This is Motley Fool Money. The horse is happy. I'm very excited. Let's get into it.
Real money advice from real people, not just a couple of dicks with a Porsche. Get more at fool.com.au forward slash triple M. Mate, this week we found out the TPG, or some people at TPG, managed to make a billion dollars appear. Literally, with a stroke of a couple of, no, maybe a few, a stroke of a virtual pen, a couple of cells in an Excel spreadsheet, and voila, a billion dollars just appeared out of nowhere.
Now, I'm going to try that trick in my bank account, see if it works, so don't hold out high hopes. What I'm talking about, of course, is the ongoing court case between the HCC and Vodafone and TPG, who are hoping to merge their operations, and the reclusive CEO of TPG, WTO, who hasn't had his photo taken in about 10 years. The big exciting news was the new photo of David Teo doing the rounds, other than that old granny shot and getting into a car somewhere. So brand new photos.
I was getting excited about that one. So TPG was going to build a mobile network, and the bottoms did the numbers, and according to evidence given by David Teo, the net present value, the fancy phrase that iconocrats and analysts use to talk about, the full value of the project was underway, was going to get negative $300 million. In other words, doing this would cost the company $300 million. And allegedly, David Teo says that Macquarie said, guys, I can't do a capital raising on that price.
Can you go ahead and look for me? And lo and behold, the wonderful Ben counters and spreadsheet jockeys at TPG came back, and all of a sudden, it was a positive $800 million. That sounds awesome. What you've got to do is change the number of customers, tweak the length of the model, add back some other numbers, and look at that.
You turn a $300 deficit, $300 million, loss, miss, reduction in value, call it what you will, into a positive $800 million, and all of a sudden, Macquarie can get the capital raising away. How good is that? That sounds awesome. You know, I'm going to say one thing about this.
Tell me. My favorite line is, all models are wrong. Right. So only some are useful.
So the question here is, was the minus $300 million model useful, or was the plus $800 million? It was very useful. I didn't get the capital raising away. I heard that.
That model was useful. Exactly. That's what I was trying to get to. The plus $800 million was useful because it solved its purpose.
Now, as much as it's fun to talk about TPG and WTO and the ACCC, all those wonderful fun things that us analysts like to talk about, that was kind of the biggest story here, right? It's not really the story. It's kind of the thing that underlines all of these conversations is, anyway, anytime, particularly those who practice a very quantitative style of investing, will put a spreadsheet together and say, right, I've put these numbers in these boxes. I end up with a number, and that number is somehow the answer to my question, right?
Is the value of the shares, or is the future value in TPG's case of the entire mobile network? To some degree, again, just there but for the grace of a couple of numbers being different, you can get a very, very, very different outcome from a spreadsheet. It's not saying you should never do the numbers, as you say. All those are useful.
So, to some degree, it can help you understand an issue, help you frame a decision. But when something can change that dramatically, and it was a change from 45,000 customers to 60,000 customers, which is 15,000 is a lot. On the other hand, we're talking about less than 100,000. This is a five-figure number.
So, there's so much. Of course, we also remember back in the day that more than one toll road had gone broke because of over-indiculous forecasts. So, a couple of things. First is, if you're an investor, just really be careful with the way you're using spreadsheets to work out the value of the companies you own, or you're investing in, or the future expectations you have.
The other thing is, also be careful of companies doing the same thing. It's a very, you know, institutional imperative, is a really wanky corporate term. The idea that people kind of are obliged or inclined to want to make things look a certain way. If you're in the mergers and acquisitions standpoint of an organisation, I'll bet you have a more positive view of a potential merger than maybe someone else on the other side of the business who isn't quite so invested in getting the same project off the ground.
Human biases are so, so, so strong here. If you want to be a conservative, you've been countering to look over all the possible things that could go wrong. That's how you get a really negative value on these things. Well, maybe the number of customers will be half, and maybe the cost will be double, and maybe the price will be lower, and you can put enough of those assumptions in.
You can make anything seem terrible. On the flip side, you can make the totality look unsinkable, funnily enough, if you put the right assumption into the same spreadsheet. So, again, I can't do better than your line, which is, well, no, what is that wrong? What is that useful?
There you go. I think it's just a really, really important one to take away. Get more modely fool money advice at fool.com.au forward slash triple M. When speaking of models, speaking of usefulness, it turns out a little company that I've frankly only heard of a couple of times called iSignThis in the world of technology companies, putting on iSignThis in the world of technology companies, putting on iSignThis in the world of everything as useful, sometimes.
Although I said it could probably, yeah, case of it not going so well. iSignThis is in the news because their shares crashed during the week, absolutely fell out of bed, because it turns out that the company's executive team would get a bonus, if they got over $5 million in revenue. And the report I read suggests that their revenue was $5.002 million. Now, for those who aren't doing the math at home, that's effectively $2,000 over their target.
That was $60 million worth of shares, or $60 million shares, whatever the number was rough for the same thing, because the shares are about a buck each, people take. Shares didn't fall for that reason. They fell because there are now, allegedly, some concerns about how that revenue recognition, excuse me, accounting terms, actually came about. In other words, you can collect the cash, but they're not measured on cash, they're measured on revenue.
