come up with an exception to the COVID rule that I’ve got, which is actually literally get a ruler out, go ’16, ’17, ’18, ’19, draw a line out to 2022-2023, and use that rather than anything that you’ve got here from 2020 or 2021. Because they’re just such bizarre, bizarre years. These businesses that we’re talking about here are still, they’re reporting zero revenue growth now, but they’re still much bigger than they were two or three years ago. There’s an argument there that that compound growth rate over the period is still reasonable and there’s some amazing, amazing businesses in there. And I do think, particularly in the case of Alphabet, I’m very, very confident that that business, maybe the growth is far more modest, but it’s not going to shrink over any meaningful period here in my view. It’s an interesting period ahead and they’re all the biggest issue’s cost escalation as much as it is that they just never, ever experienced an environment where their revenue is not growing like crazy, right?
Gareth Brown:
Yeah, that’s right.
Steve Johnson:
They’re just used to spending money and hiring people and-
Gareth Brown:
They’re not used to keeping flat costs.
Steve Johnson:
It’s a fascinating juncture for all three of these businesses, but especially so Meta, the owner of Instagram, Facebook, and WhatsApp. I mean, I’d written here it’s being priced like an oil stock on the basis of multiples of earnings of less than 10. You can buy Meta at the moment for about nine times the amount of profit that it’s going to buy, that it’s going to make this year.
Gareth Brown:
That profit will shrink.
Steve Johnson:
Over-exaggerating here because you can buy oil stocks and coal stocks at two and three times earnings, but-
Gareth Brown:
Nine might be more normal.
Steve Johnson:
The point being this business has traded at 30 times earnings and 25 times earnings for a long time and it’s now nine. The market is saying this business is going to shrink. It has come out since I wrote this for the podcast, its quarterly results came out and earnings are going to shrink a lot next year. Not because the revenue’s going to shrink, but because they are hell bent on spending a fortune. It’s not nine times earnings, it’s 15 times what they’re going to make next year because the profit side of things is going to shrink. This is a special case amongst these big guys in terms of junctures, I think.
Gareth Brown:
Yeah, I think that’s right. It never was as … What’s the word here? Irreplaceable as Google search. It’s not that special a business. And TikTok has proven that, it’s really taking eyeballs, especially the younger demographics, but also into the older demographics now. People are finding that experience of AI selected video a more entertaining thing and it’s taking time from TV. It has been taking time from Instagram and Facebook at least until recently. The results were disappointing and I think it’s important to say that we’re trying to reserve the right to change our mind on this one. We’re discussing this stock a lot at the moment internally, so I don’t want any views that we give here to be considered-
Steve Johnson:
So we-
Gareth Brown:
… set in stone.
Steve Johnson:
As we sit here today, this stock is owned in our International Fund, for context about what Gareth’s talking about there.
Gareth Brown:
Correct. I thought the fact that the revenue from their family of products I think was down 4%, but if you adjust it for currencies, because more than half of it comes from outside of the US, US dollar’s being very strong. If you actually adjust it for currency movements, they were up 2% on the revenue line. I didn’t think that was bad in the context of they’re facing struggles with TikTok, they’re facing struggles with the economy and that unwind of that COVID boost that we’ve been talking about.
Steve Johnson:
Yeah. I mean, a lot of people have been talking a lot about this business is dead and the kids aren’t using it anymore and no one who’s 18 or 19 is on Facebook and therefore the business is going to die. The interesting thing about the way that this has gone wrong for us is we’ve had a view that that’s way over-blowing things. We’ve probably been right about that. I mean, the user numbers are fine, the revenue’s reasonably good given everything that’s happened.
Gareth Brown:
It’s okay. You compare it against a YouTube, the numbers are not dramatically worse than what YouTube reported as a subset of Google.
