Prof G Markets: The Broken IPO Market, Disney’s Parks Investment, and Buying FTX Bankruptcy Claims

0:27Adobe Acrobat Studio, so brand new. Rinse takes your laundry and hand delivers it to your door, expertly cleaned and folded. So you could take the time once spent folding and sorting and waiting to finally pursue a whole new version of you. Like tea time you. Mmm. Or this tea time you. Or even this tea time you. So did you hear about Dave? Or even tea time, tea time, tea time you. Mmm. So update on Dave. It's up to you. We'll take the laundry. Rinse. It's time to be great. This week's number, 46%. That's the share of American men who believe they could successfully land a passenger plane. True story, my grandfather killed 50 German pilots.

1:12He was a shitty mechanic.

1:24Welcome to Prop G Markets. Today, we're discussing the IPO market, Disney's parks investment, and FTX's suit against Sam Bankman-Fried's parents. Here with the news is property media analyst and someone who I think would be an outstanding flight attendant, Ed Elson. Ed, get me a ginger ale and some peanuts, bitch! Did you hear that we just got nominated for an award for our podcast, Scott? I literally had not heard that say more. You know how much I'm desperate for other people's affirmation. You just got nominated for the Signal Award for Best Money in Finance podcast. Well, the Signal Award, what is that?

1:57I mean, they're obviously clearly an outstanding organization with great judgment. We're up against the Financial Times and Barron, so that's something. Oh, God. Come on. We've already won. Well, everyone, please vote for us. The voting ends October 5th. Oh, they can vote. Where do they vote? We're going to leave a link in the notes and the YouTube description. Well, okay, it's a podcast. No one, where do they go? You want me to read out the URL? Yeah, yeah. Earn your keep here. Land the plane. Claire, you want to help me out? Yeah, it's vote.signalaward.com. Or can I fax it in? All right. Okay, good.

2:33Please vote for us for the Signal Best Business Podcast. Very excited about it. All right, enough of this shit. Get to the hell out. All right, we're going to leave it in the comments. Let's start with our weekly review of Market Vitals.

2:53The S &P 500 fell, the dollar rose, Bitcoin dropped, and Treasury yields hit 15-year highs. Shifting to the headlines. The Federal Reserve paused its interest rate hiking campaign for the month, holding rates at a 22-year high. Still, a majority of the Fed's board indicated they're prepared to deliver one more increase this year. The Bank of England also held interest rates steady, ending its 14-month streak of increases after UK inflation fell for the third month in a row. Cisco struck a deal to acquire the analytics and security software company Splunk for$28 billion. After this acquisition, Cisco says it will be one of the world's largest software companies.

3:34Cisco's stock fell 4%, while Splunk's rose more than 20%. And finally, Rupert Murdoch stepped down as the chairman of Fox and News Corp at 92 years old. Both stocks rose slightly on the announcement. Scott, thoughts? So I think Chairman Powell loves the kind of the macho. I think he likes, I think he gets in front of Congress and he threatens to rate, you know, hike rates more. And then he goes home and he just has like hot sex with his companion or wife. Cause I think that guy likes, I think he just fills his, you know, he fills his riz or whatever it is. He fills his mojo when he says to the world, I don't, you know, Senators Warren or, you know, Hawley or whoever wants to try and beat up on me for raising interest rates.

4:23How do you like me now? We have the lowest inflation of any G7 economy. So I think this guy is, I think he's more inclined to keep raising rates if he feels pressure to not raise them. So good for him. I'm glad that we're starting to see inflation come down in the UK, literally something like two thirds of the stocks that have gone public in the United Kingdom over the last 10 years are below their offering price. The entire FTSE, the hundred biggest companies in the United Kingdom are worth less than Apple. And just investing in the UK or in the UK stocks just hasn't worked. And I believe it's the only country in the European Union that hasn't grown in the last five years.