In other words, how much of that cash they got could actually be applied to what the business had already done. And there are some concerns, allegations, allegedly, allegedly, allegedly, which suggest that maybe management might have been a little bit aggressive in the way they did that, so they could just trickle over that $5 million number and it would get paid out quite handsomely. So, again, this is one of those stories, in the case of the likes of incentives, models, other things, another buy-a-view-ware situation, what do you know about us on this, and what are you taking away from the whole episode thus far? Yeah.
So, I don't know much about, well, I know a little bit. So, the company's basic proposition is that it's essentially a know-your-customer equivalent service. It's a know-your-customer. So, you know, if you are doing a banking transaction, you know, to a third party, you're using an application that needs, you know, you need to do some money transfer, somebody needs to validate that, you know, you are the person that you are.
Yeah, that's awful. It's an important service. Yeah, so the blocks of, well, we know the Commonwealth Bank was taking a task by asking for allowing a large amount of transactions about knowing who was doing it, what was going on. I signed this in theory, solved that problem for some customers in some circumstances.
Yes, so that's the thing, and they have a customer base in Europe and so on and so forth. So far, so good. Say that, well, you know, why does a bank need to know your customer? I mean, bank already should know your customer if they've got an account, right?
But maybe if you're doing a transaction to a third party of the bank, maybe you need it. So, that aside, though, I mean, one big thing for me was this company had very tiny revenues. Well, this was an 18-cent stock back in March. Yeah.
Six months later, it's trading for, I'm not looking at the chart right now, well, over at $1.64. That's a nice, almost nine-fold return in six months. Six months. Now, shares, at the time of recording, we should have marked it back to it on Friday morning, so goodness that will happen.
But now, 93 cents. That's it. Depends on where you bought the shares. It's about four and a half times before six months ago.
So, market opportunity or what I call it, you know, total addressable market has to be humongous. There better be very few competitors in that space, and it's likely that you're going to win a substantial piece of that market. If all those things are true, maybe the market cap is justified at that point, right? So, I mean, so I don't know why it was trading, but it was trading.
Then there was a report out on AFR, on the PIN, which was talking about how the reconciliation periods were changed and how that had an impact, apparently, allegedly, in terms of may have resulted in this, you know, this revenue target or this cash target being met so that all these shares could vest. Some other flags were raised in terms of, you know, ownership and so on, which is neither here nor there. So, I mean, you know, again, if nothing, I'll just look at the valuation. You know, it's hard to understand.
I find it hard to understand the valuation. So, that's my take. I think that's interesting. And this is why, look, the other stories get the headlines.
We all, it's the financial market equivalent of a soap opera, right? So, we all love that. We all love dramas and some of the car crashes. And that's all fine, interesting, and whatever.
That's what we want to talk about. We don't want to talk about the tabloid headlines because they're okay, but they're not very useful. Most of the reasons, hopefully, you don't have time to share. If you did, hopefully, you bought a much lower price, you're still a lot ahead.
This is very much more a story of, as you say, mate, the sorts of companies you invest in, the sorts of risks we're taking. And you highlighted beautifully exactly that. Let's say, eventually, you want to trade in a PE, I'm going to be generous at 20. That means you have to, at a billion-dollar market cap, have a profit of $50 million a year.
And to do that, you have to take your revenues well north of, let's say, $100 million. It's very, very least, right? Let's be really, really generous. Let's say you keep half of the revenue.
Now, take tax out, you take costs out. It's almost not going to happen. But let's assume you could. That's the 20-fold increase in revenue you have to get just to justify the current price, let alone sort of gain from there on, right?
So, if you're a share market investor, you want to get a gain of, hopefully, at least 10% a year, because that's what the market's done on average in the past. But just to get square at a reasonable PE, you're going to get a profit of $50 million, you're going to get a sale of $100 or $200 million, right? So, you've got a gross sales by a factor of 20 or 40 times, just to get a PE that's at 20 times earnings. So, like, drawing that right back, that's the size of the challenge ahead of a company like this.
Now, it may happen. I don't know whether or not this will do it or not. It may well, hopefully, we're back in a year's time telling everyone how great the company's done. But to do that, to get to that sort of level, there's a lot of hurdles to clear.
There's a lot of opportunity that you have to be able to see, not just prepared to, but able to, in the face of competition and everything else. And you've got to ask yourself as an investor, because, frankly, the hot stocks tend to be the ones that fall precipitously from overly high levels without being able to justify the sorts of gains they've had. Now, again, I'll contrast that with the stuff that is worth paying up for, which is the really high-growth stuff that has quality businesses, quality operations, usually decent profits as well. So, I'm not saying all tech is bad.
I'm definitely not saying all tech is good. You have to be very, very careful. Just because the stock's going up, just because your mate or your taxi driver or your neighbour's got it, doesn't mean you should rush headlong into it as well. Otherwise, as I said, if you bought stock on the first afternoon, you've done half your already.
Anything else to add? No, this one is up, according to concept. This morning, is it? Yep.
Zero to you. It involves some fruit company, Mandarine or Tangerine or Tangerine. This is a great segment. Oh, dear, oh, dear.
Unfortunately, I couldn't say no this time because there was some meaningful new news in the streaming wars this week with your favourite company and my... Well, I don't mind. Bertie owns it, so you can't work for me. I am Bertie and you own Apple for transparency.
Apple released a very, very, very attractive cut-price offering in the streaming wars. Now, Netflix is the big behemoth of the business. Stan and Foxtel here in Australia. Disney Plus announced a couple of weeks ago Apple the latest went into the fray.
