Earnings Spotlight: AI Innovations and Market Valuations

Welcome everybody. Hope you're doing well. Excited to be with you on this Friday. We've got a lot of cool earnings to talk about. I want to make sure everyone did see, I'm going to drop in the chat the announcement about our partnership with Google Cloud. Here is a link to the press release, and then here's a link to an article Explaining a little bit more detail about what this AI is. And then lastly, I'm gonna give you access to a demo. And they're all there in the chat. Let me know if you can't get it. What we're talking about here is a major innovation. You know, when we started with Google, we were thinking of the art of the possible. What can you get when you marry really deep subject matter expertise Human expert level expertise with cutting-edge technology. What happens if you can endow the machines with that kind of expertise? Are you going to get an AI that can do things that have never been done before? Unrivaled insights? Yes, it is. That's what we got. So you can now go to an AI, you can go to a website, type in, what are the best stocks in my portfolio? What are the best stocks In the consumer staples sector? What are the best stocks in the pharmaceutical industry? And get an answer. Now, all these machines give us answers, right? The problem is the other AI, you don't know if it's hallucinating or if it's giving you a good answer. The difference between our AI and all the others is that the quality of the answers are reliable. Look, I'm a professional. And I work with other professionals, buy side, sell side. And the one thing that we need before we can trust an AI is that it's going to give us an honest answer. Because it's more expensive to type a question into something and get a bad answer than it is for us just to go get the answer ourselves. And as experts, we're used to going and getting answers. So why am I going to go try something that might not work if it's just going to add more work for me? Not gonna do that. So you need an AI to be truly endowed with information, data, and ontology that can drive reliable insights. Period. Paragraph. AI doesn't do that, it never takes off. We all know it's eventually gonna take off. Right now, all the spending is focused on infrastructure. Why don't they go on data? Because they haven't figured that out yet. They can put up wins on infrastructure. They can spend billions of dollars and build data centers to the moon. You know, spend billions of dollars and buy all the chips, build super fast chips. But none of that matters because AI models are just like every other model in the history of the world. Garbage in, garbage out. The quality of the data is paramount, essential. Nothing matters more. That's what we have in new constructs. Super clean data, an ontology. Ontology is super important too. You can have the cleanest data in the world if you don't know what to do with it. Right? And the clean data and the ontology is very much intertwined. You have to really understand what the data means and get it right in order for it to properly fit a sophisticated ontology, one that's sophisticated enough to drive Real results, and drive real results. Those of you who've been with us for a while, you know what I mean. It means generate alpha in the stock market, and that's what we do. We generate alpha in the stock market. You all have seen it, right? I can share my screen and show this again. It's not hard to show. Now it's hard to do because few people in the history of the world have outperformed the stock market. But this is our Core Earnings Leaders Total Return Index. Want to see how it does against the S&P 500? Year to date, up nearly 25% while the S&P is up just 14%. Over the last year, 21 to 11. 5 years, 130 to 86. Not bad. And it's not just the Core Earnings Leaders Index. It's also this Bloomberg New Constructs 500. It's an enhanced S&P 500. And by that, I mean all it does is takes the same stocks as the S&P 500 and weights them according to core earnings as opposed to market cap. And guess what? That outperforms as well too. So far this year, beating it by 100 basis points. 5 years, by a lot. Maybe the purest definition of how core earnings is better. It takes the same stocks, All right, somebody else can pick the stocks. We can still outperform because we've got core earnings. And then how about our ratings? How does the rating system compare? It's got a funky name because they couldn't put very attractive in there for whatever reason, but this is basically the very attractive stocks index, our top-rated stocks. This is how they perform compared to the S&P, even better. So the data, the metrics that drive this results. Are powering an AI, you got something special. Got something special. All right, let's jump into our earnings watch today. Anybody got any questions? Of course, put them into the chat. Anybody got any concerns? Keep those to yourself. Just kidding, you can put those into the chat too. And if you're new, let us know. We'd like to know when we've got new members joining us here because that's always super exciting. All right. Earnings watch today. Let's go with the biggest market cap firms first: AMD, Qualcomm, and Arm. Let's look at those guys together. Well, there's