Meta's data advantage and walled garden will remain an edge even as AI compute costs fall, because not everyone has access to the treasure trove of user data Meta possesses for ad targeting and product features.

(00:00:01) You're listening to TIP. (00:00:03) In today's episode, I'm joined by my friends and fellow value investors, Tobias Carlisle and Hari Ramachandra, for another round of, dare I say, unlocked stock pitches. (00:00:13) We kick things off with Hari's pitch of Meta. (00:00:16) The business is firing on own cylinders, yet the market has been selling off the stock, and we discuss whether investors should be worried about rising capital expenditures and whether Meta's competitive advantages lies in its AI models. (00:00:28) or in its unmatched distribution and data. (00:00:31) Now, Tobias walks us through Booking Holdings, one of the world's leading travel platforms. (00:00:35) We debate whether AI systems could eventually replace travel aggregators altogether, or if Booking's relationships, networking effects, and position in the travel ecosystem makes its mode more durable than investors currently believe. (00:00:49) And finally, I pitch the most unloved stock of them all, Adobe. (00:00:54) The stock is trading near multi-year lows as the mark worries about, yes, you guessed it, the threat of AI. (00:01:00) And the recent departure of the CEO and CFO has not made the narrative more compelling. (00:01:06) So we discussed switching costs and whether Adobe's biggest challenge is technological disruption or something completely different in a rapid changing environment. (00:01:15) As always, there's plenty to disagree with, plenty to think about, and a few investing lessons along the way. (00:01:21) So without further ado, let's jump right in. (00:01:27) Since 2014, with more than 200 million downloads, we have interviewed the world's best investors, studied deeply the principles of value investing and uncovered many compelling investment opportunities. (00:01:39) We focus on understanding businesses and intrinsic value, investing accordingly, and sharing everything we learn with you. (00:01:47) This show is not investment advice. (00:01:49) It's intended for informational and entertainment purposes only. (00:01:53) All opinions expressed by hosts and guests are solely their own, and they may have investments in the securities discussed. (00:01:59) Now for your host, Stig Broderson. (00:02:11) Welcome to the Investors Podcast. (00:02:13) I'm your host, Steg Broderson, and today, as always, throughout these Mastermind discussions, I'm here with Hari and Toby. (00:02:21) Jens, how are you today? (00:02:22) I'm well, Steg. (00:02:24) Good to see you. (00:02:24) Good to see you, Harry. (00:02:25) Hey, Steg and Toby. (00:02:27) Hello from India. (00:02:28) Good to see you both. (00:02:29) Take it away. (00:02:31) Awesome. (00:02:32) My pick for this time is Meta. (00:02:36) When I was looking at the recent shuffle in the market, I see many names falling down and Meta was one of them. (00:02:44) Its share price from its peak has fallen down by 20%. (00:02:48) And when I looked at the company, the business is pretty strong. (00:02:53) They're one of the two best advertising machines ever built. (00:02:57) In fact, they are on track to beat Google in terms of ad revenues. (00:03:03) They are forecasted (00:03:05) ad revenue for 2026 is $243 billion, which will be $3 billion more than Google's. (00:03:15) And they're growing, their operating margin is very healthy at 41% with a 46 billion free cash flow in 2025, a 30% net margin. (00:03:26) Their revenue has been growing pretty healthily for last five years with a (00:03:32) 18.5% CAGR revenue growth. (00:03:37) So what's the problem? (00:03:39) And the problem is something that is not new to Meta. (00:03:44) They are very bold and very swift in making serious bets. (00:03:51) And they put serious dollars behind those bets. (00:03:55) Metaverse was one of them, which market got spooked. (00:03:59) when they didn't see much returns and they saw it as a money pit. (00:04:04) VR Labs was another one, the Reality Labs. (00:04:08) And this time, what has spooked market is their investments of their projected CapEx, especially of $135 billion into building their data centers and infrastructure for their AI, their big bet that they're making (00:04:26) Their first LLM llama was not a big success, but recently their super intelligence group came up with their latest model, which has performed really well compared to other foundational models out in the market, which gives me confidence that one, they have the ability to come up with a good model. (00:04:49) Two, as we are seeing that models are pretty much (00:04:54) getting commoditized. (00:04:55) That means the incremental difference between models is kind of getting saturated. (00:05:03) Distribution becomes more advantageous. (00:05:06) It's