Stock Club EP#175: Tesla's Rise, Netflix's Comeback, and Airbnb's Unforeseen Triumph

In this episode, we take a deep dive into the Twitter poll that Emmet shared recently, asking which of Tesla, Airbnb, Netflix, or Atlassian you would buy and hold for 30 years.
Sept. 14, 2023
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Key Highlights:

  1. Tesla's Surprising Triumph

In this segment, we dissect Tesla's remarkable journey to success, revealing the surprising factors that propelled it to new heights. From Elon Musk's visionary leadership to the strategic data dominance in autonomous driving, we uncover the secrets behind Tesla's astonishing rise.

  1. Netflix's Comeback Strategies Unveiled

Discover the strategies that fueled Netflix's epic comeback in the streaming industry. We explore their battle plan to crush competitors and dominate the streaming wars, providing valuable lessons for investors looking to ride the wave of content consumption.

  1. Airbnb's Dominance: Market Takeover Secrets

Get ready to be amazed by Airbnb's market dominance. We unveil the megabrands of tomorrow and how Airbnb is positioning itself as a global leader. Learn about their disruptive strategies that have reshaped the gig economy landscape.

Transcript:

Emmet Savage: 0:00

Tesla's revenue just gets better and better and better, and when you overlay on top of that return on equity, it's like an undulating hill going upwards. Ok, and it's currently sitting at around 20-something percent. Ok. So revenue grows, grows, grows and returns on equity better, better, better. I look for businesses that are fundamentally changing humankind for the better. That's a really important thing at a personal value level and Chris Mayer says in his book that the average time for a company to grow 100 fold is 25 years. That's the average. So you need to have the patience of a monk.

Michael O’Mahony: 0:44

Hey there, I'm working on a Stocklub podcast brought to you by my Wall Street friend. I'm Mike, and join me. Today's episode is Emmett Savage, from my Wall Street analyst team. Quick word from my friends and sponsors at Vodafone Business before we get on with the show. Vodafone have recently launched their V Hub Digital Advisory Service, offering Irish businesses of all sizes free one to one digital support and advice. You don't even have to be a Vodafone business customer to avail of this service. Search Vodafone V Hub to book a call with one of V Hub digital experts and we will leave a link in the show notes for today's episode Amish. How are we doing? Just myself and your side today. Good to see you, Michael. How are you? I was on the front street. The Meiji heat wave is broken. I was in Bordeaux at the match at the weekend, so I cannot complain.

Emmet Savage: 1:25

Oh, I didn't know you were there. Yeah Well, you missed the Irish heat wave, Michael. Forty eight hours of it.

Michael O’Mahony: 1:31

You missed it, the Irish summer in September comes along.

Emmet Savage: 1:35

Yeah, it was all over the year. Yeah, September is my favourite. It is my favourite month. It's just the most reliable where you can actually sit out in your garden and enjoy the weather for a fleeting moment.

Michael O’Mahony: 1:49

Is that the opinion of a father to school going kids, though? You know what?

Emmet Savage: 1:53

I mean.

Michael O’Mahony: 1:54

September is where you get to get the release.

Emmet Savage: 1:58

Oh, no, to be fair, I'd rather they were with me, but still, look, we got to grab our photons when they're thrown down at us from the sky. Yeah.

Michael O’Mahony: 2:06

OK, Before we get into the show, there's two things we need to bring up because we're going to be talking about Tesla today. First, did you hear that he has a third child with Grimes, the pop star Grimes, called Techno Maximus?

Emmet Savage: 2:21

It rings a bell. You know I haven't been keeping track of his family tree, but I did reach Family situation is quite complex.

Michael O’Mahony: 2:28

Well, he's got about 15 kids. Now he wants to repopulate the earth with a bunch of mini me genius mosques all around.

Emmet Savage: 2:36

He has a. He has a child who transitioned, and I'm not too sure of the details of that, but they basically disowned him and changed their surname to Deedpole and want nothing to do with him. I was reading a really interesting excerpt from Walter Isaacson's autobiography or other biography of him in last week's Sunday Times and you know his backstory is as complex as his front story. You know, like there's, there's some serious, like it's even just listening to his family affairs, as quiet it's a quite entangled story where you know some of his kids want, just don't even want to meet him, don't even want his name, and then some of his other kids are obviously on the other end. So it's, it's. Yeah, I'm not a bit surprised to hear he has a child called what did you say? Alpha, beta, gamma.

Michael O’Mahony: 3:27

Oh no, he's got. He's got X, the X, a, e, 12. There's a Y, and now there's the third one is Techno Maximus. So just to make up the hat trick, that's a good one.

Emmet Savage: 3:37

Techno Maximus Savage that has a certain gravitas to it. I wish I'd have thought of that one first.

Michael O’Mahony: 3:44

I think Savage gives every kind of first name a bit of an age.

Emmet Savage: 3:48

Yeah, yeah, you have to choose carefully. My wife, when our first was born, liked the name Christian and I said Christian Savage, are you kidding?

Michael O’Mahony: 3:55

That's like the first settlers in the wildest West Peter moving to Rome or something Exactly.

Emmet Savage: 4:04

All right, it's a sentence. Christian Savage is a sentence. Full stop Christian Savage. He was a Christian.

