Buying Back Shares for the Wrong Reasons and Private Credit

[00:00:00] This is the Canadian Investor where you take control of your own portfolio and gain the confidence you need to succeed in the markets. Hosted by Braden Dennis and Simon Belanger The Canadian Investor podcast, welcome into the show. My name is Braden Dennis.

[00:00:22] As always joined by the brilliant Simon Belanger. Good sir, we have a lot on the slate today. Missed you last week but got some episodes. The boys are in summer mode, you know?

[00:00:38] Yeah, exactly. I mean it's been a while since we actually recorded an episode but I think this is a good one. Just the topics we have on the slate and I think we'll bring some energy to this one.

[00:00:52] Let's do it. I am going to kick us off with a discussion about stock based compensation. You're going to talk about private credit and what is the world of private credit.

[00:01:01] And then I'll talk about public fintechs, some stuff getting smashed lately. One of the most unloved areas of the market. Alright, stock based compensation and buybacks done simultaneously. This is a conversation you and I have been discussing a handful of times. I figured it deserved a full breakdown.

[00:01:24] It came up quite a bit when we were talking about Autodesk because you're like, oh look at the stock based compensation then you pulled up the total shares outstanding and that graph is going down slightly.

[00:01:36] Yet they're known as being I guess kind of bad actors in the software stock based compensation world. And so I wanted to find some data around what are the results, what's the performance when these companies do this together and how it might affect incentives for executives making those decisions.

[00:01:57] So there's not a lot of data on this and it's hard to kind of make sense of it and back test it. And it's always been an idea that has never really made sense to my brain even though it is a very simple concept.

[00:02:13] So I found a survey from the Journal of Financial Economics that interviewed and surveyed financial executives like CFOs of public companies. And the survey came to the inclusion that 68% of CFOs indicated that offsetting dilution from stock based compensation was either important or very important in their decision to buyback stock.

[00:02:41] Are you surprised by that stat?

[00:02:43] No, I mean it's, I'm not I'm not surprised. And at the end of the day, it's yeah, it just I think it just reinforces the fact for people to understand that when they're looking at the income statement that you have to understand everything that you're looking at because sometimes the, you know, the net earnings will be kind of skewed by non cash item and that would be an example of it right here.

[00:03:10] There is analysis that shows the companies buyback stock to manage their shares outstanding and stock based compensation affects payout, payout policy.

[00:03:22] Quote, there is clear evidence that many companies consider stock based compensation and buybacks together in a report by done done by Morgan Stanley I think it was written by the legendary Michael Mubbson.

[00:03:35] Although data from counterpoint global shows that gross buybacks as a multiple of stock based compensation is still over one, but it's been declining steadily since 2006, meaning there is still a lot more buybacks by companies issuing stock based compensation and buying back stock together. But that ratio is declining.

[00:03:58] The question for for discussion here is if it makes sense for them to be tied back and my basic thought is buyback should always be look at as opportunistic.

[00:04:08] And shareholders are trusting management to purchase when they're, you know, they're trusting and hoping management's correct about the shares being undervalued and attractive to buy them compared to other options that they can do with that fresh capital.

[00:04:22] But having kind of a systematic retiring of shares to compensate for the stock based compensation, no pun intended. It's really kind of a it's affecting payout policy without any real sound logic to it. And I guess that's where I have an issue with it.

[00:04:45] I think the same way dividend policies and special dividends can be looked at as opportunistic. I look at buybacks the same way.

[00:04:53] Now, if you have so much cash guzzling out of the business, and you have a routine buyback and a routine dividend policy back to shareholders, that makes sense. But to me, these things should always be done opportunistic.

[00:05:08] And I'm happy to trust management of the companies I own to do that rather than, you know, meet some mandate. That's just that's just how I feel. Yeah, I mean, it's almost like companies are dollar cost averaging their shares. They don't really think about it.

[00:05:25] And what I'm sharing here for joint TCI is Berkshire, right? And Warren Buffett, who has clearly will only buy back shares of Berkshire stock if he thinks it's actually good value to do so. Right.