Not unexpectedly. In fact, we would have been all knocked over the head if they hadn't announced something. That was pretty well flagged. But Apple is now going into the streaming wars with Apple...
What's it called? Apple TV Plus. TV Plus. Apple TV was always the box, the device.
TV Plus, their new subscription service. It made five bucks a month. That's cheaper than Disney at $8.99. Cheaper than Netflix at, what, $10.99.
So that's a hell of a lot cheaper than anything else. Is this a game-changer in streaming? What does it mean for the way we consume our content and the way we use our devices? Yeah, because it's not a game-changer.
The game-changer was Netflix, right, many, many years ago when it changed the game. I think the main thing here... You've got to think back a few years now. Changing the game away from cable, television, everything bundled together, they kind of popularized, literally, digitalized streaming.
YouTube kind of around the same way in a very different way, but Netflix was the first subscription streaming video content business. That's very cool. And it had the word net in it, right? And it reminds you of Netscape, which is like, for people who remember, was the browser of the days, right?
I used that back in the day. Netscape Navigator, as I recall. Netscape Navigator, right? It had all these, you know, connotations about it being the original disruptor.
So I think the interesting thing here is that Apple could not have priced this product at a much higher price point because they're going to have only nine shows, maybe nine very high-quality shows. That's not much for five bucks. That's not much for five bucks. I mean, exactly.
So they're going to have then a show come up every month. So they're trying to do basically be, instead of being like a factory of content, they're going to be basically like the HBO equivalent. It's even more like, I think, in my mind, a movie studio. I mean, they release a couple of, you know, one big new release movie a month or something.
It's more like you're kind of almost just writing to new release movies from one studio. So it's like, you know, they want to be like the Pixar in the TV world. So that's all interesting. And I think it's, you know, what I thought was more interesting with their approach was not what they are doing, but rather the way they go to market.
That was really interesting because what they've said is for a limited time, when they have less content, anybody who buys a new iPhone, new iPad, a new Mac, and a new Apple TV box gets one year free TV content. That's a pretty good free trial. And given the number of devices Apple sells, that would probably mean 200 million subscribers in one year. Now they're making no money off those 200 million people.
But it's quite like that. It's a good way to see it. And all of a sudden, Apple will have more subscribers than Netflix. Right.
A bit less free. But then the question is, how many of those people are going to actually leave? And at that point, you think, oh, it's got enough content, you know, for five bucks, it's not a big deal. That's one angle.
I thought that was really interesting. The other angle here, I think, is if everybody's fighting for the incremental subscriber, this changes the game for fighting for incremental subscriber because it makes it just harder to find that incremental subscriber. You know, if five bucks is going to, you know, Apple, maybe, you know, eight bucks is going to Disney. It just means for somebody like Netflix to find an incremental subscriber, it's always harder.
Especially if your stock trades on an incremental subscriber basis, that becomes even harder at that point. So I thought that was very aggressive on Apple's part to go this route. I'm notoriously pro-Google. I'm not really anti-Apple.
We've got to play that a little bit. But I have to say, I'm not surprised Apple's getting into this. I am wondering whether Apple can genuinely be an ongoing high-quality player in this market if it's only got a very, very limited amount of content. It did work because it's got to license a whole of everyone else's content.
Show it for everybody. Bundle a whole lot of stuff up. The idea of Netflix is now you can't get it because there's always something you can watch. There's always something to watch.
Maybe it's before you probably haven't. Series TV shows, comedy stuff for kids. My young boy watches Netflix just quite a lot. I'm probably too much for that.
That's a different question. I mean, I get the point of the captive subscriber because you get it free so well when you use it. On the other hand, if I've got to choose between a free cable which still doesn't exist in here in the US, Disney Plus and Netflix, YouTube, everything else I've got an option to consume. If you said to me, you can sign up just to Warner Brothers movies, if you could pay five bucks to get every Warner Brothers new release movie, I'd be like, oh, no, not really, thank you, I'll kind of wait and see it on another platform at some other time.
It isn't enough for me to make a decision. Is this the end of the week from Apple, are they going to add more and more content to become a bit of Netflix? Is this always going to be ancillary to their business? It's not quite hefty enough to really change the game material.
To keep meaningful numbers of subscribers, if you're going to make a decision, is Apple going to be your first or third choice? I just don't know that it necessarily will once you have to start paying. I'll say one thing about Apple. I mean, if you are competing against Apple and you are a sole content company that relies only on content, you're up against fighting a very hard battle.
It's like basically the battle that Fitbit was fighting is basically Fitbit has lost. I think Apple has the strategy always of entering in a small way, but you've got a captive audience. You can be guaranteed that you'll have 200 million subscribers. You can then observe how those 200 million subscribers are going.
And that's 200 million that are going to be basically the 200 million devices that have been sold this year. They get to see what works and they get to adapt their strategy accordingly. I would say this is probably going to be one of the largest streaming subscription businesses in the world. And I think they're going to follow the HBO route where they're going to have enough content, but not a lot of content.
It's not going to be like Netflix which is producing zillions and zillions of content. But they'll take the HBO. I think the other factor that's going to play out is once you've got, and I'm not saying it's doomsday for Netflix or anything, but what I'm saying is that once you've got Amazon Prime, once you've got Netflix, I would say this is Apple's gateway to being Amazon Prime. Basically everything in Apple is basically going to be available as a subscription including phones and whatnot.