5:01So the last thing they needed was like a crazy dose of inflation. So I'm glad to see it come down. At the same time, though, it's still at 6.7%. And you compare that to the US, we're down to 3.7%. We've made this point before, but we're just completely blowing all of our competitors out of the water when it comes to fighting inflation. You got France at 5%, Germany at 6%, Sweden at 7.5%. The US wins here. It's funny to have the Brit talking up in America. And I'm literally sitting here drinking tea and eating biscuits. But look, it's all about momentum and direction, and it's heading the right direction.

5:38So let's hope that rates keep coming down and Arsenal beats Tottenham. Do you know, Ed, my son won't go to the Arsenal-Tottenham game with me unless we sit in the away section of Arsenal because he's a Tottenham fan? I mean, what the fuck? He's a good fan. I respect that. It's not like he's that vocal at Tottenham games. I mean, come on. Anyways, Cisco Systems. Cisco is so interesting. Cisco reminds me that any company, any company can go down, its stock can go down 90%. Amazon from 1999 to 2001 went down 90%, as did Cisco. And when the Dodd bomb implosion happened, no one knew what to do. So everyone thought, oh, go to hardware and infrastructure just to be safe.

6:22So the company that was safe was Cisco. Because everybody, no one knew it. It was run by a guy named John Chambers, who was sort of the, I don't know, the Tim Cook of his era, just was considered the best CEO in tech. And it was like, OK, I don't know where to put my money, so I'll just put it in Cisco. And I think Cisco lost 90 percent of its value. Oh, and by the way, Cisco at one point was the most valuable company in the world. The learning here is that every company, you know, we talked about this notion of core competence. What Cisco was great at is they would kind of map out the technology ecosystem and they would figure out where they were weak and then they would go acquire companies.

6:58And they were the best acquirer in the 90s. And they just made their corporate development team there was super strategic, super smart. And they'd show up and say, all right, we need some sort of payment technology or the software that does this. And they'd say, congratulations, we're going to overpay, but you're going to fill this hole for us. They were fantastic acquirers. I think the most interesting thing here, just because, I don't know, the most interesting thing to me is that Rupert Murdoch's stepping down. One, and this sounds very macabre, I think it means he's dying. I don't think this guy gives up control unless he is totally unable to participate.

7:33And he's been out of the public eye, and also he's 92. If I sound ageist, I am, and so is biology. What's more interesting, though, is that if you look at the corporate governance, there's three kids that are in some sort of trust or have the voting shares, if you will. And I think this all adds up to one thing, and that is I think that Fox gets sold or starts disposing of their assets or starts selling them in again into this larger conglomeration of ad supported cable assets where they cut costs. So I think that Fox and the news core of old that we know and Rupert Murdoch, the sun is setting really, you know, you know, when the sun is in the ocean, it seems like it's an optical illusion, or as my father said, an optical conclusion that all of a sudden it looks like the sun's descent.

8:23It feels like it starts diving faster. Fox, as we know it has come to an end and it's going to be super interesting. There's going to be a ton of kind of legacy review of the incredible business it is, but also the incredible damage it's done. I just don't think there's any getting around it. I think I'm kind of have a lot of mixed feelings. I think capitalism is important. It's important to have a dissenting view. I mean, you want to talk about the biggest white space in the world that no one saw except for Rupert Murdoch. Media has a liberal bias. They're usually people who are overeducated and live in urban cities that skew wildly democratic.

8:59And there was like this upward spiral, or I should say this leftward inexorable spiral towards more progressive values. And he came in and just said, you know what? Somewhere between 47 and 51 % of America is not progressive and no one is talking to them. No one is speaking to them. Everyone's just mocking them and media has totally ignored them. And he created what is arguably one of the most powerful and profitable news franchises in history. And he's also spread conspiracy theory, targeted women with coordinated attacks across his properties, Fox. They've engaged in some, what feels like, for lack of a better term, anti-American activities.

9:44but this is going to be there's going to be a lot of stories about the legacy of rupert murdoch he's definitely a central figure not only in media but in american history over the last 20 or 30 years any any thoughts or reactions ed well i was just going to say the guy we should talk to about this is my old boss michael wolf who just came out with a book about this called the fall and his conclusion is the same as yours which is that this is the end of fox news and there are a few great little pieces and anecdotes in that book. But the first one was that Murdoch hates Trump, called him a fool, called him an idiot, called him nuts.

