TIP780: Top Stocks for 2026 w/ Shawn O'Malley, Daniel Mahncke, & Clay Finck

28:38But to me, the important thing is what's happening at the share count level. They've been shrinking the share base by roughly 3 % per year for the last two years. And they've actually done some really unique ways to approach that and create shoulder value. And so one of those being they did this reverse Dutch auction to buy back stock aggressively earlier in 2025. And so the way it worked was that Exer published a price range that they'd be willing to purchase shares within, and then asked existing shareholders to provide their asking price that they would be willing to sell their shares at. And then the company ranked these asking prices that they received from cheapest to the most expensive, and then executed 1 billion euros worth of buybacks at the lowest price ask rates, which could be below the market price at that time.

29:26So it's a pretty subtle thing, but I'd imagine that this actually saved them maybe tens of millions of euros versus doing repurchases in the open market where, especially in a less liquid stock, they could really move share prices just with their own repurchases. So what that ultimately translates to is them being able to buy back even more shares per dollar of repurchase. And that just creates more value for ongoing shareholders. So the CEO comp is not modest. I don't feel like Elkin as the patriarch of the Agnelli family now needs to be paid millions of dollars to be incentivized to run the business well.

30:04But overall, again, things are being done pretty pragmatically. And the shareholder actions are mostly friendly. And when you have a 60 % margin of safety, that helps make a lot of these concerns more digestible. At a 10 % discount to net asset value, I would probably have harder opinions on CEO comp or the pace at which they do buybacks. And then just so financially, the balance sheet is conservative too, which I appreciate as a shareholder. The vast majority of their debt is fixed at low rates, and then the company carries an A minus credit rating. So there's no obvious solvency risk lurking here.

30:45I mean, this is not a levered rollup that just falls apart completely in a downturn in the next financial crisis. I mean, this is a company that already survived the last great financial crisis and has persisted for a century, which is a rare thing to come across. And so another thing that they've done is they've made their financial reporting much more transparent, which I would think in theory should contribute to the net asset value discount narrowing. And under this new treatment as an investment company in line with IFRS 10, they now mark their holdings to fair value through the income statement and treat dividends and sales of proceeds as operating cash flows.

31:24So you can't just look at the reported earnings at face value because they're distorted by swings in prices of their investments. And it's the same thing with Berkshire Hathaway. And so they've also deconsolidated most of the underlying companies for further reporting clarity. And then they've begun auditing the net asset value numbers that they publish. And so again, all of this should boost investor confidence over time, because to me, I see them making a real commitment to transparency that makes me feel more confident that the nav discount at least is not going to widen dramatically further.

31:58I guess anyone who has ever tried digging into holding companies, and I know that all three of us have done that in the past. I actually looked at Berkshire Hathaway for our podcast a couple of months ago, and we all can appreciate those changes for transparency reasons. And it's just not always easy to fully grasp what's going on in these holding companies. It can be complex at best. And in this situation, more transparency is probably not enough to materially reduce the discount. But since I would assume that is a huge part of your bull thesis for Exxor, how about you walk us through how you're thinking about the upside?

32:31What has to go right for Exxor to deliver great returns in 2026, but also in the next couple of years? For me, the right way to think about Exxor is not trying to estimate their reported earnings per share next year or five years from now, but to think about how fast the net asset value can grow over that period of time. And so where might then the discount to NAV settle out longer term? And so in what I would call a pragmatic bear case, so not the worst outcome imaginable, but a plausible version of reality where things don't work out nearly as well as hoped, I modeled net asset value growth slowing way down to around 5 % a year.

33:10And then the discount narrowing only a little bit from a record high of approximately 60%, as we said a number of times, to about 50 % over the next five years, which is still very much above average for the typical discount to XRs NAV that we've seen over the last decade, which is why I would call this a longer-term bear case. Who knows what will happen in the short term, but longer term, that feels pretty bearish. And so, yeah, I mean, that's a pessimistic take. You're assuming they become a mediocre capital allocator and the market remains extremely skeptical over time, hence that large discount remaining.

33:46And even still in that world, the combination of just a little bit of modest net asset value growth plus a bit of discount compression gets you a roughly 10 % annualized return over the next five years. That's the IRR math and it's one heck of a margin of safety. And just in a base case, I assume that net asset value could compound at a little bit more typical rate of about 7 % a year, that would be in line with global equity markets historically. And with the discount to NAV closing from 60 % to 40%, which again, that 40 % is still at the high end of where Exer's discount has historically traded.

34:22Well, off of that from today's prices, that you'd be expecting a 15 % to 16 % rate of annual return over the next five years, if that very basic outline of things comes true. And then in my bull case, which I don't even think is that bullish, I have net asset value growing at 9 % a year. And then the discount closing to something more normal like 30%, which I really do not think is all that heroic for a holdco with such a GM of an asset like Ferrari at the center. And in that case, you'd be talking about expected returns north of 20 % annually. And so none of that includes the incremental benefit of additional buybacks made at such a big discount to NAV that shrinks the share count or the small dividend they actually pay out.

35:06But Daniel and I, on our show, we like to use these very rough frameworks to guide our thinking. And so that is kind of how I put things together. That's my mental model for Exer. And to me, the main point is not whether the IRR is 16 % or 18%. It's completely speculative. Really, the takeaway is that even if things go noticeably worse than they have in the past, if NAV growth very severely decelerates and the discount stays pretty wide, you can still plausibly earn double digit returns from here because you're starting so cheap relative to such a high quality anchor asset. And so for me, the range of outcomes is dramatically skewed in our favor.

35:45That's really what I see having a margin of safety to mean. And there's a relatively low likelihood of having our capital destroyed. I mean, this is not some high-flying speculative AI bet. I do like how you think about the company's valuation. As they say, if you can eliminate the downside, then all you really have is upside that's left. And as I was reading through last year's annual report, I noticed that in March of 2024, Exer sold 3 billion euros worth of its Ferrari stake. And as we know, Ferrari has done a lot the heavy lifting when it comes to compounding NAV up to this point. What are the biggest risks you see in the stock and the company today?