Michael O’Mahony: 4:09

Savage. All right, well, let's get into the show. So, we talked all last week about the benefits of long term investing, essentially, and following on from that, you stuck up a poll on Twitter and you, the question posed to your many, many, many followers, was which stock would you buy and hold for the next 30 years? So the choices were Airbnb, atlassian, netflix and Tesla. Unsurprisingly, Tesla won out. I think the fandom is still strong and it's had an unbelievable year. But were you surprised by the results, or did they kind of come as expected?

Emmet Savage: 4:50

Well, thanks for really overstating my followership. First, but 450, I think people responded to the poll, so it's not an insignificant survey and off the bat I disagree with the end result. But I hope that the majority are right because Tesla is, in fact, my largest holding, or at least the last time I checked. I don't check these things often with Netflix and set second place, but I sent that poll because there are four. These are four businesses primarily known and of passing interest to more or less everybody, with the possible exception of Atlassian, which is, I think, as most of our listeners know, an Australian software company that develops products for software developers and project managers and people in companies and those things like Jira and Confluence and Trello and Bitbucket and Bamboo and a whole range of tools that you use if you're in the bails of the business. But a few things happen when a voting public is asked something like this. First, if Tesla or Apple is included, they always get half the votes because both are clear market leaders and making awesome stuff and they have pricing power and their stuff is seen all around us and it's therefore easiest to feel comfortable and it will grow, so to say, vote. That doesn't really require any thinking and with a poll like this, you also force someone to consider their age and their longevity. So I think I said you know which of these would you choose for the next 30 years? So someone your age, Mike, can vote with a high degree of confidence that they'll be around in 30 years with the help to enjoy the spoils of their investment, whereas somebody my age would be within sight of being eight years old. And then someone just older than me needs to be very healthy, lucky and optimistic, I guess, to expect to knock another 30 years out of life. So I guess 30 years for everyone is a meaningful percentage of their life expectancy and would have an influence on how they vote. And then, finally, any poll of this nature captures in all, in a heartbeat, someone's risk propensity. I suppose Nobody thinks hard about this. It's a poll on Twitter, but in that, like by the time your thumb lands down on your smartphone, you have considered 30 years how long will my risk propensity be and how much I like these businesses. You make the decision quickly and you just want the poll to get out of the way to see what everybody else chose. But, as I said, the poll captures in some small way, people's risk propensity, but that does not come out in the end results, which is rolled up. Like if I pulled the same four companies and asked everyone which do you think is the riskiest investment, we definitely get a different reading. I don't know how different. I don't think it'd be the inverse of the choices we got. But I guess all of that is to say that you're capturing quite a lot of people's view of themselves very quickly, very, very quickly, and Tesla was in fact you're right the winner. Hold on, I have to find it now to see what, in fact. What came second place?

Michael O’Mahony: 7:56

I think Tesla got over half the votes. Airbnb was a distant second, then Atlassian, then Netflix.

Emmet Savage: 8:04

Yeah, netflix only got 7% of the votes. So you're right, Tesla got 54%, Airbnb got 23%, Atlassian 16% and Netflix 7%. So that's quiet. That's quite polarised. Actually, as interesting as it is that over half chose Tesla, I think it's even more interesting that only 7% would choose Tesla.

Michael O’Mahony: 8:24

Netflix, especially considering the comeback Netflix has had. So it was over a year, maybe a year and a half ago, where it had that quarter where it showed its first subscriber churn ever, essentially in the stock. Yeah, yeah, fell off the cliff and continued to fall, because Netflix is so intrinsically linked with growth and with subscribers that that's the vast majority of the investment thesis. But since then I think the initiatives that it's brought in to reinvigorate that subscriber growth have been working for sure. Like I think, from June and July they've added almost 6 million new subscribers. With the password sharing crackdown that's up from, I think, 2.7 million in April and May. So that shows that they are really, first of all, that they've been dealing with the saturated population in the States, especially because that's where the real money making is for Netflix. They figured out international growth but they haven't figured out how to make proper money internationally yet and I think I'm not sure if this password sharing crackdown, if that was the break in case of emergency button or if it's maybe a stop gap until they figure out how to truly penetrate, like these fast-growing regions like South Asia and especially India, which I think is their big target. What are your thoughts on the whole situation and Netflix at the minute?