the distribution that matters, whether it is Grog with XAI, Gemini of Google. (00:05:12) Meta has a solid distribution. (00:05:14) The second thing with Google and Meta is they have a lot of use for AI to make their (00:05:22) products better, their ad targeting better. (00:05:26) So they don't have to look for subscription model immediately. (00:05:30) They can actually improve their profitability, their revenue streams for their existing products with AI. (00:05:39) But they're also trying to diversify into subscription. (00:05:43) They are also looking into cloud business, but I'm not going to be accounting for those because those are still kind of things in (00:05:52) on the drawing board. (00:05:53) So my base case is that their network effects, their mode that comes out of it, the ability to use AI as a engine for their ad business, their pricing power, and then the discipline they have exhibited wherein Zuck said in 2023, it's a year of efficiency, even in 2026, they have reduced their workforce. (00:06:19) So they're kind of not going off hinge in terms of spending. (00:06:23) So I'm hoping that will continue. (00:06:26) So my base case is based on these, they're able to recover their FCF margin and also the growth stabilizes without any re-rating of the price to earnings. (00:06:40) I see a 46% upside from here. (00:06:43) If they really hit the ball out of the park with their AI monetization, (00:06:49) then it can be much more. (00:06:50) So that's kind of my case for Meta. (00:06:54) And I look forward to your feedback, Toby and Stig. (00:06:57) Thank you. (00:06:58) Good one, Harry. (00:07:00) I like Meta. (00:07:00) I think it's a good pick. (00:07:02) I agree with everything that you've said. (00:07:04) I think it's an absolutely world-class business. (00:07:07) One of the very unusual ones that still found the lead where Zach is really fully engaged and he's young and he's done a really good job. (00:07:17) So might be one of the best managers in the business at the moment. (00:07:21) Absolutely gushes free cash flow and just grows ridiculously fast. (00:07:25) You've got that optionality that they figure out AI. (00:07:30) It doesn't seem like they're a loser in that race. (00:07:33) They're competitive, at least, even if they're not at the forefront, because as you say, the models seem to be commoditized over time. (00:07:39) And so you don't necessarily need to have the best model. (00:07:42) You just need to have a model that's competitive with the other ones. (00:07:46) I think for Meta, the big issue is I think it's the same one for all of them that they've all got this massive CapEx to chase this opportunity. (00:07:57) It's hard to say whether looking back on this in five years time, it'll be like, oh, it was silly. (00:08:01) Of course, these guys were all going to figure out how to monetize this thing and that was going to be. (00:08:05) Or they all sort of tried to spend all the money at the same time and they all caused each other to overspend. (00:08:15) and the underlying kind of trajectory of the growth of these businesses was going to be sustained anyway. (00:08:22) And so they've just had this period where they've really overspent on CapEx and it's not clear how they're going to generate the revenue out of that CapEx over and above what they're already doing. (00:08:33) And I think that's what the market sees. (00:08:34) I think that's why it's probably reasonable value on what it's already done. (00:08:41) but there's some discount for the uncertainty of their ability to execute on AI. (00:08:46) It's a hard question to answer. (00:08:48) I think that it's such a high quality business that really your risk is not that you're down 50% on a position like this. (00:08:55) I think the risk is just that for a period of time, and I don't know how long this is, but could be 5 years, they just under earn on what they've invested and the multiples come down as a result and they just have like a (00:09:08) I don't know how long, but a period of time while they work through the sort of CapEx spending and start earning enough on that investment. (00:09:17) And at the same time, the problem with the spend on this stuff is that the chips age faster than infrastructure has in the past. (00:09:24) It's not like a railway or fiber optic cable, which sits in the ground for a really long period of time and you just wait for demand to catch up. (00:09:31) I think the chips age a little bit faster than that. (00:09:35) Yeah, you're right, actually. (00:09:36) It needs some faith in Zuck. (00:09:40) So, Hari, again, I really appreciate it. (00:09:43) It's such an interesting time that we're in. (00:09:46) And I have to talk a bit about AI. (00:09:51) I can't help myself. (00:09:52) Let me ask you a question. (00:09:54) And the reason I want to probably want to preface this by saying that, you know, we (00:09:59) We created a model here on TFP of Meta and we came up with a valuation of 775. (00:10:05) At the time, recordings trading at 600 and change. (00:10:07) But of course, whenever you do that, you have different scenarios and you assign different probabilities and then you look back and you're like, oh, like to Toby's point, this happened. (00:10:16) It wasn't that obvious that it would happen. (00:10:17) And I don't know, like right now I'm talking about the future. (00:10:20) I don't think anything is obvious in terms of what's going to happen with AI. (00:10:23) And so it's only really (00:10:25) Whenever we see the result, we think it's obvious, but then you again, you sign the probabilities to what you think is going to happen. (00:10:31) But one of the things that I can't help but think about for many of the stocks in my own portfolio is what happens if computing becomes free or essentially free? (00:10:44) And I know it sounds a bit odd, sort of like to have the framework. (00:10:47) It's a bit like you had a lot of, for a lot of companies, you had this thesis for the longest time. (00:10:53) What happens if we figure it out (00:10:55) how to make abundant energy, for example, and then all energy is free, then we have clean drinking water for the entire world, because being so much energy, but now it's free. (00:11:03) So it might sound very theoretical. (00:11:05) At the same time, you also see what's going on right now, and you see how much cheaper everything becomes in terms of, for example, inference, but then at the same time, you also need that much more. (00:11:16) And so you have these two things that are trying to counter with each other. (00:11:20) But anyways, I wanted to ask, this is going to be a very long question, as you can tell. (00:11:24) what happens if computing, I'm definitely going to use the wrong word here, Harv, but I hope you see where I go with this, computing, AI, whatever you call it, whatever you need to do, if that becomes free or cheap. (00:11:37) And so let me talk a bit more about the framework here, because Meta has so much data that, you know, what happens if they can utilize all that data and collect all of that data and it's essentially free for them to compute? (00:11:52) And then you can basically go to Meta and say, here's $100,000 for my campaign. (00:11:56) This is my objective. (00:11:58) Figure it out. (00:11:59) And then Meta is going to figure it out because computing is free. (00:12:03) Or is that not the way to think about it at all? (00:12:06) Because Meta doesn't have that type of advantage if computing becomes free because then everyone can collect the same amount of data because everything is possible. (00:12:15) And that's going to be my framework. (00:12:16) I know it sounds like a bit of an odd question, but I think we can sort of like break it down from there. (00:12:20) So let me throw it back over to you, Hari. (00:12:23) Yeah, actually great question at stake. (00:12:24) And that's kind of the $1,000,000 question now all of these guys are facing. (00:12:29) If you look at AI in general, I think it is constrained by power. (00:12:34) It is constrained by real estate or space because you got to build a data center somewhere. (00:12:40) And it is constrained by chips. (00:12:43) are the GPUs currently. (00:12:45) Of course, now there are competition from Google and Amazon and others with TPUs and there are specialized chips for inference versus training coming in and then the models are also being optimized. (00:12:59) So the arc is towards that. (00:13:02) So right now we are heavily constrained by chips today. (00:13:07) But as you mentioned, the arc is towards a place where (00:13:11) we might no longer be constrained by that, by a factor of 1, competition catching up, so supply coming into the market, 2, the model themselves becoming more efficient. (00:13:24) And there is a lot of papers now being published on that area, and I'm following that, where so far it was all about features in the model, if you will. (00:13:34) Now it's all about how to optimize the model for energy, for cost. (00:13:39) In fact, Google Flash, Gemini Flash, recently in their Google IO, they talked about how if you use Flash, you will save billions of dollars because it's much more efficient. (00:13:50) So that conversations have already started. (00:13:53) So I think with that arc continuing, Facebook has the advantage that it has the walled garden. (00:13:59) Not everybody has access to what the data Facebook has, and it can leverage that data (00:14:06) whether it is for better ad targeting or for suggesting products to its customers, or even coming up with new features and product and subscription model for its customers based on the treasure trove of data they have. (00:14:20) So that can prove to be an advantage for Facebook because their cost of delivering AI goes down as