Prof G Markets: Is Boeing a Buy? AI Picks & Shovels (and Scott’s Ketamine Trip)

27:22You know, that's just chasing and eating our own tail here. And then streaming gets a boost from political ad spend. I thought it was a bad idea for these streaming platforms to take on advertising. I was probably wrong. It looks like they're picking up incremental income and creating an offering for people who don't want to spend$10 or$15 a month. So far, political spending is at$164 million. That's up, get this, that's up 266%. It's almost quadrupled since the same period in 2022. Paramount, Warner, Discovery, and Hulu allow political ads. Apple and Amazon do not. this is just i mean i remember meeting with hearst and i thought god i must suck to be they own magazines hearst is killing it they own all of these kind of information driven assets they own a they own fitch which is an amazing company in ratings they own a company that tracks analytics for airline companies or private jets a subscription company that everyone signs up for and they own a bunch of regional news stations and basically regional news stations are just shitty businesses, except every two years, they have an absolute torrent of money wash over them.

28:35Because old people do two things. They watch the news, the local news, and they vote. And so they just jack up their rates and every political operative or, you know, any campaign with any money just starts buying up all the time on these local news stations. I wonder if we'll ever run political ads. Do you think Amazon and Apple will change that no political ads policy? I don't think so. If they haven't changed it already, I don't think they're going to. I don't, yeah, I don't, I don't, I'm honest answers. I don't know, but I can't imagine they would shift this, shift this light. I don't think Apple will, but maybe with Amazon, Amazon are bigger whores.

29:14Actually, that's not true. That's not fair. They're both pretty big whores. Um, I don't think so. I think they would have already announced it by now, but we would 100 % literally 100 % if fucking gobles wants to run ads on our podcast i'm down bring it daddy needs new shoes daddy daddy wants to order that second non-alcoholic beer at the hotel pool at the beverly hills hotel oh my god i'm so fabulous here we'll be right back after the break with a look at boeing's crisis

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31:28We're back with ProfG Markets. More than two months after a door blew off one of its airplanes, Boeing is still in hot water. Last week, a 787 Dreamliner plunged suddenly mid-flight, sending passengers hurtling to the roof of the plane. The very next day, a Boeing whistleblower was found dead in his car. He was a former quality control manager, and he was in the middle of testifying in a deposition concerning the company's safety issues. So it now seems like Boeing is in a full-blown crisis. The stock fell more than 9 % through the week, and year-to-date, it's down 28%. Here to break down the state of Boeing and its impact on the airline industry is George Ferguson, Senior Aerospace Defense and Airline Analyst for Bloomberg Intelligence.

32:12George, thank you for joining us. Thank you for having me. So this is the second major crisis for Boeing in recent years. The first was in 2019 when two Max 8 airliners crashed within six months of each other. When you look at this, as someone who's been studying this market for a long time, does Boeing's situation today feel more or less dire than it did five years ago? Given that it's coming after the crash and the MCAS problems on the airplane in 2018-ish, I think it's more dire, right? I think that unfortunately they're coming out of a pandemic and grounding after those crashes to have these manufacturing problems.

32:55And that's put them in a very tough spot. I think worse spot than they've been in their history. We discussed this a couple months ago when the door actually fell off. We were thinking that maybe this wouldn't harm Boeing long-term, or at least not as much as people were predicting. And a few reasons we were thinking that. One is just the duopoly that they have with Airbus, which seems like it protects them, the switching costs to go to a different aircraft manufacturer, and also the fact that commercial aircraft sales aren't the whole business. It's like 40 % of the business. Do you consider our analysis to be accurate there?

33:32Are we missing something, or is the situation worse than I just depicted? No. I mean, I think that Boeing is fortunate because the business is a duopoly with Airbus. And right now, the supply chains for both manufacturers, while they definitely appear to be doing worse for Boeing, I would say aren't providing Airbus a lot of flexibility to crank up deliveries, crank up production quickly. And so what we really see from the outside is that Airbus isn't really able to capitalize very well on this. And Airbus's backlogs are longer than Boeing, especially for the narrow body A320, which is the competitor to the 737.

