Prof G Markets: Fourth Quarter Review — with Aswath Damodaran

26:11Is there a next generation? I mean, it feels as if the Magnificent Seven or the Seven Samurais, you've labeled them, sucks so much oxygen out of the media ecosystem. Is there a next generation of companies? Yeah, in fact, I was looking at the, even the Mag-7 started as the FAANG stocks in the middle of the last decade. Then we added Apple and Microsoft, the FAANG-AM. Netflix seems to have dropped out and we added. If we keep, in hindsight, adding on the biggest winners in the last three years, the only thing we can say is 10 years from now, we're going to look back, there'll be another group of 10 companies.

26:45Maybe two of these seven might show up there, but they might not. We'll have another acronym, and it's always been true in equity markets. This isn't just the last decade. I mean, there's a very interesting study by Arizona professor Hendrik Bessenbinder, where he looked at all U.S. stocks between 1926 and 2019. And he showed that 22 % of the market cap created over almost a century, 22 % came from five stocks. This has always been the case that a few big winners take the market. The only problem is the winners run out of oxygen. When you get to$2 trillion,$2.5 trillion,$3 trillion, which is what these companies have, it becomes difficult to deliver growth on that scale.

27:37So I do think that the names will change. There'll be another group of winners. If you ask me who they are, if I knew, I'd be jumping onto those stocks. We can try to guess. But I don't think that any of these seven companies will be in that next acronym list that we see 10 years from now. And we look back and said, those are amazing companies. But is there just below that, just under the surface, when you do your valuations, kind of not the samurai, but the warrior class, I don't know what we would term it, whether it's an Uber or an Airbnb. You know, there's a bunch of companies that are still growing that should benefit from the same cost reduction power, pricing power.

28:15Is there anything that stands out to you that who do you think, if you were to say this is probably the next one that gets the tickets to the executive washroom when they decide it's now the amazing eight, who would be your candidates? Now, I'd look for companies, and you're right, what you're looking for are companies that have those networking benefits. It could be an Uber, it could be a Palantir, it could be, it's going to be some, in a company in the space of data slash software where there's a clear networking benefit. So if you're looking under the radar as to where the next winners are going to be, that's where I'd focus.

28:50What's not going to show up on that list are great manufacturing companies. And I think that is the great shift away from the 20th to the 21st century. The big winners of the 20th century were big companies that scaled up over time. Here you can have companies come out of nowhere, scale up tenfold over a period of five years because they're building on platforms that are less capital intensive. So I do own Uber. I don't own Palantir. That's one of the few companies where I look at the companies, I just don't have enough of a sense of what they do. And it's by design. The The company is secretive about what they do, and they can never perhaps be open about what they do.

29:29But I think the next layer of companies are going to come from this group of software-slash-data companies that can scale up quickly. You recently said that there are two companies that you find quite attractive right now from a valuation perspective. One is Apple, which we've just mentioned, and the other was Tesla, which I was surprised to hear. Could you explain your thoughts on Tesla's valuation? Well, Tesla gets attractive whenever it does, or let's put it this way, whenever it and its CEO do things that make it unattractive. So in a sense, we've had a period where Tesla has been on an extended down run.

30:10It's lost the narrative. Part of the reason it lost the narrative was because when it cut car prices, which I think actually makes sense in the long term, people got focused. to their cutting prices, that must be a sign of weakness. And of course, added to the fact that electric cars are going through maybe a period of adjustment. Maybe they're not as great as we thought they were. I think the stock price has given up 30%, 35 % from its recent highs. So I'd valued in November at 180. It went up to 250. Now it got back down to 180. And Tesla is one of those companies where I am willing to buy at fair value simply because I think there's enough optionality, things that might happen in the company.

30:58There are 15 things in the fire. Who knows which will pay off? But even if one or two of those things pay off, I get the icing on the cake. So from that perspective, I own all seven companies, but Tesla is the only one I added in the last couple of weeks. The rest of the companies come from 2014, 2016, 2018, 2022. So different points in time. But Tesla, I added, and I've always called it my corporate teenager, which is I added with open eyes. I know it's going to do things that frustrate me. It's the nature of the company. It's the nature of how it's run. But in spite of all of that, But the potential there for value is dramatic.

