Emerging Moats, Oscar Health, and Kraken Robotics – with Brett Schaefer

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1:23That's exactly why started throwing liquid iv's hydration multiplier sugar-free in my bag every day one stick 16 ounces of water and you're hydrating faster than water alone and the best part is it holds up to four hours powered by their liv hydroscience formula with electrolytes and essential vitamins science backed clinically researched and honestly you can just feel it working currently white peach and rainbow sherbet are my favorites you just tear them open you pour them in simple as that you're done get moving with superior hydration from liquid iv tear pour live more go to liquidiv.com and get 20 off your first purchase with code investing and checkout that's 20 off your first purchase with code investing at liquidiv.com oscar held is an upstart health insurance company that targets the obamacare market and individual payer markets so they're not going to be targeting large um like the legacy health insurance players are they're not going to be targeting large employers to try to get a bundled insurance offering to them.

2:27They're going to be targeting people that pay individually, such as me or you, that own our workforce of all businesses, right? I guess I'm saying... I love this podcast because it crushes your dreams of getting rich quick. They actually got me into reading stats for anything. You're tuned in to the Investing for Beginners podcast. Led by Andrew Sather and Dave Ahern. Step-by-step premium investing guidance for beginners. Your path to financial freedom starts now. Starts now. All right, folks. Welcome to Investing for Beginners podcast. Today, we have our good friend Brett Schaefer back to talk to us about stock market and stocks.

3:11And he also has an exciting new announcement. He has started something new, and we wanted to kind of showcase that and focus on that for today. So, Brett, welcome back to the show, and let's talk about emerging moats. Excited to be here, Dave. Yeah, excited to talk about emerging moats, some other stuff we're doing at the Chit Chat Stocks feed and newsletter, and excited to talk about two different companies. I guess I might be spoiling your little tease here, Oscar Health and Kraken Robotics, robotics companies that I've written about, talked about on the podcast, and think are two very interesting companies growing quickly, have some emerging moat characteristics, and are just overall interesting stocks to follow that might not be in the, which I think some people might be getting tired about, the AI talk, the technology stocks, some stuff off the beaten path that could be interesting for listeners to look at.

4:08For sure. So you're telling me that there's companies outside of the AI trade, if you will. Yes, there are. Really? I did not know that. That's crazy. Yeah. These are companies that may not be talked about on CNBC every day, but that is where I think a lot of the opportunities can lie. And for listeners, I guess, I know you guys are the Investing for Beginners podcast, so there's people that may be just getting started out here. Just because something is talked about on CNBC, Bloomberg, all the financial media, what have you, that just means it's extremely popular. And if you're going to make the money in the stock market, you want to be investing in stuff.

4:53It's not the end of the world if you invest in stuff that's popular, but all else equal. I think it's better to invest in something either that is never going to get popular and stays under the radar forever, or you invest in something before it gets popular. Because if it becomes a crowded trade, nine times out of 10, a lot of future growth can be priced in and the stock might be fairly expensive. Exactly. So before we start really kind of digging into both those companies, I want to talk about emerging moats a little bit. So I guess tell us what that is all about and why the name and if this is going to be any different than Chit Chat Stocks, which you guys currently do with the podcast, for example.

5:38Right. So Chit Chat Stocks is the podcast. That is not chaining for anyone that listens to that. We've talked about that in the show where we still do two episodes a week. We cover a lot of stocks that we're interested in. And Emerging Motes is what we rebranded the Chit Chat Stocks newsletter to. and we are starting a professional stock research service. It is, as the name implies, looking at stocks with emerging moat characteristics. So companies, such as the ones we're going to talk about today, that have characteristics in their business, either because they're growing, either because of their evolving business model, or just how we're looking at them, that has an expanding competitive advantage, or we're trying to at least find stocks that have expanding competitive advantages, and what the service is and it's catered to maybe more advanced diy investors or professional teams but it's a paid research service with some occasional free articles that are going to be tossed into the mix covering every four weeks a full research report on a company such as oscar health or kraken robotics and for anyone that's interested in the type of report those uh i've written about earlier this year and they'll be complimentary and they're kind of the sample reports that people can look at and then every three weeks or not every three weeks for the three weeks each week in between the research reports i'll be doing covering stocks in my uh existing portfolio stuff that i cover or either own or is on my watch list for emerging modes and yeah i mean And it's, I think, hopefully going to have basically condensing hours and hours of research each month into a single research report that readers can look at and read.