34:17When we do the calculations, we think there's seven or eight years of backlog in there at least. So it probably means some of that backlog isn't sort of serially one behind another coming out the door of Airbus. Some airlines have placed orders that take them well into the next decade. But our guesstimate on this is that you probably have to wait near the end of this decade to wedge yourself into the A320 delivery pipeline unless they can get their supply chain to work better. And so because of that, if you're a Boeing customer, the cost of pulling out and switching the Airbus is, I think, just too high, too far down the road.

34:57And that's protecting Boeing's market share right here. And so that's definitely a mitigant right now to the problems that Boeing's having. So, George, nice to meet you. Just a thesis, and you tell me you nullify or validate this thesis. So the S &P over the last five years is up 84 percent. Airbus is up 37 percent. Boeing's been cut in half. It's down 50 percent. Is this an opportunity in terms of buying a stock that's been cut in half but will get through this and return to sort of its traditional economics? So, you know, look, stock prices can be a little bit challenging because there's a lot of things that go into it.

35:42You know, fundamentals, the fundamental performance of the company from a financial standpoint and valuations, you know, component of it. What I will say is from a fundamental basis, from the fundamental driver of stock prices, their earnings, you know, I think a recovery will happen at the company. I think that their potential purchase of Spirit Aerosystems here shows you that management is serious to dive deeper into the supply chain of the company. Pull in a supplier that used to be not a subsidiary, but used to be part and parcel of Boeing. It got spun out 20 years ago. They want to pull it in so they can control quality in that business and they can make sure that what they're putting out the door is an airplane that's not going to have the problems that they've had.

36:33And so I'd argue that from a, hey, we're going to build a more quality product and we're going to be profitable, I think that's a step in the right direction to the turnaround of the company. What I will say, though, is I think that the book of business inside Boeing, the backlog, isn't as profitable as you would have expected last decade. And the reason I say that is because, one, I think that they're going to have to spend a lot more time in their manufacturing business doing more oversight, controlling the processes much closer. and that means that the cost of manufacturing is going to be higher, at least for a number of years here, while they make sure they stabilize the manufacturing process.

37:22And the second issue here, I mean, Boeing's had a bunch of these issues filtered through the company. Coming out of the pandemic, if you recall, for a while, the Chinese were not taking deliveries of Boeing airliners. They started this year, but coming out of the pandemic, they did not. And Boeing went out and essentially sold a bunch of airplanes to some of their core customers, a lot of airplanes to their core customers. They were the big Southwest order, the United order, Ryanair's always sort of pulling in a certain amount of airplanes. We think a good portion of those orders were placed at really good prices for those customers.

38:00And so I think that materially changes the profit characteristics of the book of business right now inside commercial. So I think when you look at commercial and the turnaround, there's still plenty of work to do. I think you're talking, there's long cycles to this business. I think, you know, I think you're going to see diminished deliveries this year below what, you know, consensus sort of thought as they turn around that manufacturing business. and as they turn that back on, and I think you're going to start to see better deliveries in 25 and it'll take a while, right? 26, 27 as they try to catch up to Airbus or catch up to even their old build rates that they had in the last decade, which were approaching 60 for the 737.

38:41It'll take them a while to cycle it up and it's just not going to be the same margins. And at the same time, not to throw more on this whole discussion, that defense business, you rightly mentioned that, you know, commercial isn't all this business. That defense business is underperforming as well because of a number of fixed price contracts they put on the books. And those are going to take a couple more years to clean up and start to improve profitability on. So you have, I would say, two of the three cylinders, if this was a three-cylinder engine, in this business that aren't really going to function well.

39:18I think until you get into 25 and 26. But is the company going away? I don't think so. Does this present an opening? I recognize this is a capital manufacturing-intense business. You can't just spin up a commercial jet manufacturing business. Is there any opportunity to take advantage of this, what appears to be an opening in the market? Could a Bombardier or a Gulfstream or a Dassault or, I don't know, name the company, go upstream and start producing commercial jet airliners? Those companies are very capable companies. and I think Bombardier, for example, proved their ability to design, build, and launch a larger airliner when they built what they called the C-Series and Airbus bought later on and called the A220 a great airplane.

