Perplexity’s Fourth Funding Round + Lessons From Boeing in Long-Term Thinking

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1:52Today's number,$400 ,000. That's how much Al Pacino paid his landscaper per year to maintain a property he didn't live in. And true story, Ed, the pool boy fucked my nanny. So I ended up catching a cold. True story, Ed, my pool boy fucked the nanny. So I caught the cold my wife had.

2:24Takes a minute, but it's funny. I think the funniest was the initial botched delivery. That was my favorite part of the joke. I hope that stays in the edit. That happens a lot. Welcome to Prof T Markets. Today, we're discussing Boeing's terrible day. A lot of jokes in there about air disasters, but I'm not going to make them. And perplexity's fourth funding round. That's where we are. Boeing workers are on strike and perplexity is raising a fourth round. But here for, oh wait, banter, I'm sorry. It says banter. Ed. Stop giving it away. You can't read the script word for word. What's going on in the life of a 20-something living in Brooklyn?

3:05I'm doing very well, Scott. It's been a busy week. Doing a lot of interviews. I just did two first-time founders interviews, which are very exciting, but I'm not going to give any of the details away. No, you don't want to promote it. You don't want more downloads and for us to actually make money off this Joey Bag of Donuts first-time founders podcast that we're supporting as your vanity project. Why don't you take up DJing and charge us to do that? I already do that. There you go. What else are you doing other than first-time founders interviews? what's been going on? Let's see I got some Halloween parties coming up but I don't I don't have a costume you got any ideas for me?

3:36I have a Deadpool costume you can have Oh yeah? Yeah it's awesome Mary Jean got it for me You still have it? Cheers if you want it Maybe I might take you up on that That's a good idea What are you going to be? I'm very excited I'm going as Richard Simmons although I'm going to be in London and 8th and then I don't have Halloween and me walking around in dolphin short shorts with my sons who will be walking 20 meters ahead of me because they'll be so horrified they're at that age where they're not going to do Halloween for 20 years Halloween's awesome when you're a kid and then it's awesome when you're older yeah exactly I don't I don't like Halloween myself these days oh my god how can you not love Halloween because it's like the whole thing is just like wait what are you and then everyone has to go around and explain what they are and it's like I don't know it's just like it's always it feels so contrived to me well I go as myself and people ask me what I'm supposed to be and I say I was supposed to be a lot of things And then I start weeping.

4:31That's good. Get to the headlines, Ed. Let's start with our weekly review of Market Vitals.

4:43The S &P 500 declined, the dollar gained, Bitcoin was flat, and the yield on 10-year treasuries increased. Shifting to the headlines. Sales of existing homes in the US fell 3.5 % from a year earlier. That's their lowest level since 2010 and on track for their worst year since 1995. Tesla's net income rose 17 % in the third quarter from a year earlier, beating analyst expectations. Elon Musk also predicted vehicle growth would reach at least 20 % next year, and the stock rose more than 20 % following that earnings report. McDonald's stock fell 10 % after its quarter pounders were linked to an E.

5:19coli outbreak. The illness has led to 10 hospitalizations and one death. And finally, Sheehan's profit declined 70 % in the first half of the year to just under$400 million. Revenue growth also slowed to 23%. That's nearly half of what it was a year ago. The deceleration in growth could complicate the company's plans for an IPO. Scott, your thoughts starting with this disappointing home sales data. It's really wild. The housing crisis or the housing sales just keep getting worse. I would have guessed we would have bottomed out about a year ago. Also, I think people are sort of just giving up on housing and they don't see it any longer.

5:55It's kind of the American dream. I think it's really too bad. I think it's a supply problem. We talk about interest rates. We talk about having cheap capital to go buy a house. I think there's only one way out. I think we need fairly significant government subsidies to kind of put the private sector into action and just start building a ton of houses and also past regulations that make it increasingly difficult to block housing permits. What are your thoughts? It's massively disappointing to me, especially as a young person who wants to buy a house someday. I mean, that is a personal objective of mine.

6:30So I hate to see this news. Having said that, yes, home prices relative to income have never been higher. I mean, it is out of control, the price of homes today. But if you look back at the data and if you also factor in mortgage rates in addition to home prices, it turns out that actually housing affordability today in a holistic level is around where it was in the mid-1980s. And that's because back then, the mortgage rates were just way higher. Like a 30-year rate was around 15%. Back then, today, it's around 6%. So when you factor all of that in from an affordability perspective, things actually look very similar to the 1980s.