7:26Maybe 15 to 20 minute length, not an onerously long report, but also something that's going to have all the information to help get you up to speed on a stock. And I'd recommend anyone checking it out. You can always subscribe to the free newsletter tier. They can give you some previews and the occasional free articles. and if it's something that you like, if you're a moat investor, if you like investing in competitive advantage stocks, then I'd say check it out. I will say that Brett is one of my favorite writers on the internet and he's really good, very thorough and very reasoned and well thought out and I'm looking forward to what he's going to produce in the future.

8:07So I think the world is his oyster. I'm just going to enjoy watching it grow. So let's talk about Kraken Robotics. So this is a company that, frankly, before you wrote about it, I had never heard of. The only Kraken I had ever heard of was related to crypto, and this is decidedly not that. So maybe we could talk about Kraken Robotics. What do they do? Who are they? What do they do? Yeah, Kraken Robotics, I should say, I don't have the exact listener, but some listener of the podcast recommended we look at them. It's a company that is from Canada, but I guess it's kind of a Canadian and United States company.

8:49They are going to report in Canadian dollars, and their main listing is in Canada, but they have an ADR or a listing in the United States for our United States listeners that you can easily buy. They essentially do defense and commercial products for subsea technology. So this can include batteries for electric underwater vehicles. This can include imaging services for underwater stuff or monitoring, let's say, some defense port or something, you know, for the United States Navy. And then when we're looking at them, they are essentially selling this product, either underwater batteries or these imaging services to defense contractors or commercial services, and they'll have long-term contracts with, for example, a company like Angrel or other defense contractors, and they can be considered a subcontractor for this service.

9:47And the reason I like this company is, one, well, if you look at their execution, their historical growth rate has been fantastic. They flipped from losing money to now making money and generating positive free cash flow. And there should be, given what the United States Defense Department, well, I guess it's now changed to the Department of War, but just say the United States military and its allies are investing in and planning to invest in when it comes to underwater autonomous technology, they should be a big beneficiary. And that's what gets me interested in the company. Now today, I think the stock it's definitely at a premium valuation we may talk about that later so it's not one that I bought after doing a research report on them and I think Dave anyone can look up the report I made on them it's completely free if you want a full look at the business but it's one that I would love to own at the right price and I have it on my watch list for now but fascinating business fast grower in a very dynamic industry and i think one that is an underrated way to play kind of the defense spending super cycle that we're in the middle of as we sit here in 2025 it's awesome so a question that kind of pops to my mind is you you mentioned like uh subsea um technology so when i think of that I instantly think of submarines.

11:18Is this what they're doing? Like, are the batteries are they making? Are they making that for the submarines for the United States? Or is there another purpose that I'm not thinking of? So that would be, on a broader sense, yes. But not for, say, the existing submarines that United States Navy has, those nuclear-powered ones, the ones that are just gigantic and have um maybe allegedly i guess they never disclose all the the nuclear warheads on them and there's a ton of spending around that but specifically for kraken they make electric batteries that work in extreme subsea temperatures or sorry not temperatures depths and i i guess probably temperature is part of it as well and they have this specific polymer-based technology that no one has been able to copy.

12:09And unlike, say, an electric vehicle battery or something that's operating on land, not underwater, there are much more technical things that need to happen. One, dealing with the subsea pressure. Two, dealing with the fact that you're going to be operating an electrical system underwater. So it takes a lot more to do that. But what they're specifically selling into and what companies such as Andruil and a lot of the other legacy defense contractors are building are these new initiatives for unmanned underwater vehicles or UUVs, which are similar to the drone technology that a lot of the defense contractors are building for.

12:51So in the future, now they're not building giant ones yet, but that'll be coming down the line. They're building smaller unmanned underwater vehicles for monitoring the oceans and i'm guessing specifically putting you know weapons on there eventually for defense capabilities but they sell into those contracts which is a growing part of the industry but the legacy players or the legacy systems they're not doing that at all that makes a lot of sense so what little i know about the defense industry and and the people that work in the companies that work in the industry, they do a lot on contracts.

13:32And I'm guessing that Kraken has longer-term contracts, and does this make them, I guess, stickier than maybe competitors or other types of businesses? So I guess a better way of asking it, would the revenue be a little more predictable? Would that be a fair question to ask? In some sense, yes, it can be more predictable once they have these long-term contracts in play. The specific numbers I don't have in front of me, but for example, they do have a big contract with Andruil for, okay, what is it called? They have a specific product that they're building as an unmanned underwater vehicle for, I think first actually the Australian Navy, but they're working on getting contracts with the United States Navy.