40:06But I think there's a couple things we should bear in mind here. One is I think you'd have to have that product ready to go now to capitalize, right? Because if you're going to go into the engineering rooms and start to draw that airplane up, I think you're a decade away from building something, right? Or maybe seven or eight years. So that's the real problem in this business. The barriers to entry are huge. It would just take too long unless you had something ready to go. And I would say the second side of that is, if you recall when Bombardier built that C-Series, Boeing and Airbus absolutely honed in on them in sort of the competitive landscape.

40:50They came in, they bid the smaller size of their narrow bodies against that airplane. We believe that they dropped prices on those smaller narrow bodies a lot to knock Bombardier out of that market. and Bombardier ultimately sold the program to Airbus for a dollar after Boeing and Airbus just sort of beat them up in the marketplace for years to keep them out. And I mean, it's something not to be underestimated. If you have an airplane that's already built, you've already done all the engineering on it, you've already done all the tooling on it, you can bear more pain in the marketplace by discounting to keep other participants out than the new entrant can, because they're typically burning cash as they design a new airplane, they tool up and they start ramping up production.

41:40It's really hard to break in. And so I think those items keep another competitor out, except for the Chinese, which already have an airliner in the marketplace. But I think that's Western acceptance of that airliner is still years away too, half a decade away at least, I think. When we were discussing this earlier this week, we were pointing out that there's been this downstream effect on the airline stocks. So last week, Southwest shares sank 13%. And that was basically because they announced that they're going to get fewer shipments from Boeing. They were supposed to get 79 planes this year.

42:19It's going to be 46. United had a similar thing. Their stock dropped 2%. And when we were trying to figure out, okay, what's the disparity here? is basically that 100 % of Southwest's fleet is Boeing. And for United, it's 80%. And then you look at the stocks that weren't really affected. It's like Delta, for example. Delta's only half Boeing. So there's this interesting thing that I hadn't thought of, of supply chain diversification, basically. And I'm wondering if that plays a big role in your airline analysis. And do you think that having a healthy balance between Boeing and Airbus is something that investors should be focused on right now?

42:59Yeah, so I think it depends what your airline type is, right? If you're a big full-service hub-and-spoke carrier like Delta, American, United, your operations are complex enough that you can bear having two fleet types in there. And so diversification, some of each one in your portfolio of airplanes, if you want to call it, is absolutely a positive when you get to situations like this. And I agree. I think you've seen that. America has a nice mix. Delta is very much an Airbus shop. There's still some Boeing stuff around there. And those two stand to capitalize, potentially, if there's a shortage of airplanes in the U.S.

43:40market this year. And we've seen this before. We saw this where Southwest pre-pandemic was having problems getting delivery from Boeing on the new MAX, and other airlines capitalized on it. When it comes to low-cost airlines, though, I think that the ability to drive down costs with a single fleet type is probably paramount, frankly, right? Because those airlines really, you know, they really cut costs to the bone with their ability to streamline operations. And having all the same fleet type and being able to allocate pilots to airplanes, not worrying about what the airplanes are and what the pilots rated, I think does a lot to ease their operations and keep costs really low.

44:22And so there's a couple different airplane engine challenges that are rolling through the U.S. market that if we get tight on capacity, if demand is really good this summer and these folks can't get airplanes or have to put them down, means that the airlines that are not flying those will absolutely capitalize and could have a pretty good summer. And one of the things I read from Southwest was not just the Boeing problem, but if you read into their 1Q adjusted guidance, they step change down in what they thought they were going to get paid per seat mile that they put in the air. And part of that is because they're not seeing near-term demand as strong as they thought.

45:05So we'll see those two things are playing out right now in the U.S. airline market. We're watching them closely. Right now, I don't think the airplane issue is going to be as important as the economy and general demand, but we're watching it. So just last question, George, from a consumer standpoint, you know, I'm fascinated with aviation and the only thing not perfect about my life is I've spent way too much time on planes. And I look at, I look at my phone, I look at media, you know, it just, everything's changed so dramatically. When I look at the flight experience 50 years ago, when I took my first flight with my dad versus now, it's disappointingly similar.

45:45And while I know there's been huge efficiency gains and costs of, I think on an inflation adjusted basis have come way down, what do you think of the likelihood that we're going to have supersonic travel in the next decade or so? And specifically, do you know anything about boom technologies? Disclosure, I'm an investor there. Do you think that supersonic will see a renaissance, if you will? So I haven't spent a lot of time on boom, but we've absolutely thought about supersonic. I'll tell you what my impression is of this. I'm sad to say that I'm not going to be, I'm not going to tell you that the next new age of flying, supersonic flying is coming.

