Prof G Markets: OpenAI’s Dev Day, Disney vs. Warner Bros. Discovery, and Uber’s Branding Turnaround

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1:27Welcome to Prop G Markets. We're off to a good start, Ed. did you know i'm gonna try and segue out of this did you know there are more birds in captivity than in the wild that's true story this is true because of chickens we have so many chickens being raised inhumanely yeah that was a nice segue pretty good it's really good pretty good yeah new image in my head i like it all right let's talk about the markets this is where people are questioning their decision to tune in today, as they do every day. Go ahead, talk about the markets. Okay, let's start with our weekly review of Market Vitals.

2:12The S &P 500 rose, the dollar was stable, Bitcoin hit an 18-month high, and the yield on 10-year treasuries fell. Shifting to the headlines. Amazon is offering one medical to Prime members for$99 a year, a$100 discount. The e-commerce giant acquired the primary care company in February in a bid to expand its healthcare business. Eli Lilly received FDA approval for a weight loss drug called ZepBound that costs about 20 % less than Novo Nordisk's Wegovi. Investment manager Kotu marked down its stake in NFT marketplace OpenSea. The move suggests OpenSea's valuation has dropped from$13.3 billion in 2022 to just$1.4 billion today.

2:55Fast fashion company Shein is targeting a$90 billion valuation as it explores a US IPO. That's well above private market valuations of$50 to$60 billion marked earlier this year. And finally, chipmaker Arm delivered a disappointing sales forecast in its first earnings report since its IPO. Shares fell 9%. Scott, do you have any reactions? I love One Medical. I think they do a great job. When I got COVID, I got on with one medical right away. And I said, I have these symptoms. I've just tested. I'm positive. And they said, OK. And I said, I want Paxlovid. And they asked me a bunch of questions. They said, fine.

3:33Not only did they get me a prescription, send it into the pharmacy, but they told me which pharmacies had it in stock and sent me instructions on how to walk there. I would describe it as almost like concierge medicine. You know, you hear about these families in Stanford that pay$100 ,000 a year to have the Nobel Prize winning pulmonologist come over and make sure the little Becky's cough is okay. It's sort of the Old Navy version of concierge medicine. And I think they do a fantastic job. I'm thrilled that Amazon's in the space. I think healthcare needs kind of an Amazon-like efficiency and cost-cutting approach.

4:09So I think that's a great thing. It'll be interesting to see how many people pick up the$100 offering. Eli Lilly, I love to see this because we've said here that GLP-1 drugs may be bigger than GPT-4, although after seeing OpenAI's developer conference, maybe AI will in fact be bigger. The problem right now with GLP-1 drugs, they're not getting to the right people. And that is, and I love this stat, the region that it's the greatest penetration of prescriptions of GLP-1-based drugs is also, ironically, the thinnest region in the world. And that is the Upper East Side. So in sum, right now, these drugs are essentially getting to rich people who want to lose 15 or 20 pounds.

4:51I'm convinced everyone I know is on GLP-1. I see everyone and they're like, you know, they look like their 17-year-old son. And I'm like, are you on GLP-1? They're like, no, I went gluten-free. Yeah, sure you did, boss. Anyways, so what we need is the following. You need prices to come way down. And the way you get prices to come down is through competition. I also think that there's going to be a next generation of drugs, or at least I envision one as my playing a scientist on TV, that will be marketed under kind of off-label applications. So, for example, they're finding that when people are on these drugs, they drink 60 % less alcohol.

5:30They don't bite their nails. I think these drugs are going to start being or some derivative of these drugs are going to start being prescribed to people who are spending too much time on social media platforms or too much time watching porn or too much time or have, you know, some sort of gambling addiction. So I'm just super excited. I want everyone in this business. I want these prices to come down. Cotu's marking down of OpenSea. I got this wrong. I predicted that OpenSea would double in value in 2021, I think I said, because I thought that digital assets would increase in value. And it was inspired by watching my kids buy digital assets.

6:06You know, they buy skins and weapons on Fortnite and things like that. But it appears that NFTs are just, I don't want to say they've gone away. Maybe they'll have a rebound, but it doesn't appear. It appears like this market felt like what a lot of people thought it is, and that is total bullshit. What do you think about this, Ed? Yeah, I thought the craziest number was that, I mean, obviously the valuation's down 90%, but trading volume on the platform since 2022 is down 99%, which leads me to believe that$1.5 billion is still way overvalued. I mean, that can't be a unicorn. Now, I've seen one estimate that says that OpenSea's done around a little under$50 million in revenue this year.