[00:05:41] I think for a while he had that kind of a price to book target. So it fell below a price to book target. He would start buying back the share. I think now he's a little less kind of harsh on that rule.

[00:05:52] But nonetheless, I think he's still opportunistic as he finds that the company is undervalued or not. And at the end of the day, what you were saying for me, and that's just a personal preference. If a company is mindlessly buying back shares when the shares are undervalued overvalued,

[00:06:12] but they're not necessarily doing it in a very intelligent fashion with a lack of better word. I honestly would just prefer that they pay a special dividend at that point.

[00:06:23] Just let me, you know, as a shareholder, let me take that cash and all decide how I want to invest that cash or whatever I want to do with it.

[00:06:32] Because at the end of the day, if they're buying back shares and they're doing it when the company is either overvalued or it's not the best use of capital, I'm not quite sure if I want management to be doing that. Have you ever looked at AutoZone stock?

[00:06:48] I have a while back, but I know they buy back a lot of shares. Yeah, they buy a ton. I'm pulling it back right now. So they have reduced the share count so substantially. By almost half, right? In the last 10 years and last decade.

[00:07:09] Almost exactly half in the last 10 years. Since 2004, you know, I got data going back 20 years here. 2004, there was 80 million shares outstanding. Today, there's 17. Holy smokes. They were reducing the share count aggressively through the 2000s and have continued to through 2004. And that's worked out extremely well for shareholders.

[00:07:37] I just think it's never a stock that gets expensive, that's why. Yeah, and do you think, I mean, I feel like one of the incentives aside from stock-based compensation would be that clearly companies can manipulate EPS by buying back shares as well, right?

[00:07:53] And a lot of Wall Street, Bay Street, they tend to focus not even on earnings. They tend to focus even more so on EPS, earnings per share, which can be manipulated by buying back shares.

[00:08:08] You know, you can have declining earnings on an absolute basis, but your EPS is going up because you bought back so many shares. So I think that's something to keep in mind. It may also be the incentive that is misapplying for certain businesses, depending how executives are compensated.

[00:08:25] It could be based on EPS if it is then obviously they have an incentive to buy back shares. Yeah, definitely look at that share, like that compensation structure. The auto zone stock just for kicks.

[00:08:40] The shares during that time are up 33 times your money, so no one's been too upset about them buying back stocks. No, no, yeah. The point of this discussion is it should be a nuanced conversation.

[00:08:55] Like that Berkshire example, it's like he's just got so much cash that it's almost difficult to do actual capital allocation that he could do 30 years ago.

[00:09:05] But nowadays with these software companies, I think that they are bad actors and now I have actual evidence from the Journal of Economics and Morgan Stanley backing up what I've thought for the last five years. And so I just feel like I can finally check that box.

[00:09:24] Yeah, yeah. I wonder maybe at some point in the next 5, 10, 15, 20 years that they kind of shift from SBC to just compensate your employees better. Give them a hiring bonus that you have to stay on for a year or two if no one gets caught back.

[00:09:42] There's different ways to do it. I'm not saying cash instead of stock, but I guess to my previous point companies don't necessarily love that because it does impact earnings versus stock-based compensation which is just dilutive so it doesn't show up the same way on your income statement.

[00:10:01] Yeah, and depending on who you talk to, some very heated debates about how it affects free cash flow in the accounting world. All right, let's move on to private credit.

[00:10:13] Yeah, private credit. I mean, I feel like when I get into anything private, I start going down a rapid hole. Well, first of all, anything private, the data can be a bit opaque at times because it's not the public markets. It's not always super accessible.

[00:10:29] So I think I would encourage people just to take this as well and keep that in mind. But you know, private credit, there's been more and more talk about it.

[00:10:38] I think a lot of more people are starting to get worried about the sheer size of the private credit market, but I'll kind of go over what it is and some of the downsides.

[00:10:48] The reason I decided to do this segment is because my Cairo, so we shot out to Shane who loves the podcast, was asking me about private credit because it's available on the WeldSimple platform. Well, WeldSimple, obviously they're offering private equity funds as well for people to invest in.

[00:11:07] I think it's $10,000 for people to get into those funds. I know they like to offer these products and show that it's available to the masses. It doesn't mean that something's available normally to high-network individual institutional investors that it's necessarily a good product.