31:44And to me, that's worth making a bet on. I think what you're talking about, this transition from the 19th to the 20th century, the thing that strikes me as a term I would use is asset light. So don't own the car, own the software, own Uber. Don't own the apartment, own the software, own Airbnb. Meta and Alphabet, don't own a newsroom or content creation. on the thick layer of software on top of the content creation. NVIDIA, which just shocked me, they don't own the actual chip manufacturers. If you think about other companies that bring that sort of asset light model, I just got off the phone with the vice chairman of Shein, and that strikes me as actually, it might be the first asset light.

32:27They don't own any of their factories. And they don't own any of their distribution. They're just software connecting agile supply chain with consumers. A, do you buy that thesis that that's where the extraordinary returns are, these asset-light companies? And have you identified any others that are, quote-unquote, fit this asset-light model? I would look for one more thing in addition to being asset-light. I think one of the problems that ride-sharing has had, which is an asset-light model, is it's an asset-light model with no stickiness, which is its customers don't have any loyalty. The drivers can drive for any ride-sharing company.

33:01So in fact, Uber reporting profits finally is, in a sense, the waking up of finally ride sharing is starting to build a business model. But it took them a while. So the most successful asset light models are not just asset light, but they also come with something else that makes it sticky, adds to the fact that, you know, they can actually make money without customers walking away to another asset light model that competes with them. So Airbnb and Uber are still struggling establishing that business model that can deliver profits on scale. But I think eventually they'll get there because they will remove all the alternatives.

33:41And that's part of the problem here is it's very difficult to compete against these scaled up enterprises, even if they're losing money. That would be the qualifier I would add is for the last decade was all about scaling up. Nobody cared about business models. and we built some really bad businesses, really bad big businesses, which is in a sense the worst possible combination because now when you fail, you fail with$100 billion in market cap. And I think 2022 kind of brought risk capital back to some of its senses. They're not as willing to throw money at young startups simply because they can scale up.

34:18And that to me is a healthy thing. So the next decade, I think you're going to see scaling models with more attention to building business models on the side that can actually deliver profits. Because I don't think you're going to be able to access risk capital like you did in the last decade and keep a bad model going with tens of billions of dollars of additional capital thrown at it. I just want to pivot us to streaming, which we've been discussing a lot lately on this podcast. And the big news this week is that Disney, Fox, and Warner Brothers Discovery are all teaming up to launch this new joint sports streaming venture.

34:51it feels as if we're making this slow return back to the cable era where we're seeing all this consolidation across the industry i mean as we've seen in the news paramount global is in play warner brothers is looking at acquiring it and now you have three of the largest entertainment companies bundling all of their linear sports channels into one destination and so i'm wondering from as you look at the streaming industry at a at a high level do you think the future of streaming looks more like streaming as we've known it, or does it look more like cable? So we know that streaming has broken the traditional way of delivering content entertainment, but we know streaming as constructed now is not going to make money.

35:35I mean, that's why if you look at the entertainment space, there isn't a single healthy company in there because they're all struggling with this. So we know consolidation is coming. So if by like cable, you mean we're going to end up with three big streaming services that we pay big chunks of money for. I think we're getting there already. I'm paying$23 a month for Netflix. And if you noticed, Amazon Prime is dipped its toes in the water. It's going to be$3. And Amazon and Apple, I'm not sure what their streaming services will look like, whether they ever intend those services to make money. But the companies that are dependent on streaming, I wouldn't be surprised if at the end of this, you see a consolidation because otherwise they end up falling to the wayside.