Steve Johnson:
Yeah. They’ve made some pretty big changes to Instagram that sure, people are whinging about but seem to be gaining some traction and bringing people back to that app. And WhatsApp is a really interesting asset here that they talked for the first time in this call about generating more revenue from that asset and I think it’s up to a billion and a half of revenue or something. It’s huge in India in terms of people using it so that whole the business is dead argument, we’re probably on the right side of. But on the governance side of things and where that money is going to go-
Gareth Brown:
Well, not just governance. I mean, the costs, so both in terms of OPEX, so paying for research and development staff and paying for staff, that piece of it. But also the capital expenditure piece when you buy servers and datacenters and warehouses and all this stuff they’re doing, which is some of it’s related to the core products, some of it’s related to their ambitions in VR and the Metaverse, virtual reality is VR. Disappointing on both fronts in the context of flat revenue. They’re ramping up, their expenses have shot up this quarter and will ramp up next year. Their CapEx investments have shot up this quarter and will really ramp up next year. They’re going to be spending more on CapEx than Google and more than Microsoft, two really big cloud players.
Steve Johnson:
You made a great point when we were talking about the stock today. One viewpoint, neither of them are good, but one is Mark Zuckerberg’s ego is a problem here and he just can’t let go of his crazy metaverse idea. My wife, I was talking to her today and we are just talking about Meta, she’s interested in stocks and the stock market as you’d probably have to be to listen with me. Sorry, to live with me. She said to me, “What is all of this metaverse stuff anyway? Is that just a place for losers to hang out?” She doesn’t have much time for Zuckerberg and his metaverse, but he’s spending an absolute fortune. One argument is this is Zuckerberg’s ego and he can reverse course at some point down the track. Your question today was, well, the other argument is this is the price that you have to pay to maintain relevance in terms of the business and to keep it relevant.
Gareth Brown:
A lot of that spending is not actually new wild new stuff on the metaverse, but actually on the family of apps that they have. They want to take it to TikTok. It’s quite possibly the right decision, I don’t know. But you look at it and it crunches your free cash flow. This is a business that had margins that were envy of everyone not that long ago and now they’re getting obliterated. And Zuckerberg sees this as an existential threat, I think. The alternative is he sees some opportunity and he’s going to sell it as that. It’s interesting because he has the golden … No one can tell him what to do with the voting structure.
Steve Johnson:
This is according to Google, tried Bloomberg and couldn’t work it out, but according to Google, his 10% economic ownership stake in Meta entitles him, because there’re different class of shares, to 58% of the total voting power. Nothing can happen without his approval.
Gareth Brown:
Absolute control. And I think we’re in this juncture where he’s starting to get feedback, he’s getting feedback from activists, shareholders on the register, from some of his founding investors as well, that maybe he’s not on the right track. The good thing about Zuckerberg is he’s pigheaded in the right way at the right time often, or let’s say has been historically, but he could very well go down the wrong path and that pigheadedness and that control is going to lead you to some nasty place pretty quick.
Steve Johnson:
And he’s still only 40 years old and he’s probably not been wrong about a lot in his life, right? He started this business when he was 20, he made billions out of it. They did a couple of great acquisitions…
Gareth Brown:
Never seen a backward year in revenue, right?
Steve Johnson:
Him accepting that he is wrong about something is going to be nigh on impossible.
Gareth Brown:
It might be. It might be. I don’t know. I don’t know. But it takes a certain chutzpah to be a founder and it probably makes it difficult to change course sometimes.
Steve Johnson:
Yeah. Like I said, we still own the stock as we sit here recording this, but you probably don’t need to be an expert at interpreting Reserve Bank statements on monetary policy and what they’re trying to say between the lines to understand how we’re feeling about it. We bought this stock to play a role in our portfolio that was meant to be fairly low maintenance and fairly low risk. And it’s turned into something that we’ve talked a lot about on the podcast and we’ve talked a lot about internally and has some very, very complicated problems ahead of it.
And we’ve got our expertise here is some businesses that have complicated problems but less covered than this one and get a lot less attention than this one. If we’re going to get involved in complicated things, then we want to make sure we are on the right side of who knows best when it comes to some of those things. It’s been a very, very disappointing investment for us and it’s going to be a fascinating show to watch unfold over the next 10 years, but that doesn’t mean we need to be an investor along that period.
We will wrap up the podcast with that. I think we’ve run over time by just having a quick look at the watch. I thought we only had a couple of topics and we’ll get through them quickly. Hope you’ve enjoyed it. Please send us an email, follow us on Twitter. What are you? @forager_gareth? @ForagerSteve on Twitter. Or give us a call if you want to have a chat. Thanks for tuning in and we’ll be back for episode 12 in a month or so.