10:19The second, most interesting is that he completely underestimated the Dominion lawsuit. Apparently, he thought it was going to cost the company around$50 million, and it ended up costing close to$800 million. And then, you know, the third is the same conclusion as yours, which is that Fox News is doomed and that this thing has It's gotten basically too old and too conservative and that it's in the process of being superseded by this younger, more tech-focused, Twitter-happy right-wing world. And I think he's probably right. The thing that really struck me that people don't talk about in terms of the Dominion suit is I think there's an algebra of deterrence that is super important in any society.

10:59And it goes like this. the likelihood that you get caught doing something wrong times the fine or the penalty once you're caught has to be greater than the profits you're going to get from continuing in this malfeasance or illegal activity. What's interesting here is that the inaccuracies and the impact and the slander and the defamation were exponentially greater on another media platform called Meta. But here's the thing. It wasn't a problem for Meta because Meta is protected by the shield of 230, Section 230, which says that they're not a media company. It says they're a platform and that they aren't subject to content that is on their platform.

11:42And so this kind of highlighted the problem. There was an algebra deterrence that even put some guardrails around Fox. But those guardrails just don't exist when it comes to social media networks. We'll be right back after the break with a look at the IPO market.

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13:50We're back with ProfG Markets. Marketing platform Klaviyo went public on the New York Stock Exchange last week. The IPO priced the company at a roughly$9 billion valuation, but the stock popped 23 % at the open before retreating to close up 9%. This was the third largest tech IPO in less than a week. The day before, Instacart went public, and its shares popped 40%. And five days before that, Chipmaker Arm went public, finishing opening day up 25%. But all three stocks have slumped since their debuts. So, Scott, it seems like we're witnessing a trend here. These companies have a strong pop and then they retreat.

14:29What do you make of these results? I've been thinking about this a lot. One, just disclosure, I got into the oddity IPO, super happy. I'm a baller, aren't I, a genius? Goes from 35 to 55. It's now technically a broken IPO. I think it's trading at, it might even dip below 30 today. but that seems to be what's happening to all these folks is that there's a pop a bit of a run-up and then sooner rather than later i mean shit oddity's down to 27 and a half and i'm in it for the long term here and i like kind of beauty meets ai so i'm going to hold on but what it looks like just from a market dynamic standpoint is they have a lot of hot money people are buying the ipo they're not buying the company and when they don't see a pop or they don't see like a lot of upward momentum or they start to see it getting wobbly, they're out.

15:17And typically the banker's job is to find sticky money that's in for the longterm. And it doesn't appear that that's happening here. It appears that there's a kind of a short-term sugar high. What's also appears, you know, to be kind of true or evident is that valuations have just come down, that the market is saying these might be great companies, but they're just not worth, they're not worth the valuation the banks are taking them out at and that they're recalibrating down. And I think what that means is moving forward is that the IPOs probably won't get the price they had hoped for. I think there's also a dynamic here that the IPO markets are just losing relevance, that the liquidity and valuations companies get in the private markets are now in many ways more appealing than the valuations they get in the public markets.

16:02In addition, they don't have the same reporting or administrative costs. So the question then becomes, why go public? And the answer is a lot of companies companies aren't. The number of IPOs has declined dramatically over the last 20 or 30 years. Fewer companies, I guess from 1980 to 2000, there were 6 ,500 IPOs. And then from the turn of the millennium to last year, there were fewer than 3 ,000. So what is that? They're down 60%. It used to be a company went public after an average of six years. Now it's 11. It just strikes me that the IPO market, kind of the NYSE and the NASDAQ are the big losers here.

16:38and that it also generates a certain amount of income inequality because the public markets used to be an opportunity for a fireman to participate through his pension fund. And now the private markets are kind of soaking up. In other words, the VCs and other investors say, no, you don't need to go public. We want to capture all of that upside, all of those gains. So stay private longer. We'll give you the valuation you want. We'll give you the liquidity do you want? So the question is, are public market stocks in structural decline? And that is, are we going to see because of mergers, because of companies going out of business and because of companies waiting longer or just deciding not to go public, do you need the public markets?