36:20They don't have enough content to get people going. So I do think we're going to see consolidation. I wouldn't be surprised if you're paying$50 a piece for each streaming service and ending up with pretty much, and this has always been the troublesome part of what Silicon Valley sold us about innovation. They said, you innovate, we disrupt, you're going to pay a lot less as a consumer because of it. Early on, that looked like it was a great sales pitch. I mean, remember Uber and Lyft came out, you were spending a lot less on car service than you were on taxis. You said, that's amazing. I keep tabs on what I spend on car service now.

36:55And it's very quickly approaching or, you know, expanding what I'd have spent with the status quo. And I do think you're also going to see changes in the way content is made and delivered. This make 50 shows every week thing is not working. So you're going to start to see, and Netflix has already started on this in terms of trying to produce less shows. And you're going to see that across the board on these consolidated streaming services. Sports, of course, is a different game because you get live content delivered to you through sports. And I think finally ESPN is breaking away from its golden handcuffs that cable put on it, which kept it paralyzed for a decade when they should have been moving.

37:41So I think it is part of that next phase in streaming. I don't think the sports streaming service is, I know I've read somewhere that this was going to be a challenge to Netflix. It's going to be a service that people get in addition to Netflix and Disney +, not instead of. So I think that from that perspective, it just is going to add to the cost of the average customer who might've been paying$2.99 for the small cable service that they used to watch their college network. Now they'll be asked to pay$21 to get college games they don't watch. Talking about Disney and Warner Brothers, my sense is, I mean, it is literally a tale of two cities.

38:21If you look at Netflix and some of the companies we've been looking at, they're priced as if they're kind of going to the moon and going to discover new markets and be able to dominate those new markets the way they're dominating existing markets. I look at Disney and I look at Warner Brothers Discovery, and to me, they look as if they're priced as if they're sooner rather than later going to go out of business. It feels as if they're almost trading at distressed prices. And again, while the media loves to talk about the high flyers, there's also opportunity in sort of running into the fire. Do you think there's opportunity or what do you think of the valuation right now on Disney and Warner Brothers Discovery?

38:54I think that's clearly value. In fact, I would add Paramount to that mix. Part of the reason Paramount is in play is precisely for that reason. I mean, the scarcest resource here is content. Now, everything else is technology. Without the content, there is nothing on the platform. And the reality is Warner Brothers and Disney still know how to make good content much better than Netflix and Amazon Prime can. And that's reality we can't change. I think the problem with both companies, and here I would fault the management of the companies, is they've lost the narrative. The stories become so muddled that investors are not sure where Disney is going as a company.

39:37And I think Iger is trying hard to put a narrative out there. But I mean, he's fighting through a lot of noise with the activist investors challenging him. But I think if these companies can establish a narrative of this is where we're going, this is what we're going to try to do, I think you're going to see a price recovery. And if I were to buy an entertainment, I told you I own the Mag 7, the one Fang Am stock I've never owned is Netflix. I've never understood the business model. I can understand the allure of growth, but I can understand the Disney business model better than the Netflix business model.

40:17So from that perspective, if I have an entertainment company in my portfolio, I'd rather it be Disney than Netflix at this point in time. I'm wondering if you have any thoughts on YouTube, which we've been discussing a lot lately, and its role in the streaming industry. And just some of the headline statistics that we've been finding fascinating. As a percentage of TV viewing time, YouTube is the number one streaming platform in the US and in many other countries around the world. It's more popular than Netflix. And then last week, we just saw this news that YouTube TV surpassed 8 million subscribers, which makes it the fourth largest paid TV operator in the US.

40:52It feels as if this platform doesn't get that much attention in these conversations. I'm wondering if you agree and whether you think the market might be underpricing that asset when it comes to Google's valuation. This has always been an alphabet problem, right? I mean, this is a company that I've always struggled with. Why has it been so difficult for them to monetize and deliver value on all of the other stuff? I mean, think of how much of our lives are spent on Google platforms. My wife is a schoolteacher. Google Classroom basically runs the class for her. We use Google Drives. I mean, NYU runs on essentially a Google front.