36:29Robert Leonard I think the big one here is that this is ultimately at its core a Ferrari-anchored thesis. If Ferrari's business stumbles badly, or if the market re-rates it from a luxury compounder, which is how it's been priced since IPO, to a valuation closer to just being a premium auto company like Mercedes bins, then both Exer's net asset value growth and the perceived quality of the portfolio would take very significant hits. I don't think that's very likely, but that would be something of a worst case scenario. So I'm fairly bullish on Ferrari long-term. So to me, the risk really actually is that Exer slowly sells down its Ferrari stake and then recycles the proceeds into lower quality or at least harder to underwrite assets.

37:16So more cyclicals, more venture bets, more private markets, maybe some big acquisitions that we don't necessarily like, that would be really the red flag to me. They've already trimmed a few billion euros of Ferrari, as you said, Clay. And they've done that to, as they say, reduce concentration and to fund new acquisitions. And I think that has spooked investors a little bit. And so, I mean, from the Agnelli family's perspective, I don't think they see it that way. They want to diversify their wealth. But for me, I would rather have them convert almost all of their net asset value into Ferrari rather than sell it down so that the thesis becomes even clearer that you're just buying Ferrari at a discount.

37:55And that would be very attractive if it meant buying Ferrari at a 30 % or 40 % discount. I think that would really be the best way to remove that NAB discount over time by just simplifying the story. And so it's all these other investments and concerns about investments I'll make in the future that make things a lot messier. But like I said, I mean, And ultimately, this is kind of the trade-off we're making, is that it's a family-run company, and they are trying to diversify and protect their wealth. So the last thing they want to have is 100 % exposure to Ferrari, just so that it makes the thesis more convenient for me.

38:31But if they do continue to reduce the Ferrari position dramatically, to me, that would ultimately be the sign to consider exiting the position. And I should say, though, they have not expressed any interest in doing that. They have said that their goal is to keep it around 40 % of net asset value. And so when you look at the sell-off that they did, they trimmed the position from 43 % to 39%. So I do believe them when they say that they're not really trying to fundamentally exit the position, but maybe they're just trying to manage it at that two-fifths cutoff. And you touched on this at the beginning, Clay.

39:05The big criticism here is that there's no clear catalyst. This is not an event-driven trade where you can point to a spinoff or take private. And so in a way, it is maybe just classic value investing where you buy a collection of assets at a big discount, let the underlying assets continue to compound while buybacks quietly shrink the share count in your favor. And then just trust that over time, either that discount will narrow or you'll still do at least fine or good enough because you started from a dirt cheap entry point. And so as long as Ferrari remains the crown jewel, that's worth more than Exeter's entire market cap, just to emphasize that again, and the discount stays abnormally wide, I am very happy to bet that a rational family owner with a pretty decent track record can keep compounding net asset value in the background here, at least well enough to generate satisfactory returns for me.

40:00So yeah, that's the pitch, not the sexiest pitch ever, but you can see why I like it. Robert Leonard Excellent. Well, thank you so much, Sean, for the very thoughtful pitch. And for those who aren't familiar with Sean and Daniel, they host the Intrinsic Value Podcast and they do a stock deep dive every single week. So if you've been following along with the show, you're not going to find an episode on Xer as the time of this episode goes live. It's actually going to be released a few days after, and then Daniel's pick will be released the following week. So So please stay tuned to learn more about these picks.

40:34Daniel, please take it away. Yeah, thanks, Clay. I mean, I don't know if my pick is the most sexiest either, to be honest. But yeah, since today's call is about our top stocks for 2026, I wanted to pick a company where I generally see next year as the moment things could turn around. And as Sean already knows, there was and still is a company in our intrinsic value portfolio where I felt 2026 might be the inflection year. That was actually the company I planned to pitch today. I'd even finished all my notes. And then literally an hour later, and I texted Clay about it, the CFO spoke at a conference.

41:10And let's just say the tone of that presentation changed the timeline a bit. I would say the core thesis still holds, especially at the current valuation. But the setup for 2026 just doesn't look as clear anymore. Anyway, that company was PayPal. So after a very long introduction, here I am not pitching PayPal today. And instead, I thought I would pitch a company that is MercadoLibre. And then a funny way, it's not entirely unrelated to PayPal, because often people describe MercadoLibre as the Amazon and PayPal of Latin America, which isn't a perfect analogy, but it captures the basic idea, which is that this is a company that built both the dominant e-commerce platform, and it's also one of the most powerful payment ecosystems in the region.

41:54Yeah. I mean, I was excited to see you switch your pick to MercadoLibre. This is a company that's been on my radar for quite some time, especially since one of our members of our mastermind community pitched it. I remember he compared the early days of MercadoLibre more to eBay than to Amazon. And one stat that just really struck me is this company's history of consistent high levels of growth. So back then, they delivered something like 23, 24 quarters of 30 % plus top line growth. And now that's ticked up to 27 straight quarters. And that's just something that no other publicly traded company has ever done.

42:40Yeah, it's impressive. The eBay comparison might be even more fitting. eBay is far from having achieved almost 27 consecutive quarters of 30 % growth. But in the first couple of years, MercadoLibre followed eBay's business model of facilitating mostly online auctions. And it took them a couple of years, but then they realized, okay, well, there's this other business model, which seems to be a lot better. So at that point, they decided to move away from auctions and become more of a marketplace similar to Amazon. And obviously, with the benefit of hindsight, that turned out to be a very smart decision.

43:12And I also like the eBay analogy because the two companies have something in common that Amazon never had, and that's a payment operation. eBay acquired PayPal to create trust and reduce friction at a time when people were still nervous about buying online. I still remember that 15 years ago. My parents never trusted eBay and thought the seller would likely never send the product. And to their defense, that happened from time to time. Now, Latin America is probably about five to six years behind the US when it comes to adopting new technology. And that's actually one of the key parts of today's pitch because MercadoLibre benefited from that dynamic in a big way.

43:49And to some extent, they still are benefiting from it. They couldn't simply acquire a PayPal equivalent because, well, nothing like that existed in Latin America at the time. So they decided to take matters into their own hands and just build it themselves. And that's how Mercado Pargo was born. And that decision created a very powerful flywheel. Once Mally offered a trusted, seamless way for millions of people to pay, those people suddenly started to go online and shop for things like clothing online, and they've never done that before. And that flywheel just started spinning. So you had more buyers, which led to more sellers, and then more sellers brought more product variety, and that in turn drew even more buyers into the entire MercadoLibre ecosystem.

