The Corporate Lifecycle + The Market’s Fallen Heroes — ft. Aswath Damodaran

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25:03We're back with Profit Markets. Aswath, we were on stage at Stern and I was busting into my, like, I hate MetaRap. And you pointed out that distinctive, their kind of adventures in VR and the Oculus not working and Apple kind of attempting to kneecap them, that they still sat on this cash volcano. And you made sort of a bullish call on it. At that point, the stock was at 80, and I think now it's somewhere in the 600s. Can you think of any other company that is in a similar position that's been unfairly punished that you look at and say, look, the fundamentals, there's a mismatch between perception and just the underlying fundamentals?

25:49You know, one reason I want to take a closer look at Intel is I think that the amount of punishment that has been meted out to Intel, and I'm glad we let off with Intel, seems disproportionate to what has happened already on the ground. I mean, I think that's what we're looking for. And I think in this market, it's tough to find companies we get disproportionately punished because the market's been doing so well for so long. So maybe it's healthy that we're having an overall market correction because you're going to get a chance to look at companies that you think have been beaten up and not given credit.

26:24And I think with Meta, it was particularly, I think, distinct because it went from being a superstar company to a company where people looked at and said, this company can't do anything right. It's amazing how much shifted. That was, I think, uncommon to see that much of a shift happen over such a short period. Usually it takes a much longer stretch to go from being a young growth or a high growth company that's viewed as a start to being a dog. But for me, it happened over the course of a few months. And I think that's what made it so interesting. I think it, you know, it's I can't think of another company right now where I can say, I mean, I could take companies like Zoom and Peloton.

27:08but I think a lot of the punishment there is well-deserved. I don't think it's punishment to look at. I mean, Peloton is a company that essentially overreached, and I think it might have destroyed itself in the process. So I think that, you know, I can't think of a name right now that would match up to Meta, but I would be looking at some of the more beaten-up stocks, at least in the high-growth sector, to see if any of them are worth saving. It's not high growth, But I would put it in the camp of potentially Intel and Nike, and that is, have you done any work on Starbucks? Yes. And, you know, Starbucks is a company that's had, you know, four attempts at rebirth in the last, even the last two decades, right?

27:52It's a company that overreaches, and somebody comes in and corrects it, overreaches again. And I think that, you know, right now, one of the challenges at Starbucks is they've created a business model that works really well, which is the online ordering. but it's wreaking havoc with what made them a successful company in a previous life form. I think they need to figure out a business model that's built more around the fact that a lot of people prefer to get their stuff online. I don't go into Starbucks, order and sit there to drink anymore. Almost every time I order at Starbucks, it's online.

28:27But I think they might need to to rethink whether they need these expensive Starbucks outlets with the seating for 50 in 50 places in every city when half the people there are coming and picking up stuff. I mean, this seems like an investment with very little return. But that's going to create a transition. And maybe we're again overreacting to the fact that right now things are not working the way they should, but they're under stress right now because the activists have clearly targeted them. They're going to be under pressure and here the cutting cost is going to be the first phase of what they need to do to show that they can go back to profitability.

29:07But I think they need to shift business models. And if they can, I mean, it's still the dominant company in the space and I don't see the dominance going away, but I think the key is can they shift a business model to reflect how people buy their products right now. I'm wondering what makes a good rebirth. I mean, you mentioned Starbucks has been trying. You've got Howard Schultz coming back in twice. He's been the CEO three separate times. It's not really working. And then I look at Meta, which, as you mentioned, had this downfall, and it has had this rebirth. And even you look at Mark Zuckerberg, who has gone from wearing suits and being criticized for looking like a lizard at congressional hearings and is now a cool surfer wearing baggy t-shirts and a necklace and it appears to work and it is you know his rebrand has coincided with the rebirth of the stock and don't forget the ufc fights that he's promised to get as well right exactly i think that what made matters and matters return to grace so quick was the fact that you got to give mark Zuckerberg credit.

30:18When the market punished him, as it did after the big$100 billion we're going to spend on the metaverse, he listened. Notice that he doesn't have that talk about metaverse and spending. He doesn't lead with that we're going to spend$100 billion. He leads with the fact we see a productive business we're going to try to make. That's something he learned from his mistake. And very few CEOs learn that quickly. And I think part of the reason the market was so quick to give him grace was because if you look at the earnings calls after that horrendous call where the price collapsed, he very quickly, you know, he might still be doing exactly what he was doing before, but he's at least thought about the fact, what did the markets not like about it?