Arm. Let's take a look at Arm down a lot. What happened? They beat on revenue for the third consecutive quarter, tops estimates as well, but the stock's down 15%, 14%. Guess guidance wasn't so good. Or maybe valuation's just too high. All right, let's take a look at AMD. Pretty similar things beat, but the stock is still falling. Com also not looking so good. What's happening here, folks? What's happening? Let's take a look. Well, AMD, not such a great business. Super expensive stock, 16.9 price to economic book value. Market's implying that profits are going to be like 16,000% better than they currently are. That's expensive. Qualcomm, neutral. Stronger business, much cheaper valuation, not down as much. Arm, not quite as strong a business, but again, super expensive valuation. Which stocks went down the most? The super expensive ones. So yes, let's just say that this is a great way to show you that new construct ratings matter. The unattractive stocks went down a lot worse than the neutral rated stocks. And look, in this market, folks, we're going to see volatility. We've been walking the primrose path for a long time. Bad news comes, pshaw, the market just goes up. Like, what can make this market go down? Anything? Well, we're learning. When you get to a place, and I've been doing it in this business for coming up to close to 30 years now, and there are times for sure when the market just goes up, just goes up and like nothing can stop it. Bad news is good news. That can last, but it doesn't last forever. That's the thing. It doesn't last forever. And it's hard to tell when it's going to break. I had a really smart friend, a hedge fund client a long time ago. You know, set me straight on that. He's like, you know what causes stock market corrections? And I was like, valuation. He's like, no, David, wrong. And I was like, yeah, I think that's a weak answer. He goes, yeah, that's not the right answer. Liquidity. When liquidity starts to dry up, people can't bet as much. They can't borrow as much. They all of a sudden have to be more discerning. And when you start getting discerning, first thing you're going to sell is the expensive stuff. Before everyone else sells it. So look, I think our government and regulators have become increasingly good at maximizing and maintaining liquidity no matter what. They figured out during the housing crisis that liquidity can fix everything real fast, and they've been leaning on that for a long time. You know, one of my favorite charts here, just to give you a sense of exactly What's going on here liquidity-wise? I mean, you know, this was housing crisis. Hey, boom, let's kick it, folks. Liquidity. Okay. Oh wow, that looked great. Let's do that again. Oh, I like that. You know, we shouldn't do that so much. COVID. Let's really hit it. Let's hit it some more. Right? We are so far above where we were a long time ago. Like, this is like, it's nuts. It's nuts is another way of looking at it. Pre-housing crisis, and then oh, that felt good. That's a good drug. Let me take another hit. How about another hit? Yeah. Oh, things are really bad. I need to double down on that. All right. Yeah, we're bringing it back because we had to because inflation was out of control. But folks, it's still way up there, man. Still way up there. So, but it's coming down. It's coming down. It just has a long way to go. And I think we're starting to push the place where if we don't, the damage is going to be worse than the benefit. And that damage is inflation and consumer sentiment and consumer spending. We can't expect all the rich people to carry the economy for a long time. That's not a good place to be. Not a good place to be. The K-shaped economy, that's a bad place to be for our country. For a precious few people to be doing just fine because they're super rich while so many other people really struggle. We got to fix that, folks. That's not fair. And I hope you don't think that's a political statement. I think that's just an economic statement. All right. So takeaway, expensive stocks are way more risky than less expensive stocks. All right. Speaking of expensive stocks, let's look at App. All right. Decent business. Very expensive valuation. What happened with these guys? By the way, I'd like to see some more comments. App is in there too. Like I think you're going to see sort of indiscriminately, like a lot of expensive stocks just down 10%. Bam! Like it's just it's a knee jerk. The systems, the machines, everybody knows. Hey, these are wildly speculatively highly valued stocks. Sell it. So when things start to look tough, sell that stuff as fast as you can. And that's why we're going to see, even though they had an earnings beat. And guidance beat. That's good. Crushes earnings. Time to buy the stock. The answer is no. Look, you know I'm not a market timer. Look, and we got a new 10-Q for these guys. Guess what we're forecasting? Miss. What do you see typically at the top? People start to juice the numbers as much as they can because when a market is overvaluing things, you're getting an unfair, unusually strong multiplier on your earnings. So what do you do? Make those earnings look as good as possible. Jack the number to take advantage of an expensive market. The miss score, not good. Miss