44:32Well, Clay already mentioned the phenomenal track record of growth here, but what excites me even more is how much runway I think still lies ahead. And so I've looked into this space a little bit when I've done research for NewBank. And what I found was that over the next decade, Latin American e-commerce is expected to grow to CAGR of almost 11%. So that is driven by millions of more people starting to shop online for what would really be the very first time and ultimately increasing their shopping frequency as a result of that increased convenience. And so today, just for context, e-commerce penetration in Latin America is only around 14 % to 15%, whereas in the US, you're talking about 24%, the UK is close to 30%, and then China is an elite-owned well above that.

45:23And there's really no structural reason why Latin America can't at least follow a similar trajectory, even if it's to a lesser extent over the coming years and decades. As payments digitalize, as logistics improve, and as trust increases, the region's online penetration should naturally converge toward the levels we've already seen in more mature markets. That is one of the broader secular trends that really is true across the entire world, but especially in this region. Yeah, that's what makes Mellie so interesting to me. I mean, even if you think about places or regions like South Asia, you see that actually a lot more people shop online than if you compare to the US or the EU.

46:03And South America, and especially Latin America, could become something like this. And a company with this kind of growth history should naturally be slowing down by now. But it really isn't. I mean, Clay already mentioned it, and you just repeated it, the streak of 27 consecutive quarters with 30 % growth, which is just unheard of at this scale. No company ever did it. And to me, it just sounds completely surreal. And that momentum comes mainly from two places. So first, you have the massive tailwinds of what is essentially a multi-decade super cycle for Latin American e-commerce. Then second, MercadoLibre's overwhelming dominance in the markets where it operates.

46:39And to bring the flywheel back into the conversation, Mali didn't just built a payments operation to support the marketplace, they also took a lesson from Amazon and started building out a logistics network. And what's impressive is, at least to me, how they did it, because Amazon chose, as we all know, this fully integrated approach, highly capital intensive route, and they spent billions to own nearly every piece of the infrastructure. And Melly took a bit more of a flexible and a less capital heavy approach. They own and they operate their fulfillment centers and basically the backbone of the network, moving goods from distribution centers into major city hubs.

47:15But once the package is inside the city, then they hand it off to so-called local delivery service partners, or in short, DSPs, who handle the last mile delivery. And this hybrid model just gave Melly the speed and reliability that it needed to compete with Amazon, but without anywhere near the same capex burden. And it's one of those reasons why they have been able to scale so efficiently, and why their logistics network has become such a powerful mode across Latin America. Correct me if I'm wrong, Daniel, but I mean, the part of the reason why Melly built its own logistics network was that third-party delivery services were just not good enough, right?

47:53I mean, that's my understanding. And so in e-commerce, speed and reliability are everything. And Latin America does not have and did not have the same infrastructure as the US. And so packages just took too long to deliver, or sometimes they would never arrive at all. From what I've heard on various subreddit forums about MercadoLibre. And so the need for a network owned and operated by MercadoLibre itself was probably even larger than the need for Amazon when they made that decision to try to fill that gap in the market. So I mean, if that was the problem in the first place, I'd be curious to hear why you think Melly did later bring third-party delivery partners back into the ecosystem?

48:36You know, that's a good question because it is a bit counterintuitive. But I would say that the key thing to understand here is that by the time the package reaches the city hub, most of the infrastructure problems already solved. The DSPs that Melly works with at that stage, they are mostly small and local delivery companies that know the area pretty well. And in many cases, they have Melly as their own or at least their primary customer. And that makes them just far more reliable than the state-run carriers that used to handle the entire journey, basically. And the benefits of owning the logistics network are obviously enormous.

49:11It's one of the main reasons Amazon became so dominant in the US. And if you want to accelerate e-commerce adoption, there are really just two ways to do it. And that's secure payments, and then it's fast and reliable delivery. And especially in a region where existing logistics networks are inconsistent at best, Being the only platform with an end-to-end fulfillment system, it's just a massive advantage and extremely hard to copy. And even with Melly's more capital-light approach, compared to Amazon, they still operate close to 100 warehouses and distribution centers. They run their own fleet of airplanes, which are called Melly Air, and they've built so-called Melly Places, which is basically this huge network of hundreds of third-party stores that function as pickup points across the regions that they operate in.

49:56Let's take a quick break and hear from today's sponsors.

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53:44You have multiple different players. So as I mentioned, many people think of Amazon when they hear e-commerce. But when you look at MercadoLibre, they're competing with players like Shopee, who's based out of Asia, Timu. And these are companies that are incredibly successful in their home markets and have also made attempts to compete in Latin America as well, especially Brazil, which happens to be Melly's largest and most important market. Do you think these competitors will be able to steal share from Melly or do you think they're just all going to coexist in these Latin American countries? Yeah.

54:21So Melly operates in close to 20 countries, but the markets that really matter are Brazil, Mexico, and Argentina. And those three alone account for about 80%, even a bit more than that of all e-commerce activity in Latin America. And what's interesting is that this hasn't always been the case. Venezuela, for example, used to be one of Mali's biggest and most promising markets. And then hyperinflation hit, the economy collapsed, and the opportunity essentially disappeared overnight. And there are a few other examples like that. And that just shows you how much more dynamic and sometimes unstable that region can be.

54:56What's remarkable to me is that none of this, though its entire history, has stopped Melly from compounding. Through its entire history, whenever one market struggled, another country picked up the slack. And both the marketplace and Mercado Paraguay are also naturally protected against inflation, at least when we talk about high inflation that is not yet hyperinflationary. But to actually answer your question about competition, Melly is the top two player in every market it operates in, even in Mexico, a market where you would naturally expect Amazon to dominate just because of its proximity to the US, Melly has maintained the leadership position.

55:31And in Brazil, which is the crown jewel of Latin American e-commerce, the only two players that really operate at scale are Melly and Amazon. And there as well, Melly is the clear leader, typically holding roughly three times Amazon's market share in most of the countries where they go head to head. And that gap hasn't been narrowing down either. Even if Amazon has actually been investing quite a lot of money in those markets, That gap has been pretty stable across the last years, basically. And Shopee is relevant in Brazil too, especially in those low ticket categories, but its business relies heavily on external carriers and promotions.

56:09And it hasn't yet proven it can actually be profitable the way it operates right now over the long term. So if I had to bet, I would go the highly profitable, fast growing incumbent with physical infrastructure and just a much more developed flywheel than an unprofitable foreign company, even though that phrasing might be not totally fair for what Shopee has done in the last couple of years. And I would argue it's kind of similar for Timu. I've talked to people who live in the region and to me, it seemed that Timu has a similar position in Latin America as it does in Europe. So many people use it, but it's nowhere close to Amazon in the EU or the US and Mercado Libra and Brazil.