7:15Now, I'm 25. And who were the 25-year-olds in the 1980s? It was the boomers. And who ultimately benefited from this rapid transformation of the housing market right when they hit their income earning years? It was the boomers. So I look at that data, and there are definitely very different dynamics at play here. For us, it's a price issue because of supply. And back then, it was a rates issue. But I am hoping, just based on the fact that I am in a kind of similar position to where boomers were at my age, I'm kind of hoping that something's going to change. I don't know exactly what it's going to be.

7:51I don't know what that would look like. Hopefully, it just means more housing permits, more supply. But I do have hope. And I think the right thing to do, which is what I'm doing, is just scouring real estate. I'm trying to get an understanding of this market, not because I'm going to buy something right now, but just so that when things do change, I will be ready to get involved and I would encourage other people my age to do the same So when I was your age, I bought my first home at 27. I was a year older than you when I bought my first home I just gotten out of the hospital business While I decided to start my own business the offer I had from a consulting firm was a for a hundred grand total comp My girlfriend was making I think about 80 So we had 180 grand and we bought a house in potrero hill in san francisco for 285 ,000 dollars.

8:35So one and a half 1.6 times our annual income. And we brought some money from her parents and we bought our first home. Did you take out a mortgage on that? Yeah, we had a mortgage. I don't even remember the interest rate. But two or three years later, maybe four years later, I peaked early at, I bought the house that is no joke on Noe Guerrero and 21st that is next door to where Mark Zuckerberg lives. And I paid$760 ,000 for it. And a few years later, I sold it for 920 and I I thought I was a fucking real estate genius. I thought, oh my God, pretty sure like his security lives in that house. And I would have paid so much money to just be able to sit out on my porch and a wife beater in a lawn chair.

9:18And when he come home, like how many teens did press, how many teens are self-cutting today? You fucking bitch. I just would have given anything. I'm sure people are already doing that. I just, anyway, so, but where I was headed with this is if you think I was making a hundred grand, And a story of privilege out of an elite business school, 2.8 times got you a house in San Francisco. Now I bet the average compensation out of the house school, again, these are good problems, is about 200 or 225. The average home, I think, in the Bay Area or San Francisco now is 2.1 million. So it's gone from 2.8 times the salary of an MBA grad to 10 times.

9:56Fucking insane. This needs federal action. And this needs a fairly serious subsidy or tax credit for developers who figure out a way to build housing. And then some sort of, I don't know if you have to go state by state. Supposedly there's some mayors in, for example, Minneapolis and Austin who've done a good job of figuring out a way to build more housing. But I had a really interesting conversation with Jessica Tarloff, who's my co-host on another booming podcast. Ed, I don't know if you've met her. I don't know. Who is she? Who is she? She said her and her husband make really good livings, and they've decided they live in Manhattan.

10:30They decided to rent, not to buy. And they could afford to buy, but they said, and it seemed simple, but it was sort of striking. They said, our money is doing better in the market than it would in a Tribeca condo. And I thought that was really interesting that they've made a conscious decision to leave their money in the market instead of putting all of it into a condo. But I like the way you're thinking. I do think at some point buying a house, understanding the market is the way to go. Certainly a case-by-case basis. I think that, as Ramit Sethi told us, the cult of home buying is kind of a trap.

11:05Sometimes renting is the right move. Let's move on to these Tesla earnings. Tesla had a good quarter, actually. Revenue was up 8%. Their energy and storage business was up 52%. And margin growth was really good. operating expenses are down 6 % after they cut a tenth of the workforce. So this is sort of what we've been looking for. This isn't the BS that we saw at the We Robot event at the Warner Brothers studio. This is real meaningful progress. It's real data. This is just about the performance of the fundamental business, and the fundamental business is doing pretty well. Does it warrant a 20 % jump in the stock price?

11:45I don't think so. I think it certainly warrants a jump. The one thing I would flag, though, is the valuation still. It's trading around 30 % down from its peak in 2021, but it's still trading at 79 times forward earnings, which is roughly double the multiple of, wait for it, NVIDIA. So if you wanted to value Tesla today on par with Nvidia, the stock would need to come down 48%. So good quarter, but Tesla is still way, way overpriced. The only thing I saw in this as I looked through the earnings was that it was revenue increasing 8%. Isn't that big a deal? I mean, that's good for a car company.

