Prof G Markets: ChatGPT’s First Victim + The Department of Government Efficiency (DOGE)

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1:37Seriously. Today's number, 80 ,000. That's how many pounds of butter Costco recalled last month after forgetting to add milk to the ingredient list. Today's number, 80 ,000. That's how many pounds of butter Costco recalled last month after forgetting to add milk to the ingredient list. True story, Ed. One day my mom caught me masturbating in the bathtub. I thought she'd be mad, Ed, but instead, she'd just stop buying margarine.

2:13I'm not even sure what that means. How are you, Ed? How are you? I'm very well. We finally got there. Took a while. Seems like you had a pretty big night last night, no? Oh my gosh, I do some name dropping, so. Do you have a posse of friends that you can just call, text at any moment? Like, what are you doing? Let's grab a drink. I'd like to think so. Yeah. Yeah. So I'd like to think so. Fuck you, man. Just take my advice. So my friend Scott Sabah used to be that guy for me in New York. Anyways, died of a rare form of leukemia, but we're not going to talk about this. This is a happy story. So now I don't have a posse of like textable drinking buddies and I like to both text and drink.

2:53And so last night, I'm hanging out. I got nothing to do, Ed. I'm in New York. I'm a C-list celebrity and I got nothing to do. And I know there's something great going on. And I also know that I'm just not a part of it. And so I text my new friend, Justin Theroux of Beetlejuice fame. And I'm like, dude, what are you doing? You want to grab a drink? And he's like, I'm headed to this Hyundai Genesis reveal event. And he's like, I know, I know, weakest flex in the world. And he's like, come. So I'm like, I'm on my way. So I went and saw the new Hyundai Genesis, which is lovely, which is lovely. And then we're like, okay, am I going to get a free Genesis here?

3:30Why are we here? So we're like, oh, let's go to Zero Bond. And then we text our buddy George Hahn. I'm like, come out and not drink with us. I'm trying to be better about inviting people out to drink with me, even if they're in recovery. I used to think that's it. I can no longer be friends with these people. But I'm not going to be that way. And George is always fun. George always acts a little fucked up, even when he's always not. Yeah. So he rolls in, and then, and this is totally name-dropping, but I don't care. At 9 o 'clock, I know AC 360 ends. So like at 910, I text Anderson Cooper, and I'm like, Brohemian Rhapsody playing now at Zero Bond.

4:07Come join us. And he's in the car. He's like, I'm in the car. I'm on my way. The four of us sat at Zero Bond and drank tequila sodas, except for George Hahn. And we had the best time. That's amazing. Oh, it's awesome. And the lesson I'm trying to take away from it is it's easy to think other people are super busy, and they are, but you never know. If you're not busy, just start texting people. What are you doing? And it was great to hang out with them, but what I loved about it was we're both like, we're all guys just trying to find friends. And Daddy went deep in the paint last night. I'm switching to tequila.

4:44According to Justin, it's a cleaner burn and not as bad a hangover. so uh i still feel a little bit slow today so you're gonna have to you're gonna have to do what i do on basically every podcast ed you're gonna have to carry the show you're gonna have to carry the show all right let's start with our weekly review of market vitals

5:09the s &p 500 came down from its post-election high the dollar continued to climb bitcoin Coins have passed$90 ,000 for the first time. Fucking A, Ed. And the yield on 10-year treasuries increased. Who doesn't own a coin? Raise their hand. Who doesn't own a coin? Raise your hand. Shifting to the headlines. Spotify's monthly active users grew 11 % to$640 million in the third quarter. The company is on track for its first year of profitability, with a better-than-expected forecast for the fourth quarter, and shares rose 8%. 8%. Gambling company Flutter reported third quarter earnings that beat analyst expectations with revenue up 27 % from a year earlier.

5:48The company also raised its full year guidance due to strong results outside of the US and shares climbed almost 7 % following that earnings report. Disney's stock rose 9 % after its streaming unit and studio business reported strong growth. Disney Plus marked its second consecutive quarterly profit, gaining 4.4 million core subscribers. And the company also issued guidance that projects a jump in profits over the next three years. And finally, activist investor Elliott Management has built a$5 billion stake in industrial conglomerate Honeywell. That's Elliott's largest investment in a single stock.

6:22They want Honeywell to break up its aerospace and automation businesses into two separate companies. Scott, let's start with Spotify's very strong earnings. Your reactions. So its stock is up 150 % year to date, and they've raised a ton of money massively spent to essentially consolidate the streaming music market. And I would argue people say, what about Apple? What about Amazon? I think if you're into music, I just think you have to have a Spotify subscription. And occasionally people try to act alternatively. They're like, well, I like Apple. That's me. You don't listen to Spotify? I know. For me, it's just a switching over issue.