chips gets commoditized or model becomes more efficient. (00:14:33) Now they have the advantage of data. (00:14:35) Thank you so much, Harry. (00:14:37) Toby, you are up with your pack. (00:14:41) Mine is also a AI impacted name. (00:14:47) I like booking. (00:14:48) Booking.com. (00:14:50) If you're in the States, you'll see any ads, right ads. (00:14:54) Booking.com really sticks in the mind. (00:14:56) It's a big company. (00:14:57) It's much bigger than I usually pitch. (00:15:00) And it's more expensive than I usually pitch. (00:15:03) But I think it's interesting (00:15:05) Because it is so dominant and I think it's one of the unusual chances that you get to buy one of these companies cheaply, just so for folks who don't know, Booking is a business that allows you to book travel. (00:15:20) They have Booking.com Priceline, which has been a great business forever. (00:15:24) Agoda, I don't know particularly well, but Kayak is also a name that folks will recognize and OpenTable. (00:15:30) Over time, there's secular growth in travel. (00:15:33) As people become more wealthy, they tend to travel more. (00:15:35) and they're able to control the experience. (00:15:41) They're able to upsell and control various parts of the experience. (00:15:44) They have a business model that doesn't. (00:15:47) So through 2020, some of the other sites in an effort to compete with Booking, they buy rooms up front. (00:15:53) They get caught when the rooms weren't taken. (00:15:56) Booking.com doesn't do that. (00:15:58) They don't buy their rooms up front, so they're very capital light. (00:16:01) They don't own the underlying assets, they just hook people up. (00:16:04) The big risk to booking is that folks think that they can somehow they will figure out how to get AI to control. (00:16:14) You'll just type into your AI that you want to book a trip somewhere and the AI will do all of that for you without you having to interact with any of these sites and it will either do it directly and therefore cut out booking.com (00:16:29) So booking.com, their thesis though is that doesn't happen. (00:16:33) So they're not disintermediated because there is a large database of all these sites and there are relationships that need to be maintained. (00:16:42) It's not a simple matter of just calling them and paying them. (00:16:45) They have these specialized relationships. (00:16:47) And so in order for ChatGPT or Claude or one of the other LLMs to access these (00:16:55) travel agents that'll need to go through booking.com in order to do it. (00:16:59) I don't know what the likelihood of that actually happening is, but that's their thesis. (00:17:03) They think that they won't be disintermediated, that they will continue to be part of that acquisition, that purchase journey. (00:17:11) The rest of the business is, it's very well managed. (00:17:14) Capital allocation is excellent. (00:17:16) As a result, it tends to be very high return on invested capital. (00:17:20) It's grown very steadily for years and years. (00:17:24) and has all the things that make it a great business, very asset light, great sort of network. (00:17:29) Once people get used to the site, there's high switching costs, lots of free cash flow. (00:17:34) So the competitive advantages I think are durable. (00:17:38) The risks to booking are travel is still sort of somewhat cyclical with if the economy goes through a weaker period, then folks just tend to travel less. (00:17:50) And because of the way that booking is priced, really is priced, assuming some future growth or assuming that it continues to grow into the future somewhat like it has in the past, if that sort of revenue growth slows down, that's the sort of return we would likely expect. (00:18:08) I think the most likely outcome is that travel just sort of generally grows as it has historically. (00:18:16) I like companies that buy back stock at opportune times and I think that they're doing a good job buying back here. (00:18:21) The bull case is that AI helps them and they become this sort of channel for all of these other LLMs and they just continue to grow. (00:18:34) They interconnect with them easily seamlessly. (00:18:36) You don't even know that it happens. (00:18:38) And so they do a lot better than they have historically. (00:18:42) you can handicap the bull and the bear and maybe they cancel out. (00:18:45) And so the base case is the most likely, which is just that they keep on sort of muddling along. (00:18:51) I think that booking is a reasonable risk adjusted bet at these levels because it's a little bit depressed with the fear around LLMs, but there's a reasonable chance that they are beneficiaries of that. (00:19:05) Very interesting pick, Toby. (00:19:06) And I think there are so many (00:19:09) Suddenly the market has become interesting now with the AI scare. (00:19:14) One question I have is, I agree with