[00:11:25] And private credit very similar to private equity is that WallStreets pretty big on that, Bay Street as well.

[00:11:32] That's because they make some good money offering those products and you have to keep that in mind when a product is being kind of pushed and you almost see it a lot of marketing around it.

[00:11:43] That's when my personal alarm bells start going off. I don't know about you, Brayda. I don't think, you know, this is almost like a backhanded compliment. I don't think people recognize how good Wall Street and financial markets and financial services are at marketing.

[00:11:59] And it's not the type of marketing that you're used to seeing on TV and traditional marketing but they are very, very good. And usually added complexity to the way that they offer something makes it sound actually more appealing.

[00:12:18] Yeah, yeah. And they will tend to qualify these investment as alternative investments. Right. It's this big pool of investment. It's all alts, baby. Alts is sexy. All alts. Let's go. Exactly. And they make it sound like it's almost like this unicorn. It's too good to be true.

[00:12:36] Or I mean, it's yeah, this unicorn and I'll just say that in a lot of cases, it's probably too good to be true.

[00:12:42] Not to say just like private equity, private credit funds, there are I'm sure some good ones and there's some companies that people are very familiar that are quite present in the space, which I'll touch on as well.

[00:12:53] So private credit refers to non bank lending where private funds are institutional investors provide loans or other forms of credit to company or projects, sometimes individuals, but it's typically more companies. This is done outside of the traditional banking system.

[00:13:12] There's usually going to be a lockup period where redemptions are not allowed from the fund. So this means that once the money is committed, you cannot take it out until the lockup period is done.

[00:13:24] However, once the lockup period is done, there will typically be a maximum total redemption set by the fund for a given period of time. So that will be typically either by month quarter or yearly basis.

[00:13:39] So for example, the fund may only allow 5% of redemptions for a given quarter. So if a lot of investors want to cash out, not all of them will be allowed to do so or allowed to cash out the amount that they want.

[00:13:53] So the lack of liquidity as people may start figuring out as I'm saying this is definitely an issue with these type of funds. Essentially, they offer loans or credit to businesses that would otherwise not be able to get loans elsewhere for a variety of reasons.

[00:14:09] For example, it could be loans to corporations that are below investment grades. So clearly, you know, junk bonds are even below junk status. Private credit will be marketed as a way to get higher returns by firms offering it.

[00:14:26] And the argument is that they are able to get higher interest because of the increased risk, but I will be a little sarcastic. Fear not, these are professionals who do deep diligence on the companies or individuals they lend to.

[00:14:42] So obviously I'm a bit sarcastic here because you can make some counterarguments to the fact that the due diligence is maybe not as good in certain cases. And I'll touch on that on some of the risk a bit later on.

[00:14:54] Another advantage that proponents of private credits claim is that the loans will typically be tailored on a case by case basis, which allows private credit to have more control over its investment versus publicly traded debt, for example.

[00:15:08] So in terms there are a lot of risk and issues here before I go over them. Anything you wanted to add, Braden? On their adeptions, is it a first come first serve? Like who gets liquidity priority? That's my understanding. Yeah, first come first serve.

[00:15:24] Okay, got it. No, I'm good. Keep going. That's my under... Yeah, I could be wrong, but that's my understanding in terms of redemption. So there might be some sort of pref stack as well.

[00:15:34] Yeah, yeah exactly. But typically right at institutional investors that will. So Penn you're thinking about pension funds here, endowments, players like that that will be putting money into these private credit funds.

[00:15:48] So these investors will typically have a longer time horizon. There's also you can have a high net accredited investor, so high network individuals that will have access to these kind of products.

[00:16:00] So it's definitely not available typically to the retail investor. However, there is well simple trying to democratize that and I do commend them for doing that on one hand, but doesn't mean it's a good product.

[00:16:14] That's what I'm trying to say here. So in terms of risk and issues, well, there's an easy argument to be made that credit risk are higher since these borrowers can't get financing through the traditional banking system.

[00:16:27] Like I mentioned before, there's liquidity risk and that's one of the major risks in my opinion.