6:59I know it's a better platform, but it's just a pain to switch over. I think they do such a good job. But they've taken a page out of the Netflix book and they've overspent. But for the first time, it appears to be working and they appear to be kind of hitting the same sort of escape velocity that Netflix hit about seven, eight years ago or five years ago, where they really are the default player in subscription music. and paid subscribers jumped 12 % to 250 million. The profit margin reached 31%. That's up 26%. That knocked on Spotify. It was basically a music co-op passing through all the revenues to the artists.

7:37And now it appears they have so much power that they're probably cutting better deals in terms of revenue share or lack thereof. And Spotify, get this, since 2015, last nine years, has seen its revenue grow eightfold. And it struggled to achieve full-year profitability because it kept reinvesting, but that has changed this year. It's gone into profitability. which is like putting an investor's lips around a crack pipe. It means you can't take it away. And to get there, again, I think the CEO took a page from Netflix Playbook emphasizing tighter cost discipline. The company has also cracked down on password sharing and raised prices twice in the past year.

8:09I think basically they are on fire. If this is like Netflix, it still could triple or quintuple from here if they have the kind of market power I think they have. Because Netflix supposedly had other competitors, but did they really? Did they really, Ed? So I've always loved Spotify. It was my stock pick of like 2021 or something, and it went nowhere for three years. It was flat for the longest time. You were just so early. That's it. I was early, Ed. I wasn't wrong. I was early. Yeah. That's what my ex-wife used to say. It's not bad. You're just early all the time. I'll be here all week. Try the veal.

8:47Okay. So get on Spotify. and use their AI DJ. It is fucking amazing. It is so good. It has figured out that every song for me should either be Tom Petty or Tom Petty or ELO or occasionally Calvin Harris to make me feel like I'm not 100 years old. And it just works. My whole thing, Ed, is choice is a bad thing. I only want things where there is no choice. And I love Spotify AI because a lot of times when I'm home and I'm on prescription-grade pharmaceuticals and I want to dance, I don't know the perfect dance music. And Spotify figures out, you know, I think at what time what my mood is. It's really powerful.

9:28I'm glad you mentioned the AI DJ because I think the thing that I've been thinking about with Spotify right now and what they're really good at is unlike a lot of other tech companies that just come out with these kind of meaningless product updates that no one really cares about. I feel like every product update from Spotify, the users just love. So they have video podcasts now, which they've sort of doubled down on recently to compete with YouTube. And there are now more than 300 ,000 video podcasts across Spotify. That's another great product update. They have podcast comments now, basically opening up a comment section.

10:06And then I think the best thing that they did from a product perspective was Spotify wrapped, which was sort of the year end review of all the stuff you've been listening to. And, you know, when they did that, it exploded. It went viral. Apple Music ended up having to copy them and they have just a worse version of it. Clearly the engineers there, the product managers, they're very scrappy. They're constantly figuring out new ways to package and deliver this content. And I think, you know, the market's now recognizing this. As you said, stocks up nearly 150 % in the past year. It's starting to look perhaps a little expensive.

10:45But in this case, I think it's warranted. This is just a great quarter. And I agree with you. I think this is a great company. And clearly, they're doing something right from a management perspective. And let's move on to Flutter now. So this is a gambling company. They own brands like Betfair and Sky Betting and Paddy Power. If you're from the UK, you'll recognize those names. But in the US, they also own FanDuel. And the story of this earnings report is all about America. So US revenue jumped 51 % to$1.3 billion. A big source of revenue was the NFL. The CEO said that betting activity, I found this quite staggering, betting activity on some of the NFL games that are happening right now is actually higher than betting activity on last year's Super Bowl.

11:35So sports gambling is absolutely soaring. And if you want to ride that wave, this is the stock, Flutter Entertainment. I'm uncomfortable with all of this, but the reality is the fastest way to scale your company with high margin revenue is to have some sort of tap into some sort of addictive weakness of the species. And this is doing that. Having gambling on your phone and having it be so frictionless is really, I think, really troubling. But at the same time, it's a great—there's just no getting around it. It's a great business. FanDuel has almost—they control almost half the market. They have 46 % market share.