6:45That still feels high to me, but let's assume that's true. That means that Code 2 is valuing the company at 28 times sales. 28 times sales for a company whose entire industry appears to be in structural decline, who's just laid off half the staff, and whose literal one source of revenue is down 99%. I mean, it just still feels incredibly generous. I think this thing's worth, at most, a couple hundred million dollars. Also keep in mind, just because Code2 marked it to this doesn't mean that's where it is. Yeah, yeah. Because, let me put it this way, if Code2's going to err, They're going to err on the side of a mark that says their existing holdings are worth more than they actually are.

7:25They're not going to undervalue something. Their incentives are to overvalue it because the investment managers at Code 2 get compensated based on the mark or the value of their portfolio. And by the way, their 2021 growth fund is down 20 % so far. I would bet it's down 40 or 50. It's been marked down 20. Yeah, exactly. Shein. I actually think this firm is a phenomena. And that is that I think there's some pretty big trends here. One, supply chain agility such that you can do short runs or immediately sense online what people are browsing and buying and start producing it in real time. And having almost an inventory-free supply chain is really an innovation.

8:07And I think this company has sort of mastered it. Shein is the number one most visited apparel website globally. And accounts for, get this, 50 % of U.S. fast fashion sales. Shin adds between 2 ,000 and 10 ,000 new styles every day. Zara typically adds 2 ,000 items over a 30-day period. So it feels like, what is that, somewhere between 30 and 150x the number of new styles. In 2022, they registered$23 billion in revenue, a net profit of$700 million. And their goal is by 2025 to have$60 billion in revenue and$7.5 billion in profit. That's aggressive, but I think they could potentially get there.

8:43The fastest zero to a billion apparel retailer in history was Old Navy. This is Old Navy on steroids. Old Navy was 80 % of GAAP, 50 % of the price. These guys are saying we're 80 or 90 % of Zara for 40 % of the price. And it's just got unbelievable pickup. They've got some questions around sustainability, but if they were smart, if they were smart, they would have their bankers price the IPO really aggressively because Because whoever comes out of 2023 with the best performing IPO, which quite frankly is a pretty low bar given that everything is a broken IPO, is going to get a massive amount of media attention.

9:24So let's look through the numbers here. Their latest round was at$60 billion. Say they priced it at$40 billion and it popped to$80 and then 100 % increase in performance year to date. They would get so much press that it would be the best branding event any apparel manufacturer or consumer brand could have because every other IPO has been a disappointment, I think. But wait, aren't they leaving money on the table? Say they raise$4 or$6 billion. They give up 10 % of the company at$60 billion. They give up$6 billion on$40 billion. They give up 14 % of the company at a valuation of$40 billion. So you could argue that they're giving up$4 billion in shareholder value or they're taking an additional dilution of 10%.

10:05Not even that. Actually, a lot less than that. That is worth the branding they'd get. I think the most interesting thing about Shein is it's a Chinese company. But a couple years ago when the CCP started cracking down on Didi and Alibaba and all these other Chinese tech companies, Xi 'an saw that, saw that happening, immediately said, fuck that, and got the hell out of China. And now it's headquartered in Singapore. They're trying to move their entire supply chain out of China. And now they get to be a company that goes and lists on a public US exchange. So I really like it because it's sort of a lesson for governments, which is, you know, authoritarianism works until it doesn't.

10:46And if you want to attract big, successful businesses, promote prosperity, you have to establish boundaries between the private sector and the public sector. So I don't know. I just I love that they got out of China. I think it says terrible things about the CCP and wonderful things about the West. So a couple of things. One, I agree with you. To be clear, though, the CCP wanted to kneecap Xi 'an and or not let them move to Singapore or not go public on the NASDAQ, they could do it. They could get in the way of it. So my sense is that the CCP has said, okay, we want to cut the finger off the arm or the hand of our capitalists, but we're not going to cut off the arm.

11:26We need our economy slowing. We need our thoroughbreds to run. Also, I'm hopeful the biggest tax cut in history right now would be if the U.S. and China would kiss and make up because the biggest and the second largest economies in the world with the first and the second largest militaries in the world, it's just better when we're all getting along and trading with each other and making each other money. So I'm hopeful that there are more U.S. companies that go into China and do really well. And I'm hopeful that there are more Chinese companies that have successful IPOs. We'll be right back after the break with a look at Uber's

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13:09We're back with Profitry Markets. Uber reported record ridership and a second straight quarterly profit. Passengers took 2.4 billion trips in the quarter, up 25 % from a year earlier, and net income came in at$221 million. That number was slightly below expectations, but still a huge improvement from last year's billion-dollar loss. Uber CEO Dara Khosrowshahi expressed optimism that profits would continue, stating that the company is, quote, well-positioned for the journey ahead in good or bad macro environments. Shares rose 3 % after the report. Scott, investors have long questioned Uber's ability to turn a profit.