[00:16:34] Like I mentioned earlier, it can be very hard to get the money out even once a lock up period is done on top of that. A lot of people don't realize that and it's not only for private credit private equity would be similar to this,

[00:16:46] even private or real estate funds you might see this as well fund managers can actually decide to close redemptions altogether for a period of time, meaning that the capital is actually stuck in there.

[00:16:58] This is also known as gating withdrawals. An example of that is well, a couple of examples that come to mind. So you've seen the big short, right, Braden? I sure have.

[00:17:09] So remember when Michael Burry at some point in the movie just basically tells his investors like, I'm making this bet. I'm betting against housing and this will work out but the premiums every month that they had to pay were quite high and the fund was essentially bleeding

[00:17:28] and that's before the actual market started crashing and the investment so the that they did actually started going up in value.

[00:17:37] Yeah, it's the whole idea that you can be right but the market can stay irrational longer than you can stay solvent is that exact scenario where the premiums are so high that every investment bank is like, sure, you want to make this trade?

[00:17:57] We'll take the other side of that. But the premiums, how long can you withstand these premiums basically?

[00:18:05] Yeah, and to avoid that Michael Burry decided because his investors were not really on board with the bet he was doing and he didn't want them to start pulling the capital and essentially it would just create losses on its own because investors would start redeeming.

[00:18:23] So he closed a redemption. Right.

[00:18:26] So this is an example in that movie. That's exactly what private credit funds can do. We saw that happen for private real estate funds or real estate funds when COVID hit a lot of these funds close redemptions for that same reason is because there was a lack of transaction and they didn't want investors to start pulling capital because if investors starting doing that they would have had to

[00:18:49] hold their commercial real estate likely at a major loss and then it would have impacted the returns really negative return. So that's the reasoning behind it but they can certainly do that for private equity and private credit.

[00:19:03] So that's important to understand because some investors may think, okay, when the lockup period is done I can start withdrawing my capital even if there's a limit on what I can withdraw while they can actually close that if it's at their discretion.

[00:19:16] I think they need a good reason but again they can probably make up something if they want to close redemptions or all of them.

[00:19:23] They did that scene in the big shorts so well with Michael Burry in his office and all the phone emails coming in and the phone calls coming in and everyone just turning on him.

[00:19:34] It basically has that equivalent of a bank run happening which he had to get in front of. That was just so expertly done. That is really good cinema right there.

[00:19:43] Yeah exactly but I thought it's a good example to illustrate just this and fees just like private equity the fees for private credit are like are just really high they're stupid high.

[00:19:54] There is a reason why these products are being pushed by Wall Street and Bay Street that's because they make a lot of money on these products.

[00:20:01] I won't go over all the fees but there's two main types of fees. The first one management fees where people are pretty familiar with and the second one is carried interest fees.

[00:20:13] So the fund manager gets paid whether he performs or not via management fees typically they'll be around 1-2% but you know if you're fearing that the fund manager would starve on those fees then don't worry they've got you covered.

[00:20:28] They also get the higher fees if they achieve a certain hurdle rate. So typically it will be around 5-8% so if the manager exceeds the hurdle rate they'll get 15-20% on that excess returns that they provided on top of the actual management fees that they're getting.

[00:20:48] So say a fund has a hurdle rate of 5% and 20% performance fees on that so if the fund gets 12% return then they'll get an extra 20% on that 7% additional returns that they did.

[00:21:01] So it's very lucrative for fund managers let's not hide it here they make good money on it and what's worse is they make good money whether they perform or not.

[00:21:11] Sure there could be some reputational risk and I'll talk a bit more about that but I think it's important to understand very similar to private equity the way the fees are structured.

[00:21:22] Credit risk that's one of the biggest risk here so it simply means that the company receiving these loans may not be able to pay them back so as more and more firms get into private credit space there's more competition

[00:21:36] but also firms that probably should not be in the space competing with those who have been in private credit for years if not decades.

[00:21:44] And the larger more established firms are likely to get the best deal and leaving the ones they don't like to the other firms and you'll probably recognize some of the names here,

[00:21:58] I'll share my screen for joint TCI at the top of the list people may not be familiar with this one but I know you will so it's Oak tree capital management and loans Oak tree that's Brookfield that owns Oak tree.