You have an Apple membership at some point. It basically becomes an Apple membership. And Apple has basically figured out that one way to expand your reach is to offer these different things. And the more different things touch points you've got, the more chances you've got of actually acquiring customers.
Remember Apple's market share is pretty small, 15% or 12% or something like that. So you can incrementally bump that from 12% to 20%. That's huge. So I think that's the strategy.
And the strategy is, and over time, maybe something like Warner Brothers or something else gets, basically they can't fight out against all these big guys so they're going to get sold somebody's going to buy them. So there's going to be something there's so many streaming options now. So Channel 10 now part of CBS and he had their own thing. The Freelay guys have their own catch-ups.
You've got Stan, you've got Foxtel Go, you've got Netflix, you've got Disney Plus is coming, KO, the Foxtel Sports streaming thing, Amazon Prime you've already mentioned, there's probably a dozen I can't think of right now, when YouTube has a premium subscription model. It's right to that these guys can't all survive Stan. If we fly forward five or ten years, they can't, well maybe they can, but I guess they're all global, right, other than the local guys. So to some degree you can afford to be a small share of a global market rather than be sure of a local one.
So that's one thing going for it. But at some level to your point about one rather than others, this has got to shake out some way, shape or form, right? We've got, on one hand, we've got content streams from the likes of producers like the movie studios. You've got platforms the likes of, I don't know, probably Amazon's probably a good one or the Roku box for example.
Yeah, we can Fox on some degree where it's kind of a platform with its own kind of bundled content. And then you've got the true bundles like in Netflix and like in Amazon Prime maybe more specifically. I don't know that I have a view on how this ends up, but it strikes me that it's unlikely that will have so many content producers, so many platforms, so many bundled solutions. At some point this has got to be meaningfully concentrated.
I don't know if it goes broke necessarily, but I've got to figure there's a whole lot of consolidation. Yeah, I agree with that. There's going to be a whole lot of consolidation. And I think, again, I think for a standalone streaming business it's going to be hard given that you've got all these, you know, there's no good money for Apple to produce content, right?
And you can produce basically any content you want. That's right. I'll buy half a thousand small countries. And it could buy, you know, it could buy Greenland.
It could buy Greenland. Greenland. That's true. It could buy something like, you know, Lionsgate movies or something like that, right?
I mean, there are lots of small movie studios. Ultimately, you don't even have to buy them. You just have to pay money before you produce the content that you want to produce. I mean, yeah.
So, yeah, it's really interesting. Let me go. Mate, are you ready? I'm very ready.
The starter's on his podium. Go for it. Damn, bye, Phylls. This is Motley Fool Money.
Subscribe to the free newsletter at fool.com.au forward slash triple M. Oh, mate, I'm on a high horse. I'm going to start off slow. I'm going to build up a crescendo.
I'm going to peak at exactly the right moment here. I noticed in the paper today an article in the Australian Financial Review. We are recording this on Friday, as I've said. The headline is, The investing call is weak, says the Host Plus CIO, Chief Investment Officer.
And this brought me to remember an article I've written a little while ago. I think we might have even spoken about it in the past, about the folly of what I call ethical investing. And I want to just touch on this a little bit because it just really gives me the irrits that people are spending money, wasting money with fund managers and others who are promising ethical investing as if it's a world-changing pursuit. And I don't mind people investing in the way their conscience is dictated.
I think it's a wonderful, wonderful idea. I would absolutely always say invest in things you want to own but the reason you want to own them is because you get to keep them and do the right thing, right? If you feel good about what you own, you're less likely to sell in a fit of peak at some inappropriate time. So absolutely buy the stocks you believe in, buy the companies you believe in, hold them for as long as you believe in them.
That is absolutely all completely legitimate. Sam Cecilia, the CIO of Host Plus, in the paper today, is quoted as a tweet stream, such as the modern world, this is a tweet stream or newspaper article by somebody else. He basically has complained about the fact that people are trying to get him to divest some unethical net quotes, companies, and somehow that's going to get a better result for the environment, better result for his men, and here's what he says. He says, oh, this is quite a few article, he argues that dumping shares in fossil fuel companies is a, quote, waste of time because those shares will be bought by other investors with the associated emissions therefore continuing unabated.
He goes on to say, activism has wasted precious time focusing on coal divestment rather than reducing coal burning. Divestment is one sector, one investor, sorry, selling shares to another investor ineffective at combating climate change. He says, divestment is weak. Climate change is a very serious threat but you're wasting your precious time fighting investors when you should be persuading governments around the world to take action now.
This is exactly what I've been saying for the longest time. If you want to Google something, Google the inconvenient truth about ethical investing by Scott Phillips in case it doesn't come up directly. I've outlined exactly why and it's kind of, sorry, Sam has actually nailed it completely by saying basically the challenge with investing in shares is you are exchanging them with somebody else. If I buy your Apple shares, mate, Apple doesn't get a cent.
If you sell me your Apple shares, Apple doesn't get a cent and Apple doesn't know nor care which one of us owns those shares. This is exactly the problem. I think the climate change issue is a massive, massive one. Listen, I don't agree, at least all of you.
If you disagree, that's fine but I have a very strong conviction that climate change is a problem. 98% of the world's scientists agree. If we're going to combat climate change, you don't do it by swapping shares with the other blow. There's absolutely no point in you selling all your coal shares to me or me selling all my coal shares to you.