56:46And it almost seems as if you buy something when you're willing to take a gamble on both shopping times and most importantly on product quality. And to me, that just doesn't sound as sustainable. So if I had to summarize it, I think it will be extremely difficult for any outside competitor to beat Melly on the combination of logistics density, payment integration, and the network effects that come from running the entire ecosystem basically end to end. But I also don't think that e-commerce is a winner-takes-it-all market, or it doesn't have to be. Most regions, except for the US, maybe settle into more of an oligopoly position.

57:22With a massive runway ahead for Latin America, there's plenty of room for multiple players to grow. So it doesn't necessarily have to be at Melly's expense, should Sharpie or Tmoo keep growing in that region. I mentioned it earlier that you and I covered NewBank on our show, and now it's a holding in our intrinsic value portfolio. So we're familiar a bit with Latin America, but we also know that fintech and banking in that area of the world is just incredibly complex, maybe the understatement of the year. So I wouldn't want to ask you to go deep into the weeds here, but I am curious whether Nubank and Mali through Mercado Pago are actually competitors.

58:00And if they are, how do they stack up against each other, in your opinion? I'm the one who did a lot of the work on Nubank. You've now done most of the work on Mercado Libres would be very interesting just to compare the perspectives there. We've been blown away by the numbers that NewBank has been consistently putting up for quarter after quarter now. NewBank is actually even trying to expand into the US with a banking charter. So some very big ambitions coming out of that company. And yet at the same time, we've also made it clear that this is a business model where we're both a little bit out of our depth.

58:33As I sit here in the US and And Daniel sits in Germany trying to figure out what's actually happening with the end consumer in Latin America. Obviously, even just saying Latin America is a massive generalization. So it's a big dynamic market with just so many moving parts that are hard to fully grasp all the forces at play. Well, I mean, both companies offer credit cards and both operate in the biggest Latin American markets like Brazil and Mexico. So there's definitely some competitive overlap. But NewBank, as the name kind of suggests, is fundamentally a neobank. And its core strength are low funding costs and incredibly trusted consumer brand, and also a cleaner and more traditional credit portfolio.

59:15And Mercado Pargo, on the other hand, was born out of the commerce system and was born out of the commerce ecosystem. And you can see that DNA everywhere. It started as the payment solution for Melly's marketplace, then expanded into off-platform payments and eventually even into offline acquiring. So they basically sell these point of sale devices, especially mobile ones, to small shops and local merchants. And that essentially does two things at once. First, it drives more payment volume through Mercado Paro. And second, it becomes kind of a bridge that brings offline merchants into the digital economy.

59:50And that's a big deal in a region where roughly 85 % of merchants are still entirely offline. So for many of them, And Mali point of sales device is the first step toward eventually listing products online and becoming part of the broader ecosystem that Mali offers. And the part of Mercado Pargo that I personally find easier to understand the new bank is its access to first party behavioral data. When they issue loans, whether to merchants or consumers, they can base those decisions on thousands of data points. So they know what you ended up buying, how many products you returned, and how you paid for them.

1:00:25And they have so much data to decide who should get a loan and who shouldn't, and also how to price them. It just makes me a lot more confident that I can understand this business. And perhaps it's one of the reasons why Mercado Pargo is willing to take on slightly more risk than Eubank. One of the best ways that you can see this difference is in so-called NPLs, which stands for non-performing loans. And analysts usually look at two checkpoints. So loans that go delinquent after 15 days, and then loans that go delinquent after 90 days. And NewBank's NPLs are noticeably lower than Mercado Pargo's, which simply means a smaller share of its borrowers end up missing payments.

1:01:04And the flip side of that is that Mercado Pargo earns risk adjusted a margin of a little over 20%, which is roughly double the margin of Nubank. And this is basically after you account for all the credit losses that both of them face. So in other words, you could say that Mercado Pargo takes more risk, but it also gets paid significantly more for taking that risk. And most importantly, probably both of them carry more reserves than needed to cover all expected losses. So neither of these companies is out there gambling with credit cards or loans that they give off to other merchants or consumers.

1:01:38And still, this is the part of the business that would come under pressure if one of the major economies Mercado Parvo operates in were to experience a serious downturn and more risk, obviously, beautifully and stable or improving environments, but it can cut the other direction if macro conditions deteriorate quickly. I think everyone listening is going to be familiar with the risks that come with investing in emerging markets. MercadoLibre is obviously exposed to many of them as well. For example, you just look at the high inflation environments in countries like Argentina and Venezuela, but the company just has a phenomenal track record of navigating these storms.

1:02:18A lot of that comes down to management. Marcos Galperin, he's the co-founder of Melli, and he's been leading the company for more than two decades. And he's consistently steered through every macro crisis the region has thrown at him, all while keeping this long-term vision intact for the company. He's also made these remarkable decisions that are very shareholder-friendly along the way. So Melly might be the only large tech company that I've seen with stock-based compensation running at about 1 % of revenue. And this means that there's essentially no dilution for existing shareholders. So for a company operating at this scale and still growing as fast as they are, I think that is just very hard to find.

1:03:07The one thing that can look odd at first glance is the margin profile. Normally, you would expect margins to expand for a company like this, but with Melly, it's almost the opposite. Operating margins, they were north of 30 % in the mid-2000s, and today we're in the low to mid-teens. How about you talk more about that? Yeah, that's a great point. It's a bit counterintuitive, but the decline started around 2017. And that was a time where largely the result of deliberate reinvestment showed up in the financials. And there was a period when the company aggressively expanded all of the investments they wanted to do for the long term.

1:03:42So we're talking about the logistics network, we're talking about expanding free shipping subsidies to accelerate adoption. They also began scaling Mercado Pago at about that timeframe. So beyond the marketplace, when you expect to scale a payment provider, you have to do a lot of investment upfront and you only get the benefits of that later on. And each of these moves temporarily compressed operating margins, but dramatically strengthened the long-term competitive position of the company. So in other words, the margin volatility was one of those long-term strategic choices of the CEO to take more market share and just solidify Manny's position.

