Third Quarter 2024 Review — ft. Aswath Damodaran

25:37So, Aswath, always good to see you. When I got out of business school, we loved this topic of fallen angels. The best job you could get in 1992 in the Bay Area was to go to work for Intel. And it's 2021 was worth three times more than NVIDIA. Now, NVIDIA is worth 33 times what Intel is. Jensen Huang, the CEO of NVIDIA, is worth more than Intel. That, to me, I wonder if it's been oversold, because I do think there are some moats there around IP, manufacturing facilities. And then the other one where I would also say it's a great American icon that has fallen really far is Boeing. And I wonder if that's been oversold, given that it's a duopoly.

26:14Thoughts on Intel and Boeing? Let me start with Intel. I mean, I think, you know, again, Intel was one of the companies I did write about a few weeks ago. I think the problem for Intel is they were at the top for so long that their story is, we're the biggest, we're the best. And when that slipped, they wanted to go back to the top. I mean, if you think about what they've done over the last 10 years, it's not that they haven't tried to do the things that would make them successful. I think they've tried too hard. Tried too hard in what sense? They tried to out TSMC, TSMC with the Intel Foundry.

26:49Huge investments in manufacturing chips saying we too can be like TSMC. They've invested, I think, after NVIDIA, perhaps even more than NVIDIA, they've thrown in billions of dollars into developing the next AI chip because they're convinced that they can out NVIDIA, NVIDIA. And I think in the process, they've overreached. I call it me-tooism on steroids because that's basically what Intel has done for the last five years is me too. I can do that, and I can do it five times more expensively than you can. Now, I remember going into Intel six or seven years ago. I went to their offices, and I was talking to their, you know, they asked me to come in and speak to their general audience.

27:28And what I noticed about Intel as a company was the absence of energy. You don't get that sense of excitement and energy. It wasn't there anymore. And it's tough to be in the business that Intel is in without that driving the choices. I do think, though, that it's been oversold. I think that, you know, especially when it dropped below$20 per share, you are effectively assuming that Intel would shrink over time and its margins would go away. Intel has a couple of advantages still that can work in its favor. One is the Inflation Reduction Act, as you know, put as a priority, you know, chips made in the U.S.

28:06TSMC has built a factory in the US, but Intel is supremely well-positioned to take advantage of the subsidies that come out of that. So if Intel can find its feet on the foundry business, there's a way back. And I think that as long as they don't try too hard and accept the fact that they will not dominate AI, that battle's lost, NVIDIA will, but they have a niche portion of the AI business they can go after. I think there's a pathway back to middle age. Not great growth, but middle age for Intel. And at less than$20 per share, I thought it was a pretty good bargain as an investment. I own Intel now, so I've got to be quite open about that.

28:48I did it after I wrote the piece, and I looked at what would happen if they became a 3 % growth company, and the margins slipped by 3 % or 4%, and they were$28 per share with those assumptions built in. I can live with those assumptions. I think the odds are, in fact, in your favor and in doubt. Boeing, though, is an entirely different story. I mean, I've never seen a company blow up its reputation as thoroughly and as completely as Boeing has done over the last 20 years. I mean, it's one of the great engineering companies in the world. I mean, a company that was, you know, people went to because it had superb, superb engineering and technology knowledge, trusted in many dimensions.

29:30The only reason Boeing is afloat is because it's in a duopoly. I mean, that's the reality is this company has so thoroughly trashed its credibility in markets that in any other market, we'd be talking about wrapping up, winding up the story and selling the assets to others. I do think they're thinking about selling their space division now. And that's the first face in a company saying, we're in trouble. We're going to sell off our crown jewels because we have to survive. They're in complete survival mode. And I don't know an easy pathway back to credibility because once people get the perception that you cannot be trusted, that your products are not safe, which for an aircraft manufacturer is diabolically dangerous, it's very difficult to find a pathway back.

30:22So Boeing, I would not buy at any price simply because I think there are too many things that can go wrong here. that can cause the company, if not to go bankrupt, at least to be taken into receivership by somebody that might maintain the assets and run it. But, you know, the company is in serious, serious trouble. So two other fallen angels that have been kind of the leaders in their category held up as icons of management. First, Estee Lauder, which made some of the best acquisitions in the aughts with Mac. like consistent earnings growth, great performer, really strong in China. And then Disney, which was always seen as this, talk about moats between the intellectual property, the parks, diversified business, kind of owned family and imagination, just these incredible brand associations.

