Prof G Markets: Alibaba and Mercado Libre, Share Buybacks vs. Dividends, and National Credit Ratings

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1:26This week's number, 31. The world's oldest dog, Bobby, just turned 31. More than 100 people attended his birthday party in Portugal. True story, when my girlfriend's dog died, I got her an identical one. And she said, what am I going to do with two dead dogs?

1:55Welcome to Prop G Markets. Today, we're discussing Mercado Libre and Alibaba, share buybacks and the market impacts of an aging population. Here with the news is non-pet owner and Prop G media analyst Ed Elson. Ed, you don't have any pets, right? No, I used to have a dog, but he died. Well, I'll get you an identical one. What kind of dog did you have? Thank you. I had a Border Terrier. Nice. It's a Scottish dog. But he wasn't the best dog because he would attack other dogs and he would not play fetch. He was kind of like a pretty bad dog, to be honest. Well, that's, you know what? That's just a charming experience, Ed.

2:33That's a great story. It wasn't that close to him. I love how you shitpost your dead dog. That's really touching. I appreciate that. Anyways, break down the headlines for us, Ed. Let's start with our weekly review of Market Vitals.

2:52The S &P 500 was up and gold sank as the dollar gained. Shifting to the headlines. The European Union approved Microsoft's$69 billion acquisition of Activision Blizzard just weeks after the UK blocked the deal. Qatar has thrown its hat in the ring to host the 2025 Rugby League World Cup, its latest bid to attract global business through sports. Vice officially filed for bankruptcy, as we anticipated a couple weeks ago. What's curious is that it was one of seven companies that filed for Chapter 11 in just two days. Montana is banning TikTok. The law will go into effect January 1st and will block the app from operating within state lines.

3:33It will also penalize app stores if they make it available for download. And finally, OpenAI founder and CEO Sam Altman testified before Congress on the state of AI. He urged members of the Senate to regulate the technology to avoid causing, quote, significant harm to the world. Also on the panel was Gary Marcus, Scott's colleague at NYU and the host of the Humans vs. Machines podcast. Marcus is one of the most vocal critics of AI and has raised the alarm about the threats he believes it poses. Mia spoke with him after his testimony, and he believes that when Altman called for regulation, he meant it.

4:10I think he was very sincere, and I could just, like, see that because I was next to him from the side, you know, three feet away, see things that you can't on the camera. And I actually said as much towards the end of the testimony. I said, I'm sitting next to this man, and I think he's speaking sincerely. For more of Mia's interview with Gary Marcus, check out our special report on YouTube. Scott, any thoughts? I just feel as if we've been to this movie before, and I don't doubt he was sincere. I don't doubt that Shel Sambord was sincere when she said, We're open to regulation. We work with lawmakers all over the world.

4:48I don't think Zuckerberg was insincere, maybe, but said, I think the real question, as the internet becomes more important in people's lives, is what is the right regulation, not whether there should be or not. But you as a company welcome regulation? I think if it's the right regulation, then yes. I think Twitter's CEO Dorsey probably meant it in April of 19 when he said... Generally, I think regulation is a good thing. It's a net positive. And I think our role as a company should be that of an educator, helping regulators and legislators understand what's happening with technology. I think it goes to something much deeper.

5:25And I'm cynical around this. Everyone I know that knows Sam Altman says he's a good guy. I think it's sincere now, but I think to be a billionaire in the United States is to be loved. And I think slowly but surely, the incremental road to hell is, okay, we're good people, we'll figure this out. And also we have the opportunity to make tens or hundreds of billions of dollars. So I'll incrementally start making a series of decisions that maybe ignore or delay and obfuscate and attempt to push back on our firm's profit-making ability because they're worried about it. But don't be worried because at the end of the day, I'm a good guy.

6:02And I've just seen this happen over and over and over. I don't think these people went into these companies as bad people. I think slowly but surely they figured out reasons why I embrace regulation, just not this regulation. So I hope I'm wrong. There's some evidence here that maybe we're taking a different tact with AI, but there are now three different types of regulation that have been proposed recently. I mean, there's Amy Klobuchar's antitrust regulation. There's Senator Bennett's proposed regulation around a new digital czar. There's Senator Warren's restrict act. And nothing ever fucking happened.

6:34So the other weapon of mass distraction being deployed here is open AI referring to themselves or constantly saying that they're governed by a nonprofit body. they really shouldn't say that because it's really not true. The first, I think the money goes back to the nonprofit after the original investors get, I think it's 100 times their original investment. I think we did this calculation that the first 80 or 90 billion in profits go to investors and management and Microsoft, meaning that until this company is one of the five most profitable companies in the world or in history, it effectively is a for-profit.

7:08it. So I don't look, I hope I'm wrong. I hope that Congress acts and it's not his fault. I'm sure he's earnest. The onus is on Congress to actually create some sort of regulatory body. I think there should be one under NATO because I do think there's a need for multilateral cooperation. But, you know, I'm sort of like in the show me phase. What are your thoughts? Well, I was really interested in his interaction with Senator Kennedy, where Kennedy asked him, You make a lot of money, do you? I make, no. I paid enough for health insurance. I have no equity in OpenAI. Really? That's interesting. You need a lawyer.