12:14Americans spent a record$120 billion on sports wagers in 2023. That's up 28 % from 2022. This year, sports betting is expected to surpass$150 billion. $150 billion. I just want to emphasize that$150 billion in sports bets. That's a crazy number, no? Yeah, it's huge. People, you know, it's fun. And I mean, it really is passing out crack. $50 free for your first bet, right? Free money for your first bet. It's also just such a shame that like the most ascendant companies and assets right now are just totally unproductive in terms of the actual real economy. me. Like, I wish that the best performing assets were actually productive.

12:57This is not societally productive. Well, the only thing I'll wrap up with is people say, well, Scott, investing in the stock market is gambling. This is no different. No, it is different. If you invest in the stock market and you don't trade over time, you're going to make money. When you gamble, if you enjoy it, fine. Just like the way you enjoy drinking alcohol or buying tennis shoes, it's consumption. This is consumption. It's not investing. And be clear. Keep track of how much psychic enjoyment you're getting. Because in terms of money, you're going to walk away from the table eventually over time with less money.

13:28Let's move on to Disney earnings. Very solid quarter. Not much really jumped out to me apart from the fact that this is the second quarter in a row where the streaming business has been profitable. So last quarter was the first time that streaming was profitable. And we said, well, maybe they've got this whole streaming thing figured out. I think this earnings report confirms it. They have finally figured out streaming, which is essential for Disney because the traditional TV business is essentially in free fall. Just this number here from the earnings report, operating profit on that traditional TV business was down 38 % this quarter.

14:06And that's despite all of the election spending and that's despite owning ABC. So they need streaming to work out and it looks like that's what's happening. It's doing really well. I think the movies are meaningful. The revenue from the parks are meaningful, But from the market perspective, the results of the streaming division are profound. And the streaming division had a great, great quarter. I like it because I like Bob Iger. And this is going to give him a chance. Like, he was stupid enough to go back to Afghanistan. But on a second tour, he's going to get another medal pinned on his uniform.

14:37He's going to get to leave this combat zone called traditional media, a hero again. I thought you'd analogize Disney with Afghanistan. Well, ad-supported media right now. Point taken, yeah. I mean, it is hand-to-hand combat. And the thing about Disney, they're one of the survivors because they have this singular positioning around family and unbelievably deep IP, and it's starting to pay off. And also, it's paying off for them because they stood the test of time through what is this walking through the desert, if you will, of consolidation. And for the first time in two years, Netflix is no longer increasing their spend.

15:13So every other company doesn't have to follow them down this rabbit hole of unsustainable spend. And there's also pricing power. Netflix is kind of creating a, elevating the ceiling around pricing and they're raising their prices, which gives everyone cloud cover to raise their prices. I think it's good for Disney, good for Bob Iger, good for the planet. I think it's a great company. I hope it stays independent. And it was one of my stock picks last year at Disney and Warner Brothers. So we'll see, but yeah, I think good for them. Congratulations. Great quarter. We'll move on to Elliott's investment, activist investment in Honeywell, which is this industrial conglomerate.

15:46I think this is interesting for two reasons. One, it's Elliott's biggest single company investment ever,$5 billion. So this is a very high conviction bet. And two, what they are suggesting from an activist perspective is right out of the Prof G Markets playbook. Specifically, this is all about the conglomerate tax, which you've talked about a lot on this podcast, which is that conglomerates tend to get these slightly depressed valuations because investors don't really reward diversification. What they really care about is focus and growth. And that's a lot harder to do when you're operating multiple businesses.

16:23Honeywell is a great example of that because their aerospace business and their automation business, they're two very different things. And oftentimes when one has performed, the other has lagged and vice versa. So I think this is a great idea from Elliot. Split them up, have an aerospace company and an automation company. the only question i would have is all the partners at elliott management listening to this podcast because if they are we deserve some credit and we deserve a cut oh 100 yeah there's no doubt uh check coming our way yeah i like this stuff like sometimes when a stock gets below a certain amount this the you know the whole is less than the sum of its parts and that's that's the strategy here so the stock's up 12 year to date but the industrial sector etf is up 25 so it's underperformed the market.

17:12And then one of these themes among old economy companies is growing by shrinking. And that is, we've talked about this, the market rewards deconglomerization. G's break up in April. G Aerospace stock had risen more than 25%. And G of Renova shares have risen more than 20%. Honeywell trades at 27 times earnings, while G Aerospace trades at 32 times earnings. So I wouldn't be surprised if they decide to do this themselves or come up with some sort of extra dividend that gives Elliot their pound of flesh. The guy who handled Elliot better than anyone was Mark Benioff. And they showed up and said, you're spending too much money.