14:20So that is durable, but given the fact that when their end defense contract customers are maybe not building on a consistent basis or they're selling their batteries on an inconsistent basis they're not going to have steady subscription like revenue from these batteries but they can have predictable contracts and predictable backlog and if you talk to management or if you read their conference calls you can see that all right if we look at their numbers here over the last 12 months, they've done 90 million Canadian dollars in revenue. They talk about a potential, this isn't a contracted backlog, but this is, okay, Boeing, Northrop Grumman, Andrew are all working on these UUV systems.

15:07There's potential for $2 billion in contracts coming down the line for these type of systems that they could hopefully sign and then turn into, all right, well, let's say just hypothetically Andruel's making 50 of these UUVs every year and maybe another company is building a larger one or trying to develop a larger one. And that can turn into, I think, reliable contract revenue, similar to other defense contractors as they get locked into these contracts with the United States Navy and their allies. that's that's definitely a bullish bullish thing for them so um the you mentioned that uh in your kind of intro to the company that they have recently turned profitable has is the company in the in the state where they can maybe are they diluting and in other words are they offering equity to raise money or are they kind of moving past that i know that when looking at Uber recently, that was one of the things I noticed was that they were still offering equity and diluting shareholders to a certain extent.

16:17And is Kraken kind of moving past that? So I wouldn't say that I'm 100 % confident that they move past that. They may be eventually acquiring some other capabilities and they have acquired their way. They actually acquired their way into this, which isn't their entire business, but the promising uh high growth battery segment that had acquired that a few years ago but you are right that in in 20 basically we can say from 2020 through 2024 they were raising a ton of money to increase their manufacturing capacity get up to you know they got to build all this stuff and in ahead of when they're selling it to these defense contractors but if we look at okay 2023 they made$9 million in operating income.

17:092024, they made$14 million in operating income. The last 12 months, they made$9 million in operating income. And their operating margin has grown to 10 % or higher for the last three years or so. And if we go to the cash flow statement, I think it's going to be perhaps a little bit lumpier. But if you look at free cash flow, it's flipped from negative to positive in 2023. But over the last 12 months, it has been negative. In 2024, it was negative because they're three, I think it's about three or four X-ing their manufacturing capacity for batteries to get well ahead of existing demand. I think they will, after this, they'll have the capability to sell about$200 million worth of batteries from these facilities.

17:59So they have some upfront capital expenditures they've recently done. And that's, I think, related to the capital raises they did over the last few years, along with them getting to that operating leverage. But once we go to 2026 and 2027, I think that'll get lapped and they'll have the ability to be self-funding. So I wouldn't worry for anyone researching this company. Something that you probably would get concerned about is looking at that shares outstanding chart. It's grown quite a bit. And you might be worried about that over the next few years and how that could impact shareholder returns.

18:36But I think they'll have the capability to be more self-funding. The share dilution will be a little bit less, although I'm sure they're going to give out stock options to the executive team and employees and what have you. But despite that, if we look at their revenue per share growth, and I'll pull it up on our friends at Fiscal AI right now, Now, their revenue per share has still grown at a 31 % annual rate from 2015 to today. So that's a decade of 31 % revenue per share growth, despite a lot of dilution, which shows, I think, that the company was smart in using its stock price to help fund its growth.

19:15And it's worked out quite well for them. sometimes you got to build up the war chest to invest so that you can grow in the future so yeah you know dilution is always not ideal but sometimes there is rationale for it and the future will tell if that was a good capital allocation or not i agree i agree and i think given the opportunity in front of them given what i think is at least to decade-long tailwind in investing in the uv space there is it's going to work out quite well for them an analogy they like to give and i think this is definitely correct if you look at and i mentioned andrew just because of the most i'd say press release happy fastest growing defense contractor out there they say that if you look at drones a decade ago where that was okay the future of, you know, on land battle or on land warfare, as we've seen in the Ukraine war and other stuff out there.