[00:22:12] So there's about a handful here on the Charter Time Showing so there's Oak Tree capital management at the top and you're looking here at an excess of 100 billion in private debt private credit and a decent amount.

[00:22:26] I'd say about like 1015 billion in dry powder Goldman Sachs is second heiress management, HPS investment partners and Blackstone Group Roundout the top five and there's a clear demarcation at the top five mark with all of those being over 60 billion in terms of actual private credit investments and over I would say about 75 80 billion if you include the dry

[00:22:52] powder and then there's a significant drop from that point on. Yeah this is the king the kings of the Alts at the top here. I mean this is this is fantastic business to I mean you just described how these fund structures work and it is it is pretty lucrative for the asset managers that's for sure.

[00:23:15] And then you think about one that may have only 500 million or 1 billion I mean it's peanuts compared to these these companies right it's a bit like you're you're more familiar with the venture capital space which is private right as well it's a different kind of private investment but the big players tend to get first dibs on,

[00:23:35] you know most of the deals and it's not any different here and when these big players pass on the deals maybe you know they miss some.

[00:23:44] Some deals they should have gone through like obviously they will like no one's perfect, but I think there's a good argument to be said that you know probably majority of the time when the big players pass on the deals they're probably not that great because they have a whole lot of experience in this space.

[00:23:59] Yeah like track record really matters for every type of asset manager and VC is no different. It's like some VC wants to give you money and it's like sure I sure I am a founder if you're really desperate then maybe you'll take their money but if they have no track record of success with companies in their portfolio that are at least adjacent in your type of vertical or industry.

[00:24:26] It's going to be really hard and you're not going to be able to back you're not going to be able to, you know go call their founders in their portfolio and you know just get that seal of approval that they were good to have, especially if they're taking a board seat on your company right like the last thing you want is to give up a board seat and a venture round with a group of people you don't get along with.

[00:24:48] Yeah, exactly. So I mean it's really interesting and the chart I showed is actually from the Federal Reserve in the US so there is a really interesting piece that they did on that the IMF even raised it as a global systemic risk private credit it's getting quite massive and I'll talk a bit more about the size here.

[00:25:08] The default rates are low in private credit currently however interest coverage ratio have been declining since peaking in 2022 meaning that the companies are having your you know they have their interest payments covered less and less by EBITDA so it's not something you want to see especially if you're in private credit it's not an alarming phase just now but it is something that the Federal Reserve did highlight in the paper.

[00:25:34] And on average according to Federal Reserve again 33% of the value on a loan is recovered when there's a default for private credit that's versus 39% for high yield bonds and 52% for syndicated loans so syndicated loan would just be multiple kind of multiple banks or multiple companies providing loans to one big project for example so if it's a major project.

[00:26:03] You'd have you'd have several partners in there but it just goes to show that when a company does default the recovery rate is not great and I think that's important because we don't talk that much about bonds in general for corporate bonds but obviously if a company goes bankrupt or defaults.

[00:26:20] Usually bonds will have they'll be at the top right in terms of the rights to the asset and then shareholders will typically not typically but a lot of the time we'll just get wiped out because there's just not enough assets to you know pay the debt holders and then go all the way to the shareholders so I think that's just it just goes to show you how risky it can be when you have high yield bonds which is

[00:26:45] Jung bonds that are their recovery rate is still quite a decent amount higher than credit private credit. That's a good summary so are you you dumping money into private credit here or what.

[00:26:58] No no not yet so in terms of size I mean it is quite massive so in 2010 private credit had around 250 billion in asset under management and according to a 2024 pre-knead global report on private debt in 2022 that amount at reach 1.5 trillion and in April of this year that amount was

[00:27:20] estimated to have grown to 2.8 trillion so I wouldn't be surprised if globally in terms of private credit we reach a 3 trillion mark by the end of this year and then you know just kind of wrap this up in terms of saying look there's no obviously there's risk to any investment

[00:27:38] but I think it's important for people especially when you see these opportunities on your broker like well simple offering them it may be good often times they'll show you the returns historical returns but I've noticed they tend to show a gross return so not net of fees so that's something to keep in mind

[00:27:58] and you know make sure you do your research on the investment they're offering you especially because well simple I mean they're offering it but it's a minimum $10,000 investment so I know for a lot of people 10 grand may be a significant portion of their investment portfolio

[00:28:15] whether it's 10% 15-20% and that's a lot of money to put in one single investment so it's really important to do your research when you see these kind of offers especially when they may seem too good to be true because a lot of the time that's unfortunately the case.