31:06What do I need to do differently? And that's just an adaptability to Mark Zuckerberg that I did not think he had. And I think that's what the market is rewarding. So that might be one of the things is you need adaptability. And that's why Howard Schultz might not be the person to try to save Starbucks because you need somebody who's adaptable, who's willing to take what originally made Starbucks and say, that's not working anymore. Maybe we have to try things differently. a break from the past. And that break from the past might require a new person at the top. The way I see it is the markets, I'm curious if you buy the thesis, they're bifurcating and anything that's reasonably good in tech is fully valued, if not overvalued.

31:50And I wonder if on the other side, all of those capital flows into the Magnificent Seven has presented opportunities for kind of fallen heroes or orphaned iconic companies. We talked about Nike, we talked about Starbucks, Intel. Another one I've been looking at that was a high flyer for so long in the best performing stock in its category and has been cut in half is Lululemon. Do you have any thoughts on Lulu? I think that that is an incredibly comparative business now. I mean, it's a business space where they own the business, but now it's kind of, you know, everybody's entering. I think they still have a market that's large.

32:24I won't call it a niche market. It's too big to be niche market, but their growth in that market is fairly limited because that market itself, so if you look at the basic apparel market, they're trying to expand out of the market to get more growth, but that expansion has to be geographical to parts of the world where they're not as well recognized, Asia, parts of Europe, or into new product lines where they're not established yet. Footwear, maybe the mirror thing wasn't going very far. I think they tried that But basically, they're trying both products and geography. I like them as a company, but I think that if I were an investor, I would do it with realistic expectations of what they can deliver.

33:11Their margins are already pretty high, so it's not going to be easy to improve margins, especially because their pricing power is fairly restricted with the competition. But I don't think they're going to go back to being a 20 % growth company. That's not happening, but they can at least have that solid growth, maintain margins part of it. And for investors leaving Nike, it might not be a bad place to go because Nike's got its own share of issues. You might say, I don't want to deal with those. Lulu might be the fallback strategy if you want an apparel company in your mix. In another name, we always love to talk about Tesla, and I would almost describe it as half meme stock, half company, because whenever I want to talk about valuation with anyone, they claim it's an energy company or they talk about autonomous driving.

34:03Don't forget the robo Tesla bots. It feels like it's sleight of hand. Look over here, weapons of mass distraction, because if we're going to have an honest conversation around what this company actually is, there's no way we can justify the valuation. And yet it'll explode up for what appears to me to be no reason at all. Any thoughts on where Tesla is right now? I think the problem with Tesla is I think there's a core story that's a good story. I mean, this is the company that's brought electric cars from a side story, something that people thought would never be more than this tiny slice of the market to the center of the market.

34:33It's changed the conversation of the market. Right. I think if they played their cards right and had a narrative that was disciplined about what they are as a company, because I think there are strands of truth to all of these side stories, right? I mean, they are ahead of the game in terms of automated driving, and maybe there's a business there or in terms of robots, but they need some discipline in their storytelling. And one word that I would not use to describe Tesla over its entire lifetime is disciplined. I mean, this is a company that I call my corporate teenager because it absolutely lacks discipline.

35:08The story is all over the place, which gets played out in the market price. It's either boom or bust. It goes to$1 ,000, drops to$200. So I think that we need some story discipline here. And for that story discipline to happen, maybe Elon needs to kind of concede that he has too many other things that he's interested in, that he needs somebody who becomes the Tesla narrative. setter, who becomes the one who tells markets where the company is going. Because too many distractions. I mean, some of those distractions push up the price, but I think they also cause distractions within the company. What are we working on?

35:45What's our next phase? And I think at this stage, when you're a half a trillion dollar company or a$700 billion company, you can't afford to have those distractions. You need some focus. And I think that would be my advice if anybody's willing to take advice in that company. Find some focus. Find a narrative that actually is well thought through that you stick with. You know, you could learn from Bezos and Amazon because Jeff Bezos built that company because he had a narrative. He stuck with that narrative. He acted consistently. And he made Amazon one of the great companies in the world. And I think Tesla can do it, but it does need that focus.

36:23Stay with us.