It makes absolutely no difference to the planet, no difference to corporate decisions. It's a complete and total waste of time. If you're going to put money into things like clean energy with new funding, go for it. Otherwise, take your profits, use them to combat climate change by changing your consumer behavior.
Change your vote, go and protest if you want to but for the love of God, it doesn't make any difference whatsoever whether or not you own the shares or someone else owns the shares might make you feel better. It has absolutely zero impact on the climate or whatever other ethical approach you're trying to enforce your influence. It just simply does not matter. In fact, if you believe it matters, it's even worse if you sell the shares because you're not on the register anymore.
You actually go and make noise at those annual general meetings. You're actually better if you're making your view felt than trying to argue and yell from the outside. That's better now. You're feeling awesome.
That's so much better. That's great. That's cathartic. I like this.
I've joined the weekend in a much better mood having got purged by demons. You should just do this every time. You think? Yeah.
Well, I listen to me. The question might be whether or not our listeners are happy with it. I'm not sure if anyone's still listening. Oh, there we go.
Anyone there? Hello? Hello? Stand by.
Motley Fool Money. For more, go to fool.com.au forward slash triple M. Of course, you're still listening to Doc because we're about to get into our favourite segment, the Motley Fool Mailbag. And I did a tease last week and unlike the last time I did this, I'm actually going to come back directly and answer that question rather than forgetting for a week and leaving our members on 10th or 10th or 10th, I should say.
We've got a question through, as I said, from Jai last week and I answered the question if you didn't have a chance to answer it. Here is our chance, mate. Are you ready? All right.
Jai has two questions. Firstly, infrastructure investments. With global economic growth slowing down and with bond yields around the globe at record lows is now the time to invest in infrastructure investments. Governments around the world are able to borrow money at record low rates and use the funds to build roads, railways, airports, etc.
to help stimulate their economies which flow to the infrastructure companies involved. It seems like an obvious investment but am I missing something here? He mentions that as a student when he was looking at. Infrastructure investments.
I mean, you're not really infrastructure guys. It's not your core investment thesis but think about Jai's suggestion if we follow his train of logic. Rates are low. Governments are A.
able to borrow at very low rates and B. looking for opportunities to stoke economic growth. Infrastructure, therefore, because governments do these things, seems like a natural place, natural beneficiary of such government largesse or just economic stimulus in any case, does that not give a really nice tailwind for and therefore make good investments of some of those infrastructure businesses? I think it's reasonable to expect more, you know, let's build more railroads let's build more tollways bridges, tunnels let's build airports do stuff like that.
That'll make sense. The Western Sydney Aerotropel is going to the world worth it. Let's just get the biggest airport investment. So yeah, that's all good.
That's all fine. And I mean, it's true that that will help the infrastructure companies, right? So, you know, something like the Sydney Airport was participating in it or like, you know, yeah, but here's the thing. The question is, has that potential tailwind already been priced into the shares?
That's number one, right? I mean, ultimately, you're looking to get a combination of share price appreciation and, you know, some dividends from these companies. Most of these companies pay decent dividends, right? Unless you're the first one to the party.
You've got to work out whether or not, if you're right about the trend that's already priced in, then there's no market-beating potential left. Yeah, or it might not be that big and, you know, you have to just figure that out. I mean, that's not that easy. That's number one.
Number two is like, I mean, it's a relative question, right? I mean, do you want to get, you know, maybe you're going to get 1% performance relative to the market with something like this? You could invest somewhere else and maybe get a little bit more, right? So there's always a question of alternative opportunities, you know, is this the best opportunity one can find?
Okay, so even if it is potentially market-beating, it's still the question of is it still the best market-beating opportunity? Or rather, the question is, is this something that fits your needs in the sense that, you know, maybe if you're looking for a combination of income and share price growth appreciation, then this is maybe something that if you are not in that phase that you don't want to, you're not really interested in the dividends and you don't want to pay taxes on the dividends or whatever it is, maybe this is not for you, right? So I mean, there's all these other considerations coming into play. Frankly, I mean, some of the infrastructure companies actually look pretty expensive, right?
There's a lot of yield chasing going on, right? That's the other problem. This is to some degree what we call bond proxies. In other words, when rates go down, these things go up because the yields are more and more attractive.
It may, again, once the news is already priced in, you might be paying up for the trend and for the opportunity to supply dividends. So are you concerned that ties all the way in? It's hard to, I mean, what I think is that some of the quality companies look expensive or at least on a historic basis look expensive. Now the question is, of course, historically the rates have not been this low so you have to factor that in.
It just becomes a little more convoluted in terms of figuring out this is not straight up growth, right? I mean, in growth investing, you basically say, well, there's enough growth. If there's enough growth, even if I'm wrong by, you know, 20%, 30%, it'll probably be okay if the growth has roughly that trajectory, right? Here you kind of have to get the, better handle the value, which frankly is not really my skill set.
But I mean, it appears that some of these companies are, I'll add one more thing. So if some company is building toll roads, as an example, and you are expecting to, the fact that the government is building more toll roads doesn't necessarily mean that people are going to actually be paying. There's the same way people going through the roads, right? It's not that all of a sudden there's going to be 10% growth in the population that's going to drive somehow the tail growth.
I mean, you're basically devoting traffic from one end to the other end, right? I mean, the same story with airports. So we could put two airports in Sydney or we could just keep the Sydney airport in mascot open 24 hours, right? It'd roughly have the same effect and you just smooth out the load, right?