1:04:19And today, margins are picking back up again. As you mentioned, they are in the low teens right now because most of the heavy lifting from at least that investment cycle is now done. Utilization of the logistics network is increasing and the fintech business has reached a scale in their biggest markets. although there is still plenty of room for margin expansion that's definitely part of the thesis if you look out five to ten years we didn't even talk about the ads business that mallee just rolled out last year for example which is growing very quickly and is obviously a high margin business and i think there's no reason why you shouldn't expect similar numbers to what amazon has put up they like i said just started out so i think there's a lot of growth coming from that and overall i wouldn't be surprised if we see margin declines from time to time there will be new investment cycles.

1:05:04And just this year, there was another free shipping initiative that put pressure on margins. I generally say, I see this as a positive thing. First of all, because more people come into the ecosystem. And second of all, because the more people come into the ecosystem, the more people or the more money you will save on your logistic network, because it just gets more efficient every time. So yeah, I believe it will be a while before Melly starts optimizing for margins. There's still way too much growth ahead to stop reinvesting in the business now. And yeah, I guess that's it. That's pretty much most of my pitch.

1:05:36I basically switched from what you could call a deep value pitch by now with PayPal to a company that is probably on the more expensive side, which is usually not where I look for opportunities. But this stock traded down about 25 % from all-time highs at the time of recording and factoring in its growth, it's not trading at unreasonable levels or valuations. And it's really a pick that if you believe in it, I would say you need to hold it for probably four to five years, and it could be a fantastic company over the next decade. Sounds a lot like Nubank. And MercadoLibre, people love to compare it to Amazon.

1:06:08And in some ways, that's a good comparison. In some ways, it's lacking. One of the big differences is that MercadoLibre does not, as far as I know, have the same kind of cloud computing ambitions as Amazon, which has really become just a juggernaut of their profitability. And then as you said, and we didn't have a ton of time to linger on it, but what makes me most excited about MercadoLibre is probably the advertising opportunities. You've seen Amazon become one of the largest advertising platforms in the world. And with companies like Uber that I've pitched to Clay in the past and Daniel, we've talked about at length before, advertising is really materially increasing their profit margins.

1:06:44And this is probably an equally difficult business, if not more so, but there's a lot of potential to the upside if they can implement digital advertising at scale. At least that would be my thought. Yeah, totally. I mean, I honestly look forward a lot to when I pitched this stock in a deep dive on our show to you, Sean, in a couple of weeks, because I think there's so much more to talk about and so much more to get excited about. I am just totally with you guys on the advertising business. That definitely excites me. I think advertising is a tough nut to crack, but if they can do it, the potential upside is just enormous.

1:07:20And that should be no surprise given my pick today. So thank you, Daniel, for the wonderful pitch here. I was very surprised you put this together on a Saturday night. So thank you for grinding out that last minute research for the discussion today. And had you guys shown me these two picks ahead of time without saying who was picking what, I would have said Daniel was pitching Xer and Sean was pitching Melly. So I like that you both try and think outside the box from your more conventional investing styles. So while you guys have been, I would say, a bit more creative with your picks, I hope you'll forgive me today for simply selecting a magnificent seven player that's trading slightly out of favor.

1:08:05And my hope is that this pitch will hopefully nudge you guys to cover it on the Intrinsic Value Podcast this year. I'm sure we will at some point. Slowly but surely, we're making our way through the S &P 500. And the fact that we're a year into covering different company every week on our podcast, we still have not done all of the Mag 7. Maybe that's surprising to people, but I guess we've taken our time with this one. Well, it certainly is a fun one to cover. And maybe it depends on how you look at it. On the one hand, there's just so much to talk about. On the other hand, it can be very controversial.

1:08:40I'm sure some listeners are going to love the pick. Some listeners are going to hate the pick for various reasons. So my pick today is Meta. First, I'll mention that I did recently purchase shares for my own portfolio. My average purchase price is around$6.48 a share, and it's currently around 3 % of the portfolio. I'd love to add more. I just have a hard time selling existing positions to fund a new position. So zooming out, unfortunately, when it comes to investing, I can just be a slow learner. Meta is one of those stocks that I've watched for the longest time. And obviously, we're all familiar with the company.

1:09:16And just given the level of controversy with this name and the regulatory pressure they face, it's gone through a number of significant drawdowns, which gets a lot of investors interested at different points in time. But I never really acted in size with this name, but I hopefully wanted to correct that mistake from the past. So the first drawdown I witnessed was in 2018. If investors or listeners remember, this was during the Cambridge Analytica scandal. The stock fell by around 40%. And I temporarily owned the stock for a short period of time before locking in a profit. And part of what kept me from really betting big on Meta was simply this bias I had against investing in very large companies.

1:10:02So in 2018, the market cap dipped below$400 billion. And it's just like, how much bigger can it really be? At that point in time, you had Apple, that was like the only trillion dollar company at the time. Well, today, Meta is a$1.5 trillion company. So they've nearly 4X their market value over that period of time. It also wasn't until just recently that I appreciated the service that Meta is providing to advertisers. So I've been running Meta ads for a small e-commerce company over the past couple of years. And I saw firsthand how advertisers are able to view the data behind their ad spend. So you can see the number of impressions, the number of clicks, the click-through rate, the number of conversions, cost per acquisition.

1:10:46There's all this data that really gives advertisers exactly what they need to understand the performance of how every dollar they're spending is performing in terms of return on investment. And it reminds me of the old saying, half of my advertising doesn't work. I just don't know which half. And Meta just completely eliminates that problem. So in my research on Meta, I came across an interview all the way back from 2018. It was with Pat Dorsey of Dorsey Asset Management. And I thought it was such a great line that I had to share it here today. So in the interview, he said something to the effect of, if God invented an advertising platform, it would be called Facebook.

1:11:24And really the biggest breakthrough with Meta was being able to measure the return on ad spend. So when you look at billboards or radio advertising, these may never go away. Just digital advertising has proven to be significantly more effective for businesses wanting to market their products and grow. So Meta and Google or Alphabet, these two have really been the dominant players in digital advertising. And over the past decade, when I look at their stock returns, it's been surprisingly correlated between the two. But when we look at 2025, we saw a pretty drastic divergence. So here as of the time of recording in mid-December, shares of Alphabet are up around 70 % on the year, which is just phenomenal.