41:37So this is a company that's everywhere, but still seems to make money on just the search box and still seems to drive it. So here again, I think it's a failure on the part of Google management to essentially, they're so caught up in that other more techie stuff, the electric car. They want to push the high tech stuff. This is low tech in many ways. YouTube is not cutting edge in terms of technology, but it is in fact the closest to a great business that Google has outside the search box. So I think that part of the problem here is the reason investors don't notice YouTube is when was the last time Google management actually came in and put YouTube front and center when they did an earnings report, right?

42:24So stop talking about what I call the seven dwarves, those little other tech startups that you have within Alphabet. Those bets are still bets, seven, eight, nine years after you created this moniker of Alphabet to reflect the fact that in multiple businesses and start hyping YouTube. It is a great business model. And if they paid attention to it, it is the first business model that can actually supplement their search box revenues and start delivering real value for them. So this is a case of management not paying enough heed to what should be a promising business and investors, in a sense, going along with management.

43:05Is AI a seven dwarf to you? At least the way Google plays it, this is the history of Google. You can have businesses that other companies seem to take advantage of. But for whatever reason, and again, I don't know what it is about the company, within Google, all these great potential businesses stay great potential businesses. They never seem to deliver on the potential. And Microsoft has eaten Google's lunch on the AI space at least so far. Maybe Google will catch up, but I'll wait. It hasn't happened yet. We'll be right back.

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45:27We're back with ProfG Markets. Let's pull the lens back. Like, you know, I think the S &P or Nasdaq is trading at about 20 or 22 times earnings. Chinese stocks are trading at five times earnings. They've shed 40 % of their value in the last three years. It's amazing that it's not made more news that they've collapsed. And they've collapsed. And two things. One, it's not made the news. And it's a first market crisis in a large market that hasn't had ripple effects across the world. I don't know whether it's a delayed reaction. The second largest equity market in the world lost$2.5 trillion worth of market cap.

46:08And people don't seem to be noticing. So Chinese companies have been marked down. And I think for, you know, I was talking about corporate governance in my class yesterday. And I was talking about alternative corporate governance systems. You got the shareholder-based system of the U.S. You had the Kairitsos of Japan. And you had the Chinese corporate governance system, which has nothing to do with shareholders. And the power rests with management, with Beijing being in the room with every company's management. And I said, look, when times are good, corporate governance systems look great. The way you test a corporate governance system is not when times are good, but when times are bad.

46:50When China was growing 10%, 11%, 12 % a year in real terms, the weaknesses of their governance system kind of got hidden. But that buffer is gone. And I think what you've seen, it's not just in the last year or two. I mean, I go back to when Beijing cracked down on the big Chinese tech companies, Tencent, Alibaba. They claim to do it because they cared about consumers. If you think Beijing cares about consumers, then you're being naive. I mean, this is a government that cares about one thing and one thing alone, which is control. And I think what you're seeing playing out in the Chinese market is people recognizing how little power they have in companies, how opaque these companies are, and how much you don't know in big publicly traded Chinese companies.

47:40And I think that fear factor is driving prices down. And I don't blame investors because you really don't know what you're getting with a Chinese company. Now, it's not the old Buffett description of you buying a share of a business. You're definitely not buying a share of a business when you buy shares in any big Chinese company. You're a capital provider, and that's how they treat you. You gave us the capital. We'll do what we want with this capital, and don't you dare push back. But at some point, is it a buy, or is it similar to, I mean, basically what you said in terms of small versus big stocks, it's not a cyclical thing.

48:15It's a structural shift. Are you saying the same thing with poor? And I'm a huge fan of corporate governance, but you're saying at no price are these things a buy? Selective buy, I would say, I would pick my battles here. Not all Chinese companies, you're not as equally exposed. I would avoid the Chinese companies with significant amounts of debt because that's where the opacity comes out of Chinese companies is, how much do you owe? Are you really in good financial position? I'd avoid Chinese companies with significant real estate holdings because there the pricing adjustments are going to play out.

