Prof G Markets: Arm’s IPO, Instacart’s Valuation, and Salesforce’s Year of Efficiency

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1:13No joke. I have a child that is Gen Z, and when I ground him, I force him to go outside and socialize.

1:30Welcome to Prop G Markets. Today, we're discussing ARMS IPO, Instacart's S1 filing, and Salesforce's earnings. Here with the news is Prop G media analyst Ed Elson. Ed, I have this new sensation. I am happy to see you. It's great to hear. I've been so sad without you. Life's been meaningless and dull for all of August. I'm glad you're back. I get it. I understand. I think everyone can empathize with that. Are you going to keep doing this, this whole take an entire month off of work thing? Yeah, I've done it for a few years. You don't get anxious that you're not working? Yeah, I get restless. I try and do some writing.

2:08I'm actually really good at doing nothing. It's like a core competence, but I like to at least have some deadlines and try and do some stuff. I think I did less this August than I have done, I don't know, since I was in college where I was outstanding at doing nothing in college. but I'm glad to be back at work. Any exotic experiences? Not really. We were in Colorado and then we were in Nantucket. Nothing that interesting. I was in Mykonos. How was Mykonos for you? It was epic. Epic? What does that mean? Seven days of not drinking and not partying. Just hanging out. Wholesome fun. What? What happened?

2:48It was all a blur. It was great. The only thing I know for certain was that dude, never mind. Break down the news, Ed. Save me from myself here. All right, let's start with our weekly review of Market Vitals.

3:06The S &P was down. The dollar rose. Bitcoin dropped. And the yield on 10-year treasuries climbed. Shifting to the headlines. China expanded a ban on government worker use of iPhones due to cybersecurity concerns. The country is one of Apple's largest markets, accounting for 19 % of its revenue. Shares fell as much as 7%, wiping out more than$200 billion in market value. Warner Bros. Discovery slashed its full-year adjusted earnings guidance by$500 million. The company says that cut is owed to the writer's strike. Meanwhile, CNN is launching 24-7 live news on the Max streaming app. CNN Max will arrive just more than a year after CNN Plus was shut down.

3:49And finally, Lionel Messi's Inter Miami debut drove 110 ,000 new signups in one day to MLS Season Pass, which Apple has exclusive rights to distribute. Apple CEO Tim Cook credited Messi on the last earnings call for his contribution to Apple TV's subscriber growth. Scott, I actually saw Messi play at the Red Bull Arena a couple weeks ago. Do you have any thoughts on this? So we'll go in reverse order. American soccer, the MLS, whatever they call it, everyone's waiting for tomorrow to be today. And a lot of people think the league will never reach the same heights as other leagues in Europe. But I just think it's wonderful.

4:27I think it's a win for him. It's a win for the MLS. It's a win for his family because they get to hang out in Miami. And just the power of celebrity and social media, you know, celebrity just continues to be something that's very monetizable. So nothing really there other than it's fascinating and fun. Best news has happened in a while. In terms of China, we're in a full-blown shooting match, trading war now with China, where Montana bans TikTok, and we're talking about banning TikTok. And this was an attempt to say, okay, the most valuable company in the world that's headquartered in the U.S.

5:00actually has more employees in China, and it's also the second largest consumer market for your phones just beyond the U.S. so apple's been largely protected by she i think in the ccp because they see the company is just so integral to their growth and i think they have a great relationship with them their supply chain i just got to think there's literally millions of people who are directly or indirectly get their living in china from apple but i think they've decided like that we need to send a signal that every time they punch us and you know fuck with us specifically by dance we're gonna fuck with them But this is a full on kind of non-shooting war, if you will.

5:39And it's a shame because, I mean, there's few things that could lift more people out of poverty than China and the U.S. getting along. because the cocaine and champagne of our incredible consumption culture, their emerging economy, their manufacturing and supply chain prowess with our innovation and intellectual property, creativity, we could create just a ton of shareholder value, a ton of jobs that would absolutely lift both boats and lift all boats globally. War is expensive, and this is the type of war that, it's felt a thousand different ways. where it's, you know, the cost of something. Costs are going to go up.

6:21And that means fewer people. I mean, it's a standard of living for everyone across the world is going to go down when we have trade wars like this. At the same time, I think China has definitely kind of outed itself. It's not our enemy, but they used to be our competitor. And now I would see them squarely as our adversary. And I think what will be really interesting is how they respond if we do, in fact, get close to a TikTok ban. Let's move on to Warner Brothers' discovery. So this notion, and it's just hilarious, that it's the writer's strike is the reason why they've lost$500 million. This is David Zaslav.