17:19If you can have liquidity and you can have fundraising, unfortunately, you don't have the same level of transparency. But if you look at the valuations of a lot of these companies, A lot of these companies, technically, the IPO was a down route. Do you think that it's also possible, though, that there's an argument to be made that, you know, the float on these IPOs is pretty small? That is, the number of shares that are actually sold on the public market. So for Klaviyo, there were 19 million shares, Instacart, 22 million. And then you compare that to when Facebook went public and it sold nearly 450 million shares.

17:51So the floats are becoming smaller, which leads to heightened sensitivity on trading activity, which creates these exaggerated swings in the stock price. But now they're back to where they were at the IPO. So do you think there's an argument to be made here that they were just, you know, priced correctly? I don't think so. I think generally speaking, when your stock is back to its, when it pops and it's back to your IPO, the initial price within a week or two weeks, the bottom line is a lot of these companies are either near or are broken IPOs. And I think the lower floats are a function of they were able to raise so much money in the private markets and also a lower flow creates a mismatch of demand and supply, hoping that the stock gets a pop.

18:34And so what do they do if they don't need the capital? They take a small number of shares out and hope that they have 12 to 15 times oversubscribed when they go public and that the stock pops. And the stock price is a signal. I mean, Instacart was valued at$40 billion at one point in the private markets. And some of that sometimes is a head fake going into an IPO saying, oh, smart people think it's worth 40 billion. So you dump shit investor on the retail side should buy it at 50 billion. But by the way, all those late stage investors basically lost money on this. Oh yeah. I mean, if you invested like after the A, you're underwater.

19:09Yeah, I think that's right. And then, I mean, there's a couple of things. The IPO market is, I think you'd have to say it's thawing, right? They've already raised more money than they did in 2022 where they've raised almost no money. Or I think IPOs are up year to date versus 2022, which is literally a nuclear winter. But it's not, the IPO market doesn't have the momentum we thought it had one or two weeks ago, because these are good companies. You know, Instacart, I think has been profitable. It's scaling well, all the numbers are headed in the right direction. But at the end of the day, it's in the grocery business and the media business, which are both, you know, kind of difficult slash shitty businesses.

19:46And these things just, they feel like they were priced. They feel like they were priced for the existing investors to get out at a good price. And you got to imagine if these folks were in Instacart for years and years and years, and you're down 75 % at whoever the late stage investors are, that you're probably, your legs aren't that fresh. You're probably kind of ready to sell and move on. And I think that's what we're seeing. But no doubt about it, the market isn't holding up for IPOs the way we'd hoped.

20:22Disney shares fell 3 % after the company announced its ambitious new spending plan. In the next 10 years, it will invest$60 billion in its Parks and Cruises business. That amount is double what Disney spent on Parks and Cruises over the past decade. It's also triple what Disney paid, adjusted for inflation, for Pixar, Marvel, and Lucasfilm combined. CEO Bob Iger described the Parks division as Disney's, quote, key growth engine. He's already increased investment in the Paris and Hong Kong parks and plans to add three more ships to the Disney cruise line. Scott, the market didn't like this. The stock fell and it was already sitting at a nine-year low.

21:00Do you think Iger is making the right call here? So it's really interesting. I just got off a call with some Hollywood execs talking about a project that I'm involved in. And they think that the writer's strike is going to be solved or they're going to come to an agreement in the next 24 hours. And when this episode goes out, by the way, that may have already happened. There you go. So we're recording this on a Thursday, a Thursday evening. But I found that just, I found that really interesting. And I said, well, what's happened? They said, the biggest thing that's happened in Hollywood from kind of an emotional standpoint is not the writer's strike, but what is perceived as the absolute staggering decline of Disney.