1:12:09It's been labeled an AI winner now, and shares of Meta are up around 9%. But Meta's business has been firing on all cylinders. They have revenue growth over 25 % in the most recent quarter, and they're capitalizing on immense pricing power as well as the average price per ad grew by 10 % year over year. It's funny to me and probably to you, Sean, as well, that we now talk about Alphabet as a winner of 2025. And for a long time, we heard about our stock pick that Alphabet is actually lagging behind OpenAI. And now it worked out pretty well, which of course is great for us. But I've actually gone through a very similar journey with Meta as you did, Clay.

1:12:47It's been on my mental watch list so many times, but I never ended up pulling the trigger. And it's funny because looking back at the Max 7, it feels like their success was so obvious. But in reality, and you mentioned it, they kind of redefined how much companies can grow at the scale that they had reached even 10 years ago. I mean, you mentioned that in 2018, Apple was the first publicly traded company to ever reach a trillion dollar market cap. And that milestone really seemed like it wouldn't be surpassed that quickly again. And now less than 10 years later, we have more than 10 companies that have crossed that mark and some are worth multiples of that.

1:13:22So if anything, that has taught me that there's still plenty of opportunity, even in the biggest names, especially when they're beaten down by either temporary issues or just general doubts about the management, as it has been the case with Zuckerberg now multiple times. Yeah. I mean, it also sort of points to how, if I were to wrap some sort of narrative around this, I think the internet has just enabled just this winner-take-all dynamic where you look at digital advertising, for example, just Meta and Alphabet have just eaten this market as it continues to grow at double-digit rates. So the recent drawdown in Meta is really primarily driven by fears related to their CapEx spend.

1:14:00So AI CapEx is just all the rage with many of these MAG7 stocks. In 2025, Meta is going to spend around$70 billion on CapEx. And since they don't have the capacity that they currently would like to have, which is pretty remarkable, they do expect significant growth in CapEx in 2026. So they clearly don't want to undershoot their compute needs that they've had in recent years. So Zuckerberg mentioned on their recent earnings call that they do expect this additional spend to yield good results. And of course, they believe that. Otherwise, why would they do such a thing? But he made the additional point that if it turns out that they overinvest in these compute needs, then they would be able to allow other companies to use that compute should they not really need it.

1:14:49So that's the big question that the market is really trying to figure out is will Meta's huge AI spend turn out like the Metaverse spend, for example, that didn't really deliver any positive returns for investors. But if we look back historically at Meta and understand the bigger picture, Zuckerberg clearly has a history of being a good capital allocator and overcoming the challenges that the business has faced. So if you zoom all the way back to the mid-2000s, Facebook Blue was started one year after MySpace and Facebook managed to overtake MySpace, which was pretty remarkable given that it was the number one social media platform and one of the most popular sites globally.

1:15:29Then you have the transition from desktop to mobile in the early 2010s, 2011 to 2014 timeframe. They started out, their mobile had a pretty terrible experience. And then in the years that followed, mobile would end up generating around 90 % of their revenue, which again, is just another example of Zuckerberg being able to weather through these storms and these transitions. And in the span of just a few years, they essentially transformed their entire business. And then in 2012, they had the purchase of Instagram. They bought it for just$1 billion. It had no revenue, 13 employees. And today it's estimated that Instagram generates nearly$100 billion in revenue per year.

1:16:10And then 2014, they made another home run acquisition and buying WhatsApp for$21 billion. And they've also integrated what's been successful for other social media companies. So for example, you have Stories after Snapchat released those, They integrated the same feature on Instagram and Facebook Blue. And then with the rise of TikTok, they were very fast in launching Reels. In their most recent earnings call, they shared that Reels crossed a$50 billion ARR. So Zuckerberg has a long history of navigating the company through these periods of constant change and uncertainty. And with the capital and resources at their disposal, I just like the risk reward profile at this level.

1:16:51So Meta generates the vast majority of their revenue from advertising on their family of apps. Think Facebook Blue, Instagram, and WhatsApp. And my thesis is that AI will be a big driver for the business going forward. So by all measures, the strength of this business only seems to be improving, whether you're looking at margins, growth in active users, time spent on the platforms, et cetera. And if anyone is looking for a company that will be a beneficiary to the trend of AI, I think that Meta is certainly a good candidate. So many are speculating on how all these companies will be able to capitalize on AI spend in the future.

1:17:31I think it can be argued that Meta has been doing this for more than a decade now. Social media apps like Facebook are being run by AI and machine learning already. So them, alongside Alphabet, have been at this for a while now. So I wanted to talk a bit more about why AI will be a tailwind for meta. So I have four points here. First is AI is going to make it easier for users and content creators to generate content. And meta themselves even has tools that allows users to do this. So since creating new content will be easier, I think it's pretty reasonable to assume that more content is going to be generated going forward.

1:18:14Second, it's just not enough just to have the content. Meta needs to be able to deliver content that is relevant to users. So as AI continues to improve their algorithms and recommendation models improve, engagement on the platform will increase. I mean, we've been seeing that for many years now, and this isn't speculation. Engagement across all of Meta's apps are improving, so it's already happening. And third, more engagement on their platforms means more ads are going to be delivered to users. Which brings me to my third point, Meta has the models that deliver advertisements to users. And as their models continue to improve as a result of AI, this essentially means that their ads will continue to be more effective at converting and delivering more value to advertisers.

1:19:01As a result, they can charge more for ads over time, which gives them more pricing power. And lastly, on this point, I would mention that AI also makes it easier for advertisers to spin up new creatives and test them out in their campaigns. So it's cheaper and easier to run different ads, which will allow advertisers to put together more effective campaigns. And perhaps AI will also remove some of the barriers to entry for advertisers. For example, some just don't have the technical experience to figure out how to run ads, how to test new creatives. And I think that Meta is just going to make advertising on their platform more and more accessible over time.

1:19:43So if one were to hire an agency to do this for them to manage their digital ads, it can quickly cost thousands of dollars per month. And it's certainly in Meta's best interest to try and remove that barrier for as many businesses as possible who just don't have the time or don't have the capital to run ads today. So I think the opportunity in Meta is getting some exposure to the potential upside of AI's capabilities while also getting that upside at a reasonable price. So really quickly on the valuation here, when I adjust for a one-time income tax provision, Meta trades for an adjusted PE of around 22.