31:15Estee Lauder's off 38 % year to date. It's been cut in half over the last five years. Disney is up 6 % year to date, but it's off 27 % in the last five years. And I think it's trading kind of where it was about 10 years ago, Estee Lauder and Disney. I'll take the Disney part first, because I think Disney is, if you were writing a case study about how not to transition top management, Disney would be the case study. I think, you know, because let's face it, 2012 was when Bob Iger went to the board and said, you know, I'm ready to leave. I mean, I actually wrote a very complimentary piece about him then saying, this is the way top CEOs should behave is they've made themselves dispensable.

31:58And he said, and I blame the board of directors at Disney, which I think has to rank up there among the 10 worst boards of directors in terms of corporate governance. You know, they convinced Bob Iger that the company could not make it without him. I mean, in my classroom, I use the example of Julius Caesar, you know, and in the Shakespearean version where he says, you know, where they try to crown him king. He He says, no, no, I'm not the king. And the second time they try. The third time around, he says, okay, I'm the king. And in a sense, Eiger initially resisted, but they were so persistent that finally he said, you're right, this company cannot make it without me.

32:32When he came back in 2015, though, he set in motion an entire set of events at Disney Still trying to live down. That second layer of management that was waiting to move up said, we're not waiting around. You know, if you think about Tom's tag, basically go down and look at the people who are supposed to step in. They all left and moved on, which left Disney with an empty cupboard in terms of top management skills. So, of course, Bob Iger became indispensable because there was nobody else left. And I was surprised when he left in 2020, to be quite honest, because there was really nobody ready to step in.

33:10But I think Disney is facing a problem that's out of their control as well. The entertainment business is broken. I mean, I haven't talked to a single person in entertainment who feels secure about what the future will deliver. We know who broke it. Netflix did with the streaming model. But even Netflix hasn't benefited from breaking the business. And that's why, you know, one of the things I often say is disruption is easy, but making money of disruption is really difficult. At this point, the one thing we know is nobody in the entertainment business is healthy. Healthy in the sense of you can look at the company and say, this company has a business business model that's going to deliver sustained profits for the long term.

33:49Netflix can't do it. Disney cannot do it. Warner cannot do it. Paramount definitely cannot do it. But there's consolidation coming in this business. You're going to see the business consolidate. Estee Lauder, I have less strong feelings about. It's a business that I'm not that comfortable. You know, I don't quite understand the movements, the fads, the fashions that drive that business. I mean, I think that too, there might be a governance issue that we've got to deal with sooner rather than later of, you know, if change is needed, is it likely to come with the people running the business? I'm not sure it is.

34:24And I think almost both these companies, I think, reflect the fact that the underlying businesses they were in for a long time were predictable businesses that they learned how to operate in. Those businesses have changed. these companies are struggling with an entirely new business that they're in and how to make their way to success on both. Just a sort of general question about succession planning while we're on the subject, Asworth. Philosophy on hiring insiders versus outsiders. So Estee Lauder, they have just said they are going to hire or they're going to promote an internal executive to CEO.

35:02We saw the same thing at Nike. Starbucks brought in the Chipotle guy. Disney is sort of balancing that question. What's your view on internal versus external hires? I think the question is, why are you in trouble? If you're in trouble because of mechanics, logistics, something that's inside the business, then I think it makes sense to go inside the business. You want to bring somebody who understands. If your trouble is with storyline, you've lost your narrative as a company, you have to go outside. You have to bring in fresh thinking into the business. I mean, you know, my views on Starbucks are it's the Starbucks story is broken.

35:40It's broken because the original Starbucks story was to bring the European coffee shop experience to the U.S., a country which never had that experience, and it succeeded beyond its wildest imagination. Coffee shops where people came and hung out three, four, five hours a day, brought the laptops. That was the Starbucks story. And I hate to bring COVID into it because we blame COVID for everything. But COVID, in a sense, set the framework for the Starbucks story breaking. Why? Because it created the online ordering system. And today, when I walk into a Starbucks, I notice 25 people standing around picking up their online orders and three people forlornly sitting in the coffee shop drinking their coffee.

36:27The coffee shop experience is broken, and it's also created logistical challenges. Because at 8.30 in the morning, whether you live in LA or New York or any big city, you walk into a Starbucks, there are like 100 online orders that come in at the same time, and the barista just can't handle them. You don't have the old mechanism of the line slowing you down. It's created both a story and a logistical problem. The Chipotle guy might be able to solve the logistical problem, but I don't know whether he has the capacity to solve the story problem, and that's going to be the test. I went into a Starbucks the other day and I tried to order a coffee and they said, oh, you can only order on your phone.