20:19UUVs or underwater unmanned vehicles are at the same point that on land drones were a decade ago. And that just gives them a massive runway to grow as the militaries, which operate slowly, kind of slowly move those gears and say, OK, this is the future of underwater capabilities. We need to invest in this to be modern and stay ahead of the competition. Yeah. Yeah, that's awesome. So do you feel like you mentioned in the report that you feel like the company could start exhibiting some signs of operating leverage? Do you still feel like that today? I know that you said that the margins have more recently turned positive.

21:03And on an operating income basis, the company is definitely profitable. How do you see that going forward, especially with the investments that they're making today? Okay, for context for the listeners, they have gross margins, and this is over the last 12 months, of 54%. This is expanding a little bit. And the reason I mention that is because, okay, that is the revenue minus the cost of goods sold. So that's the margin they are earning from, all right, we have to build these batteries, or they have other stuff out there. they have the sonar capabilities for underwater imaging systems they are able to sell that with a 54 margin and given the fact that when you're selling into defense or enterprise systems and you have some of the only capabilities out there your marketing sales budget does not have to be very large and if we go from that 54 on the dollar down to what their potential bottom line could be right now of course since they're a smaller company their general overhead costs can be fairly sizable but they also have a large r &d budget and i think both of those as a percentage of revenue will i think not easily but has the potential to be to decline as a percentage of revenue over the next five to ten years because their existing battery technology of course they're working on future systems to try to keep improving this but right now if they're selling again this is just a ballpark number this is not exactly what they're selling eg if they're selling 50 million dollars of batteries of the same technology now if that grows to 200 million 300 million over the next five years and they have the same margin well you're gonna have the similar r &d uh capital expenditures or manufacturing costs as you did while you were selling 50 million Of course, there's the variable cost, but we're talking about below this gross profit line.

23:05And I think there's no reason why they can't keep expanding to 20%, 25 % margin because the fact that you're not going to need to market, you don't need to be spending on Google AdSpend or something like that. You can have a very efficient business below, say, your gross profit minus your R &D costs. And R &D is going to be the number one cost over the long term. And as long as they can be efficient in their general administrative expenses, which interviewing or talking with their investor relations team, I got a very positive sense on their frugality in the executive department. For example, an anecdote I had is that their CEO, who's actually taken them from a tiny micro cap and maybe even a nano cap to the$1 billion plus market cap they have today, he still flies coach and only stays in, I don't know if it's motels, but it's still very frugal when traveling on the road, which I think is a great indicator that they're not going to overspend on their overhead costs.

24:09and that'll help with that operating leverage over the long term. Yeah, that's awesome. I love that anecdote. It reminds me very much of Mark Leonard, right? Exactly, exactly. It's always a good sign when you, if the CEO is just a frugal aunt traveling on the road, I think that is an underrated indicator on their mentality and what they kind of care about taking care of their stakeholders, which includes shareholders first instead of themselves. I'm excited to share our friends over at the Plink app released a major upgrade featuring a sleek new look, real-time insights, smoother trades, and tools that help you feel more confident with every move.

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26:55Yeah, yeah, for sure. Because the company operates in the kind of defense spending space, is there any over-reliance on a particular customer or customer concentration that could be a red flag in the future or could cause them problems if that one customer leaves? Yes and no. Of course, if one of these projects just get scrapped uh meaning the uv projects and within that there's the sonar imaging and the basically monitoring with the 3d imaging and just kind of all right well we're gonna do imaging stuff for the military and commercial services that can be a part of these deals but i think positively there's i believe over 10 uv projects in development from defense contractors so they're not over reliant on just one customer such as andrel now andrel is maybe their biggest customer now because they're the one that moves the quickest but when these other defense contractors catch up they'll be in the mix as well and i don't necessarily think that the customer alliance is a risk because they're not selling to the united states defense department they're selling to the defense contractors and they're the only company that has the subsea batteries with the capabilities that can sell into these uvs just at the most efficient cost they're 200 i think the number is at least 100 or 200 more energy efficient and density efficient compared to any competitor out there and of course if the united states military decides to pivot away from unmanned underwater vehicles that would take away some of their demand but i think the likelihood of that is extremely low because when you're operating an underwater vehicle you'd much rather have it be unmanned because it's just really really hard to operate with the person in these summaries and ideally you'd want these type of systems to not have anyone stuck down in a little tube for months on end at all yeah right uh so what are your thoughts on management?

29:13You mentioned the frugality that you learned from talking to investor relations. It's a smaller company, so management feels like it's probably more important than it would be for MasterCard, for example. Not that they're not both important, but it feels like for a smaller company, they definitely are more important. So what are your thoughts on management, their capital allocation skills, how they're approaching how the company can continue to grow and so on. I like what management has done, but of course they are a smaller company that has become a micro cap and developed into a small cap over the last five years or so.