17:45And rather than the traditional, you know, don't, you know, you have insulted me, good sirs, and circle the wagons and hire lawyers and proxy solicitors and comps people to shitpost the activists. They say, okay, we can learn from you. Mark Benioff uses his cloud cover to cut costs. AI came in and Salesforce stock is now at an all-time high. And essentially what you do as an activist investor is you just show up with a big stake and say, we're here. And if the stock goes up on its own, if we're wrong and the stock goes up on its own, fine, we'll sell and congratulations, you win. If it doesn't, then you need to do what we say or we're going to start nominating directors.

18:19So you get a little bit of a free call option if the stock is cheap enough. So I like these things. I think they go through a cycle where they conglomerize and they deconglomerize. Anyways, the aerospace and automation, do they need to be in the same umbrella? And it's this basic notion of CEOs to love to diversify by having a bigger company and diversify or smooth out their earnings. When again, investors don't need CEOs to do that for them. They can diversify on their own. So I like this. We'll be right back after the break with a look at one of ChatGPT's first victims. If you're enjoying the show so far, be sure to give Prof G Markets a follow wherever you get your podcasts.

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20:15We're back with Prof G Markets. More than a year ago, ChatGPT took a bite out of a leader in the edtech space. Chegg, a textbook and homework help provider, was a big winner during COVID as learning moved online. And then the AI hype cycle began, and Chegg was one of the first companies to say that ChatGPT was stifling its growth. 18 months later, the company is telling the same story. Chegg's earnings last week showed revenue, subscribers, and web traffic all fell by double digits in the latest quarter. The company is also laying off 21 % of its workforce, its second round of big job cuts this year.

20:51Scott, Chegg was still blaming ChatGPT for its problems on its latest earnings call. It has lost half a million paid subscribers since the launch of that product. Shares are down around 99 % from 2021, erasing $14.5 billion in value. And according to the Wall Street Journal, bond traders doubt this company will be able to pay its debts. Is it safe to say that Chachi Biti has claimed its first victim? It's really interesting. So if you look at the industries that were supposed to be disrupted by AI, I've been predicting it would be healthcare. It was supposed to be education. It hasn't happened in education.

21:30Actually, the top 100 universities are as strong or stronger than they've ever been. And I'm so confident about disruption. I started an ed tech company. And quite frankly, it just hasn't panned out. Chag came in. It was a COVID darling. A lot of people trapped indoors taking courses, but it's off 99%. And some of this is not their fault or the market dynamics, well, as Trump individual performance. But this company was going to get cut in half. Now, why has it been cut by 99 %? I just think the comms here is terrible. I think to blame ChatGPT is to say ChatGPT is our enemy. Okay, you're fighting an enemy.

22:07This is the Albanian army taking on the Third Reich right now. So if you identify that ChatGPT is coming for us and they're our enemy, it's like, okay, that's too bad. And we understand. And you're right. It's their fault. But you're fucked. Because if, in fact, you're right and they're your enemy and they've identified this as the space they want to go after or that consumers are using agents to help them with their studies or essentially find the same utility they were finding for you at a higher price, we see no reason why that problem won't get just worse. The interesting thing here is what you said about the debt.

22:41I'd love to know what the debt is trading at because I believe someone is going to make real money here. And who is that? I think a distressed credit investor is going to come in and buy the bonds. And if they do, in fact, blow their covenants and the thing goes into bankruptcy, I think whoever owns the bonds will come in, cut a lot of costs, say this is no longer a growth company, this is a distressed asset, but they do have revenues have fallen 18%, subscribers have fallen 20%, which means they still have 80 % of their subscribers. So this is probably still a pretty decent company. It's just that somebody's going to have to come in here and massively cut costs and recognize we're no longer a growth company.

23:22We're a company in decline, but if we can cut costs faster than the decline, we're still going to have something here. And they probably have invested a massive amount of money. I don't know what the market cap is, but if it's off 99%, that means it's like 100. It's 170 million. Okay. I'd be curious how much debt they have. But I would think distressed credit investors are looking at those bonds and saying, okay, can I own this company for tens or hundreds of millions of dollars and say, it's probably worth a couple billion dollars to someone else. They have a subscriber base who are still paying, you know, companies not going to zero.

23:59The best investments I have ever made have been pulling bankrupt companies out of bankruptcy at a very low price in things like consumer products or the yellow pages and then consolidating or seeing if there's other acquisitions of other distressed companies in the space, cutting costs faster than the revenue declines. and you can usually pick them up really cheaply. And then, you know, you can make a lot of money. And the analogy I always use is that in 1999, people knew Blockbuster was going away. So you could buy a Blockbuster franchise for two and a half times its cashflow. They did go away, but it took another 12 years.