Emmet Savage: 9:55

I have been a shareholder for 20 years and watched a story on fuel and the one thing I've learned in that time is you just don't bet against it. And I've often said in the podcast that some of my biggest, all of my biggest mistakes in investing in some way are related to a cell. And I'm sure along the way sorry, I know as a fact along the way I sold portions of my Netflix when I had this. Couldn't get any bigger mentality. Now, Netflix is a function, if you like, of broadband availability and it's still amazing to me how broadband isn't fully saturated even in the United States of America. I mean, I'm looking at businesses like Basta Noma Corporation that are concerned with rolling broadband out into smaller towns. So even in a first world country, broadband isn't fully there yet for a lot of people, and I think there still is. I don't have the numbers at hand, but Netflix's opportunity still lies ahead. It's the only profitable movie house, if you like to call it that, and I found Marie was here with us today. She is like, as everyone knows, a fire hose of intellect on almost everything, but on this particular subject, I think she'd also agree that that Netflix has a lead on all the other movie subscription services, or I should say streaming services, like Disney Plus, apple Prime, like they of course have their own offering and even Prime has bought its own studio. But Netflix had a strategic approach which was called oh, what was it called? Again, it was a call vendor lock in and it was that Ray Dolby. I'll have to actually come back to that. But the strategy they employed at the start was quite interesting because they started with the endpoint and were backwards towards the studio, where studios start, like Warner Brothers, with the giant big gates, and they produce the movies and push it out to the cinema and ultimately to the small screen. But when you think about the absolute user experience, netflix had started at the endpoint. They didn't create content, they didn't own content. They simply sent you DVDs which we returned in the post, and that was the relationship that they worked on, rather than up at the other end. And all the other studios were at the other end and in fact, that has played now to their major advantage because, frankly, they've saturated the entire vertical, if you like, and they now produce movies, they produce shows, they produce bangers like Stranger Things, and then they produce flops, and they're not scared of taking moonshots, because occasionally, what they least expected to be a huge hit knocks the doors off the hinges like making of a murder. Was that one there two years ago? Which?

Michael O’Mahony: 12:35

I just blew up my store. Yeah, and like Squid Game, is that example?

Emmet Savage: 12:38

Squid.

Michael O’Mahony: 12:39

Game cost absolutely nothing in its Korean division and it became a worldwide hit.

Emmet Savage: 12:45

And what I find interesting about Netflix, just as a customer, is that you really don't know when that next great show is just going to land. They don't know. When you're a subscriber to Prime, yeah, you're going to get quality shows and you're going to get the latest Indiana Jones or whatever it is, and there's no debating it's a fabulous service. But with Netflix you are going to get the Squid Game and it's more prevalent on that service than any other. I suppose I'm drifting, but what would I say about the four companies that I polled? It's worthwhile for our listeners, like just to throw out one or two numbers, and I appreciate talking numbers over podcasts is ugly stuff. But just if we talk about these businesses in descending order of size, Tesla today is an eight hundred and sixty five billion dollar business. So and it's been, I think it's been in a trillion dollar club. Pretty sure it was. Yeah, of course it has. Oh yeah, oh yeah, I was well into it. So it's , let's call it a trillion dollar business. That's profitable, and last quarter Tesla had revenue of twenty five billion dollars and a bottom line profit of nearly three billion dollars. Next biggest is Netflix, and it's a two hundred billion dollar business. So it's about one quarter or slightly smaller the size of Tesla and it too is considerably bigger, as was more or less everything two years ago, and it too is very profitable. It had around eight billion in revenue last quarter and bottom line profit something like one and a half billion, I don't, I don't recall. Airbnb is next in the size scale. It's a ninety four billion dollar business and it too is profitable. In the last quarter it did about two point six billion in sales and revenue and a bottom line about point six billion in profit. And then the smallest of the four that we pulled is Atlassian, which is about half the size of Airbnb and it's about a fifty, fifty, five billion dollar business and it's not profitable. So so obviously, people don't have those stats at hand when they're going to take to a poll, and if you had them, I think the poll would skew slightly, because if you're investing in Netflix and nearly a trillion dollar business and put it side by side by Airbnb, for example, which is a hundred billion dollar business or even smaller, you realise that what has this 10 X the size of Airbnb? And that would affect the way you'd vote, but of course, a quick and simple vote. Really, as I said, people just wanted to get out of the way, but these votes really do hold the mirror up and in a split second, force you to, I suppose, write a micro, microscopic chapter of your autobiography. You're, you're somewhat expressing your risk, propensity, your interests, you're aligning yourself with the things you believe in, and I think that they're fun. The polls are fun because they kind of cause you to tap into there and really, I suppose, when it is a function of the type of investor you are, I think it's worthwhile, you and I and you're my Mike thinking about describing ourselves, what our investing style is. So my question to you is how do you describe your investing style? In a sentence or two?

Michael O’Mahony: 16:07

That sentence or two will be tough. I think it's been quite haphazard, yeah, in the last few years. Obviously, we got caught up in that post COVID bull market where everything was going up into the right and you seem like an absolute genius. We're probably overloaded on unprofitable tech stocks as a start. I've been adding a few of them since, but I don't think discussing my actual portfolio is the point of that question. It's more so. What am I trying to achieve with my investing and working in a startup? We don't have pension plans and all the rest. My idea of investing is to set up that pseudo-pension for myself. This is my retirement fund that I would contribute to, hopefully once a month depends on if I like to take trips to Bordeaux on the weekend and that kind of stuff, having that discipline to know that it's a habit, rather than I once off and invest every month and build that portfolio and build that savings. This is the retirement portfolio I would say that's my take on investing at the minute.

Emmet Savage: 17:19

Your advantage is your age, the fact that you can just keep throwing another $10, $50, $100 on the pile and know that you'll get some right and some wrong, because you actually do. We all hope to have at least 30 years of working on that. It is unquestionably and comprehensively measured that time is the number one advantage for stock investors. Again, I don't have the absolute stat to hand at the moment, but I think 95% 96% of Warren Buffett's wealth was generated after his 80th birthday. He started young. Do you have that stat to hand?