[00:28:31] These fintechs eventually become further and further looking more like traditional financial services because that's where all the margin is so just something to be aware of.

[00:28:45] Yeah and I guess too one thing I didn't mention is you have these smaller companies right or these smaller funds and they may not have access to a whole lot of deal and typically they'll have a given amount of time to find deals if not they have to return the capital to their investors so there is also a perverse incentive for them to actually

[00:29:10] Deploy.

[00:29:11] Invest the money, deploy even if it might not be a great deal because they want at least to have a shot at those performance fees because they're getting their management fees regardless and it may not be good for their reputation if they just sit on the money they return it to investors instead of investing it even if they don't end up getting great returns at least they invested it so something to keep in mind as well as I wrap this up.

[00:29:36] And a tangible example to relate it back to venture is no one was deploying in 2022 because it was spooky and scary to be in high growth software remember so like everyone's FOMO, everyone follows the trends whether it's private or public same thing but they have a limited amount of time before they have to deploy that fund

[00:30:01] because you know say they're on fund 3 the firms on fund 3 if certain amount of time to deploy if that is creeping into 2024 or whatever it's like they're in a sprint to deploy in a bunch of different portfolio companies and sprinkle cash here or whatever they're incentive because dude I don't want to return capital I want to bear fees on the capital are you kidding me I don't want to return capital I work so hard to gather all the capital so yeah that's a really good point.

[00:30:32] Yeah, I don't know about you but if I'm giving my money to someone to invest it I don't want them to rush and invest it and throw it at whatever they first see because they don't have a choice. Yeah well put.

[00:30:48] Alright let's shift gears and look at some public FinTech specifically in the payment space so the ETF FinX FINX over the I'm going to put everything basically to the end of 2021 in terms of a timeframe to look at when a lot of this stuff kind of peaked it was right before it peaked and then it all kind of came crashing down so that ETF

[00:31:18] FinX is down 47% since that timeframe we'll call it July 2021 so since how similar do you think it is to ARC?

[00:31:30] Yeah it looks pretty similar to ARC if I was to comment them out I think ARC's been actually worse but yeah a lot of this buy now pay later junk got smoked as well so I'm going to talk a lot about some of these names.

[00:31:44] I have some select FinTech names here that are all down at least 65% up to 92% wise ad-yans square affirm toast lightspeed are all down bad.

[00:32:00] Paypal is down 73% during that timeframe it's just astounding if lightspeed down 82% it's been crazy the price to gross profit multiples are all down more than 65% sorry I most spoke there that's all the multiples are down at least 65%.

[00:32:24] All the stocks are negative during that time in terms of share price some of them down well over 50% and into the 80%. If you look at just square like or I guess now block but ticker SQ is down 72% during that timeframe.

[00:32:43] Woof the only ones that are kind of holding out a little bit are wise and kind of ad-yans but ad-yans been getting smoked as well. Paypal's price to gross profit is down 82% during that timeframe so that is just complete multiple compression.

[00:33:00] So what I'm going with this is the multiple that investors have assigned to these payments companies is way way down they're very very out of favor now that doesn't take a genius to say that but the analysis here is is this deserved or is this an opportunity?

[00:33:21] If I look at just top line growth for these names it's been pretty good during that timeframe of July 2021 and even like if you look at an international payments like Mercado Libre or something you get a very nice growth trajectory and a very declining stock multiple on gross profit on earnings on sales whatever you want to use.

[00:33:49] So all of those names are up at least 75% in terms of on their revenue. Toast which is the restaurants point of sale system is up 342% on revenue wise and ad-yans and lightspeed are all up over 200%.