6:51I mean, here's the real story. I'm David Zaslav. I wanted to live in Hollywood and have a Porsche and get invited to the Academy Awards. And I was willing to do a stupid deal and overpay and bail out AT &T, who did even a stupider deal and overpaid even more. And now I'm going to blame my melting ice cube of a shitty business, specifically cable television, where the ad rates continue to fall and advertising revenues continue to fall. I'm going to blame it on the writer's strike. And I don't doubt that the writer's strike hurt these guys. And what's interesting is that the notion that Netflix is on the same, quote unquote, side of the table as Time Warner and Disney is just ridiculous.

7:29Because I believe every day the writer's strike goes on, it does hurt Time Warner. It does hurt Disney because they can't go to the upfronts and sell advertising because they have no new programming. Whereas Netflix, who gets a great deal of programming internationally, 10 ,000 people producing content in just Madrid alone, and a content queue that is just so dramatically deep. I think Netflix loves this strike. Their cash hoard, their cash pile has grown so fast because they have this kind of reduction in content production that they're going to do additional share buybacks, and the stock is up.

8:04So it's just hilarious that Time Warner and Disney, at least initially, are pretending to be on the same side as Netflix. If I were Netflix, I would just come up with all these reasons, thoughtful reasons around why we shouldn't end the strike. Netflix comes out of this a big winner, Time Warner, a big loser. But that half a billion dollar loss, it's just to be an ad-supported cable is just a shitty business. I think where the model is headed is I read something super interesting. The guy who started Five Hour Energy is now a multi-billionaire. It's going and buying these regional sports networks and essentially firing everybody and using AI to produce minimum viable content at a fraction of the cost.

8:41I think you're going to see a lot of that. I mean, here at Prop G, we're talking about using AI to expand into different languages at what would have been several thousand dollars an episode to get an actor to read and try and exhibit the sort of good looks and charm of Scott and Ed, respectively. Now with AI, our crack tech team here has found the right technology where we can do this for much lower costs. And if it works, we're going to do it in Portuguese. And anyways, that to me is kind of the new model of media, ground up using technology to do stuff kind of that's not as good, but 90 % is good for 2%, 10 % of the price.

9:21So what I think is going to happen, what I think is going to happen is that we're going to go good bank, bad bank. And that is there's going to be consolidation. I think it'll start at Viacom. I think Sherry Redstone has to find a strategy here. And Paramount Plus actually does have a story. But what happens is, in all these earnings calls at Time Warner, Disney, Viacom, is they talk about subscriber growth and they can kind of explain, you know, they can say, look, we're growing our streaming things. That's the future. It's really expensive. But I think the market will say, all right, we'll give you the benefit of the doubt.

9:54At least it's growing. And then they spend the rest of the earnings call apologizing for the decline in business at their traditional cash cows, that is cable. I think what they're going to do is spin those assets into new co. There'll be consolidation. Someone will come in and buy up all of these assets, whether it's the Cartoon Network or the Learning Channel or the Food Network, just all of these things, and cut costs and stop this consensual hallucination that these things are ever going to grow again and try and cut costs faster than the decline in revenues. The thing about these businesses, they usually go out of business more slowly than you think.

10:30I mean, Disney, Iger has basically said FX and ABC. He's put them in the front of the lawn and said best offer. You know, no reasonable offer refused. Because what happens in these multi, you know, headed hydras with different companies with different business models is that people or investors hate conglomerates. And they'll look at these things and they'll find the shittiest business, which is the ad supported cable businesses. And they'll assign that multiple of that value to the entire thing. when Peacock or Paramount Plus or HBO should trade at much higher multiples. So I believe that Paramount, Time Warner, Disney could probably shed these cable assets or sell them for a dollar.

11:09And within a year, their stocks would be higher than they are now, even without those cash flows, or if they could strike a good deal to get monetized or securitize those cash flows in the sale, because their story would just be cleaner. I think the CNN launching a 24-7 live news on the Mac streaming app is actually the beginning of a very innovative idea. And that is, if I were CNN, I would become like Intel inside. And that I would say, okay, I have a newsroom. I have the best newsroom in the world. And if Netflix, you Netflix or Apple TV or Amazon pay us X dollars, in exchange for that, you can put a little CNN logo on your app or on your service or on your platform.

11:47And at any point, someone can just click on it and click business, politics, culture, and get a 10, 15, 20 minute loop that's updated twice a day during a normal day, 12 times a day during the insurrection. Because the thing that kills these things is the cost of having 16 hours a day of programming. And what they really should do is people don't want all that programming. CNN should say, we're gonna bring you the best news in the world because we have the best newsroom in the world. But for two, five, 100,$300 million a year, Apple TV Plus, you can have access to just plug and play news. And so, and I think this is a start.