1:20:21And if we look at the S &P 500 and exclude the MAG-7, the market's also trading at a similar level. So essentially, the market's telling us that Meta should trade in line with your typical company in the S &P 500, which I just don't think is giving them enough credit. It's similar to how for an extended period of time, Alphabet traded below that of the market, and yet Alphabet continued to publish solid results and quietly be at the forefront of AI. When we look at Meta today, top line's growing north of 20%, profits are up a similar level, and the company's deploying more than$40 billion into share repurchases in addition to paying out a small dividend as well.

1:20:59And lastly, I would mention a few embedded call options that investors get when investing in Meta. So WhatsApp, they currently have over 3 billion monthly active users, and they're in the very early stages of monetizing this platform. So I think in the coming five years, WhatsApp is going to be a significant contributor to earnings growth. They also have reality labs. I think virtual reality, augmented reality. This segment doesn't give me too much inspiration or interest me too much in terms of what it will deliver going forward. Perhaps it'll be another profitable division for them down the line by generating broad appeal for consumers or enterprises.

1:21:41I'm not going to place a big bet on that segment specifically. And then lastly, the company has released an open source LLM, and it's estimated to be the number four player behind Anthropic, OpenAI, and Alphabet, or Google's DeepMind. So that pretty much sums up the pitch. I'd be really curious to hear what you guys think. It's a good one, Clay. And gosh, I remember really looking into Meta for the first time in 2022 and reading Aswath Demodaran's valuations of the company at the time. And I mean, it was just pretty wild that from its peak in 2021, the stock was down nearly 80 % in 2022. And for a company that has more than one in three people on earth, just using Facebook with this track record of incredible growth and profitability and really shareholder stewardship, it really makes me question the whole idea of efficient markets that were taught in schools.

1:22:37Volatility of that magnitude is just not supposed to happen to companies like Meta. And clearly, in hindsight, it shouldn't have happened. And so that was a missed opportunity for me. And I was probably too smart for my own good in that I remember wanting to be very disciplined and feeling like, okay, even though intuitively this looks to be pretty clearly a point of extreme pessimism in the market on arguably one of the best businesses in the history of capitalism, I also did not want to be investing in businesses that I didn't feel like I could fully wrap my head around. And I was taking inspiration from Buffett and how he tends to avoid tech companies.

1:23:13I remember really wanting to pull the trigger and being proud of myself for not having done so because I hadn't done the prior research to know the company well enough and just to feel comfortable with understanding their moat. And so the concern now with Meta that I have at least is that the Metaverse investments are pretty clearly looking to be a flop, which is what the market was worried about rightly in 2022, maybe just to an extreme extent. And then now you're looking at them having the fourth best LLM. And unfortunately, I'm not sure having the fourth best is going to take them very far.

1:23:48And so there were all these headlines earlier this year about them signing top AI researchers to contracts that would honestly make some of the most famous athletes in the world blush to how much they were paying these people. And yet, we just really have not seen the payoff from all that spending, just like with the metaverse. And that's a little bit of a yellow flag to me. So I think you could look at this and say, okay, that is undergoing a phase shift. It's not the capital light business it once was, as it's making these huge bets on the future. But so far, one of those bets with the metaverse has really gained no traction and does look like a money pit.

1:24:23And then with the other area they've invested significantly into with AI, they are pretty clearly a laggard. So it's hard to say to what extent their investments in that area are going to pay off for them. Even though I do hear your point that for really in a way they've been monetizing AI for something like a decade now. And just for me, I think it falls into the too hard bucket of there's two core areas that they're dumping capital into. And the thing we have to remember with investing is it's the future returns on capital that will drive our experience as shareholders and not necessarily the historic returns in capital, which are obviously very, very attractive in this case.

1:25:01And so it seems like a business where the capital intensity is fundamentally changing. And that doesn't have to be a bad thing, but it just means that buying meta today is potentially a very, very different type of business than it was a decade ago. And so I'm not going to be here to say that I'm shorting meta, but just to provide maybe a little bit of pushback and just to say that as the capital intensity scales up, which is something you could say really about any of the Mag7 companies, including our portfolio company, alphabet. And as the law of large numbers continue to kick in, given their existing size, it's how difficult it is to find attractive opportunities to redeploy capital that actually move the needle.

1:25:39I could easily imagine over the next decade that meta would produce somewhat mediocre results, but I'm just feeling a little bearish. So I don't know. Yeah. I mean, your points are certainly well taken. To the point about the doomsday scenario that Aswat DeModeran published, I mean, you aren't getting the bargain price that investors were getting in late 2022. But sometimes good investing is all about just trying to hit these base hits and just avoiding the losers. So if you can consistently pick up great companies at fair prices, then I think that will fare well for a lot of investors. But to the point on the metaverse, as Stig likes to say, capitalism is just brutal.

1:26:18And I think that's exactly what we've seen with the bets on the metaverse. Meta could be a great case study that can illustrate that many projects a business will work on just simply won't work. But the ones that do work will make up for the losers many times over. And I totally get the capital intensity concern. It is a legitimate risk. And you are putting a lot of faith in management and Zuckerberg and understanding the returns they believe they're going to get on this spend. And the numbers are just unbelievably large. Meta is still burning billions of dollars in cash in their reality labs division.

1:26:55And just the other day, they announced that they'll be reducing their reality lab spend by 30%, which the market reacted positively to. But with that said, I still think that the majority of their increased capex is to build out their existing infrastructure that underpins their core business of their family of apps. And this historically, of course, has delivered a positive return on investment. And I think that management has a good feel for what that will look like, at least in the near term. We'll see what happens if they continue to increase this year after year for the next decade, how that will end up panning out for them.

1:27:31But much of the reason that Meta sold off in 2022 was due to them making these largely speculative investments in the metaverse. And now I would say that they're really doubling down on what's already working. And these AI systems are already driving higher engagement and better ad performance. So the return on investment is showing up in the numbers today. As I mentioned earlier, ad pricing is up 10 % year over year, which is a direct reflection of their investments delivering strong growth for the core business. And I'm not sure that Meta has to have the best LLM to win. What really matters, I think, is optimizing their models for their own proprietary data and specific use cases.

1:28:12And on the point about whether Meta should license LLMs from OpenAI or Google instead of spending all of this capital themselves, I just don't think this is a direction they could go. The core of Meta's business depends on real-time ranking, recommendations, and ad delivery. And the latency requirements are so tight that those models have to run on Meta's own infrastructure. And on top of that, they can't ship all of this data on user behavior to an external model without running into privacy and regulatory issues. And lastly, I don't think they want to hand over control of a core part of their business to another big tech company.