37:06Sorry. Just turned away and went back into the kitchen. It's unbelievable. And maybe there's a different storyline. Maybe we need to shut down all these expensive leaseholds of big stores and just have kiosks. Maybe that's a better, that's a different. I'm not saying it is what they will do. More of an Uber Eats story. Exactly, right? In a sense, that's what it's become. and for better or worse, that's the reality that a new CEO of Starbucks will have to face. Absolutely. I'm just going to shift us over to tech. We've got some big tech earnings rolling out over the next few days. Is there anything you're paying particular attention to in these earnings reports?

37:44I'm looking for patents. If you see all of them underperformed, then there's a signal here that you're... My guess is you're going to see what you've seen all year, which is, you know, you take the MAG7, four will beat their earnings, three will fall. It's almost like if you have all seven in your portfolio like I do, disappointment on one or offset by gains on the other. One of these days, that's going to end. They're all going to go down at the same time, but that's going to happen because a market correction occurs, which is large, not what you're seeing. So I expect the usual pattern. I do think that expectations have been lowered for some of the tech companies, in particular, you know, for Med and Alphabet, the expectations are set lower than they used to be.

38:30I think it's going to be easier for them to meet those expectations. NVIDIA's last earnings report was a crapshoot. I mean, their expectations were set so high that even though they beat their estimate by 5%, the stock, of course, took a beating, it'll be interesting to see if people have adjusted expectations to reflect the new reality or not, because you're seeing the expectations game. And I'm watching the expectations game a lot more than the actual game. Right. It seems like a lot of these earnings, I mean, we'll see Microsoft, Alphabet, Amazon, Meta. A lot of the story there is, interestingly, actually about NVIDIA, because their CapEx is basically NVIDIA's top line.

39:11That's a spending for those companies and revenues. At the same time, the server businesses for all these companies are going gangbusters because the same AI zeal that's causing them to spend the money on these AI chips is also causing demand for cloud. So look at Microsoft today, and I was looking at it last week. It gets about half its revenues from the cloud business. It's more cloud business than software company now. I never thought I would see that day 10 years ago. But it's astounding how big it is and how incredibly profitable that business is. In fact, if you're an antitrust person, you should probably go after the cloud business in terms of dominance, not the businesses you're going after, smartphones, advertising, because that's really where I think you see the dominance play out.

40:01Stay with us.

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41:43we're back with prof g markets so let's talk about tesla the most recent earnings call you saw a substantial pop in the stock price i think it was up 21 growth up 6 but the revenue mix was an improvement some of their higher margin categories grew faster than the core business, but it still seems to be, I call it kind of a hybrid stock. It's a company with real cash flows, but it also feels like it has some meme-ish qualities to it. Your thoughts on the most recent Tesla earnings? As a Tesla owner, I like the earnings because the stock, I do think the jump is on the price. A Tesla vehicle owner or a Tesla stock owner, right?

42:25Okay. I own a Honda Civic, a 2010 Honda Civic that basically nobody would steal. But as a Tesla stockholder, it was good news for me. But I did think it was out of proportion to the good news in the report. It almost was a relief rally because we've had so many bad surprises with Tesla earnings reports that people heave a sigh of relief saying, thank you for not seeing the margins drop even more and reporting more bad news because that's what people were... So it's almost like the consensus numbers have become a side story now. The market seems to have its own set of expectations for companies that if they don't meet or do meet, reflect on the price.

43:06Now, I do think that this automated driving thing is still very much in the mix. And I'm not sure that it's a distraction or an addendum to the story, to be quite honest. I think that, you know, that took a lot of the publicity around, you know, around what happened around the last earnings report. But I do think that the relief was, hey, you know, at least they're going back to the products and services that deliver the highest margins. That's good news. They're not throwing a ton of money after these businesses they're chasing. But I think this is going to be one good earnings report followed by a second earnings report where you get surprised again.

43:49I mean, with Tesla, you never can rest easy on what you're sitting on. So I'm going to go earnings report to earnings report. Right now, I'm feeling okay, but who knows what the next earnings report will deliver and what new businesses they will claim to be in before the next earnings report. The WeRobot event, by most consensus, it was kind of a disaster. you know it was sort of all all talk no action is what i would say but the thing that really stuck out to me was the fact that the ai humanoid robots which are supposed to be the future it's what's fueling this huge valuation of the company they were being controlled by people they were being voiced by people they were basically being puppeted by people um i'd love to get your view on that And how bad is that?