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39:21We're back with Prof. G. Markets. Pulling back and looking at the markets more holistically, the U.S. market, which trades at a premium to almost every other market because of the liquidity, because of our culture, our agility, the fact that, you know, it wasn't an accident. The hottest thing is basically owned and operated by American companies, AI. How do you compare the U.S. market to other markets? I mean, U.S. equities now are almost 50 percent of global, of all equities globally. It was, I think, 37 % or 38 % just a few years ago. The biggest loser has been China. China's dropped off. It's still the second largest market, but India's starting to move up the ranks.

40:03The most expensive market in the world right now in terms of multiples of earnings is actually India. More expensive than the U.S., but the U.S. is right below. In terms of performance this year, it's been a no-brainer. The U.S. has carried global equities. If you think about the total increase in market cap in equities, It's almost entirely come from the U.S., which is part of the reason when you see a drop in the market, it's going to be more in the U.S. than everywhere else because we have more to give up. I just want to stay on the U.S. for a moment. You wrote on your blog, Musings on Markets, about this thing you describe as country risk and how country risk varies across different geographies.

40:41Could you give us a review of what country risk is and also where the U.S. stands right now from a risk perspective? Country risk basically reflects what you worry about as an investor, either as a company or as an individual investor, when you put your money in equity in a country, whether it's in Brazil or whether it's China. And I think that it's fundamental to thinking about investing. And the reason you have to do it is even if you're a purely U.S. investor, is U.S. companies get a significant amount of their revenues from outside the U.S. So if you're investing in NVIDIA, whether you like it or not, you've got to worry about China risk.

41:19Why? Because those chips get made by TSMC. And I don't want to go through worst-case scenarios, but you can see how China risk can affect your value, the value of NVIDIA and as an investor, indirectly your money. So I think we all need to be aware of the rest of the globe because we're all connected. I mean, you saw this already in the last few days. The sell-off in markets started in Japan and spilled over into the U.S. And you see the spreading. This is something we've seen with every crisis in the last few years, effectively this high correlation across markets. Country risk captures the fact that if bad things happen in the U.S., it gets multiplied in parts of the world which are more risky.

42:023 % drop in the U.S. will play out as a 5 % drop in Brazil. Again, it's that multiplication of risk. With my country, what I try to capture in that country risk effect is how much of a multiplier effect on risk am I going to have? If I invest in a company that gets all its revenues in Brazil or all its revenues in China, what goes into country risk is everything. It's economic risk. It's political risk. I mean, every aspect of risk plays out there. In fact, in that post, I also looked at war and violence around the world, corruption around the world, because those are all things that affect you as an investor.

42:39And by affecting as an investor, affect the value of your investments. So it's a snapshot in time. Things change. You know, every time I put that country risk profile out, there are people who push back and say, I disagree with you. And I said, of course you do. You know, because things change. Even, you know, even as I print that, I have to worry about, hey, how much can happen the next week that could change those country risk premiums? It's kind of paradoxical what you just described, which is, you know, if the U.S. has sort of embedded itself in every country and every market around the world, you would think that if you're investing in Brazil, you're protecting yourself from the U.S.

43:17But what you're describing is that actually, because they're so connected, issues in the U.S. can amplify in Brazil. And I guess my question, my follow-up question would be, so then what's the takeaway? If the answer is that, you know, we're all connected, then what even is the benefit in trying to protect yourself from country risk? The takeaway is that there's no safe place to be. I mean, if you go back 40 years, if you're an Indian investor, a Brazilian investor, you know how you protected yourself? You moved your money into the US. If you're a US investor, you were asked to invest in other countries to get geographical diversification.

43:54That doesn't work anymore. You take every crisis in the last 20 years, 2020, COVID crisis, the 2008, what tends to happen is when markets go into crisis, they all seem to go into crisis at the same time. Being geographically diversified doesn't protect you from risk because it ripples through your entire portfolio. So I think we sold people really well on globalization. But this is one of the downsides of globalization. Everyone's problem becomes everybody else's problem. It's going to play out as crises that roll through on a regular basis. It's part of investing now. you got to incorporate into your investment philosophy that this is the way the world is, that you're going to have every two or three or four years.

44:43A crisis that originates somewhere else in the world that spills over into your global portfolio. I used to think that the only downside of the U.S. stock market is that you're missing out on the rest of the world, and it's not really much of a downside. But from what you're saying, it sounds like actually the U.S. stock market is the world stock market. There is no downside. The S &P 500 is not a U.S. equity index anymore, right? At least if you think about U.S. equity index as companies that make their money operate in the U.S., the S &P 500 is a global equity index. I mean, the only thing is the accident of history.