you, the relationships booking has, the channels they have maintained is definitely a mode for them. (00:19:23) Even if I'm going through, say, a ChatGPT or Anthropic Cloud client and booking becomes like a headless and provides an API, it might go in background, but I'm still querying booking. (00:19:38) through ChatGPT or LLM. (00:19:40) So booking can be a plugin to ChatGPT. (00:19:43) So that's kind of the case where it's still there, it's not disrupted. (00:19:49) However, in the longer term, so in the short term, it's not a problem, but in the longer term, they're gradually losing the mind share. (00:19:59) And they're also (00:20:00) losing the real estate in the sense that right now folks land on booking website and they can cross-sell to them, you can promote, you can show advertisements, and then people discover things as they are on the site. (00:20:20) So those are some of the opportunities they might lose in the long term if they just become a plugin for Cloud or OpenAI. (00:20:29) It's certainly sold off over the last sort of six months after being a pretty consistent compounder for a very long period of time. (00:20:38) I do think that the valuation got a little bit ahead of itself, but I think the valuation has, it is at a reasonable discount now. (00:20:47) Or if it loses that mind share, then that's the bear case. (00:20:50) That's the risk. (00:20:52) So I think it's a great question. (00:20:53) I don't have a great answer, but I think that you've, I think that is really the (00:20:58) The reason why Tradesfer does. (00:21:00) Let's take a quick break and hear from today's sponsors. (00:21:03) Curious about online trading, but haven't taken the first step yet? (00:21:06) You're not alone. (00:21:07) And Plus 500 Futures is a great place to start. (00:21:11) The futures markets are moving fast, and with Plus 500, you can explore popular assets like oil, gold, S&P 500, Bitcoin, and more. (00:21:19) From crypto to commodities, there's always something happening. (00:21:23) The platform is super easy to use, so you can trade on the go right from your phone. (00:21:27) You can get started with just $100 and jump into the action. (00:21:31) See something interesting? 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(00:24:14) Booking has been on my radar for years now. (00:24:19) And I can't really figure out now that it's been selling off, like if now's the time, because I do feel like there is a reason why it's selling off. (00:24:26) And I know this is very anecdotal, but please take it for what it is. (00:24:29) But I just came back from a wonderful trip to Paris with my wife, and I've seen how we increasingly have started to use LLMs. (00:24:39) And this one probably, because it was as recent as last week, was the one where we used it the most. (00:24:45) And it's so incredibly helpful in so many ways. (00:24:49) You talked before about all the things that were working behind the scenes that's super, super important and that just needs to be done. (00:24:57) And so I'm sort of like using that as a microcosm for, it's probably just me who are an ignorant traveler. (00:25:02) I don't know why it's so difficult that you can't make it through an LLM. (00:25:07) Like why can't I tell an LLM, book me a hotel in Paris throughout this criteria and then I probably need to give a final sign off and then I don't need booking.com at all. (00:25:17) I think Hari is absolutely right that there are some wonderful things that something like Booking.com can do. (00:25:23) For example, you can explore, you can do that different ways. (00:25:26) But I guess I'm not sure if you need an intermediary like Booking.com if you're already doing it through an LLM that knows you better and will give you, like one of the challenges I have at Booking.com and I've used it multiple times is that I kind of feel that there are too many options. (00:25:42) It's almost like going on Netflix sometimes. (00:25:44) And so I'm like, (00:25:45) If my LLM of choice is really knows me better than anyone, I would probably like to put in different criteria, or perhaps I don't even want to put in different criteria because it already knows me. (00:25:57) And then these are the three, five choices, and then I'm going to click that one. (00:26:02) And so I also think it goes to Horace's point about like, are they going to lose Mindsha, perhaps? (00:26:09) I can probably see a case where LLMs, because they're so expensive to run, they would need like the booking.coms, their advertising dollar. (00:26:16) You know, I think it's well known by now that booking.com is one of the biggest spenders on Google. (00:26:21) And I can see your sort of like why you want to build a big new business model up around that because travel is such an obvious thing to use LLMs for. (00:26:28) And so that's a way to monetize it. (00:26:30) Right now they can just raise money