Michael O’Mahony: 17:55

I think he was worth like 500 million when he was 65 and now he's worth what? 80, 90 billion. So figure that out, yeah.

Emmet Savage: 18:04

I suppose just describing my investing style, which has been solidified over the years and hasn't varied a whole lot in the last 10 or 15 years. I look to find the next Dell. As our listeners have heard too many times, Dell has a business that grew 1600 fold in the decade of the 1990s, meaning that 10K resulted in $16 million out Now. Obviously, that's about as rare an investment as you can even imagine. After a lifetime of trying, I've only had two 100 baggers. I'm not holding my breath for a 500 bagger, let alone a 1000 bagger, and never even mind a 1600 bagger. Like Dell, I look for businesses that are fundamentally changing humankind for the better. That's a really important thing at a personal value level. Obviously, this is just known as growth investing, meaning. I accept there's going to be losers along the way, but it only takes one Dell to change your life. There's a lot of next Dell's out there. According to our analysis of 58,000 listed companies from 60 exchanges, there's about 12 next Dell's out there. That's a story for another podcast, because backstage here at my Wall Street we have been working very, very hard with state-of-the-art screeners and AI to look at all of those businesses listed outside of America. Today there's 5,700 companies listed in America. That is the place I've always gone fishing. There's 58,000 companies listed in the world. Even if you go hard on it and go well, let's just talk about first world countries and first world exchanges on businesses that have pretty good, clean financials, you're still talking about a short list of 30,000, 35,000 businesses, which is almost 5x. What's in America? That's a new product. I really didn't mean to just go wait into this water, but we've been building this thing on Nvidia chips. We're using hedge fund data. I actually plugged in the four stocks that we looked at in that poll into the system to see which we believe or which one looks positioned to do the best Not to put too far on a point. What is the one? And we stick in the parameters for 100 bagger, which was, as we've discussed loads of times on this podcast, an interview, the guy who wrote the book on Chris Mayer. When you stick to those four businesses Atlassian, airbnb, tesla and Netflix which are the ones that look most favourable to grow many fold from here, I actually have a view on what my favourite is, but we'll get there I guess.

Michael O’Mahony: 21:03

I have a question before we get into the poll again, and it's to do with your Netflix investment. That was over 20 years ago now, was it yeah?

Emmet Savage: 21:14

2003. 2003. That was when I took my first position.

Michael O’Mahony: 21:17

yeah, my question is was the success of that investment dictating your further strategy? Finding this open comer so early and I think what did you say about it? Sold your car to buy Netflix shares way back when, or something like that yeah, that's right. Making that big bet and paying off and it being 100 bagger did that? Then say I can and will recreate that success. You've done that again with Tesla since. Has that been a factor in why you invest this way, or were you already doing it? That was confirmation of the fact.

Emmet Savage: 22:05

My dedication to my strategy hasn't been influenced by the outcome of the strategy. I was always mesmerised by just the fact that anything you can invest in can go up 1600 fold. I got lucky with Netflix and in fact, that look wasn't apparent for the first 10 years. Chris Mayer says in his book that the average time for a company to grow 100 fold the average across every company that has ever grown 100 fold up until the point where he published his book is 25 years. That's the average. You need to have the patience of a monk. You just have to decide. This is just there. I'm leaving it out. And, as he says, the coffee can portfolio, I'm just leaving it out in the back garden. Until that day, I had no grey hair when I bought Netflix. I'm fortunate enough now to still have a little bit of hair, but it's fully grey. To your question, Mike, no, I didn't get it. There wasn't a positive loop, or at least I wasn't so conscious of it that I said oh yeah, this is my strategy. Really, what inspires me is that I love owning a piece of business that I think is doing good and doing something better than everyone else. When I heard about Netflix, it just sounded like a brilliant idea. When I first heard about Tesla, without even going into the science, I thought, wow, a manufacturer's got fully electric cars. That's part of the future, even though it wasn't crystallised in my line of sight and I never heard of anyone owning an electric car. I'd never seen an electric car on the road. It just sounded right to me. I'm under armour, which at this stage is a very, I might say, unexciting and uninspiring business, but when I first invested in under armour, it was super cool. Only one team in America had it. They were differentiating with super high tech sports apparel, wicking clothing. I bought one of these wicking tops online when I was really heavy into exercising and I couldn't believe that wearing one of these compression tops, I was cooler than if I was literally bare skinned. That was incredible technology. So I invested in that. I'm not trying to reduce my investing approach to something as trivial as oh yeah, I like to look at a company and I'd buy it, but it certainly has influence. It certainly helps Chipotle. Chipotle's a pitch again at a time when it was quite unique as we do organic Mexican food in a fast food style. It just sounded great because more or less everyone was fast. It just sounded like it was taking an older business model where you'd sit down at a table in a Mexican restaurant and just making it more like a subway assembly line. The food was whole and the guy had a passion in founding CEO Steve Ells, who was a qualified chef who spoke well. I was like, yeah, I want to own a bit of that. I'm doing it today, I will continue to do it and I'll do it for the rest of my life. There's no doubt about it. I will be buying businesses when nobody wants to hear a word. I have to say that it inspires me and interests me. I think we found a good few of them already in Horizon. I'm not here to plug the service, but of the 20-something stocks I own in Horizon, I'd say three of them will turn out to be 50 to 100 baggers. We're going to have to give it a lot of time. That's the one thing that really drags people, because 25 years, as I said at the top was it's a huge portion of your life For so many years. Another thing Chris Mayer comprehensively studied, and I lived and observed in real time, is that there will be quarters and years where your businesses are letting you down as you well know, mike, because you're my right-hand man on Horizon I will say I love ABC Corp. Here's why: Then, a few weeks later, I'll go and buy ABC Corp. Here's why: Then, three months later, I have an audience of people with a sad face because the stock is down 50%. That's ugly. I hate it. That's the one thing about my job. I most hate that there are those who will listen to my words, follow the lead and take action. Then they're sad because things have gone south, whereas my twisted sense of time is like oh good, we'll get some more, it doesn't matter. We're just leaving it there for 20 years or 12 years or 10 years or whatever, but a long enough time that really this quarter's results matter not, they don't matter at all. Truly, they don't.