score for App, not good. We got a miss score at Arm. Strong miss based on the new, a new 6-K. Qualcomm, strong beat. Among the most profitable, reasonably valued. That's kind of where you want to be, folks. If you're going to have money in the market, I'd rather be in a stock that's got a reasonable valuation and a strong beat as opposed to an expensive valuation and a miss. Let me tell you what, that's the biggest no-brainer I've heard in a long time. All right. Let's now talk about— let's hit McDonald's. One of our best long ideas in recent memory. We wrote about this stock a long time ago. It got expensive. We closed the position too early. Want me to just be cutthroat honest? Too early considering that the stock continued to go up a lot. But look, we stood by our principles. Got expensive. We couldn't really justify. But I think what I call McDonald's, modern meme stock, right? Modern is all relative now, right? I mean, modern is just maybe more than a year old. And so I think the meme stock phenomenon started with, oh, let's just invest in junk stocks. Like it's a joke, the Bored Ape. I'm so dumb, I don't even know what's going on, right? And then I think the investors got smarter. They're like, you know what? Yeah, I can speculate into stocks that actually make money, like Berkshire Hathaway or Nvidia or even McDonald's, which has kind of been a popular stock for a long time, right? I mean, everyone knows McDonald's. It's a great business. There's a movie made about it. And so yeah, I think it just got really expensive. And so like this isn't tech company expensive, but for this kind of business, it's pretty expensive. Now, I think things have come down a bit over time. Let's see here, rating history. Yeah, came down, got cheap, looked attractive again there. But the one thing I love about McDonald's is just economic earnings. I mean, it's just been steady forever. Shares coming down, return on invested capital up and steady forever. If we open the model for this thing, I mean, it is just like, it's like Walmart on that level. It deserves a premium valuation. We were happy to get it when it was cheap, and we're going to look for stocks and find stocks and recommend stocks that look cheap and have great economics. The key in this business is not finding great companies, it's finding great companies before anyone else realizes they're a great company, right? It's like a good friend of mine once said about wine, anyone can buy great wine. That's not the hard part. Hard part's buying it at a reasonable price. You want to spend 10 grand on a bottle of wine, it's going to be really good. But could you get something, I don't know, close to that for $1,000? Probably, yeah. I'm not a wine expert, but you get the idea, right? You get the idea. All right. Let's talk about Shopify. New 10-K. Strong miss. What's going on with this stock? 15%. Yeah, it's a tough week for these stocks when you're this expensive. Just getting dangerous. Now, I just got out of an interview and we're talking about danger zone and what that means. And look, you know, where we are in this big AI arms race. I'm going to give you a kind of a preview on something we're going to publish here. I think a really cool piece. We're in the first stage of the AI arms race. Second stage is going to be a whole new level spending on a different kind of commodity or a different kind of asset, but one that we think is even more essential to the spending focus in the first stage. The first stage focus, infrastructure, chips, power, data centers. You spend all kinds of money, you can show it, put it up there. Hey, I got more chips. I got more power. I got bigger data centers. What they haven't spent on that they need to spend on is data. Just like what I said about FinSites, our AI agent, right? It's all about the data. It's all about the inputs. They haven't spent on that. Why? Because they don't want to talk about it. They don't want you to know that, hey, all this great AI we have, billions of dollars spent, but we're running it based on the internet. We are putting regular unleaded fuel in our Formula 1 sports car, and we've got a new awesome sports car coming with that same fuel, so it's not gonna go any faster. But man, if we had good fuel— they don't tell you that because they don't have it yet. They don't have the fuel. They don't want to tell you how important the fuel is because the narrative about something they don't have that they need is not nearly as good as The narrative about how we're spending to get the thing that they need. This is about understanding what's about to happen. Investing is about understanding what's about to happen, not what has happened. So Shopify, super expensive stock, kind of doesn't matter what happens. It's going to go down at some point. Uber, this kind of valuation for this kind of business, it's kind of a joke. People have asked us for a long time, do you have different ratings for different sectors? We don't. This works so well. As per the very attractive stocks index we showed you before, dramatically outperforms over five years. Look at that consistent above the line always, right? The rating system works great. Now, can someone take a more sophisticated view than just the overall view? Absolutely. New