13:50This is two straight quarters of profits. Do you think the company has officially figured it out? I think they have. And you have to give Dara Khosrowshahi a lot of credit. I've never been a fan of Uber because I thought they were using software to skirt minimum wage laws. I didn't like that they were sort of this move fast and break things and not get business licenses. And simply put, I wasn't a fan of Travis Kalanick. And I think that Dara's come in and sort of been adult supervision and taken a great concept and made it into a sustainable company. Demand rose across Uber's two main revenue segments, mobility and delivery, with bookings increasing 31 % and 18 % respectively.

14:28In addition, they're getting into the advertising business. And when you think about it, they have data that says, oh, you are going driving to the airport? Well, we're going to run an ad for Delta Airlines or whatever it is. They know that you pulled up to the American Airlines first class check-in. They know a lot about you. They know you're headed into Soho and you don't live there. Well, here's a coupon at a new restaurant. I mean, this targeting, this data set is kind of an advertiser's dream. And as a result, their advertising base grew 70 % to 445 ,000 businesses. This pushed revenues up 11 % year on year.

15:04The delivery business registered efficiency games with times per delivery decreasing by three minutes in the U.S. and cost decreasing by 5%. So revenues up, cost down. And this all adds up to one thing, profitability. And this is their second consecutive quarter of profitability. This is, you know, this is an example of a company that used capital as a weapon. They raised a shit ton of capital. They underpriced the product. There was no reason that people should be driving in an Escalade to the airport for$38. They've raised prices because they now kind of have monopoly power. They have a weak number two in Lyft.

15:37I like Lyft. I like the management team. But people think of Uber. And the app is going to have the scale for advertising. They're getting delivery. They're diversifying their revenue base. They're a global company. They offer mobility solutions that are customized to individual markets. They partner with taxi services in LA, New York City, SF, and in Japan, where taxi culture is still pervasive. In less developed markets, such as India and Argentina, they offer moto and auto trips on motorcycles and rickshaws. Q3 trips and motorcycle and rickshaws grew 160 % year-on-year, respectively. And in India, rickshaw trips represented over 40 % of all trips in Q3.

16:12I remember going to Cannes Alliance, and they had something called Ubercopter. It was a branding event, but you could click on a little helicopter and this 14-year-old in a uniform took on a lawnmower with a turbo on it and flew you across the Cote d 'Azur to Cannes, which was pretty cool. Their stock has doubled in the last year. It's trading at about three times sales, significantly lower than its four-year average at 4.4 times sales. I just, like, Dara Khashashoggi, he should be nominated for CEO of the year. And Uber's doing an amazing job. What are your thoughts? Yeah, I completely agree.

16:45I mean, you think back to where Uber was four years ago when it actually went public. The IPO was basically a disaster. It immediately tanked, and then it quickly became one of the most shorted stocks on the market. It was just a bad business. It was losing$9 billion annually. But then in terms of PR, to your point, I feel like Uber at one point was arguably the most disliked company in Silicon Valley. I mean, they had massive scandals with the founder, Travis Kalanick. They were getting sued for basically lying about pricing and safety requirements, and they were settling all these class action lawsuits.

17:21And then they were also dealing with all these labor union protests for, you know, classifying their drivers as contractors instead of employees. And I think most people believe, it sounds like you agree with this at least, that Uber mistreated its workers. And now you look at the company and it feels like Uber has suddenly turned into the good guy. I'm not sure exactly what they did to do that. Their drivers are still contractors. But, you know, he's done something to basically completely transform Uber's brand and reputation without any of us even noticing. They've done a great job. They're, you know, it's now a verb, right?

18:00I'll Uber there. And I use a service in London called Wheelie, which I love, which is sort of the high-end version of Uber. but Uber Luxe in London is just amazing. It's 7 Series and S-Glasses and... God, I sound like an entitled douche. Anyway, love Uber. Love Uber. Luber. I'm a Luber.

18:29Warner Brothers Discovery and Disney reported third quarter earnings last week, and it was a tale of two companies. Warner Brothers Discovery missed by almost every metric. It missed on earnings with a$417 million net loss. TV ad revenue fell 12 % from a year earlier, and it lost 700 ,000 subscribers. The stock sank 19 % after that report. Meanwhile, at Disney, things looked brighter. The company added 7 million Disney Plus subscribers, and despite a drop in ad revenue, net income came in at$264 million. That's up 60 % from the previous quarter. Shares rose 4%. Scott, we've been tracking entertainment pretty closely recently.