29:53And I'm trying to, his name is escaping me. Okay. Yeah. Yep. I had it right. So the CEO is Greg Reed, who was an ex finance guy. I believe the CFO of the, of the company. And if we look at the reason he transitioned to become the CEO is because the founder of Kraken Robotics unfortunately passed away due to health complications, but he was leading the business and then Reed, Greg Reed, took over and has actually done a phenomenal job. Now, what I'll be interested in looking at is, okay, Reed, he's done a great job, but he hasn't, he hasn't led a business of this size and his only historical just experience within any sort of company leadership is in accounting and finance.

30:40So I wonder if they're going to maybe transition to a more professional defense contract focused CEO over time. But I think so far so good looking at their execution. I mean, you can just see the numbers and the contracts they've won. It has been great. You can't say really anything negative about what Greg Reed has done. And they've added more, let's say, industry-focused leaders on the board of directors. For example, they just added Vice Admiral Michael J. Connor to the board of directors, and he has a huge, long-standing career in the United States Navy. I believe he's retired now. He was, and let me get this right by looking at his bio, He was the vice admiral in the United States Navy of, I think, something within the United States submarine forces, which would relate specifically to the UUV systems.

31:36And he should be a great asset to have on the board of directors to connect Kraken Robotics to the United States Defense Department. Unquestionably, unquestionably. So this sounds like a really, really intriguing business. The next question that I would ask is let's talk valuation. Every company is great, but some are better than others based on where they are with the price. So how do you think about Kraken and valuation? Yeah, and even with the recent drawdown here, the stock is up, and I'm looking at the chart right now, 772 % with, and this is their Canadian listing, the US dollar one is going to be a little bit different just because of foreign exchange.

32:16but 772 percent in the last five years if we look at their canadian market cap it's 1.63 billion dollars and if we bring the enterprise value into play it's not going to be that much different just because they've raised a lot of money through their share offering so we'll get 1.6 billion dollars and they're trailing 12 month revenue is about 90 million canadian so their price to sales ratio or EV to sales is going to be fairly high. And if we look at something such as a top line earnings metric that I like to look at, which is EV to gross profit, which kind of brings down that variable cost and I just think it's better than price to sales when looking at a top line metric.

32:58The trailing one is 33.6, which is quite expensive. But given their growth rate, as we talked about the revenue per share is growing at a 30 % rate over the last 10 years i think it has a chance to keep growing at a similar pace the valuation isn't maybe insane but i i would not uh want to be a buyer here i'm keeping it on the watch list they let's just go through okay they can probably earn conservatively a 20 operating margin at scale i'm not sure exactly i can't remember exactly what i put in the research report but let's say it's something around that if they scaled up to 500 million canadian dollars in revenue that would be 100 million in operating earnings which would be a reasonable price earnings ratio compared to the current market cap of 16 that's 1.6 billion dollars divided by 100 million in operating earnings well to get there they'd have to more than 5x their revenue so it's i think it's an expensive stock but is it a fascinating business it's one i'd love to own at the right price and if we see a downturn in defense stocks because of a narrative around the super cycle, maybe there would be an opportunity to buy, or if there's a down cycle just in stocks in general, we've seen their stock draw down quite quickly with the stock market correction here in November.

34:36If there's an extended drawdown, this is one I love to own because this is not going to be reliant on consumer spending. The great thing about the United States military is that the spending is going to be there if it's a part of their, let's say, systems that they feel is very necessary to keep up defense superiority, which would be the underwater capabilities with the nuclear summaries and all the underwater stuff is a part of that. Now, the downside is that they can move slowly. but I think given the fact that there's not going to be any cyclicality from the end market here, if there's a stock market drawdown and the stock gets very cheap, it's something I would be interested in adding to my portfolio.

35:25It sounds like a really intriguing business and it sounds like management is on top of it and is doing a good job of executing on what they're trying to do and they're not trying to be anything they're not. And I think that's also appealing as well. Yep. And the last thing I'll add is that this is a potential acquisition target of a company such as Andrel because that could give them proprietary technology for the UV development. So something to keep something definitely to keep an eye on. Yeah, I loved learning about this company. It was kind of fun. All right. Let's segue into something completely different.