45:19These are companies that are incorporated in the U.S. I mean, multinationals are basically the dominant force of the world. They're global companies. And the fact that they're, you know, that you have, you know, Vale incorporated and traded in And Brazil doesn't take away from the fact that it's a global iron ore mining company. So I think that that's basically what you see as an investor. So you can be in the S &P 500, you've got a global portfolio there, right there. And you just have to recognize that it is going to be affected by global movements, not just by the U.S. economy. Last time we spoke, you said the number one thing you would be watching for this year in terms of markets impact was the presidential election.

46:05So I'm going to switch us to our favorite topic, U.S. politics. Any thoughts on the race so far and how it has impacted the markets? I think part of the volatility you're seeing in markets reflects the fact that we're getting closer to November and closer to the election. I think you are going to see, and here's the potential downside of heading into an election, is everything is going to be politics, right? Right now, I can't even imagine how much pressure Jerome Powell is in to do something eight weeks ahead of the election. In fact, I heard people throw out that the Fed should lower the Fed funds rate by 1.5%.

46:44I think that would be insane. To do that would be a signal of complete panic. It would be the worst thing for markets. But unfortunately, when you get this close to an election, the things that governments and central banks do will be driven by the fact that even an election coming up. So my concern is not so much the uncertainty about who will win the election, but what it creates in terms of bad policy choices in the weeks leading up, because people feel under so much pressure to do something or the other. So, you know, I would hope that the Fed doesn't act, you know, suddenly to do something because they're being forced to do it.

47:28And if they do act, that it's driven by information they have or economics. But, you know, I'm a realist. I think that this is the season of politics, and politics is going to drive a lot of decisions, you see. And just as we wrap up here, Aswath, you've been in and around higher ed. You're obviously considered one of the premier teachers in higher ed globally. I've been waiting and calling for disruption in higher ed for a decade, and I've been wrong for a decade. I still can't get over the fact that kids have to pay$7 ,000 to take my class. I can understand them paying$7 ,000 for your class, but, you know, 300 kids,$7 ,000,$2.1 million,$170 ,000 a night.

48:11That, to me, just reeked of disruption. And yet it hasn't happened. I'd just love to get your thoughts on the state of higher ed right now. I think two reasons. One is inertia, which is we've spent a century telling people that an education requires a four-year university degree. And that basically means that a 19-year-old goes to his parents and says, look, I don't want to go to university. I think I can get an equivalent education by taking online classes. Many parents are going to say, no way, you're going to go to college because that's what we've been saving money for. So that's the inertia part is I think there are 45 to 50-year-olds to whom an education is a college education that takes four years.

48:54The second, I think, is we have a financing system for higher ed that I think encourages this madness. You know, you've got student loans and you've got, you know, aid systems basically saying, look, we'll put off the day of reckoning. And that's a dangerous thing because you're saying, you know, you're telling somebody you're going to a four-year college, look, you'll make a lot of money in the future with a college degree. What does it matter? We'll loan you the money right now. And that's a bomb waiting to go off in terms of student loans, you know, accumulating over time. So I think that we're delaying this adjustment that needs to happen.

49:33It's not healthy because that bubble is only going to get bigger. And like you, I've been not just calling for the disruption of higher education. I've been actively trying to act like a disruptor of higher education. But at the margin, I'm just nibbling. I'm not just taking bites out of the substance. But I think it will happen. but I think what might cause it to happen is a financial bubble blowing. Those student loans ultimately becoming so large that they just blow up on you. And that's a terrible thing to happen, to have to have a financial crisis be the reason why higher education gets disrupted.

50:12But maybe that's the only way it'll happen. Professor Aswath Damodaran is the Kirshner Family Chair in Finance Education and Professor of Finance at NYU's Stern School of Business, where he teaches corporate finance and valuation. his latest book, which he told us he's not trying to sell, that he doesn't want us to plug, but we're going to plug it anyway. His latest book, The Corporate Life Cycle, is available right now. Aswath, thank you so much for joining us once again. Thank you. This episode was produced by Claire Miller and engineered by Benjamin Spencer. Our associate producer is Alison Weiss.

50:45Our executive producer is Catherine Dillon. Mia Silverio is our research lead, and Drew Burrows is our technical director. Thank you for listening to Prof G Markets from the Vox Media Podcast Network. If you like what you heard, give us a follow and join us for a fresh take on markets on Monday.

51:21As the world turns And the dark flies In love

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