without making any money. (00:26:33) So perhaps they're saying, no, we're just basically cutting out the middleman. (00:26:36) We don't care about advertising. (00:26:37) We're just (00:26:38) providing the best possible service. (00:26:40) And again, this might be my own travel habits. (00:26:43) I would love if I could go to ChatGPT or Gemini or whatnot and not go through booking.com. (00:26:49) That brings me absolutely no pleasure, but perhaps I'm just a very anxious traveler. (00:26:54) So anyways, those were a few thoughts. (00:26:56) Let me say it back over to you, Toby. (00:26:58) I think those are good thoughts and I think that is the real risk. (00:27:01) We're in this transitional period where (00:27:04) We don't really know how everybody's going to interact with all of these businesses. (00:27:10) And because booking.com is an aggregator, it's entirely possible it is intermediated by the LOMs. (00:27:17) The only thing I would say is that has always been the risk, but the boogeyman for most of booking.com's history was Google, that Google was going to do exactly that, you could just search. (00:27:28) And Google has tried to do that. (00:27:29) You can search flights and so on Google. (00:27:32) and then book all the way through with the carrier. (00:27:36) And that's disintimated booking.com. (00:27:38) But booking.com has continued to be, has continued to grow and the lines show that despite the fact that Google has been out there. (00:27:47) But again, as Harry mentioned, does that impact their mind share and their ability to charge? (00:27:52) I think that's a good question. (00:27:53) But I still think that you get, this is not priced for perfection. (00:27:57) I think that you're getting a little bit of a discount. (00:27:59) And I guess the question is whether the discount is enough for that risk. (00:28:04) But I think that there is, if you assume that things sort of go back to normal, it doesn't continue to earn what it has in the past, but maybe it sort of muddles along a little bit below that. (00:28:15) I don't think you're going to too many problems here at the current valuation. (00:28:19) So a way of thinking of this is if booking.com disappeared tomorrow, who would notice it first? (00:28:25) Would it be travelers or other hotels? (00:28:27) And (00:28:28) There's a bit of a, probably a bit of a rhetorical question, but I see why booking.com has a strong foothold, especially here in Europe. (00:28:36) We don't have as many brand new chains as you do in the States, for example. (00:28:38) So there are a lot of independent hotels, very like they don't have a lot of rooms and they're very much dependent on the booking.coms of the world. (00:28:47) One of the things that we talked about here before we hit record, because I'm also going to talk about a company where the management is saying AI is going to be a tailwind, not a headwind. (00:28:57) But I dare everyone to see if they can find a CEO of a public company who is not saying that AI is definitely not going to disrupt them, but this is going to be a tailwind. (00:29:07) Anyways, one of the ways that I like to think about this is, can it replace the entire value chain? (00:29:13) And that was also what I was getting at here with Har before, where I was saying, okay, when, if, when, and how would it look like if I went to Meta and said, here's $100,000, (00:29:23) run my campaign, this is what I want to achieve. (00:29:25) And then they will figure out the rest and create the ad and like whatever. (00:29:29) I probably would like some kind of control, but even so, I want to see more money coming in and get a report on that than the money I'm putting out. (00:29:37) And the more automated it can be, the better. (00:29:41) Of course, it's going to take a long time before AI can like change the sink in my house, but how long is it going to take before I can do something that's completely digital? (00:29:51) And so one of the things that I was quite impressed by and have been, because I've been using LLMs here for, well, I'm going to say for the longest time, but I haven't existed for the longest time. (00:30:00) But just something like you see what kind of tasks it can do whenever you're traveling and how helpful it is in terms of planning, whatever. (00:30:08) I don't know. (00:30:09) Whenever I look at what booking.com is doing, I wonder if it can do the entire value chain and how long it's going to take. (00:30:17) And I'm not, again, I kind of sound overly barriers. (00:30:20) I've been looking at this wonderful company for the longest time. (00:30:23) I think it's a very, very strong company. (00:30:24) So please don't get me wrong. (00:30:26) I think it might be a helpful framework in terms of seeing when is this going to be disrupted and how is it going to be disrupted. (00:30:32) Because if it could only take a small part of the value chain and