46:21It's right around the corner. And we're all going to have, you know, a blast going out there across the Pacific in half the time and across the Atlantic in half the time. So the big challenge in this business is getting the consumer to pay up for that supersonic travel and enough of those consumers to pay up to be able to build those airplane fleets in size. And so if you think about a wide-body airplane from Boeing or Airbus, wide-body, remember, means probably have two aisles in it rather than the A320, 737, or single aisles, one down the middle. You got two. You got a lot more people inside that tube.

47:02The typical wide-body airplane designed and built by Boeing and Airbus, a successful one, has over 1 ,000 units built. So you typically, you see$1 ,200,$1 ,300,$1 ,400. That usually gets them into the, let's call it the green zone, the profitable zone, for the cost that it was to design it, tool up for it, build it. What we saw with the Concorde, it was great technology. It's old technology now, but they built what? They built less than 20. I think they built somewhere in the, I think they got over 10 maybe or so. You can't get the economies of scale you need for manufacturing to drive down costs building in those sizes.

47:51You've got to get up, like I said, into 1 ,000 plus. And right now, I still don't think you have enough demand for supersonic travel to get the numbers you need on the manufacturing side of the business. One of the challenges, too, is if you think about when we go to Europe. if we, if we, you know, we're all here on the East coast, you go over to a Newark at a Kennedy, you get in an airplane, you get a lie flat seat, which you probably pay less for than supersonic travel. You and I get in that tube and we lie down seven hours later, we're landing in, in London. We almost don't care. We don't want to be there in four hours.

48:34Cause we'll be, you know, I guess we'll be in London at, uh, you know, at 4am their time or something like that. We'll say, hey, what was the gain? The gain was I didn't get a full night's sleep. I paid a heck of a lot more money. And now I'm stumbling around London at 6 a.m. waiting for businesses to open. So right now, I think on transatlantic, I think Lie Flat, I think the services you have work pretty well. I don't know that I would pay up for transatlantic on a supersonic. Into Asia, yeah, the distances are a lot larger. So I think I'm ready to pay up on an Asia trip, 17 hours to Singapore.

49:09It's a heck of a lot of time. We'd have to see fuel burn and see how far they could get and where they'd have to stop. That could be a limiter. But right now, I just don't see the technology having progressed enough to change the equation on supersonic. I just don't see the size. But it's like a lot of things in aviation. We start going there. Some people run out of money. Some ideas die for a little period of time. It's the seeds that are replanted next and grow again. and we try again. And at every iteration, I think we learn more, take costs out of the equation, develop the idea. The day will come.

49:50I just don't think it's in the next, I don't think it's in the next decade. I think it's great analysis, but that frame where I justified my investment is, and I think you're looking at correctly looking at a consumer. My sense is one of the fastest growing demographic is billionaires. We've gone from 500 to 2 ,500. We're probably going to have 10 ,000 in the next five to six years. The average age of a billionaire is 69. These guys have more money than time. If I'm a billionaire, I'm buying supersonic. I actually think the market is for billionaires, not for commercial aviation. A supersonic bizjet could probably do better than a supersonic commercial jet.

50:30I get it. But all those guys have private jets, right? So they're all, those are the guys that are buying the Gulfstream 650 ER, 700, 800, the Bombardier 7500. They're bringing their own airplane to the game and they'll pay up. They'll pay 75 million for a Bombardier 7500 or a Gulfstream 700. 75 million more than a commercial airliner. Because like you said, time matters to them. Time matters a lot to them. They're willing to pay for it. George, this was great. Thanks for your good work. And we really appreciate your insights. Appreciate it. We'll be right back after the break with a look at AI compute power.

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53:24We're back with Prof.G Markets. A few weeks ago, we discussed NVIDIA's run-up in the markets and asked what other downstream picks and shovels could benefit from AI. There will likely be many, but there's one area in particular that's been getting a lot more attention, computing power. By 2030, electricity demand at US data centers could triple, using as much power as 40 million homes or the annual energy demand of the UK and Greece combined. Businesses that can figure out how to support that demand sustainably should be well positioned to ride the AI wave. So Scott, people often point to crypto's energy consumption as one of the main negative externalities.