For investors at least, if you're taking a toll road rather than a public road, there's money being made by investors somewhere. So by building that traffic, by kind of putting in that flea generating machine, it can have value for investors at some level. Absolutely. All I'm saying is that the growth here you're looking at, you're probably looking at public growth in 5%, 6%, maybe 7%, 8%, and you're not looking at blistering 10, 15%.
Just because the government is putting in money does not mean that it's going to generate 20% growth. No, but it can be more, right? If Lendless has twice as many projects because the government has built twice as many bridges, there may well be some meaningful change to those guys. Or to your point, if Trends Urban opens another couple of tollways, there's something going to be in some way.
So I have mixed feelings for this. I think you're right about the trend. So you need to make an investment decision-based on whether or not there's value there. I like it, man.
I think you're bang on with the question. Look, the best thing about some of this stuff is the thinking behind it, and you're thinking exactly the right way. I like your point about being careful that the store not priced in, right? Just because you see a trend doesn't mean it's a great trend.
Plenty of opportunities. Again, I'll use a well-hackenade example of in the dot-com boom. Most of those ideas are going to be huge. Yes, everyone's going to pay online.
Yes, everyone's going to shop online. Yes, everyone's going to search online. Yes. And then have a look at how Pets.com or Yahoo or someone else has done in the meantime, even eBay for the latter days.
And even though it did worse, except for Microsoft for 15 years to get back to its 1999 share price peak, right? So if you're thinking about what were those investments worth making was the trend right? Absolutely. Were those companies worth investing at those prices at that point?
Well, history would say in hindsight, but history would say absolutely not. Just be careful about how that's being done. Look, the second question from Joy. It's tech stock remuneration, which I think you wanted to think about being your pay.
This is not about your pay. I thought it was my pay. Mate, your 50 bucks a week is safe. Don't worry.
He said, my second question might be more up Doc's alley, but I love your thoughts too, so it's very kind. Thank you, Joy. I've been watching the stock live tiles for a while as I think the business is interesting and they have partnerships with Microsoft already in place. However, the share price dropped last week, this is two weeks ago, although revenue was up over 200%, they are burning through cash paying for staff and management and it seems unsustainable.
What are your thoughts on A, live tiles as a company and B, without overpaying staff at a young tech company is normal or dangerous for investors? You finish this up by saying, thanks, Jens, and of course, bloody love the podcast. Good man, Jai. Doc, tell me, let's get the way around first.
Let's talk about remuneration and talk about life tiles. Does overpaying staff in a young tech company make sense or is it something investors should be throwing a red or yellow flag over? So, number one is you never want to overpay people you want to pay people the right amount. I'll give them money to my house for payrolls, good.
I'm going to pay, right, so I should always be paying more. But it's only when I'm evaluating others who I said. You should be paying, right. But yeah.
Julian, I don't say, yeah. Don't forget my payrolls. That's it. I mean, so I think Jai's question is he's saying overpaying or rather he's basically saying that there's a substantial chunk of the revenue disappearing paying for staff and management, right?
So that's a question. I would not say it's overpaying. It's rather the question is the company's still at scale and the company has not yet hit the scale at which it can demonstrate that there's, you know, operating average. And by that fancy term, what I mean is that, you know, your operating costs are not increasing as fast as they're increasing right now because right now you're not at that scale, right?
So you're trying to grow fast. In an attempt to grow fast, you need to have more salespeople and you need to pay, you know, salespeople by their weight in gold. So it's costing you money on the hope would be for software companies and they're basically trying to get to the point at which it will become scalable. And this is the challenge I was talking about earlier.
This is the challenge for all young tech companies, right? You need a certain number of people to give yourself a chance a shot at big time. It's very hard to bootstrap yourself to $100 million with revenue with two people working on the business. I mean, if you're very lucky, that's the word.
I'll run that business if you can adoption. But primarily, you're going to need sales and marketing staff. You're going to need programming staff. You need some people who know the business of business.
You need some finance staff. You know, at some level you have to pay overs early. Not 2.0, not 2.0, this is kind of new. We haven't really talked about this a lot but in the old days you had one widget factory and then you might open a second one and you put a second production line in and you can kind of scale production.
You start off in your street then your suburb then your region then your city then your country then internationally. You kind of used to grow really slowly. These days, particularly online businesses where it's a land grab. you want to get big as quickly as you can you can't front load that so there is more risk but also more potential return I think that's part of the risk of big, big, big valuations and also big profit growth if you want to get big, you've got to get big fast and so you're having to front load you're front loading all this expenditure saying right, we've got eight months to go from zero to 100 if we make it, we're geniuses if we don't make it well, someone's going to be there anyway and so we don't have any other choice if you want to be successful in this particular business and not lifetime in particular, but whatever it is you have to get there fast and this is kind of the Uber Lyft story if they hadn't got big fast enough, Lyft would have beaten them to it once the opportunity is there you kind of have to get big and get dominant super fast yeah, so I don't have anything to add to that I mean, so back to that's because I was going to repeat what you said, sorry yeah, so I mean so yeah, there's a beautiful catalog model you know, it's not like building factories for cars, right so you know, the fixed costs are pretty small the gross margins are pretty high the incremental is selling the same software to any number of people it basically costs you nothing extra, right it just costs you something comes to salespeople but it doesn't cost you you don't want to build a new factory you built a car once, you sold the same car to everybody yeah, exactly which is weird so back to Lyft House I mean, so what do I think about Lyft House?