12:29But the story here, and they did a good job laying it out in the earnings call, was that it's not the revenue increase, it's the revenue mix. And that is the sale of higher margin products. So storage batteries, which are used by utilities, businesses, and homeowners increased 52%. And revenues from services, including charging, jumped 29%. And those are higher margin offerings in their cars. And they've also deployed more battery storage products this year than it did in all of 2023. So for all the Tesla bulls who say, it's not a car company, it's an energy company, it's a services company, now they can legitimately say, see, I told you.

13:05Yeah, but it's not an AI company. And that's my issue. They're not selling you robots. But to be fair, this more robust revenue mix or growth in higher margin product categories resulted in their gross margins increasing 200 basis points and their net income increasing 17%. And I think that's an important lesson for entrepreneurs. And that is when I had my firm L2, I would say, okay, we can get, we get paid, you know, if I come spoke or a one day symposium or people constantly want us to do a consulting gig. And I'm like, rather than getting a half a million dollar consulting gig, we'd much rather get a$200 ,000 annual recurring membership because all revenue is not created equally.

13:49And revenue they get from their automobiles is going to have a much lower multiple on it than revenue they get from services or charging because they have higher margins, more sustainable. I think the Tesla product lineup, quite frankly, is a little bit tired. So this is about revenue mix, not about revenue growth. Should we talk about McDonald's and this E. coli outbreak and the initial reactions? See, here's the thing about what you want to do if you're McDonald's or in the fast food business. You can kill hundreds of thousands of people as long as you kill them slowly. but if you kill a bunch in one day, your stock gets taken down.

14:23Seriously, how many people do you think are going to have colon cancer this year because of a lifetime of McDonald's? I mean, it's just, if you price McDonald's to its externality, specifically if you price beef to what it costs because of water, subsidized water and the health externality, a Big Mac would be 50 bucks. So I don't especially like this firm. I would just love to see an article on how many people died today because of long-term illness from this type of food. Anyway, it's easy for me to say. Yeah, I mean, the investor reaction, I think people were pretty freaked out by this. But I think the thing to remember about these outbreaks is that in the food industry, this actually happens all the time.

15:07It happened to Wendy's a couple years ago, and it was E. coli. it's happened to taco bell jack in the box tim hortons on and on this is sort of a rite of passage in the fast food industry you have an outbreak then you announce a recall and then you kind of you move on and life goes on what you don't want is what happened to chipotle back in 2015 which is where there was an e coli outbreak 20 people were hospitalized and zero people died but it just exploded into this giant international news story. The media totally ran away with it. It was really exciting. Everyone was talking about it. And as a result, despite the fact that it was historically pretty standard, sales dropped 20%, profits fell 50%, and the stock was cut in half.

15:56And it was like the worst thing to happen ever. So McDonald's needs that to not happen. My view, it won't happen. Why? Because we've got a presidential election coming up in two weeks. weeks. I just don't think there is enough steam in the media to turn this into something bigger than it is. My prediction is that, you know, come next week, it won't be an issue. We're focused on other things. Chipotle, after it had that 50 % cut, it's up sixfold since then. And this is Pulse Marketing, but my first thought when I read about McDonald's was like, oh, it's time for a colonoscopy. And also I quite enjoy it.

16:32That Michael Jackson drug, oh my God, that shit is money. That shit is money. God, that's a good sleep. That's a good sleep. And I love my jokes in there. I'm like, will you stroke my hair as you're probing my hair? I'm full of so many jokes. And they're like, we've heard them all. Any new ones? Exactly. It's like hosting this podcast. Yeah. But my first thought, I remember when I heard about the Chipotle e. coli outbreak, Rick, you know what my first thought was? Jesus, I'd like some Chipotle. I think the Chipotle product is so outstanding. I think it is just an amazing, and actually it's not, I wouldn't call it health food, but I would go as far to say it's actually fairly healthy.

17:15And it's got the right fats, it's fairly fresh. And the most, I have such fondness or affection for Chipotle because the first swag I ever received when we started this Joey Bagadonis podcast about 300 episodes ago, I just constantly talk about Chipotle. And you know what they sent me? They sent me a lifetime free card of Chipotle. Like, and I had this card and I knew I was going to get it. So my kids were in Manhattan and we roll into Chipotle and they order something and I pull out the card and I'm just very slick about it. My youngest one goes, what is that? And I'm like, oh, it's a Chipotle card.