12:23I think having the ability to be on, you know, HBO Max and just click a button and have over-the-top, tighter, commercial-free news, I think that makes a lot of sense. I think it's smart. And I think that's, if you will, how CNN creates a lot of value. We'll be right back after the break with a look at ARMS IPO.

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14:57Arm specializes in smartphone processor designs. Its clients include Apple, Google, NVIDIA, and Samsung. And each of those companies have agreed to buy shares at the IPO. Its largest shareholder, though, is SoftBank, Japanese investment firm run by Masayoshi Sun. We'll get to SoftBank's involvement in this deal in a moment. But first, Scott, you predicted that the IPO market would pick back up in the second half of this year. It looks like you were right. We've seen a slight pickup recently. There were 15 US IPOs in July, 11 in August. That's up from 2022. Do you have any initial thoughts on either Arm as a business or on this IPO?

15:37So, I mean, there's two things. The first thing is indisputable. It's a great business. Their chips power 99 % of the world's smartphones. 70 % of the world's population uses an Arm-based product. Their chips aren't just in smartphones. They're in other things, smart speakers, TVs, surveillance cameras, thermostats. And they also see growth in cloud computing. They receive royalty payments for chips, which have incredible margins. Licensing is 37 % of the revenue. Royalty is 63 % of the revenue. This also comes down to valuation. And that is, there has never been a drunken sailor like SoftBank in terms of just throwing cash at the wallet with crazy valuations.

16:17And they're supposedly targeting an IPO price range of 47 to about 51 bucks a share, which would give it 18 times its trailing 12-month revenue. And NVIDIA trades at 37, but I would argue NVIDIA is radically overvalued. So what would be interesting is if SoftBank gets their money back or makes money. Because at some point, this is an amazing company, but at some point it was a bad investment. The context here is that SoftBank, which is the Japanese investment firm we've talked about a lot on this show, largely because of how poorly they perform, they own around 90 % of the company. And last month, they valued the company at$64 billion, which is around 30 % higher than the expected valuation at the IPO.

17:05You were talking about that mismatch in valuation, the fact that they're going to go into the public markets 30 % lower. What are your thoughts on that? Well, you know, it sucks to be a grownup. They got to get money back to their investors. They have to fund stuff. They're not meant to be, you know, they're not, they're in the moving business, not in the storage business. And that is they need to move shares at some point out and recognize valuation for them. And the market has just changed dramatically. In addition, I would argue Masayoshi-san is the worst investor in history. he got incredibly lucky on his stake in alibaba and let's be honest that was luck and then everyone assumed oh he must be a genius and he began to prove that he's a terrible investor over and over and over again and that the people who invested in softbank i mean it's just show me a company that just makes no fucking sense but raise money to billion dollar valuation and there's a one in craziness infected all aspects of the organization.

18:06So I doubt they'll get their money back. It feels like at least not for a while. So just the history of SoftBank's involvement in ARM, they acquired ARM back in 2016. They acquired it for$32 billion. And then they immediately sold 25 % of that stake to their own vision fund, which is SoftBank's tech-focused venture fund, basically. And just a side note, when they made that trade, Master Sun told Anas, you can say, quote, you can say almost with confidence that it will grow 5x in five years. That obviously didn't happen. But something strange is that last month, SoftBank bought back that stake from its own vision fund unit.

18:48That's where we saw this$64 billion valuation. My question to you, have you seen that before? Why would SoftBank be transferring its stake in a company between different units and essentially buying it back from the Vision Fund. What's the point in that? There might be something administrative here around tax treatment or a change in strategy in one asset makes more sense than the other. What it also might be is a purposeful head fake to the markets. And that is they want to send a signal that smart people value this company at$64 billion. The last two rounds of WeWork were nothing, in my opinion, but jazz hands to say, oh, no, this company is worth 35 or 40 billion because smart people are investing capital at this valuation and you dump shit retail investor should value it at 55 because here's the momentum i think that's probably what happened here is it wants to send a signal to the market it wants to send a mark in addition they might be out raising money and when you when you're raising money the potential investors want to look at your returns and your returns are based on marks and you get to mark your assets at the most recent valuation.

19:59I'm on the board right now of a company and we just closed around. And I found, I said, this is ridiculous that we're raising, trying to raise this valuation. Let's raise it a more sane valuation, even if it's a down round and go raise more money because the company needs capital. And I think things are going to get worse. And what was clear is that the previous investor who was the largest shareholder would rather raise less money and would rather participate himself at a higher valuation so he can mark his book and his stake at a higher valuation, even if that valuation doesn't make any fucking sense.