1:28:54Well, you said to yourself at the beginning of your pitch, Clay, there's just so much to talk about and so much to consider when we're talking about Meta. And personally, I'm just very interested in how they want to monetize WhatsApp. As you said, there are 3 billion people and I'm one of them. And I know that I'm the only one here on this call using WhatsApp every single day. So I'm thinking this is huge potential. And at the same time, I don't really know how they're going to monetize it. I don't think it has the same potential as let's say Instagram. And I don't really know where to place the ads in a way that it doesn't hurt the user feeling when they use WhatsApp.

1:29:27And still it's 3 billion people. So it could be a phenomenal driver of revenue in the future. And by now, it's basically not monetized at all. What gives me confidence as well in the most recent investments, and you mentioned it, is that it's almost certain that there will be demand for more data centers and computer infrastructure in the decades ahead. And so even if it turns out that Meta won't need all of it themselves, there will most likely be a way to monetize all of those data centers at at least a decent return. And on the other side, what gives me a bit of pause is that at least when I look at the past track record of their investments, I think they never really managed to invest successfully outside of its main social media operations.

1:30:08And when you just gave us the numbers, Clay, it honestly blew my mind that Meta's apps still see these increases in usage. It probably says more about my personal preference and the bubble I live in than anything else. But from my perspective, it feels like people are generally trying to consume social media more consciously, which is a polite way of saying just less social media consumption. But clearly, that's not what the data shows. And I would definitely not put my personal opinion above the data. That is clearly true. I mean, if the core business weren't still compounding the way it is, there would be a good argument to make that Zuckerberg is spending heavily to find the next big thing because growth is actually slowing down.

1:30:48And that would obviously not be a bullish interpretation. But with the core business or the core app still getting stronger every single year, and with the current investment cycle being much more adjacent to the core business than Metaverse ever was, I don't think Meta should trade anything close to an average S &P for multiple. So yeah, I really like the pitch. And if your goal was actually to convince us to finally cover Meta on the show, and I saw that Sean is not as bullish, I can tell you that mission has been accomplished because I would definitely go for it. Yeah, it's funny. I think Meta is one of those companies.

1:31:20if you talk to the regular everyday person, that they would not see this as one of the greatest businesses here in the United States. I think a lot of people think of Facebook Blue as an app for older demographics. All the kids are on Snapchat and TikTok. But it's just remarkable that the family of apps are still growing. And I think even us, I think we sort of see Facebook Blue as an app for older demographics and all the younger demographics are going to other apps. But I think Instagram does attract that younger demographic. And then even when you look at the advertising business, I think most people would assume that, you know, who's going to buy something that they see on Facebook?

1:32:02But the reality is that people do. And I think there are even some cases where I myself end up seeing an ad on some of these apps and end up eventually purchasing. And part of it is, is they just keep delivering that to you. You might not buy it on the first impression, but maybe the sixth or seventh impression, and you finally are like, hey, I'm going to pull the trigger on that. But I think we would all love to use social media less. And knowing who you are, Daniel, I think that I just don't think most people are as disciplined as you. A lot of people just fall prey to the algorithm. And the reality is that these apps are getting better at delivering content that's relevant to users.

1:32:40And that might be my way of saying that they're becoming more addictive. So I do appreciate your guys' feedback on this pick today. And I look forward to tuning into your episode on Meta and your upcoming episodes on Exer and MercadoLibre. And I'm sure you'll find some things on Meta that I'm overlooking when you do some more digging. So lastly, I just wanted to congratulate you guys. You just crossed the one-year mark since launching the Intrinsic Value Podcast. What you've done in the past year is just incredible. And along the way, you've been just incredibly supportive of me doing the presentation you did with our group in Montana and doing a couple of presentations for our mastermind community.

1:33:22How about we just close it out by talking a little bit about the show? For those that haven't tuned into it yet, what can listeners expect from the Intrinsic Value Podcast in 2026? Thank you for saying so, Clay. Yeah, more of the same, I hope, in the best way. We're going to just keep continuing to grind through different companies every week, pouring dozens of hours of research into each one, and then just sharing our findings with the world completely for free on our podcast and in our Intrinsic Value newsletter, while trying to build a portfolio publicly of our highest conviction bets. And like I said, doing so completely transparently for anyone at home to follow along with.

1:34:02And we've got a ton of really fun episodes planned for the New Year's. So yeah, just keep tuning in or start tuning in if you haven't before. And you can go through a whole archive of content to get up to speed on the stocks that interest you most. Yeah, perhaps a good episode to start with is actually the one we just published, which is the one-year portfolio update. I think we published it a couple of weeks ago. And for context, as Sean just said, whenever we find companies on the show that we feel are great opportunities, we include them in our show portfolio. And since it has been almost one year since we started.

1:34:36We did an episode looking back on many of our positions, the thesis and performance, just discussing how we want to position ourselves for 2026. So yeah, might be a good one to get an overview of what we have done last year and what we will do more of in 2026. And I'll just quickly say for folks who do want to take their investing to the next level, Daniel and I run a group called the Intrinsic Value Community, similar to the Mastermind group. And this one is devoted really entirely to sharing and discussing stock ideas in depth. And so you've got to apply an interview to be considered. It's a small but special group to join if you're admitted.

1:35:16And we host weekly calls, digging into stock ideas, having debates about them. Or we also will have private talks given by guest speakers. Folks like Adam Cecil and William Green have joined in the past, as has Clay. We also do stock pitch competitions, organize private dinners in Omaha during Berkshire weekend and really just a whole lot more. It's a lot of fun. So if you're looking for like-minded investors to support you on your investing journey, because investing can be lonely work, and to connect with on finding new stock ideas, or just to get feedback on your ideas, I'd really encourage you to join the waitlist for a spot in our group at theinvestorspodcast.com slash intrinsic value community.

1:35:59Excellent. Well, be sure to get all that linked in the show notes, the podcast, the newsletter, the community, especially if you're a podcast listener, I'd encourage you to just get on your podcast app now and hit follow on the Intrinsic Value Podcast. But Sean, Daniel, it's such a pleasure working with you guys. Thank you so much for joining me here today and cheers to the new year. Cheers to the new year. Cheers. Thanks for having us. Thanks for listening to TIP. Follow We Study Billionaires on your favorite podcast app And visit theinvestorspodcast.com for show notes and educational resources.

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