Michael O’Mahony: 27:04

Yeah, that's the quote we used to always say was if you're looking at a quality report and basing your whole investment thesis on it, if you plan on holding for 10 years, you want to see 40 of them. You can place so much importance on one 40th of a year, of a time period. Okay, well, let's revert back. So we mentioned the four stocks there that you would buy and hold for 30 years, but you haven't actually told us which one you voted for.

Emmet Savage: 27:36

Mike, one of the things I love about this podcast is describing the shape of a curve.

Michael O’Mahony: 27:41

So we do so often.

Emmet Savage: 27:44

And our listeners turn up the radio, they go oh yeah, tell me, is it a V, is it a W, is it a C? That's fallen over? Is it an? I, like everybody, loves the shape of a curve on a podcast and that's our thing and we need to put a trademark on it. So I'm gonna describe the four companies with two metrics and then come back and explain why these two metrics matter so much. And the first is Tesla, and I have data in front of me that starts in December 2013 rather and finishes in June 2023. And it shows simple annual revenue on a trading 12 month basis, and it is like a xylophone; it just goes up, up, up, up, up, up, up, up, up, up. So you can just picture it Tesla's revenue just gets better and better and better, and when you overlay on top of that return on equity, it's hovering, it's like an undulating hill going upwards, and it's currently sitting at around 20-something percent. So revenue grows, grows, grows and returns on equity better, better, better. But I look at Netflix so you hit me.

Michael O’Mahony: 28:51

No, I was just gonna say Tesla and Netflix both have this interest. They're in this interesting position where a lot of people felt that their first mover advantage would wear off eventually.

Emmet Savage: 29:03

Yeah, that's right.

Michael O’Mahony: 29:04

With the entrance of all these new competitors and all these established competitors. So you have the old studio heads Disney, Warner Brothers, Paramount, they're all coming in with their own streaming services. Same for in the EV space. We have Ford, gm all of them are coming in and we're like, oh well, that's Tesla's advantage gone. But it's actually even more pronounced now because Tesla and Netflix are the only ones in their industry that are doing this profitably and efficiently, while all the rest I think Amazon, apple, disney are hammering cash on their streaming services. Ford upped their expected losses from 3 billion to 4.5 billion on its EV division just this year. So it just shows that. And I fell into this trap too, where you think, okay, once competitors come in, it's gonna become so much more difficult. But actually it's showing off how much those 10, 20 years Tesla and Netflix have had before those competitors came in are standing to them now and it's a really interesting phenomenon because you think the opposite. You think, oh well, it's not game over for them, but they're not the only people in the market right now and it's even more pronounced now at that advantage.

Emmet Savage: 30:16

That's a good point. I mean when you read, if you do an MBA, or read strategy books or do a Masters in Strategy, as I did 100 years ago like you basically the word, the written word on the matter is that first mover advantage is time limited. Of course it's time limited and hence it's like letting somebody edit a trap first, but it is a huge advantage and I think, in the world of tech, the lead that like Netflix, I mean, say, tesla, for example has on all the other manufacturers, on simply the data gathered by the cameras on the vehicle, is ginormous, absolutely ginormous. Last time I checked, which was a good long time ago, they had something like all the millions of miles of road data gathered by cars or companies looking to do autonomous driving, Tesla had 99.1% better. I think the second place was Waymo. Is Waymo that good? Google's Waymo yeah, waymo, yeah, so they have like. So that first mover advantage is time limited, but it's by no means trivial. It's huge. Levi Strauss we spoke about them on this podcast a few weeks ago. They had the first mover advantage. They invented the modern denim jeans and look at where they are now, over 100 years later. So first mover advantage can set you up to be the leader and to set the rules of your industry for a very long time. And Tesla is the leader and setting the rules of the EV industry.

Michael O’Mahony: 31:49

Yeah, okay, sorry I interrupted you. We're gonna move on to Netflix there and describe another ten-hour or something.