54:04Annually, the global crypto industry uses as much electricity as the Netherlands. AI's consumption is poised to eclipse that. What do you make of this problem? And what kind of solutions do you think we'll see? I think this is super interesting. I've never understood, one of the things I've never understood about crypto. It was in a world where we see the existential threat is climate change. And we invented a currency. We invented something of our own making that requires the electricity consumption of Argentina. I've always heard Argentina. By the way, in the Netherlands, do they use any electricity?

54:38Aren't there a bunch of polar bears on treadmills powering everything? I've just never understood that we decided to invent something that we really didn't need that's based on mathematical computations that require the energy of argentina anyways the i think this is fascinating and so the question is are there knock-on or downstream investment opportunities in making ai more energy efficient is company estera labs which has filed for an ipo they make hardware and software products that increase the efficiency and reliability of data transfers within ai systems and it has microsoft nvidia amazon and intel as investors shit that's a company i'd like to invest in i mean that is the I mean, crazy, huge trend, boring company doing really, really hard work.

55:25Oh, disco, Ed, disco. AI and data center infrastructure, a company called Vertiv provides power management and cooling equipment for data centers. Another like stupid fucking boring business. It's going to make a lot of people very rich. And in a typical data center, only 40 to 45 percent of the energy use is for the actual computing. The rest is used just to keep cooling down the servers, right? just to make sure that they can operate so they don't overheat. By the way, I remember I was at one of my first clients. Let's talk about me again. One of my first clients. The ketamine didn't fix that.

55:58I bet it was. No, no, no, no. It's one of the things I found on my trip through the universe is that it's my universe. We just all live in it. I remember I worked with the COO of William Snowman, this guy named Denny Chantlin, and I ultimately ended up putting him on my board because I just found him so practical and thoughtful and strategic. and they had a server room you know they built this big e-commerce operation we actually believe it or not yours truly and profit actually built their first e-commerce site and they had the server room and it was overheating and the power went out and they got denny on the phone and they said denny what are we doing he said is there a window and they said yeah but he said well open the fucking window and they said we can't it doesn't open he's like okay he's like go find a hammer and we all looked at each other i was in the room when they were doing this and they went found a hammer and they just bashed the fucking window and problems solved they're like and i thought that's how you become the coo of a of a global like of a fortune and whatever 1000 company is we in a million years we were like oh no but the window doesn't open yeah it's like go get a hammer open the fucking window we got whatever three million dollars in servers that are about to explode anyways so the cat is out of the bag vert of outperform nvidia in 2023 rising 269 jesus christ so we're late on that one prologis which is one of my favorite companies of back to me a mentor of mine is a guy named hamid mogadam who ran amb and then they merged with prologis which i think is the largest warehouse or logistics uh storage company uh in america and they planned their they announced they're planning to invest eight billion dollars in data centers over the next five years with the potential to expand to 100 data center projects and a$25 billion investment in the longer term.

57:48Like this just makes a shit ton of sense. This is, in my opinion, word is out on the big guys, the NVIDIAs. I think in terms of if I were a fund manager or stock picking, which I'm not recommending you do, I'd be looking downstream at this type of stuff. What are your thoughts, Ed? Yeah, I mean, it feels like there are two main issues that are to be solved here when you have compute power growing this rapidly. I mean, it's estimated by 2037, global spend on compute power will be greater than the current GDP of the US, which is$27 trillion. So there are two things to solve. One is computational efficiency.

58:30That is, how can you minimize your energy consumption while, you know, accelerating inference, decelerating latency. And there are a bunch of companies that are working specifically on that problem. You mentioned several of them, Astera Labs, but there are more Broadcom, Marvel Technology, Parade Technologies, etc. The second thing is just computational production. Like, how do we just produce and deliver massive amounts of computing power at mass scale? and obviously nvidia is a huge part of that story but the way i see it so are just the plain old energy companies that actually power these data centers so like exxon and chevron bp aramco having said that it's been a very bad year for energy companies in general especially in terms of their stock price i mean the energy index is down one and a half percent this year compare that to the S &P, which is up like 26%.