7:44I need a what? You need a lawyer or an agent. I'm doing this because I love it. Thank you, Mr. Chairman. What do you think of that? Do you think that is also a distraction? I mean, he's very rich, that's for sure, but he's not rich from OpenAI. I think that's a great counter-argument. And I hope that Congress acts on this quickly. I think that they feel like, you know, we won't be fooled again. Fool me once. Shame on you. Fool me twice. Shame on me. I think they've been fooled about 7 million times by these people. But there's just our ecosystem just sets it up such that ultimately over time, they find really good reasons to delay and obfuscate around regulation.

8:24And we end up with technology that has externalities that has absolutely no guardrails. Anyways, we'll see. So on Montana, that's not a state's job. I want TikTok banned. It's not a governor's job to ban media companies. You're the CEO of the state, and you're meant to make sure that the trains run on time and the police force and the fire department show up when you call 911. And he's kind of making it probably more difficult for federal legislation because it'll probably be overturned in court. It's grandstanding. Every governor wakes up, looks in the mirror and says, hello, Mr. President, and then tries to inflame the crazies around the nation to raise money and get a call that you're a principled weirdo and you should run for president.

9:08It's just total posturing. It's what Governor DeSantis is doing, you know, telling, passing legislation, telling principals and teachers what pronouns they can or can't use in schools. That's not what a governor is supposed to be doing. Qatar throwing its hat in the ring for the 2025 Rugby League World Cup. You're going to see more and more of this because if you want to burnish your image as a nation, you can run those ads on CNN saying, come to Malaysia, do business in Malaysia, right? Have you seen those sort of those ads on CNN International that promote Taiwan as a great place to do business?

9:42That is probably effective, makes you feel better about the country, right? But it costs money. Well, what if you could do something, run an ad, you know, 80 times a year that reached hundreds of millions of people? And in 10 years, you could sell all of those ads for more money than you paid for them. That's called a football team. So you're going to see the term sports washing, but you're going to see this everywhere. You're going to see it in enormous acceleration in the value of these companies. And we're already seeing it. And then probably the bigger news in business that won't get a lot of attention because it's boring is the EU approving Microsoft's acquisition of Activision after the UK blocked the deal.

10:24And I think basically the EU said, hey, you Brexit loving bitches, we're on top. and they basically said, we're approving the deal. This probably means the deal goes through. We'll be right back after the break with a look at two titans of e-commerce. Stay with us.

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13:12We're back with PropG Markets. Two e-commerce giants recently reported earnings. Argentina's MercadoLibre and China's Alibaba. MercadoLibre, known as the Amazon of Latin America, saw significant growth in gross merchandise volume, up 43 % year over year. Meanwhile, earnings per share came in at$3.97. That was 30 % higher than analyst estimates. Alibaba missed expectations on revenue and EPS, but it announced it will spin off its cloud division as a separate publicly traded company. Scott, that's something you've suggested Amazon should do with AWS for a while now. Now, we spend a lot of time focusing on Amazon, but we rarely look at its international competitors.

13:57Scott, what are your thoughts on these earnings? So MercadoLibre is probably the most impressive company probably in Latin America. It's really well run. The revenue grew 78 % in 2021, 50 % in 2022, and 58 % in QN 2023. And this is off a big base. I mean, this company is, you know, kind of the little Amazon that could. Their operating margins increased from 3 % in 2020 to 10 % in 2022 on the integration of their ad network. And this is several times higher than Amazon's operating margins. And it's profitable. Again, see above 58 % growth in Q1. That's just striking. MercadoLibre, you would argue, is a teenager, not a mature adult like Amazon right now.

14:44Amazon went public in 1997, MercadoLibre 10 years later in 2007. The one that's probably the value here is there was so much overhang, even with their recent run-up, there was so much overhang on Chinese stocks because of the CCP's involvement and willingness to just shut companies down overnight. Alibaba only trades it 12 times, EBITDA. So that's probably if you were looking for a value play. But we'd spend so much time talking about Amazon, we don't talk about the other guys. And I think Alibaba spinning its cloud unit is exactly what Amazon should do. I wouldn't be surprised if at some point that cloud unit is worth more than Alibaba itself.

15:24Yeah, you mentioned the sort of government risk discount that you're seeing with Alibaba at 12 times EBITDA. A couple things. One, I assume the reason that the 12 times EBITDA multiple is there is because they're pricing in that government risk. because, you know, the Chinese government disappeared Jack Ma, among other things. And then the other side of this is with Mercado Libre. There's also government risk there. I mean, the Argentinian government has defaulted nine times on its debt, most recently in 2020. There's this really long history of government corruption. I saw that just a few months ago, the country's vice president was sentenced to six years in prison for fraud.

16:02Do you not think that government risk and our lack of ability to trust these governments is something that investors should be thinking about when they look at these stocks? It's absolutely something they should be thinking about. And I mean, in the US, we basically err on the side of the private sector. We have a ton of respect for companies and we let our horses run, so to speak. In China, they were doing that. China is a much different place than it was 10 years ago. And then she came in and said, yeah, fuck that. You want to ship post me, I'll disappear your ass and you can show up painting in Tokyo.