constructs is not. You know, there's not just not every answer is perfect, but the data is there. To glean incredible insights. So yeah, you know, a valuation on a firm like Uber, you know, can still be horrifically expensive, even if it's not quite as high a valuation as you would see for a firm like Oracle or Microsoft, AMD or Arm, right? Because those businesses technically are a lot more profitable when you're in the taxi business. Right? How many like big taxi companies do we know of in the history of the world? Right before these Uber technology companies and before that, they didn't have any. There were none. I think this is a bit of a gimmick. I don't think their profits are going to be very long-lived. I just, I don't really know that there is much of a sustainable margin in These companies. Free cash flow has kind of been all over the place, pretty highly negative now. Look, I mean, they weren't really making money for a long time, and they started to make some money, and maybe these were these years, and it's negative again because, look, people are price sensitive. I don't know about you. I'm looking for a car. I go Uber. What's your price? Lyft. What's your price? If there were a third, I'd look at it too. Who's the cheapest? They all show up on time for the most part. They're all pretty much the same. It's a commodity, folks. It's commodity. It's riding in a car. Where's the long-term margin in that? I don't see it. All right, let's take a step out here and look at Pfizer. Well, it's kind of the opposite. Not such a great business, cheap stock. Interesting. So Pfizer— is Pfizer one of these companies? 5 days, not nearly as bad, folks. Not nearly as bad. Is Pfizer one of these companies that just did a deal with the White House to make these drugs cheaper? I can't remember who that was. I think this industry is definitely under attack and rightfully so. Really great profits. And look, to the extent that there are drugs out there that people really need, we've got to think a little bit differently about how we do this. Yes, we need to fund innovation. We have to incentivize innovation or we will lose these. But I think there's a better middle ground. You know, there's a capitalist side and there's a societal side. Right now, capitalism maybe is winning a little bit more than it should, which is why we're seeing what we're seeing in New York. Let's face it. Look, I'm a capitalist through and through. Don't get me wrong. But that stuff happened in New York, guys. They elected socialist and Marxist, you know, and maybe, as a friend of mine said, the best thing that can happen for the socialist or Marxist movement is for us to see it play out and see how much of a disaster it'll be or not be. And know for sure so that we're not just speculating. My guess is it's not gonna work out so well and we'll know. It'll be like, hey, by the way, we tried that. 'Cause I think in the collective memory of society, it's been too long since we've seen how that plays out. So we gotta do it again and show all those folks who, you know, don't necessarily want to understand basic math or read history what that actually means. So that was a little bit of a political statement. I apologize. Maybe I read too much Ayn Rand as a kid. All right, let's, we'll just change the subject here. Pfizer, cheap, but doesn't look like such a great business. Does have a great yield, pretty steady. They haven't really recovered from the COVID profits. So Pfizer looks a little bit, it's in the middle. I don't have strong feelings. Spotify. This is a great example of a company I love. I mean, we, I use Spotify. I love it. Love it. I buy it for the whole family. It's awesome. It's the coolest thing in the world to find all these cool songs, have access to the cool songs. Look, I grew up like making mixtapes from the internet. So you had to sit around and listen to the radio. And as soon as you're good, you know, like one of your favorite songs came on, you gotta hit that record button and then you had it. Otherwise, like it was super expensive. You had to like buy all the tapes, buy all the CDs. Who, who in the audience remembers what a cassette tape is? Whoever listened to music on a cassette tape? Anyway, Spotify, awesome. Putting together playlists, like the ease with which you can put together a playlist compared to what it took to make a mixtape, unbelievable. 8-track. Yeah, I remember 8-tracks. Elvis Presley 8-tracks. I remember early on as a kid, I used to spend time at a friend's house and they had a ton of 8-tracks, man. Elvis Presley, Blue Suede Shoes, 8-tracks, baby. In the car, at home. 8-track is like a cassette that's like the size of a video cassette. Anyway, funny stuff. Spotify is awesome, but it's expensive. Great question here. How does this company like Spotify have a negative invested capital? You know, what happens in a situation like this is that their networking capital is negative enough to offset the fixed assets. So these guys don't have a lot of fixed assets, and it's part of the danger of the business model. They rent the music for the most part. So they got almost no fixed assets. They're getting paid for that music before they have to deliver it a lot of times, right? And so they got a big negative net working