48:49But they're really good Chinese businesses. I like Tencent as a company. I like it as a company because it's built an amazing platform, a platform that people use for everything. And I think at today's prices, I would buy Tencent, but I wouldn't buy Chinese equities in a bag because I can get a lot of crap with the good stuff. So if you're going to go into the Chinese market, do it selectively, pick companies that you understand what they do, what their business is. Don't pick these opaque companies which claim to make a lot of money, but you're not sure what the business is. And I think that you can get some good investments to add on, but do it with open eyes, which is you're never going to have much shareholder power of these companies ever.

49:30I feel like this is a good segue to talk about Elon Musk's compensation package that was, as we know, recently voided, $56 billion. I'm wondering what you make of that news from a valuation perspective, because the stock fell around 3 % after that news broke. That isn't huge, but it's still material. Does that whole corporate governance fiasco change your perspective on the valuation of Tesla? Corporate governance has never been Tesla's strong point, right? All you have to do is look at Tesla's board to know that this was never a board that was going to challenge Elon Musk. And that's part of the reason I told you that I called it my corporate teenager.

50:09This is a company where there's no check or balance on the CEO. So I think by itself, the ruling doesn't change my perspective on Tesla. It's always been a horrifically bad company on corporate governance. It stays horrifically bad. I must confess, I was surprised by the ruling because it was based on the fact that the board of directors was not independent. And if I use that criterion, I would challenge you to find me more than 50 companies in the S &P 500 with truly independent boards. I would challenge you to take the Disney board and show me it's independent, right? It's got, you know, people are not insiders.

50:48That doesn't make it independent. My definition of independent is that you actually ask questions, challenge management. And that's not something you find in most companies. So that'll be the test. Is this selective to Tesla or is this something that, you know, I think part of the reason that decision came down is in hindsight, it's an incredibly huge compensation package, right? It was tied to the price going up, but it was devised when the company was at a$50 billion market cap. At a$650 billion market cap, that pay package ballooned out to$50 billion. You're effectively giving away a big chunk of the company.

51:26So I think that played a role. It's just a magnitude, even though it's hindsight bias, I think played a role. But then the independent board became the excuse for that's why. I'll wage if this compensation packet were$50 million or even a billion, the Delaware courts would probably have let it go. So it's a combination of seeing that expose big compensation package and then looking for a justification to say, that's too big, We have to stop it. Talk to us about, I mean, we're talking about structural change. I've always maintained that with the liquidity you can now get in the private markets, with the benefit of not having the type of public scrutiny and reporting requirements that a public company has mandated, that we might see a structural decline in just the sheer number of companies going public and a longer duration before they go public, if at all.

52:16Do you think there's a structural shift? And also in 2024, do you think the IPO market comes back? And are you excited about any of these companies lining up to go public, a Reddit, a Turo, or a Shein? I think it's more cyclical than a long-term trend. The last decade, you're absolutely right. Companies could stay private and they could raise immense amounts of capital. I mean, think of how long Uber was rumored to go public and kept raising billions of dollars from private investors. That's because the last decade was a decade. If you graph out risk capital over time, and you can graph it on lots of different ways.

52:54There's venture capital money, but basically capital invested in companies that are very risky, often not listed. The last decade was an aberration. You had insane amounts of money of risk capital floating around, which meant that companies had buffer before they went public. That risk capital has dried up. Even though stock markets are up, risk capital is still on the sidelines. You can talk to young startups that are still struggling to raise VC. It's not coming back the way it was last decade. So I do think you're going to see more companies go public earlier now than they did the last decade.

53:30Am I excited? The company I would like to see the most as a public company is OpenAI. And I want to see what this company can be if it were actually a company. because people informally are saying it's worth$80 billion, it's worth$100 billion, it's worth$120 billion. So I'd like to see some of the companies, the AI space, hit the market. If nothing else, to see what kinds of products and services we're talking about. Are they viable? Is there actually a business model here? So I do think we're going to see more IPOs hit the market, and I don't think you're going to see the seven, eight, nine years to market and the tens of billions of dollars cash burned before you go public that you saw in the last decade.