59:29But it feels as if AI could inspire a resurgence here. So I'm wondering if you think that we're going to start to see some renewed interest in energy stocks as people start predicting this massive computing power wave over the next few years. Do you think that we'll see more investor interest in energy? Yeah, you'd think. I mean, it strikes me, energy consumption is just not going anywhere. Every year we come up with new ways to use energy. It's never like, oh, we have too much. I mean, oil prices will come down, wind prices might come down, whatever it is. But there's never kind of energy just sitting fallow.

1:00:05And the fact that the energy index is down a percent, I would imagine that industry is pretty cyclical. And it's probably not a bad place to park some money right now. So any estimate of energy consumption is up over the next 10, 20, 100 years. The question is, is there some sort of breakthrough that's all of a sudden going to provide massive? And remember a year ago, they announced that they had achieved fission and that is they had figured out a way to collide two molecules that create more energy than they absorb. But the infrastructure around it was still like 53 times the amount of energy they created.

1:00:43So that number, there's a term for that. That number is going to have to come down until it gets below one. But yeah, it strikes me that, I don't know, it's just one of those industries where you feel like those people are always going to figure out a way to make money. All right. Thanks, Scott. Let's take a look at the week ahead. We'll see earnings from Nike, FedEx, and Lululemon. We'll also hear the latest interest rate decision from the Federal Reserve. And finally, Reddit is expected to IPO this week. Scott, do you have any predictions? My prediction is that Reddit gets, and this is dangerous, that Reddit gets a fairly substantial day one pop.

1:01:23And it just goes back to we used to live in an agriculture economy. Then the world's trade routes were driven by spices. And then it was obviously we were in an oil or natural resource based economy. I think we are in an attention based economy. The most valuable firms in the world basically monetize our attention. And if you look at the most trafficked sites in America, number three is Reddit. And if you look at those four companies, three of them have a trillion dollar plus valuation. And one is going out at a valuation, I think it's estimated about six and a half billion. So if you look at the charts from, I used to love this chart from 10 years ago that I used to show in presentations.

1:02:03And it had attention versus ad spend. And so, for example, newspapers were getting 6 % of the nation's attention, but they had 15 % of the advertising. And digital was getting 35 % of the nation's attention, but only had 8 % of the advertising. And you just knew over time that they would calibrate or they would equalize. And when I look at the third most trafficked site in the United States, going out at$6.5 billion, I think that that has opportunity, and this sounds crazy, but that has opportunity to be 100x in 10 years if they can maintain that sort of attention. So my prediction is Reddit gets a substantial pop on the first trade in the IPO.

1:02:45Do you have any thoughts on how they could start monetizing that attention more efficiently and just better? I mean, you look at where it ranks in web traffic, but then you look at its revenue,$800 million in revenue. That's a fraction of all of these other companies you mentioned. How do they unlock that attention and start monetizing it in a substantial way? I think it's about management and the ad stack. And by the way, the exact same criticisms were levied against Meta. I remember our buddy Bill Cohen interviewing me on Bloomberg 15 years ago before the IPO of Meta. And he said, what is this business?

1:03:21Is this in? You know, the revenues weren't that big. They were growing fast. But this is in some, this is about the ad stack. This is about figuring out a way to target people the right, you know, right place, right time, right kind of situation and hit them with the right ad. It's about developing crazy ad tools that help advertisers reach the right people in the right context. But I think that is less difficult, I think, than building an offering that gets the third most attention of any website in America. I think they've got the hard stuff done. I think they've done the heavy lifting. I think good management, good management with just the third most traffic site in America can figure out a way to get this thing worth$100 billion.

1:04:05You'll be buying? I'm going to try. I'm calling everyone I know, trying to get in on the IPO. And depending on, A, if I'm able to get shares in the IPO, I might not be able to. But if I can, I'll look at what the first day pop is. And if it's not too extraordinary, I will probably buy some shares, yeah. All right. This episode was produced by Claire Miller and engineered by Benjamin Spencer. Our executive producers are Jason Stavis and Catherine Dillon. Mia Silverio is our research lead. And Drew Burrows is our technical director. Thank you for listening to Prof G Markets from the Vox Media Podcast Network.

1:04:37Join us on Wednesday for office hours, and we'll be back with a fresh take on markets every Monday.

1:04:46Lifetimes

1:04:51You have me In kind reunion As the world turns And the dark flies In love