then do it much, much better, then it could be a tailwind. (00:30:39) So anyways, just a few thoughts that came off way too much barriers than I wanted it to sound like. (00:30:47) I think they're off about 30% from their high on a sort of DCF basis. (00:30:51) I think you can get to about $220. (00:30:53) I think it's worth about, it's trading at about 167 today. (00:30:58) So the question is, that enough of a discount for those risks and that 220 is based on sort of historical growth rates. (00:31:06) They've bought back a significant amount of stock over the last 12 months as they've traded down. (00:31:11) I think it's (00:31:13) It might be one of the bellwether sort of stocks that we watch and tells us how the LLMs are impacting other businesses. (00:31:21) It's an interesting time in the markets, fellas. (00:31:25) It definitely is. (00:31:26) All right, so thank you so much, Toby. (00:31:29) Now it's time for you to bash my pick. (00:31:32) My pick is Adobe. (00:31:34) And if anyone is unfamiliar with Adobe, it's a software company. (00:31:38) They're known for Photoshop in particular. (00:31:42) But now, they have a ton of different apps you would typically use if you're a designer, creative person. (00:31:47) They also have something called Digital Experience that's more about analytics. (00:31:51) But my pick is Adobe. (00:31:52) I guess that's what I'm trying to say. (00:31:54) Market cap roughly $100 billion. (00:31:57) And it has been growing double digits for the longest time. (00:32:01) And it's not only trading at a 52 week low or near that, but near a seven-year low. (00:32:08) And of course, I should have said that (00:32:11) It traded at 224, not too long ago. (00:32:15) At the time of recording, it's 270, so it had a small bump. (00:32:19) But the market, like all software or SaaS companies these days, is just unloved. (00:32:26) Because at first glance, there is a lot to love. (00:32:28) 96% of the $23 billion in revenue comes from subscription revenue. (00:32:34) That is exactly what you want to see. (00:32:36) Diversified base of more than 41 million paying users. (00:32:41) And I mean, if I had pitched this just a few years ago before the era of the LLMs, we'd be all over it. (00:32:49) But of course, you could also see that in evaluation because everyone was at some point in time trying to make their software business into, software as a service with a subscription. (00:32:59) And Adobe has really been one of the companies that men do that successfully. (00:33:05) You know, back in the day, (00:33:07) you would not use it in the cloud. (00:33:09) You would use it, you would get a CD and then you would install it. (00:33:13) And then some of the younger listeners are probably saying, hey dude, grandpa, what's a CD? (00:33:19) To which I'm going to say it's a more modern version of a floppy disk. (00:33:24) And so of course that's my way of saying that I'm super old, but it's also my way of saying that Adobe IPO'd in 1986 and it's really been the industry standard more or less ever since. (00:33:36) many people don't think about a PDF whenever they use that today. (00:33:40) That's a standard, owned by Adobe. (00:33:43) And there is something to be said about whenever you, for example, whenever I'm, if I'm calling a car, like, or I would visit Toby, I would be Ubering, you know, that's a verb. (00:33:54) And if I'm going to edit a photo, I am not editing a photo, I am photoshopping. (00:34:00) And, you know, Adobe saw that a long time ago. (00:34:04) Actually, they didn't come up with (00:34:06) with Photoshop themselves. (00:34:07) They acquired the rights to market it from the Noll brothers. (00:34:12) But it's a long time ago and today, everyone associates very much Photoshop with Adobe. (00:34:17) Launched in 1990. (00:34:19) Let's just continue to take a trip down memory lane. (00:34:22) It was four years before Netscape for your listeners who remember that company. (00:34:27) All right, so let's talk a bit about the competitive advantage. (00:34:32) The most important mode, I would say, is switching costs. (00:34:36) And I was hinting at before, you can think of Adobe as having two segments. (00:34:40) They have digital media, which is 76% of their business. (00:34:43) And that's where you have the creative cloud, you have the document cloud where that resides. (00:34:48) And then you have digital experiences. (00:34:50) That's the enterprise software business that help companies manage marketing, customer data, e-commerce, digital content, and so on. (00:34:59) And (00:35:00) We're all creature of habits. (00:35:02) And as uninspiring as it sounds, inertia is just very good whenever you're thinking about it in terms of a business model. (00:35:09) And you also have to consider that people follow incentives. (00:35:14) And of course, in this day and age with AI, it seems like it should be a