54:12As you look ahead to 2024, is there anything that you're paying more attention to or that you're specifically focused on? The elections, right? This is going to be a year where political risk is going to be front and center. There's no way around it. So we're going to see, and same thing happened in 2016 with Brexit in the UK. I mean, the elections are going to drive the market this year more than we think they will. And the closer you get to November in the U.S., I don't know, UK, I think is September, October, sometime like that, you're going to see more volatility attached to political risk.

54:53So just to wrap up here, Aswath, I think that stock picking and valuation is this invaluable exercise. I think it's a great way to learn business and sort of damage the muscle such that it grows back stronger. But when I think about everything you've said, the fact that seven stocks were responsible for the majority of the gains. Isn't this all just sort of a lesson in that young people and maybe people my age, we shouldn't be trying to find the diamond in the rough. We should be buying all the rough or not the needle, but buy the whole haystack. That isn't really the best advice for investors to go into low cost ETF and index funds because isn't stock picking a bit of a fool's errand?

55:35And I think the reasons, I mean, I agree with you, but the reason stock picking will hang in there is people say, if I'd pick these seven, think of how much money I'd have had. It's almost like you can show them all the numbers, but the allure of if I can pick the next - Playing the lottery. Yeah, it's like the lottery. In fact, I look to see what would have happened over the last 15 years if you'd taken$100 and invested in everything but the MAG-7. So in other words, you just remove those seven. you'd have run about 25 % below what you'd have had on the overall market. So when people point at index funds, oh, you're crazy, you're putting money in an index fund.

56:13One of the great things about being in an index fund is these seven companies will definitely be in there. So given a choice between picking stocks and missing out and picking an index fund and buying in, I think given the way the world is evolving, you're seeing an even stronger argument for indexing and going back to living the rest of your life than you would have 20, 30, 40 years ago. Going back to living the rest of your life. I love that. Aswath Damodaran is the Kirchner Family Chair of Finance Education and Professor of Finance at NYU Stern School of Business where he teaches corporate finance and valuation.

56:49He joins us from his home in San Diego. And let me just add another lesson I've learned from you, and I hope our viewers glean. The most impressive influential people present the shortest biographies. Aswath, thanks for your time. Thank you.

57:12All right, let's take a look at the weekend. We'll see earnings from Airbnb, Shopify, and Coinbase. We'll also see the latest inflation data for January from the consumer and producer price indices. Scott, do you have any predictions for us? I do, and I'm talking my own book, but typically I own Airbnb, Apple, Amazon. I own some oddity, the kind of AI-driven beauty company, and I write covered calls against them. So that is as a means of hedging and producing income the way you'd produce income or rental income on an apartment complex. If Airbnb is at$148, I'll write call options at$155, and I sort of collect rent on it.

57:54Now, if it accelerates to$160, I have to pay off. I have to pay more to buy back those options than I got for writing them. But I think of it as a means of kind of hedging the stock and creating some additional income. And you don't get hurt too badly because if the thing goes to$300 overnight for some reason, like it turns into a meme stock, your underlying stock goes up in value. You just sort of net it out. You give up all your gains. Anyways, this week or recently, I am not writing covered calls against Airbnb, a big holding of mine, because I think Airbnb is going to be the latest company that benefits from discipline operations and keeping its costs flat or even decreasing and a substantial increase in revenue.

58:37Specifically, I think young people, and this is a bad thing, have somewhat given up or delayed their hopes of buying a home and are spending it on travel. So Airbnb's earnings, I believe, are on Tuesday, and I think they're going to beat their earnings, and I think you're going to see a pop in the stock. This episode was produced by Claire Miller and engineered by Benjamin Spencer. Our executive producers are Jason Stavvers and Catherine Dillon. Mia Silverio is our research lead, and Drew Burrows is our technical director. Thank you for listening to Prop G Markets from the Vox Media Podcast Network.

59:08Join us on Wednesday for office hours, and we'll be back with a fresh take on markets every Monday.

59:16Lifetimes

59:22You help me In kind Reunion As the world turns And the dark flies In love, love, love, love