17:49He's like, what do you get with it? I'm like, well, I never have to pay for Chipotle. Holy shit. He has never been as impressed with me. He just couldn't believe it. He wanted to see the card. I want to say, what does it look like? It's okay. It looks like a, I don't know. It's just a little, looks like a credit card. And it says Chipotle lifetime free or whatever. I don't use it because I'm lazy and I can't find the card. And I don't know, I can buy my Chipotle. But anyways, let's talk about Shin. Yeah, let's talk about it. Your reactions to growth is slowing. You're an investor, right? I am an investor.

18:19It's one of my biggest investments. So, okay, let's just be real here. And granted, I have a vested interest in success, this company. The bad news is its growth slowed to 23%. The good news is it's growing 23%. Amazon retail was up 9%. Zara was up 7%. H &M was up 1%. So Shein is growing two and a half times as fast as Amazon. I mean, I guess it's all how you frame this. When I heard about this, I actually felt pretty good about my investment. If a company that's doing$36 billion in sales is still growing 20, can you name any company over 10 or 20 billion growing more than 20 % a year that isn't valued at a trillion dollars?

19:02I was going to say NVIDIA until you said that. Right. I mean, there are firms that big growing that fast, but they're all worth more than a trillion dollars. So I don't know. I like my prospects here, Ed. I like my prospects. What do you think? What do I have this wrong? I don't think you have anything wrong on the financials. I completely agree with you. I think this business is still crushing it. Where I continue to disagree with you, I don't want to rain on your parade or be the woke police is the moral viability of this company. The moral viability. Well, smell you, you little indulgent virtue signaling millennial Brooklyn sandaled eye.

19:39Don't speak too soon. Because wait till I drop this on you. So I've told you that I think that there are valid concerns about child labor at Sheehan. And it turns out, as of a couple months ago, they released a report. they have been using child labor. They found two cases of child labor in their supply chain. And to be fair to them, they reported it and they disclosed it and they cut the ties with those suppliers. But the fact remains, it's like, wow, how do they sell dresses for$10? Well, the answer is that they've spent the majority of their time employing children to do it. I'm defensive. I spent some time looking at this.

20:19The first was that they were using forced labor for their cotton. And they've actually gotten out of all cotton, I believe all cotton production in China. And they had a company that looks at clothes and tries to estimate the amount of cotton coming from a forced labor region. And they actually had a lower count than many of the other fast fashion guys. So the management I know, or at least the interaction I've had with them is they are committed to, for economic reasons, being the best or one of the better players in this space around this stuff. And I think when they found that out, they disclosed it, which is unusual.

20:54It wasn't like Mark Zuckerberg going in front of Congress and lying and saying, I've heard actually social media is good for the mental health of teens. They said, we found it out, we're disclosing it, and we're severing ties with these guys. I would like to see a similar audit across all the other fast fashion guys and find out, yeah, where is their cotton and where is their shit being made? I agree that But when you're buying a T-shirt that's three bucks, it's unlikely the supply chain is aspirational. It's just it's unlikely that the employees are getting pet bereavement leave and mental health counseling.

21:27But I don't I believe management when they say we're going to try for economic reasons to starch our hat white here. So I don't you know, if I sound offensive, I am. But Donald Tang, the chairman, has said to me straight up, he's looking me in the eye and said, we're going to be the role model. in, they don't call it fast fashion, an on-demand fashion around a sustainable, progressive, ethical supply chain. But they should be held accountable like anybody else. As you say, countless companies have done countless bad things. Apple has had supply chain and child labor issues as well. You know, so has Nike.

22:03I think the reality is, you know, I just look at the company, I associate it with that. It turns out it's true. It may be true of other companies, But the reality is that, for me at least, I still hear the word Xi 'an, and my initial gut reaction is, eh, not a huge fan. And I would bet that a lot of people feel similarly, and I think that's why you're seeing some of these issues they're having with getting out to the public markets. It's also because they're from China, or at least the majority of their supply chain is in China. But that's just the gut reaction. And so, yeah, I think it's on them to address that.

22:41And I think that starts with doing a very, very thorough audit of their supply chains, which they appear to be doing. And maybe over time, they'll get me on their side. Actually, Edward, you buy your clothes. Where do I get the kind of like skateboarder who things didn't work out for look? That's good. That's good. I've been on a pretty big J.Crew kick recently. J.Crew? So you're just leaning into that whole Caucasian thing? Yeah. J.Crew. Wow, I did not expect that. J.Crew, send me a lifetime card, please. There you go. We'll be right back. Thank you. off your plate. You can even automatically spot tax write-offs.

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