Emmet Savage: 31:55

Yeah, yeah, yeah. Tesla's revenue is the Xylophone and its OREO return equity just gets better. Netflix I have, for the same time period, 10 years of revenue. It's trailing 12-month revenue. It's like Xylophone a bit, but you can see it's flattened off. It's kind of tapered off revenue has. Its growth isn't as hard and you just can see it's cool a little. Its return on equity has deteriorated where it was about two years ago. It was at 35% and it's currently drifted back down to about 20%. But any business that has a return on equity of 20% or more is quite at least. So it's not like it's a bad news story and I'm gonna come back and discuss return on equity in a moment and, in fact, why these two metrics matter in a moment. When we look at Airbnb, which is comparatively a new business, that we have data from December 2017 in our system called Nexus and it, the revenue for Airbnb for the first couple of years was up up, down, up, right, okay, kind of flat, but then in the last three years has grown quite substantially. So it's it's flattish, but now then started to accelerate and I think that was a consequence of the work from anywhere movement and, I guess, a back tailwind, rather from the virus. Its return on equity is currently has gone up, up, up, and it's now around 45%. And then, finally, atlassian's revenue is the stuff you just wanna see. It's like that exponential growth from over the last 10 years, up, up, up up, but it's return on equity is very poor. Actually, it has a negative return on equity. So when you superimpose that data on top, a picture emerges which, for me, makes the decision of which of these four businesses is the best to buy and hold now. It makes it very easy. What'd I tell you?

Michael O’Mahony: 33:52

Go for it, please. Half an hour in and we're getting your answer Airbnb.

Emmet Savage: 33:59

Airbnb and there's. I have four reasons why Airbnb, for me, is a clear leader and I think in the poll it came out second place. Firstly, it is passionate. It has passionate, inspirational founders and CEOs. Brian Chesky, their chief strategy, nate something or other unpronounceable surname and then Joe Gebbia, who's the chairman of Airbnb Org, are four very inspiring visionaries who are leading that business from day one through to today. The second is the business has become a mega brand in an area that was once full of niche players and it was very fragmented, and now it's their name. It shapes the industry the way Tesla shaped the EV industry with its first mover advantage. The third reason is, in the age of trillion dollar companies, airbnb, at 100 billion, is still a teenager. It's certainly not small. 100 billion is a giant business. That's been a huge success, but when you put it beside some of the other companies out there, it's a monster. And then the fourth reason is when we look at the trends, the ones I just read out that everybody turned up the radio for. Revenue is growing like mad and return on equity genuinely is the stuff of dreams, and I just want to just get before. I should up and ask you for your answer, mike. I just want to explain why those two numbers matter. Well, first, a study conducted by Boston Consulting Group, bcg and Morgan Stanley about two years ago of individual stock performance between 1990 and 2009, found that the primary driver of stock performance is, very simply, sales and eventually profit growth. So the reason I described, why is the money in detail, the shape year on year? Why does that matter? It's because it isn't a matter of opinion that sales and profit growth is a good thing. It's a matter of fact. It's been completely comprehensively studied and published by BCG and Morgan Stanley that businesses that have been proven to grow the most are ones that are growing revenue year on year, quarter on quarter, time after time, and it's going up, up, up like that xylophone. And the longer the investment period, the less the purchase multiple matters, and that was an outcome of their study, and these two fundamental business factors determine the stock's return, revenue and profit. But the nuance that they said is that sales growth has to come from value adding activities, either in the form of direct profits or strengthening the business's network effect. With each new customer added. Now you think about Airbnb and its network effect. This is exactly what it's doing. It's ramping sales and it's ramping profit, but it's building out this network of guests who eventually become hosts and hosts who eventually become guests. And people become. They cross the line and they are now comfortable with this model. For the previous day, I never considered going to stay in somebody's home either in a room or the whole thing. Then the second number I read out, mike, was the return on equity, which is a financial ratio that measures the profitability of a company in relation to shareholders equity. And I can't even be embarrassed to tell you many times I've had to Google this to remind myself what it is. And it's calculated by dividing the company's net income by its shareholders equity. So higher an OREO indicates that a company is more profitable and more efficient in using its shareholders' money, and a lower ROE indicates the company is less profitable and less efficient. And again, I just really hope we don't have people switching it off now. I'll just give you one tiny more bit of detail. So just so we know what those two things are. Net income is the company's profit after taxes. Shareholder's equity is the total assets minus the total liabilities. And here's how it explained return on equity to a five year old because, frankly, that's what you get when you look at my intellect with an X-ray machine. If you had a lemonade stand and you started with $100, that's your shareholders equity, and you sell $200 worth of lemonade using ingredients that your mom gave you for free. That's your net income. So your return on equity is $200 divided by $100, which is 20%, which means you're making $2 for every $10 you invest in the lemonade stand and that's a winning business. So that's what return on equity is. And then, finally, before I should apply, does this matter? Well, again, when I interviewed Chris Mayer, author of 100 Baggers, on when to Find them, I asked him at the end of that interview, where we walked through 26 or so factors that he looks for when assessing if a business is going to grow 100 fold, I said which one is the one? If you could only look at one number, he said return on equity and a heartbeat. That for him is the most important single number. So it's not a single number story. And he said it needs to be above 20% for 100 baggers. And if this was the only number, I could see this is the one I choose. So, bringing that all together, when we look at our four companies that I polled and I'm a shareholder in all four, I should say, I like them and I want them all to succeed. But Airbnb, with revenue growth and like eye watering return on equity, looks to me like a business that someday will no longer be a teenager and will in fact join a trillion dollar club. And it's just for me a matter of waiting and I'm going to give it 20 years. There's no question right about that.