16:32and, oh, we think you're bad for middle of class in terms of this huge tutoring industrial complex. We're just going to shut you down. Oh, you don't want to share your data, Diddy? Fuck you. We're going to put you out of business. And here we have laws and senators who like to claim their pro-business and want to protect the private sector and say, this is the engine of growth. This is what makes America great. The call we made, and we actually picked Chinese internet stocks in our predictions deck in November of 2022 as being the best performing sector. and we got that right was because I don't think she is going to, I think he's going to cut off the fingers, but I don't think he's going to cut off limbs of his thoroughbred, so to speak.

17:09And I think that the private sector kind of got the message and said, okay, let's be honest, he's in charge and the CCP is in charge. And now these companies are, you know, have had huge run-ups and even though it's at 12 times, it was at eight times. So the question is, do you think they're going to come in and, you know, pull another like heavy handed move, But absolutely, government risk. One of the reasons that the S &P always trades or typically trades at a higher price earnings multiple than other markets is people do have a lot. When I say people, investors globally do have a lot of respect for rule of law, think that you can't have an event where all of a sudden one guy, she moves in and kills a company that we have due process.

17:51and as a result, capital flows into our market like no other market in the world. But to return to Alibaba, I think that was an unbelievable buying opportunity because the CCP still wants to bring tens of millions of people out of poverty, otherwise they have a revolution on their hand.

18:15As we discussed on an episode last September, there are two main ways a company can return money to shareholders. The first is a dividend. A share of the company's profits are distributed to shareholders on a regular basis, usually every quarter. And the second is a share buyback. That's when a company buys its own outstanding shares, which reduces the supply of shares on the open market and thus increases the share price. Now, historically, dividends have been more popular. But recently, that started to change. Over the past decade, share buybacks among the world's 1 ,200 largest companies tripled.

18:49And last year, share buybacks hit a record of$1.3 trillion. That's almost the same amount companies paid in dividends last year. Meanwhile, over the past 10 years, dividend payments have only increased 54%. So Scott, the obvious question here is, why are companies choosing share buybacks over dividends? But before we get to that, can you refresh our memory on why a company would buy back shares or pay dividends in the first place? So a dividend payer, there are a lot of investors who are willing to put$100 into a stock and then wait till they sell it, hoping to get some appreciation. There are other investors, usually a little bit older, that want dividends, that want cash flow.

19:28I'm like, okay, I've got$100 ,000 and I want to get$4 ,000 a year. I want to get some type of cash flow. I need some money to live. They like dividends. One of the reasons that stock buybacks have been so popular is that, I mean, essentially a stock buyback is the following. You have$100 in earnings. You have 10 shares. That's$10 per share in earnings. If you buy back 20 % of your shares, you have eight shares, it's$100 in earnings. Now you have$12.50 per share in earnings and the stock should go up. And what that does is for the shareholder, you get taxed on dividends, but effectively, if you're not selling your shares, it's a way of increasing or distributing capital back to the shareholder, at least capital appreciation, without an immediate tax hit.

20:16But also, it appears the market, at least in the short term, likes these share buybacks. And it's a means of a CEO who makes most of these decisions with his or her CFO of moving the stock up in kind of the medium term, between one and four years, the vesting period of the CEO so he or she can get their Gulfstream and their home in the Hamptons. So the controversy is whether or not, I think I read that Apple has bought back$600 billion worth of shares, which means that if Apple had decided to try and grow through acquisitions, it could have bought any but maybe the three or four most valuable companies in the world with that money.

20:52But instead, it buys back shares. The fear is that rather than growing the economy, rather than investing in new plants, property and equipment, new hiring, you're just trying to push up the share price, which largely benefits a small group of people. I think about 90 % of all shareholder equity is owned by the top 1%. And the question is, well, okay, do we have sort of a perverse incentives here where share buybacks are great in the short run for the CEO, but maybe not for the economy? So there's been additional taxation placed on share buybacks. They're talking about increasing it. But it is a very efficient way to return capital, if you will, to shareholders.

21:30Yeah, there's also some arguments against, which I found interesting. One is that, kind of like you say, there's this self-serving bias for the company's executives. But there's a very specific bias here, which is that if you take shares off of the market, you essentially inflate the earnings per share because the profits are being divided up among less outstanding shares. And typically, executives get bonuses that are tied to increases in earnings per share. That's been one of the big criticisms. But something that I was thinking in pushback to that criticism, isn't it on the board and the shareholders to create the right incentive structures for the CEO?

22:09In other words, shouldn't they be the ones that are taking buybacks and any manipulation that you could do to earnings per share and any bonuses that you get as a result of that? Isn't it on the board to figure out how to accurately compensate the CEO such that they incentivize what's best for the company? Well, 100%. But how does the board get compensated? They get some cash and they get options. So they too are incentivized around the same thing. But I've always thought compensation is the hardest part about being on a board. Whenever you see really strange behavior at a company, you can usually reverse engineer it to compensation.