it's a company that we've recommended in Extreme Opportunities actually we've actually recommended in August it's not a $1 million revenue company it's not a $5 million revenue company it's about its annual recurring revenue at the end of fiscal 19 was about $40 million that's not nothing they have a partnership of sorts with Microsoft and here's the thing they've grown that annual recurring revenue from about $4 million two years ago to $40 million that's a tenfold increase in two years it's still relatively small if I'm walking across the you know, it's $50 billion annual sales and quantity large numbers $40 million is good but in the full scale it's still relatively small it's really small so this is a small company too it's like a $200 million market cap company, right it's better than I signed this market cap you know, $5 million in revenue or something like that and this company has $4 million in revenue and $5.002 and $5.002 if it had the same multiple as I signed this this would be a huge company, right so this would be an overnight multi-bank the partnership with Microsoft is both a benefit and a risk, right so the benefit is that you are riding the cocktails of one of the, you know one of the best software enterprise companies out there today so that's one they're a huge sales force they have got their feet you know, across the door in so many different places they can co-sell stuff that's great that's kind of nice, right if your business card is a pretty good selling point yeah, so I mean so I think they're doing well this company has over 900 enterprise customers they've got some very big logos that they're signed so they're leveraging this relationship well at the same time that's also a risk in the sense that well, you know, one day if Microsoft says hello, bye-bye you're in trouble this was the same so VITS group VITS owns and operates most of the Telstra shops in the country and that's great while Telstra's growing nicely and looking after you when Telstra says oh, look, we might do it ourselves or maybe we might give you less money per handset per plan sold you kind of got nowhere to go, right so the downside is that while things are going great you're a hero when your big, you know huge partner says I'm going to tighten those screws a little bit there's not much you'll have to stay away to stand on so I think that's the risk and that's the risk you need to be cognizant of you know, like if there's a mutual beneficial relationship here as long as it lasts that's great you know, maybe Microsoft can acquire it and stuff like that if they think it is I'm not saying that an acquisition is a possibility but yeah so I mean I think the market recognizes some of that and recognizes the fact that it's not yet profitable it's growing money and therefore it has the multiple it has right and it's not fortunate enough to have signed up a valuation but it had and that's the thing I think that's important too you mentioned in a perfect world if you deal with you know, left-handed coffee modes your market's only going to be so big if you deal with oxygen your market's pretty much the world right so, horrible examples because I thought I was on the spot but if you think about that you know, is one or why the business better or worse well, I mean the perfect world would be like the largest total addressable market if you had to pay you know, $45 trillion for the oxygen company or you could buy the left-handed coffee mode company for a buck well, that changes the story it doesn't mean that you've got the same market opportunity but more you necessarily need to depending on how much you're paying for the share so a lifetime maybe doesn't have the same size business as an Apple or Amazon eventually you don't have to be the biggest company you'll have the best market opportunity potentially as long as you're paying a decent price and for a business with a decent growth ahead yeah, I have nothing to add good man oh, you won't pay attention or do a good job I won't ask you which you did an awesome job we've got lots of questions in the mail but we've got time for one more just because we really value our listeners' time we'll know that from we're trying to be a bit more this one this question is from Ben Ben writes a lovely question and his aim, I'm sure is to understand more from us or Ben just wants to fight and I haven't quite decided which so Ben, I'm going to spin the wheel of fortune I'll do the baby John Burgers and I will ask Ben a question Ben says, question for the Australian podcast hi Scott and Doc, love the podcast awesome as a subscriber, share advisor and extreme opportunities now, I run share advisor you run extreme opportunities I've been comparing the two types of investment styles if you would report both services performance over the last two years which services outperform the other and by how much PSI had to change the equaliser settings to vocal on my car stereo do you want the abundance deeper voice cheers Ben Ben, I'm going to pretend that wasn't a compliment for Doc because I don't do it that way if you guys want to say say it about me, please you're doing a good job as always so here, that's the question from Ben EO versus SA extreme opportunities versus share advisor which would have done better the last two years do you reckon, why? so I mean, I'll start by saying I'll start by saying that actually they're two very different services right, so I mean if you, I think comparing them is a bit like comparing apples to oranges that's number one you have to make apples you couldn't say oranges and mandarin, you have to say apples you know apples everybody knows about apples right, so so like share advisor would focus on essentially more blue chippy companies but you know I'm not saying exactly blue chippy but you know companies that are medium and large and have some growth but you know they're likely to be profitable they'll probably pay dividends they've got a growth prospect but it's not like go-go growth and we should say just quickly I actually should start by saying what they share in common is you and I both make a recommendation once a month of one stock on the ASX we actually have US stock and share advisor but for our purposes one stock on the ASX so we're in the same sort of cadence our job is to try and pick the market and we try and give our members stocks to buy one month with the aim of being in the market over three to five years and probably longer so that's the similarity the difference that you start with the types of companies we choose and you're mentioning SA has you know medium and large compared to EO which is really it's really fishing the smaller end of the pond it's looking for higher risk but higher reward companies it would likely have a higher fail rate and so on and so forth so that's number one so I think we can't really both services are being the market over the long term track record that they've got and share us with a much longer term track record versus EO if you're just specifically comparing last two years and last two years have been very heavy growth focus I have not done the calculation off the top of my head my guess would be maybe that extreme opportunity may be doing slightly better than SA because share advisor largely because I think the market has been that type of market so that's another thing I think this is something investors don't think about but you should think about is that market sentiment also to