Michael O’Mahony: 39:46

That's great. Okay, and before we move on, then I'm just going to give a quick promo to our newsletter, charging and Fearless. So Charging and Fearless is one of the most unique products on the market and it gives you a free stock pitch every week from an international stock exchange. So no one else is covering the markets we cover with Charging and Fearless, where we deliver a new weekly stock pitch that could be from Amsterdam, Tokyo, Paris or somewhere in between. So a completely free stock pitch. You'll have it read in about 30 seconds flat and we can almost guarantee most of these companies are going to be brand new to you, which is where you get an edge. Sign up now in the show notes for this episode. Okay.

Emmet Savage: 40:21

Mike. Mike, you tell me what's your favourite of the four and give us a bit of context.

Michael O’Mahony: 40:26

Yeah, I actually agree with you with Airbnb. I like all of them. I think I've outlined my reasoning behind Tesla and Netflix and that first mover advantage is still very much in play, I think, especially for Netflix. I think it's competitors in the streaming industry and absolute mess Like there's risks involved there as well. I think this rider strike might expose the royalties and the residual structure it has and that could lead into margins. I think in five years time we could see Netflix still at the head of the industry, but it might be a very different industry. I think Apple and Amazon might look at the last leaders, the money they're sinking into their streaming services. Disney at Bob Iger's already got the cost cutting out on Disney Plus. He's up in the prices, but then he's also locked into buying Hulu at the end of Hulu off Comcast for 10 billion. So Disney's a mess. Hbo Go, hbo, max Max, whatever it's called. Now I don't see any competitive juices around Netflix, so Netflix is up there for me. I like Airbnb too. I think there are some inherent risks with Airbnb that I think we might discuss later. And big deal or no big deal, and it's interesting. I think what makes Airbnb so great can also be one of its weaknesses, if that makes sense. So the uniqueness and the peer to peer nature of it will say the lack of standards that you don't get with hotels and chains and everything else can also be a detriment because its brand power is controlled by One individual host. You know what I mean. Like I mentioned, I was in Bordeaux at the weekend at the match and my uncle was staying in an Airbnb and it was very clear there was an opportunistic host who stuck it up for the weekend that was in it for the rugby fans who wouldn't really care, and and you know, that actually weakens Airbnb's brand strength because my uncle was like oh well, I had a bad experience there B&B and you don't get that if you go to the Radisson or Hilton or Marius where it's been standardised, and I know it's standardised through price points and everything else. But it is just a factor to take into consideration. I'm at. The other big risk of Airbnb is the regulation which we're gonna discuss in big deal. I know it's a big deal so I won't double up on it. But yeah, I think there's a lot to consider. I think Atlassian is Too big of a company to not be profitable and I know there's a lot of Accounting kind of tax stuff around that that makes it, I suppose, reasonable for it not to be profitable. We talked about stock price compensation and then stock buybacks and the tax efficiency of that. But I Think you just got to be more efficient on your bottom line there for Atlassian to be up with these kinds of big three stocks. So that's kind of my opinion, kind of neck and neck there with Netflix and Airbnb over the four of them.

Emmet Savage: 43:27

Yeah, and I must say to our listeners that just before we went live we slacked each other, our choice, and so there was no group think I didn't sway Mike and he didn't sway me, but it's just interesting to see of the four that one got a double vote and I suppose that's great. I love it. I love hearing when my thoughts are.

Michael O’Mahony: 43:52

I

Emmet Savage: 43:53

Thank you, yes, but I actually prefer when someone actually argues me down on something, because it certainly challenges that, but in this case I'll be very happy with that.

Michael O’Mahony: 44:02

Okay, we get into a big deal or no big deal. So I had to finish.

Emmet Savage: 44:05

Yeah, so I'm gonna start with Tesla.

Michael O’Mahony: 44:10

So we've tested Airbnb and big deal or no big deal just to make it. Make it a full loop here on the show.

Emmet Savage: 44:16

It writes itself, doesn't it?

Michael O’Mahony: 44:17

Yeah. So shares jumped at the start of the week after Morgan Stanley predicted the dojo Supercomputer could add 500 billion in market value. I'm mature looking at this big deal, or no?

Emmet Savage: 44:30

Well, what's another 500 billion? In the scheme of Tesla's size, it's something like 50, maybe 45% up the size. So it's kind of big. But what's really big is that this supercomputer Could potentially put Tesla at an advantage in a market where 10 trillion dollars and that's really big Imagine owning a piece of a company that eliminated are almost eliminated road debts, because that's what we're looking at here like the biggest killer of young people age 10 to 24 in the world is road injury. And of course that's according to the WHO, who said that last year, 1.3 million debts were in that age bracket, whereas a result of car crashes and car injuries. And when we are looking at a business that might cure that or remove that, I just think that's a goose bumps moment. I think it's a big deal. What would you say?