19:10What are your reactions to this pair of results? I thought this was really interesting. So Max, the company's streaming business, turned a profit while the overall company narrowed its net loss to$417 million from a$2.3 billion loss a year ago. So that's actually decent news. Total revenue increased 2 % to$10 billion in what is a challenging environment. TV ad revenue dropped 12%. That's a significant decline. And linear content distribution dropped 22 % as a result of lower third-party licensing revenue. And as of September 30, 2023, the average duration of the company's outstanding debt was 15 years with an average cost of debt of 4.7%, which means they have really friendly debt on really friendly terms, and that's important.

19:52Let's talk about Disney, and then we'll talk about the contrast between the two. Disney also saw a 10 % decline in revenue from linear TV networks, So it has the same problem, but achieved an 11 % increase in streaming revenue. Operating losses on streaming improved by nearly$1 billion. In other words, I think they only lost$400 million instead of$1.4 billion. They added 7 million subscribers. Now they have about$150 million total. And then the parks continues just to be a juggernaut, up 13 % year-on-year, higher attendance and ticket prices domestically and abroad. And also, they're cutting costs.

20:24By the end of Disney's fiscal year 2024, it expects to reduce operating costs and entertainment spending by$7.5 billion, nearly$2 billion ahead of its original target. So they have some of the same problems, but they have a better story. You had Disney up 3 % or 4%, and you had Warner Brothers Discovery had its, I think, worst single day in history in terms of its stock. And some of that was because Warner Brothers Discovery doesn't have the parks and their streaming isn't showing the same type of robust growth that Disney is. But they both kind of face the same headwinds. The difference is, quite frankly, is the CEOs and their ability to tell a story.

21:01The story that Zaslav told was essentially, here's the bad news and here's the worst news. Our linear TV is off and we're not sure we can maintain our deleveraging. And effectively, what you have is the reason why people were sort of in the stock or the story they liked was the enterprise value is the market capitalization of the company, the number of shares times the price of those shares, plus the debt. So when you have a company that has, call it a$65 billion enterprise value, people say the company's worth$65 billion and they have$40 billion in debt, so we'll make the equity then is worth$25 billion.

21:37If they can reduce the debt$5 billion a year and still have these assets maintain kind of the same robust revenue or same value, then the market cap, the stock should go up by$5 billion. And that was why people were in the stock. That's why people were comfortable. They saw Zaslav as a competent operator who was de-levering. And they liked that because every time you de-lever by$2 to$5 billion a year, the equity value should go up$2 to$5 billion. That was kind of the story here. And so when he said, one, business is shitty, I don't really have a story, and the de-levering is at risk, it's like, okay, here's a shit sandwich with sprinkles of shit on it.

22:15Whereas Iger said, yeah, our linear assets are imploding, but I'm taking all of Hulu, I'm doubling down on streaming. Streaming, by the way, is a flex for me. Look at what's going on. And also the parks are killing it. I think that even Iger, though, could have a better story. I think Iger's story should say we are going to be the singularly most profitable, aspirational, dominant media and live events company for any household globally that has children. Because the reality is if you have kids, unless you want child services coming to your house, you're taking them to Disneyland. You are watching The Mandalorian.

22:52I would go all in on that. And again, this is a tale of two worlds, and that is the Rider Strike and the SAG Strike effectively just took dump trucks, drove them over to the linear guys, Paramount, Warner Brothers, Time Warner, loaded it up with cash, and then took all the cash over to Netflix. Disney stock is flat. It's up 1 % for the year or year to date. Warner Brothers is down 2%, so they're both flat. Netflix is up 47%. 47%, you and your friends hanging out, watching Netflix all day or whatever it is you do, is literally, you're just taking money from Hollywood and sending it up to, what are they, Los Gatos?

23:32Los Gatos. They're in Los Gatos. I find this shit fascinating. This is a case study in leadership. You're going to see an activist at Warner Brothers Discovery because it just feels, quite frankly, it just feels like, all right, the business isn't good and you don't have a story. I also think it's worth considering the fact that, you know, you're comparing this to last year when you had the midterm elections and one of the main cable assets for Warner Brothers is CNN. And, you know, politics is a significant revenue driver for platforms like that. And as we know, media is cyclical. So as soon as the presidential elections get going, I think that's going to immediately stabilize.

24:09And my prediction would be that linear ad revenue is actually going to grow year on year. So, yeah, I'm in agreement. This is a bad quarter, but a 20 % stock drop in one day, it's worst ever. That feels like an overreaction. Yeah, we're putting together our prediction stack. And one of my, you know, I pick stocks every year because I'm a glutton for punishment. But I think Disney and Warner Brothers Discover are actually pretty good buys right now. We'll be right back after the break with a look at OpenAI's Developer Day.

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