tailwind. (00:35:20) Shareholders, management, they want the employees of whatever kind of company to embrace AI. (00:35:27) For example, to become more productive or to save on costs, guess what? (00:35:31) Most employees do not have the same incentive. (00:35:34) They think, and perhaps rightly so, that any efficiency gains doesn't really benefit their paycheck. (00:35:41) And worst case, they can lose their own or the coworkers' jobs. (00:35:45) And so management and shareholders just are way more excited about embracing AI to cut costs, which very often mean salaries. (00:35:55) And (00:35:56) I would also say that it sounds good on paper, right? (00:36:00) But let's look at from the other side. (00:36:02) Even if we are looking away from the financial incentives and job risk and so on and so forth, there is a professional pride in knowing how to use Adobe. (00:36:13) If you're a designer and you're taught those tools, you've used it for decades, it's really difficult to embrace a new technology where there is a level playing field for (00:36:23) I wouldn't say everyone, but more or less everyone and certainly someone who's entry level who might be making a third of what you're making. (00:36:29) Like you don't really have that incentive to stop playing that game. (00:36:35) And I'm going to talk a bit more about incentives here, but I think anyone who's been running a business would tell you that whenever you roll out a new initiative, everyone would constantly or subconsciously be thinking, what's in it for me? (00:36:49) And (00:36:51) One of the things I often think about whenever I would make an investment is how does this align with human nature? (00:36:57) in this day and age, we see disruption from everywhere, but it's very difficult to disrupt human nature. (00:37:04) And so one of the things that I wanted to highlight is like for 99% of people have an easier time spending other people's money than their own. (00:37:14) It sounds so passive aggressive whenever I'm saying this. (00:37:17) But I think a lot of the AI fears are probably overblown in the sense of how rapid things are going to change. (00:37:25) And I'm not questioning at all that AI is going to change a bunch of different things. (00:37:29) But I think we sometimes underestimate how much of these changes that need to be almost brute force and how difficult it is to brute force something in an organization. (00:37:40) And it is very difficult to get people to understand something whenever your livelihood is depending on not understanding it. (00:37:47) And of course, even that there's a limit to. (00:37:50) If you don't understand the car and you swore by faster horses, you would eventually have to wake up to the reality. (00:37:58) And so I'm not saying that if AI isn't 10 times better and despite the switching cars, then we would eventually have to use something else than say Adobe's products. (00:38:10) And of course, whenever you ask the CEO about that, he's saying, oh, no, (00:38:16) AI is not going to disrupt us. (00:38:17) It's going to be a tailwind. (00:38:19) We're going to be so much better because of AI. (00:38:22) So I think that's a pretty weak signal. (00:38:25) Any CEO that's worth his salt would probably say that today. (00:38:28) But I would also be the first to say that a company like the Investors Podcast Network, we are so dependent on Adobe. (00:38:37) And we're 20 people on the team. (00:38:39) 15 of them are using Adobe. (00:38:42) Some of them are just using one app, but most are using the entire suite. (00:38:45) and the overall cost is significantly less than 1% of our total cost. (00:38:51) So as much as it sounds great, let's use something that's cheaper and it's sort of like a different discussion if it's better, but let's say that this is going to be a lot cheaper. (00:39:02) You know, even me as one of the owners of the company, as much as I would like to save on cost, it's just not really a cost saver. (00:39:10) And whenever you run a company, and of course it depends on the company, but (00:39:15) It's not always the creative people that are paid the most. (00:39:18) They are typically one team inside a larger organization. (00:39:22) It's the same with TIP. (00:39:24) Then you have the salaries. (00:39:25) So the people, that's the biggest cost. (00:39:28) And then the second biggest cost is typically the equipment. (00:39:30) And then a very small part of the cost is the software. (00:39:35) So you're looking at something that's very small. (00:39:37) So whenever you're doing that, I would say that Adobe is an incredible cheap product. (00:39:42) for the value that it provides. (00:39:44) And I think it's very important that you also, whenever you hear people talking about the cost of Adobe, you would have a lot of people who are saying, it's ridiculously expensive. (00:39:55) You know, the freelancer who has a side hustle.