Michael O’Mahony: 45:25

I have my Misgivings around this robot taxi thing. I think people, in terms of valuing the company and in terms of the following the stock has, people are taking it for granted when there's so much More unknown there. Yeah, it's true and just to price it all in now seems very Eager, I'll say so. I think it could be absolutely massive, but there's so many more hurdles to get over before it really becomes a factor. So that's why I Wouldn't really touch Tesla stock, because there's too much credit for this, giving into it, yeah.

Emmet Savage: 46:06

And Morgan Stanley really is just saying remember, I interviewed Brett Winton, the chief strategy officer of Ark Invest. Yeah, almost two years ago. I mean Ark, who are, you know, very bullish on growth stocks. They have put what Morgan Stanley spoke about there. It started this week central and pivotal to their investment thesis for the longest time. So it's not news. It just so happens that Morgan Stanley came out and said it. Yeah absolutely. Mike, I'm gonna hit you with a deal or no big deal, and you introduced it already. The Airbnb BAM has come into effect in New York City. Is this a deal? Oh, I blew it, only for the first time. Is this a big deal or no big deal?

Michael O’Mahony: 46:51

It's kind of tough to give a straight answer right now because in In of itself it's not that big of a deal. About 1% of overall revenue is from New York City. I'm sure this will go through a number of appeals and everything in the courts as well. So actually actually saying that legally, if Airbnb could manage to set a precedent that this type of regulation isn't legal, it would be a huge positive for them. I don't know if that's the case. I think the first kind of challenge Airbnb had was shot down pretty quickly by New York courts. So I'm not sure. But what is a big deal is the downstream effects of this. So if it proves to be a success and alleviates the stress on the housing and rental markets in New York, a lot of other major cities With similar issues are gonna think of doing the same thing. So Barcelona, Lisbon, Dublin, and even Airbnb are the scapegoat for their own housing and rental crises, which Shouldn't really be the case. I think Airbnb is a small player and a much bigger factor, especially in Dublin, like there's so many things that are causing the shortage in housing, and Airbnb is a factor, but a small one. But I think it's an easily like Identifiable scapegoat, and it also gives the politicians a kind of straw man to go out with as well. But that's a different conversation. So I think we can't really say anything yet, but the potential for this could be a very big deal. But before we kind of get into the scaremongering of it, I just want to give the details on how strict the actual restrictions are. So it's called local law 18 and it says that from now on, all short-term rental hosts in New York must register with the city, and only those who live in the place they're renting and are present, is someone staying, can qualify, and people can only have two guests. So that's why Airbnb has basically called it a ban, because it's so ridiculously strange in that it's not really feasible to short-term let your apartment anymore. So I Don't know if cities that are incredibly reliant on tourism are more so than New York City, whose economy Obviously has huge tourism, but it runs on a lot more than that. I don't know if that's gonna be a viable option for them. I'm not sure. So it's a wait and see, wait and see deal for me for now. I'm just not sure if that commitment from other cities would make sense. So so yeah, that's my, that's my kind of Two cents on the matter. What, what do you think?

Emmet Savage: 49:29

Yeah well, every giant business, when it goes from being a niche player to a multi market player, encounters their own version of Tricky situations, and yeah, it's platform risk, like in Facebook, google, amazon.

Michael O’Mahony: 49:42

Have all gone through a different type of the same issue exactly.

Emmet Savage: 49:47

I mean, I'd mentioned Chipotle. They had a. They had a chapter where there was "Was it E Coli " in their guac, which Basically nobody wants, but it's a consequence of crushing avocados and leaving them exposed for a very short period of time and this was a huge impact. I think Jack in the box Many years ago had a couple of customers who passed away as a consequence of something that really was just Wasn't designed out. So every business has really terrible hazards on its own, in its trajectory, that they need to navigate. Let me look at Airbnb's and, as you described, every single market brings its own consideration. So, whether we're talking about Paris City, new York City, barcelona and they are three cities that matter a lot to Airbnb it's a shame that the regulation in New York has been so stringent, because we don't want to find that there's a daisy chain of Other cities that take influence and follow the lead, which I think is quite probable. But do I think that a beautiful house in the middle of Tuscany is not going to be opening its doors and welcoming guests? You know, for the next 20, 30, 40, 50 years, there is no way to be more and more of them. So I think they do need to navigate these local regulations where there are hotspots and zones that are considered to be inaccessible to the locals, and that's just one of the hazards of the business. As you said, it's a platform risk and then I'm not trivialising it. It's huge, but I wouldn't let it influence my view of buying a business that I believe is going to be one of the great American icon brands of the next 100 years.

Michael O’Mahony: 51:30

Okay, all right. That will finish up. So before we do, I just want to give a quick word from our friends and sponsors at Vodafone business. Vodafone recently launched their V Hub digital advisory service, so it offers Irish businesses of all sizes free one-to-one digital support and advice. You don't even have to be a Vodafone business customer to avail of the service. So just search Vodafone V Hub to book a call with one of their digital experts and we will leave a link as well in the show notes for today's show and thanks for joining me and everyone listening. Thank you very much for joining the two of us. Remember, if you have any questions you'd like answered or elevated pitches like tackle, make sure to get in touch. You can find us on Twitter at my wall street HQ on tiktok, at my wall studio. Simply just email us a pod at my wall street calm if you're enjoying the show, leave us a review and tell your friends all about us. Thanks for joining us and we will talk to you next week.

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