[00:34:06] So those businesses have been growing now are any of them really particularly interesting I would say wise and ad-yans are the most interesting they're both European payments companies that's ticker wise on the London Stock Exchange and ticker ad-y which is the ADR in the US because none of the other names are consistently profitable maybe outside of Paypal.

[00:34:32] Wise and ad-yans are basically the only ones predictably creating EBITDA and operating cash flow and free cash flow. Now Paypal is a very interesting one here because Paypal has been getting smoked very unloved company the company just reported earnings yesterday and transaction volumes continue to tick up very effectively.

[00:35:01] So something's gotta gotta give here with some of these payment company names. I think it's a pretty good place to hunt. I don't like the unprofitable ones but wise ad-yans and maybe Paypal Paypal certainly got some problems but the numbers still look good.

[00:35:21] I think this is a really good place to hunt right now Simone. Yeah I mean it's different than 2021 I remember when these prices were just crazy and people were just I mean These were like the most expensive stocks in the market two years ago.

[00:35:39] Yeah I think it was growth top line growth at all costs didn't matter whether you were profitable or not as long as you grew the top line that was good.

[00:35:49] I mean I think we can also probably make the argument that it kind of goes hand in hand with the ZERP policy so zero interest rate policy that was in place where people had no incentive at all to hold cash.

[00:36:05] So they were looking to invest in anything that provided growth and these were clearly providing growth and probably not the right kind of growth but they were definitely there and I'm with you.

[00:36:17] I would definitely look more at the profitable ones. The non-profitable ones I can't I mean we'll have to see by the end of the year flight speeds able to be profitable.

[00:36:27] I think they use adjusted profitability. My God having trouble with that word today but they're adjusted metrics if they're profitable on that I'm not quite sure they'll be able to and honestly I would like them to just be

[00:36:42] profitable on a gap basis but also on a free cash flow basis but it shows that it's not an easy industry. There's a lot of competition and a lot of these companies like you know Aedion better than I do but I think their margins have been hit a bit too right in the last couple of years.

[00:37:00] They have been but they're still so good.

[00:37:03] Yeah but I'm just saying right is what you're starting to see for these companies is that you know you're seeing the margins being hit so the company has to be quite solid from a margin perspective to be able to take a little bit of a hit there but still be profitable.

[00:37:21] Aedion is a 33 billion Euro 25 billion enterprise value in Euros company today they're doing the same transaction volume as Stripe and Stripe is now valued I think at 80 billion on their latest private valuation 80 billion US.

[00:37:43] So there is a massive disparity between those two companies right now on and Aedion's way more efficient way more efficient they do the same amount volume with way less people and way higher margins and similar growth profiles so.

[00:38:00] I think that they're both pretty awesome businesses you know in terms of sitting there as the payment process there's B2B for a lot of people all API based very very good businesses.

[00:38:12] It's just so hard like every time I arrive at I'll buy more Visa and Mastercard you know that's like I think that they're attractive here too.

[00:38:21] You know American Express even I would be comfortable with as well I think it's the third most attractive of the three credit card players but still very different business but still very good business.

[00:38:34] Yeah so in summary Aedion wise the two European FinTechs I think are worth a look here for the listeners worth a look for researching none of this is advice worth a look for your own research and maybe PayPal if you want to get into the deeper value.

[00:38:53] But those three companies I feel let's let's let's exclude PayPal because I think they have some growth issues when it comes to active users on the platform going to competitors like Revolut and Wise for instance.

[00:39:05] I didn't wise feel like they're the babies being thrown out with the bathwater that's how I think about these companies right now and that's where there's good opportunity.

[00:39:13] Yeah I mean Aedion is trading at the cheapest multiple pretty much almost that ever has not quite but it's getting there.

[00:39:22] It's around you know on a forward basis around like 40 in terms of price earnings and price to free cash flow and it I mean it was trading and the high 100s at the peak in 2021 and 20 early 22. Yeah it's traded at a median of 77 EV to EBITDA expensive stock.

[00:39:44] It's at 32 today and much less on a forward so that's the point of my segment I think these are worth a look here without a doubt they're very unloved they were maybe the most loved companies just a few years ago and it's so funny what can happen in the market stuff goes in and out of favor.

