Sunday Finds + 3 Thoughts From Last Week
CMG + NVDA
Welcome to Chit Chat Money’s Sunday Finds + 3 Thoughts From Last Week. In this newsletter you will find three topics I thought about last week, links to shows we’ve recently released, and links to some interesting articles, podcasts, and tweets. Check out the archive here.
1. The high-quality nature of subscription businesses
This week we launched a paywalled subscription for the podcast. I’m not going to bore you and explain all the details (you can read about them here), but it has me thinking about subscription products.
First, subscription products are just so much…cleaner. I think that’s the right word for it. Unlike other methods for monetization, subscriptions create a single KPI (the number of paying users) that you can target. And as we all know, once a subscriber starts paying, they will typically stay around as long as the product/service retains its quality. This gives ease of mind to the business owner.
I think subscriptions generally align incentives better with the customer and business. For paying subscribers to our show, we now put all of our effort into what they are looking for (stock research content) instead of having advertisements that may be a nuisance to some of them. Don’t get me wrong, I think advertisements are a viable way to monetize a podcast, but there’s that tradeoff and friction that doesn’t exist with an ad-free subscription service.
From my extremely brief experience now running a subscription business with a (tiny) amount of paying users, the revenue just has a higher quality feel to it. I know that as long as we continue to release a good product, subscribers will likely stay around, making our revenue more reliable. Compared to using advertisers, which may bail out after a few months or revise their budgets during tough economic environments, subscription revenue is much, much more predictable.
Seeing this firsthand, I’ve realized once again what makes subscription businesses higher quality, all else equal, than a non-subscription product.
2. Management integrity (or lack thereof)
One of our core investing tenets is buying stocks where we believe the executive team will act rationally with the cash that is given to them. This could be cash raised through outside funds or operating cash flow.
When acting with cash, there are two main things a company can do: reinvest into the business or return cash to shareholders. The right place to allocate capital depends on what business the executive team is managing. You wouldn’t want Amazon instituting a buyback program back in 2005. Conversely, it wouldn’t be smart for Altria (Phillip Morris) to increase its capital expenditures to “modernize” its cigarette manufacturing.
Most of the time, our decision on whether to invest with an executive team comes down to what they’ve said/written and whether we trust them to act rationally to create long-term shareholder value. But far too often, I think we find executive teams that repeat what they think investors like to hear but actually act selfishly or in a detrimental manner. For example, we just took a look at Warby Parker for a podcast recording. Management said all the right things (we treat all stakeholders fairly, are focused on the long-term, blah blah blah) but are acting with egregious selfishness when rewarding themselves with huge stock grants. I don’t know how to find an equilibrium between these two things.
More broadly, strong management teams are few and far between. Especially ones that stick together for a long time. When you find them, I think it is best to hold on as long as you can.
“Watch what I do, not what I say”
3. Zillow says housing will be fine
The digital real estate company says that housing prices will rise over the next year:
Call me skeptical. As I’ve written here before, with mortgage rates rising so quickly, it feels so unlikely that housing prices will remain this elevated. There is just an inability to finance the monthly mortgage payments at this point. However, it is not impossible. There are two scenarios that could play out here, which are really on the same spectrum:
Housing prices fall in conjunction with rising mortgage rates, keeping affordability/monthly payments roughly in line with before. This would — all else equal — allow people to spend the same amount on other goods outside of housing.
Housing prices stay high or even rise as Zillow predicts. This would maybe double (?) monthly payments for new homebuyers, severely hurting their ability to buy other goods. I can’t imagine this would be good for our nation’s general economic health to have so much of someone’s income going to where they live.
Neither is a fantastic outcome, but I hope we get less money tied up in housing that can be freed up to work on productive things for society, all else equal.
I thought this was a funny tweet from our friend Greenwald Capital about Zillow’s projections:
Lance Lambert @NewsLambert#NEW Zillow says housing bears are wrong. The firm forecasts U.S. home prices to jump 7.8% between July 2022 and June 2023. https://t.co/BuzRlR1H7u
See you next week,
***Our fund, Arch Capital, may own securities discussed in this newsletter. Check our holdings page and read our full disclosure to learn more.***
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Catch up on Our Shows From Last Week
Not So Deep Dive: Chipotle (CCM+ only)
Sunday Finds is brought to you by CCM+, our subscription podcast/research feed. For $5 a month, subscribers get:
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A monthly Arch Capital investment fund episode covering a stock we own in our limited partnership.
3 Good Reads
Why BeReal is Breaking Out - Platformer
The occasion for writing that post was the temporary rise of Vero, which also faded away more or less immediately. And BeReal seems to hit a lot of the same boxes that those apps did: remixing a few things you’ve seen before with a few things you haven’t, having a breakout moment, raising some money, and hoping for the best.
Make no mistake, though: the novelty of that two-minute timer will fade, and will fade sooner than anyone at BeReal will hope. And so the developers must race to keep shipping — to build out the feature set, and to fix the app’s many bugs — while their extremely fickle users are still paying attention. It’s an extremely tough challenge, as Clubhouse — the last pop-up social network to briefly break out — has learned over and over again since interest in it peaked.
Stock Comp in Software - Voss Capital
Now this is interesting. Since 2016, the median software company has increased their stock comp rate as % of sales from 4% to 9%. That’s effectively 500 bps of hidden margin compression.
If we compare the median Adjusted EBITDA margin vs. what we might call the “True” Operating margin (Adjusted EBITDA- Capex - SBC), we can see that not only has there been a persistent decline in both numbers, but the gap has been widening. As illustrated by the gray bars, the gap between Adjusted EBITDA and True Operating margin has been as low as 4% historically, but now sits at a record high of 12%.
Epistemology, Semantics, and Doublethink - Palladium Magazine
We are pleased to publish for the first time this essay by the late Carroll Quigley, originally written in 1950. The compelling account of the history of epistemology that Quigley advances in reviewing George Orwell’s 1949 book Nineteen Eighty-Four remains relevant, even prescient, after more than seventy years. This essay is published with permission from the committee of historians left in charge of the work of the late Dr. Quigley, which holds the rights to this essay.
1 Good Listen
Walmart - Acquired
We kick off Season 11 with the incredible story of the retail “granddaddy of them all” Walmart, and its founder Sam Walton. Once you study Walmart, you realize just how deep its heritage runs through Amazon and so many iconic modern companies we cover on Acquired. This episode was an absolute blast, and we even uncovered a new addendum to the hallowed “focus on what makes your beer taste better” playbook theme!