21:38and that is it feels like all of a sudden disney is kind of threatened and going away and disney were always the smartest people in the room and just this icon of success and the kind of the the elephant in the room and overnight it feels like all of a sudden they've been hobbled stocks at a 10-year low and they're trying to shed they basically put their ad supported cable assets their networks and their affiliates in the front yard and said no reasonable offer decline. I think in terms, as it relates to announcing a big investment in their parks, I think it's a great move. And I think of what Peter Drucker, the economist, the actually Austrian economist who taught at the Claremont College, Claremont McKenna, I think, he said, invest in your opportunities, not your problems.

22:26And that always stuck with me. And here's the thing we've been talking about. I think the operating profits at the cable affiliates went from like 10 billion to five and a half billion. They're off like 46 % year on year. The parks in the last 10 years have gone from 2 billion in profits to 10 billion. And in addition, let's just look at this strategically. Let's look at the three businesses that Disney plans to be in. Let's ignore the cable assets. Let's assume they're gonna be out of that business. They've basically said these things are for sale. And my guess is they're gonna go in the next 60 days.

23:02but let's look at the three businesses. They're going to be in parks. They're going to be in movies or movie production, and they're going to be in streaming. Okay. Streaming. They have unbelievable assets. They were kind of rookie of the year three or four years ago, got off to a big start. The Galloway household loves the Mandalorian, WandaVision. It's hemorrhaging money because they're competing against Netflix and Apple and Amazon prime. And everyone's playing, you know, try and follow the leader into the rabbit hole of billions of dollars of expenses. and that rabbit is Netflix. All right.

23:34A growing business, but shit, it's expensive to play streaming. Let's look at movies. Very competitive. You could argue a certain amount of structural decline. Now you can feed it in. It does have synergy with your streaming company, but, you know, it's as sexy as it is, the movie business and as excited as we got about Oppenheimer and Barbie, it's a shitty business. It's just a difficult business and it's getting harder and harder and harder. And then there's the parks, which is an amazing business. And who does Disney have as competition? You could argue, okay, there's Universal, but guess what?

24:12There's no deep-pocketed, irrational investor nipping your heels there. Netflix, Amazon, NVIDIA aren't opening parks. So they sort of, they don't have a monopoly on this, but they have a very strong duopoly. Nine in 10 Americans have been to a theme park or amusement park, and three quarters of people have visited a Disney park. Eight of the 10 largest theme parks on the planet, as measured by attendance, are affiliated with Disney. And you want to talk about ringing the register? I've told you about my experience, my VIP tour thing. it's seven or eight hundred bucks an hour for six to eight hours and a high eq person usually from kansas meets you at the parking lot you go behind in the kind of bowels of disney across all the parks and you can hit the two or three best rides check this out okay i did the math i talked to bob from kansas and i'm like bob how many tour guides are do you have a day doing these vip things and he said we're up to i think he said 60 i'm like okay 60 times 8 000 that's a half a million times call it 300 let me get this you're making 150 million dollars a year and 90 margins 90 margins on 150 million dollars a year 135 million dollars times what a multiple of 10 this is a one and a half billion dollar enterprise value offering and i think they're hiring more and more of you i mean basically they're lvmh-ing the whole goddamn place and saying the people with all the incremental income because of a regressive tax policy in America is we're going after the top 1%.

25:43This thing is a juggernaut. And so for them to be investing here makes a ton of sense. The interesting thing is that the stock actually declined on this news. And I was trying to think of some of the reasons for that. You know, the thing that I think that people might be reacting to is the fact that maybe the success of the parks are dependent on the continuing production of existing, strong IP, which Disney has completely fallen short of in the last few years. I mean, you look at the movies they've released in the past year. Little Mermaid, reboot. Pinocchio, reboot. Lightyear, prequel. Avatar, sequel.

26:21I mean, the list goes on. Don't you think Disney needs to also start pulling its weight in terms of creating original, iconic content like it has done for the past several decades? Or do you think it's acceptable to continue relying on its existing IP? Well, this is the challenge that every CEO faces, and that is to what extent do you make forward-leaning investments that will pay off in the future versus trying to harvest profits in the short term? And essentially, there's so much short-term pressure on these guys, especially in a media market, in a movie market, that's gotten increasingly difficult.