capital. And so that negative net working capital is enough negative to offset the fixed assets. And so the invested capital is negative. So it's an infinite return on capital business. Great business, folks. Very expensive. We've talked about this being too expensive. I think they're kind of caught between a rock and a hard place. Right? I mean, they start making too much money on other people's product or other people's assets. What's going to happen? The owners are going to say, yeah, I want some of that to come back to me. So, you know, and there are other competing platforms out there who can say, I'm going to give everybody the same access to music that you get from Spotify, but at a lower price. It's not something that they do that's so special. They used to talk about how their song picking algorithms and recommendation algorithms were better. Yeah, it's not so good. It's not so good. Rarely do I get like a new song like, oh, that's great. In the beginning when I'm searching stuff out and like learning, yeah, it's great. But after a while, they're all the same. Yeah. Yeah, I think, Sam, you make a good point about Apple or Amazon. They got tons of music too. Google for that matter. I think you just give it all away for free, which I would not be surprised they do. Like Google gives so much YouTube TV away for free or YouTube away for free. They better fix this thing up with ESPN. I'm going to drop it like a bad habit. I don't like this stuff. Give me my sports or get out. That's why I signed up for YouTube TV. I don't watch any regular TV, right? I don't know about you, but it's the sports. You don't have my SEC football games on YouTube TV? See ya. All right, Spotify. Let's talk about Robinhood. Oh, one of my least favorite businesses has actually gotten profitable. That's kind of sad. Super expensive. What's happening with these guys? Down 15%. That's what I'm telling you, folks. You're going to be in these super expensive stocks, you're going to have some painful days, especially I think through the end of the year and going into next year. I think it's just the way it is. Yeah, they're just now barely economically profitable, just kind of broke even on that. Let's see what free cash flow looks like. Going to be negative. They've done some acquisitions here. Free cash flow, not bad. Look, the reason that— Sam, I have to agree with you. I mean, you know, the problem I have with, with, with Robinhood is they're basically— it's cannibalistic. Hey investors, come make money with us as we take advantage of your other fellow investors. They make their money by selling off your trading intentions. The orders you put in go to high-frequency traders and hedge funds before they go to the market. Why do these hedge funds make so much money? They have a crystal ball. They have your order flow before it hits the market. That's why these big funds and things can invest so much and own all these crazy expensive stocks. When I was first on Wall Street, the big firms like Fidelity, these guys, they couldn't afford to speculate into expensive stocks because they couldn't take the hit if it did go down all of a sudden. Well, now with order flow, they know it's going to go down before it's going to go down. So they can take that risk. Now they can just fan the flames of speculation. All right. Yeah, and let's hope they never turn down the buy button on you or the sell button. DoorDash. Oh yeah. So what happened to DoorDash? I mean, this is one of— this is up there with the all-time worst stocks. Like Beyond Meat, a joke, right? DoorDash also, I think, a joke. Folks, I told you taxi drivers— never seen a big company that was a taxi company before the invention of Uber. You You ever seen a company that was a food delivery company? They didn't exist until recently. And they tried it and those businesses got demolished. I remember being in New York around the tech bubble and there was this business that would deliver you anything. I remember one time I was at a buddy's house. He's like, hey, watch this, Trainer. You had a pack of cigarettes delivered. And I don't even remember if he smoked, but it was kind of funny. So DoorDash actually up a little bit today because it's got crushed. 3Q earnings, they talked about spending a lot more money. People were like, yeah, whatever, dude, we don't need you spending money because you're not a profitable business. Economic earnings are negative, right? Return on invested capital below the cost of capital here. Return on tangible invested capital is peeking out above. I don't know, I think for DoorDash, return on invested capital is the better metric. It's still below, it's getting better. But like, the valuation's absurd. I mean, 24.5 price to economic book value on a food delivery business? Profit's going to grow 24,500%? Come on, folks. Crazy. All right, we are at the limit here today. If you don't have any other questions or comments, I'm going to go ahead and shut it down here. But I thought this is a great session, great talking about all these stocks, interesting stuff going on. Cool stuff going on. It's exciting time for us, for AI, and I think for investing in general. And look, discernment favors investors. So keep it up. Keep up the good stuff. Have a great weekend.