44:39Are we bordering on fraud here? I'm not going to go that far, but I think we're overpromising. In general, with AI products and services, I think there's a lot of overpromising going along of these great new devices, which will not need any, as you pointed out, many of these AI products and services require almost as many human beings behind them as they claim to replace. And that's really going to be the test, is whether, I mean, somebody described AI, the difference between AI and machine learning is the difference between stochastic and deterministic. Now, machine learning is basically deterministic.

45:15It's rule-driven and principle-driven. What makes AI different and perhaps better than machine learning is it's stochastic. It adjusts in the moment based on the data it has. But we don't know how well it does that. I mean, that's, I think, still an unknown. The AI advocates claim it'll get better, that AI beings are going to be sentient in some sense and behave more like human beings. But I don't think we've seen any evidence of that happening yet. Maybe it will, maybe it will not, but I think that you're right. What you saw in the robot dynamics was, you're saying, this isn't that impressive.

45:56This isn't going to change the world. But it's still early. So I'm going to be, I'm leaving the door open, but I think a lot, I mean, it's not, and it's not just Tesla across the board. I think the product and service part of AI, I'm hearing a lot of promises, but I'm not seeing much in terms of delivery. What are your thoughts on Uber and potentially the vertical expansion into travel, but with a potential acquisition of Expedia? To me, big acquisitions are the death knell for great companies. I mean, I, you know, I, I just don't like them. I don't like them because you pay a premium on the market price and you got to deliver on that market price.

46:35So from a strategic standpoint, from a marketing standpoint, you might say this is great news, but the price they'll have to pay to get it, I don't think it's worth it. And that's my bias playing out. I do not like acquiring large public companies as part of my growth plan because historically, it's almost never delivered enough returns to justify it. I'll make a prediction. If they do go for the Expedia acquisition, their stock price will drop, and it'll drop pretty substantially in the announcement of the acquisition. Because I think markets share that same skepticism about growth through big acquisitions.

47:09I'd much rather Uber focus on smaller acquisitions, perhaps with private businesses that add to their platform, add to their technology, and get them there. I'm not sure buying Expedia is the way to get there. I just want to go back to Google, one of the big tech companies. There's been talk from the FTC about breaking up Google. The courts have, of course, declared them a monopoly, and we're entering into the remedy phase. You believe a breakup is not the right remedy. Why are you against a breakup of Google, and what kinds of remedies do you think would be more appropriate, in your view? Let's talk about the companies that have been broken up successfully and why it worked.

47:48You know, Standard Oil, easy to break up because it was geographic. You know, basically broke it up into 36 different companies geographically. AT &T, again, regional bells and long distance. Microsoft in 2000, close to a breakup. They never pulled it off, but they said Office on one side, Windows and browsers on the other. I'm not sure where the breakup lines would be in Alphabet. You know, because Alphabet's business is not a platform. It's online advertising. It has multiple platforms, and being in the ecosystem increases their advertising revenues. I think when I look at Alphabet, the two businesses that could potentially be broken up are YouTube subscriptions.

48:32Because YouTube, you could argue the subscription model doesn't have to be, and the cloud business. YouTube subscriptions, would they survive as a standalone business? I'm not sure they could because I think it's still very heavily subsidized by the advertising business in terms of how much it costs them to maintain the platform. And the cloud business, even if you're able to separate it out, what advantage or benefit do you get as the Justice Department? It doesn't take away the dominance in the core business. I mean, if the Department of Justice is worried, it's worried because Google controls so much of online advertising that so much flows through that search box.

49:10It's really very difficult to figure out a way to break that because it's the natural economics of the business. I don't like it, but the consolidation that you see in online advertising is reflective of the networking benefits that you can't make go away through Justice Department actions. So I don't think it's going to be effective. It's not that I like Alphabet as a company or I like their management. It's just that I don't think it'll deliver what the Department of Justice wants to deliver, which is less dominance from the search box. I think that's still going to remain. A couple of years ago, Aswath, you essentially said meta distinctive, how badly it had been beaten up because of this hallucination around headsets, the massive investment they made there.

49:58You said, look, this is just a cash volcano that's been oversold. When you look at some of these fallen angels and these icons that are trading at near 10-year lows, is there any sector or specific companies that stand out to you as being dramatically oversold? If I look across sectors, I think, you know, I would be looking at entertainment, maybe apparel, because there's a shakeup happening. And perhaps in the shakeup, there are companies that are, you know, falling off the cliff, which don't deserve to because it's being shaken up. so right now nothing catches my eye as being incredibly cheap in terms of cash flow but I think that as I said buying these selectively buying these companies which have dropped 40 or 50 % might actually be a pathway in fact the last four companies I bought have all been middle-aged or declining companies where the market price has dropped much more than I think it should So, no, that's where I would look if I were an investor is look at companies that are downed companies which had glorious pasts.