20:34So he can then try and fly to Riyadh and say, I'm up 22%, not 11%, and you should invest more money. So you really have to look. These related party transactions are fake marks. The only marks you can trust are marks where a round is led by fresh capital that is new capital into the company. And they can get it wrong, but at least they think that is what the company is worth and that they're going to get a return on that investment.

21:11So there's another company that's about to IPO, and that's Instacort. They just filed the S1. And they're in a similar situation. So in 2021, they raised$265 million at a$39 billion valuation. But last year, they ran into some trouble. And they slashed that valuation first down to$24 billion and then to$10 billion. Now, they haven't disclosed any price targets for this IPO. But this firm, Meritech Capital, did a nice analysis. And they found that at a roughly 20x multiple on EBITDA, and that's around where most of these grocery delivery stocks trade at, the enterprise value would be$15 billion.

21:47Point being, it's likely going to be another massive reduction from the$39 billion valuation they received in 2021. Do you have any thoughts on Instacart's valuation journey? We're going to see a lot of this. Again, this is a great company, a pandemic darling. They execute well. There's no reason, in my opinion, unless you enjoy it, for anyone to go into a grocery store. I think other than gas stations, grocery stores, maybe the worst retail. And they have innovated and they save people time. We've always said that the fastest way to build a unicorn is to build a time machine. This is a time machine.

22:20It saves people time. It's not worth$39 billion. It got out in front of its skis. What's interesting here, and I've been in this situation several times, is the unnatural acts that are spawned by down rounds. So an example. when you invest in a company and you're the last money in, you're paying a higher valuation. All right. I'm in the C round. The A round was done at a valuation of 10 million, the B round, 50 million, the C round, 150 million. And that's bad. You're paying more, right? But the good news is you get something called a liquidity preference, meaning that if you invest 10 million bucks, let's call it 25 million bucks in the C round at a valuation of 150 million, and then things don't go as well and the company gets sold for 30 million to another private company, the last investors get their full 25 million back before anyone else gets anything.

23:11And it waterfalls back until all the preps have been met. And then the common shareholders start to participate, peripussu with everybody else. That is a wonderful thing to have. Now, what happens is if a company's going public, and this happened to be a red envelope, at a lower valuation than what investors invested in the last round, they're kind of pissed off and they're thinking, well, actually, we'd rather you sell it to somebody else and then we'll get 100 cents on the dollar instead of 70 cents on the dollar. But the previous investors wanted to go public. And so there's some arm wrestling and some wrangling and sometimes some dealing.

23:45But generally speaking, what I say to entrepreneurs is be careful about raising money at a really big valuation because granted, most investors, I'm looking at investment right now and we're arguing over valuation. I'm like, all right, you have to prove to me or show me how i'm going to get 5x on this if it goes well so okay be careful we ask for you raise money at 150 million dollar valuation keep in mind those investors are expecting you to have a liquidity event in three to seven years at 750 million and if you don't what's what stage is this company that you're looking at is a growth stage company so it's a company that's doing it's a small vc-backed company in a business very similar to to L2.

24:25So I understand it. The company's killing it. The founder's great. It just feels, smells, and looks like L2. And I'm like, okay, you want to raise money at a$30 million valuation. How does this get worth 150 million with dilution of employees? How's it going to be worth 200 million? Because if it's not, your last round of investors, unless this goes south, are going to tell you to just stick with it and aren't going to be open to conversations around an IPO or an acquisition until you get there. And I imagine there's a lot of that here because what happens when you go public is all of those liquidity preferences disappear and every share becomes the same.

24:59So anyone who's underwater or invested a large valuation would rather them keep going and not do the IPO unless they're fatigued and they just want to get their money out and they want some liquidity and the company will be worth more and have the currency and the capital to grow the business. And the early investors are dying for everyone to convert to one class of stock because as then all those liquidity preferences ahead of them dissolve and go away. So there ends up being a lot of arguments and very pointed conversations and intransigence in the boardroom. When we were going public at Red Envelope, the last investor had invested at a higher valuation than the IPO, and they wouldn't approve the IPO until finally it became clear, like, we have no other options.

25:41And keep in mind, it's lower than you'd like, but it's going to end up being zero if we don't raise capital at some point. The capital markets are friendly, so you're going to get, you know, would you rather get 70 or 80 cents on the dollar or 30 in two years if we don't maintain momentum, have the currency for acquisitions and the capital to fund the business. This is going to be a really interesting one because while they're trying to position as technology, it sort of is, but where I think they get most of their money is from advertising on the platform. And what's interesting is that the margins that drive grocery and even Amazon are not actual the sale of groceries.