some extent defines how returns work in the intermediate term at least and if the sentiment is it's a great question but at the same time there's a great answer for me because it's hard to and here's the other thing one last thing then I'm going to just shut up it is hard if you're building just a portfolio out of EO that's going to be really hard because that's going to be a very very volatile portfolio you can do it but it's going to be very volatile so I mean at a portfolio level there's room for different strategies that you need to use to actually have a more balanced portfolio that takes care of risks and rewards and things like that so I think that's the that's the thing and again you know I think the cycles change things change so I think that's something that people need to you know if you think of being an yield investor it's like yield investing in many ways out of favor in the sense that people are just getting the yield but you're not going to beat the market easily with the yields right now so exactly so that's the thing so again you know you've got to be mindful of that you know I'll add a couple things just quickly Doc is dead right so he was very modest EO would have absolutely beaten their savers the last two years I think that's I haven't done the numbers yet but I'm absolutely sure that's true and basically to some degree that's because of the favorability of the types of stocks now I don't mind Birchie Hathaway as members might others might remember Doc doesn't mind Apple I would go so far as say there were two or three stretches over the last 20 years when both Apple and Birchie probably at different times as it turns out we've actually lost money for investors and so again there's no excuse for me Doc's not much better than I have probably because he's got a better stock picker rather than because the market was kind but let's assume that part of that list involves just for my ego's sake at some level that's the reality right so if you think about okay Birchie will have lost a certain period of time over two years maybe even three years Apple almost certainly would have done the same you know which stock was the best over the last two or three years given those time periods well sometimes it would have been Birchie sometimes it would have been Apple over 20 years they've both done spectacularly well I think Apple's probably outperformed over that period of time in total and so that's a valid question too by the way all I would say is over any two year period if the numbers were reversed Doc's not a great job he's beating the market there's six stocks on the EO score that have more than doubled since July 2017 that's a very very good track record I expect to see many many more of those gains one of those is a triple by the way so you know those things will continue to happen I expect on EO as Doc said they're very different services we try and beat the market overall on average over the long term but we do it differently Doc has got more stocks that have done better and probably more stocks that have done worse than ShareAdvisor probably have a narrower band of performance because of the types of stocks we're looking for Doc is looking for the absolute big winners that are the next Apples the next Amazons the next Ebay the next big company the next Tesla's Netflix's looking for the next big winners and when you find those they will go really really well you've just got to actually buy a broad representative sample of those stocks because there will be some losers in there as well because for every Google there's Yahoo for every Apple there's a Motorola Blackberry there you go so yeah that's the reality so ShareAdvisor we have fewer of those as Doc said more that pay dividends we will have more better known names I'm sorry the big blue chips because most of the blue chips are overvalued and overappreciated but overall we're looking for the medium medium large kind of stocks in that kind of range the ones that have more proven have better and longer track records just because of the virtue of the way they've done which service is better well depending on your own approach I agree with Doc entirely other than to say I think you can build a market betting portfolio at the EO you just have to be very prepared for market volatility right so as an investor if you love what you can put up with high volatility EO's a great way to invest just be really mindful that's going to happen now SA is volatile too by the way so I wouldn't suggest any way to perform people shouldn't be expected individual stocks in the scorecard at large has swings just be mindful that's exactly what happens and if you are someone who prefers a little bit less volatility then mixing the styles actually makes a whole heap of sense I think we both agree on that I was just going to say you said what six or seven multibaggers let's go with six six is fine six multibaggers so there are seven then I can't even have 50% or more losses so that's important though because we said this before this is not just about blowing up your size or trying to sell more subscriptions because members can do what they want whether they choose to but it's a bit flippant to say except that it also happens to be true the most you can lose 100% the most you can gain is I mean look at Apple long term what's Apple up 100 fold or something stupid but she's up 2,000% over 50 years I mean the sort of gains you can get a big long term winners you could have bought one Apple and 19 loses and still made money oh yeah almost a loser I mean 19 broke and so made money but the main issue is that most people are not able to hold for that time holding for a long time is really hard and that's part of the reason why people end up with inferior returns is that the holding periods are too short which is why you say two years maybe is too short you need to at least think three to five and that's not like you probably need to think even longer because these are like baby companies that are trying to become real companies over the long term there are so many examples of companies that have actually done really well in their 4, 5, 6 years and that's where the money is made and you don't think if you get the trend right the idea right the analysis right you've got to let that play out and look here's something I want to say we could be reasonably accused of trying to screw our own stuff and that would be a fair criticism if that was all we were trying to do and you listen to decide for themselves whether or not hopefully you listen long enough and we're pretty straight up and down on this stuff the reality is that we actually we're saying how to buy our score how to buy our services that's absolutely true but this is actually quite literally how we invest like how our investing careers are built and or will fail on the result of our investing styles so what we're saying to you as listeners is this is exactly how we run our services for members and the results will manage themselves that the outcomes will show one way or the other so if we're just sprigging to try to get to buy stuff and you lose money we're not going to hang around so we have no delusions of grandeur we're not trying to say here's a good reason that you should buy each of them other than hey this is how the doc actually invests so if you like that that's exactly what you're going to get on the inside as well if you're 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