51:05Don't just jump into them and ask yourself, is there a pathway back for these companies? And I think there is for Intel and Starbucks if they can find that pathway. At the beginning of the year, I asked you, Professor DeModurin, what you were most focused on in the public markets as an investor in 2024. and your answer was the election. We are now days away. The markets appear to be pricing in a Trump win. I'd love to know what is just generally on your mind right now, particularly as an investor, as we approach November 5th. You know what? Sometimes when the data comes in, you have to reassess your thinking.

51:44The more I look at what markets are doing, the more I'm getting the impression that markets don't believe that that either presidential candidate is serious about what they're saying on their plans. Because if they were, you'd see much bigger contortions in the market. You might get a collective market expectation that Trump will win. But if you look at the sectors that would be hurt by, let's say, a tariff of 200%, you're not seeing that. Similarly, you can look at the companies that would benefit from a Harris win, and you're not seeing those companies go up. So it's almost like the market saying these people are not serious about the economic plans.

52:25There's a lot of posturing going on. But the posturing, you might as well just go back and make a collective judgment on who's going to win. And right now, tax rates are going to go down under Trump. We'll push up the pricing a little bit more. But I think it's, you know, we'll see in hindsight whether that's true and whether this is a dangerous thing to do. But that's my impression of what markets have done this year. They've been remarkably sanguine as both sides have put out their economic plans about how those economic plans will play out in revenues, earnings, cash flows, and market prices.

52:59Are you thinking about the election in terms of your own investing strategy? Do you have any politically-based theses that you're investing towards? Are you trying to kind of compartmentalize what's happening in politics? I try to avoid politically-based investing because I'm a terrible political prognosticator. So I've learned to avoid doing things where I don't have any competitive advantage. And it's one reason why I underinvest in Chinese companies because I've talked about how China is part of every Chinese company story. I don't like mixing my politics with my investing and I prefer to keep it that way.

53:43So for better or worse, I've stayed away from making any bets. Professor DeModeren is the Kirshner Family Chair in Finance Education and Professor of Finance at NYU Stern School of Business, where he teaches corporate finance and valuation. As always, fascinating and a pleasure. Thank you so much for joining us. Thank you. Thanks, Aswad. Thank you, Scott.

54:11Algebra of Wealth. Scott, Professor DeModeran said he does not like to mix his politics with his investing. We're a few days away from the election. It feels harder than ever to keep those two things separate. What would your advice be to listeners who are probably anxious about this election and what it could mean for their money? So my advice would be to do what Professor DeModeren says, not what Prof. G did. And that is, what is likely to happen, regardless of who wins, is that we're going to have more intransigence. And some people see that as a good thing. Some people see it as a bad thing.

54:47And that is, any big sweeping changes likely aren't going to happen. And so the notion that you should try and figure out, A, we don't know who's going to win, and then try and game which companies will do well or poorly based on their victory, is just not a good idea. And I have personal experience here. In 2016, when Trump won, I had some experience with Trump-affiliated companies, and I thought, these people are fucking village idiots. They were some of the worst business people I had ever encountered in business. And I thought, okay, this guy's now running the country. That is really bad news.

55:22And I think a week after the election, I sold most, if not all of my stocks. I was convinced the market was going to crash. The market ripped that year because of tax cuts and other things. And the fact that I took a tax hit on the sales and then had to buy back in, one of the dumbest investment decisions I've made. And it's a lesson, and that is your emotions are your enemy. I can't stand the catastrophizing on both sides. Hardcore supporters on both sides have each decided that if the other candidate wins, it's the end of America. That lacks historical context, and it doesn't appreciate or recognize how enduring the American experiment is.

56:04And also, I think that's true of the markets. I would not try to game the market here. I would not try to make any sort of predictions about what impact it's going to have on your stocks or on your investments. So the bottom line is stay the course and also recognize for your own mental health, whatever happens here, America will endure. This episode was produced by Claire Miller and engineered by Benjamin Spencer. Our associate producer is Alison Weiss. Mia Silverio is our research lead. Jessica Lange is our research associate. Drew Burrows is our technical director. And Catherine Dillon is our executive producer.

56:37Thank you for listening to Prof G Markets from the Vox Media Podcast Network. If you liked what you heard, give us a follow and join us for a fresh take on markets on Monday.

56:52Don't let go, you got the music in you One dance left, this world is gonna flow through Don't give up, you got a reason to live Can't forget, we only got what we give

57:22Thank you.