[00:40:04] The question you have to ask yourself is is it deserved and to me you know blinders on to stock price these businesses I'll throw Mercado Libre in the mix too as well.

[00:40:17] Those businesses have been executing on all cylinders and the multiple just continues to compress so with a look. Yeah yeah I had another segment but I'm not sure if we'll have time should we do it or wait for next time.

[00:40:33] I moved it up to the top of the dock for next time. Okay so we'll wait yeah okay I was kind of looking for it and I wasn't sure.

[00:40:40] I gotta get ready for a flight to New York so tomorrow I'm going to New York at 7am and flying home at 7pm. I've never done this before we'll see how it goes I'm experimenting but it's a full it's literally a commuting for the day.

[00:40:56] Commute yeah yeah I mean it's yeah it was one I've never done that in one day but I'm not a fan typically of the airport travel experience so good luck with that. I'll be a Billy Bishop dude I am not I'm not going to Pearson so I'm good.

[00:41:12] But it's still going to the US right so there's gonna be is it not a bit more intense or. It's still going to the US but I got that Nexus card. Okay okay.

[00:41:22] You know I still got it so they they got all the data on you yeah basically big data has everything they need to know about me. Hey big data you can know anything you need to know about me as long as I get to the airport faster.

[00:41:34] I'm willing to sell my soul. Brayden for CBDC. Yeah yeah yeah yeah you heard it here first thanks for listening to the podcast folks we really appreciate you we are here Mondays and Thursdays.

[00:41:48] If you're on your podcast player right now you're looking at that phone and you're on Spotify and you haven't pressed follow subscribe to the podcast on the top of our podcast page do so if you're on Apple podcasts or any of the other ones that are coming into the fold here.

[00:42:04] If you subscribe it would really really help on Apple podcast now they change some stuff so you gotta actually go into the pod they disabled a bunch of notifications and getting people to go.

[00:42:17] Listen to the podcast if they're subscribed so if you're on Apple podcast and like oh I haven't been tuning into podcasts as much or this podcast for instance because Apple's made some changes.

[00:42:27] Tim Cook Thanos just snap of a finger changes a couple businesses and doesn't even notice perfect. Oh it was probably a side project in between that new AI Apple intelligence that they unveiled I think was it yesterday. Did they do some developers. Oh yeah I think so.

[00:42:48] WCC was yesterday. World developer conference whoever. Worldwide developer conference WWDC. Yeah so I think they unveiled it I mean they unveiled that they said it was coming a month or two ago but I think they were launching it yesterday for developers to try out.

[00:43:05] Oh okay yeah it's gonna because I thought the developer conference was like a month or so ago. Yeah they announced it then and then I think I saw the launch yesterday so yeah it's gonna turn Apple's iPhone sales around. They'll start growing because everyone will switch.

[00:43:23] Because everyone wants chat EBT on their phone right. That's exactly why. That's the bet right there. I'm gonna go buy a stock. I'm a little skeptical yeah exactly but we'll see maybe they will. I'm a little skeptical myself.

[00:43:40] I'm skeptical you know it's so funny I like run an AI company I'm skeptical on all these applications of AI because so many of them are completely useless but I don't feel that same way about investment research.

[00:43:52] Like being able to summarize an earnings call and not have to listen to it in four seconds that's really useful like for my workflow and for professional investors too. It's like Google works fine for a lot of this stuff that people want to do.

[00:44:06] I haven't seen search volumes come down at all. You know and chat EBT is it's a great tool. I use it all the time but it's not it's far from perfect.

[00:44:17] If you've used chat EBT a little bit you know it's far from perfect and you know you have to make sure when you ask a questions and you're looking for data I always double check with the sources just to make sure it's accurate. Not hallucinating.

[00:44:32] Sometimes I ask it to you know just kind of rework an email or whatever and sometimes it will just kind of remove an important part and I have to tell it to like redo it and include that important part so it's not. It's not perfect.

[00:44:46] I will obviously get better over time but I think I mean I'm more than happy to have it on my laptop and when I want to use it I go on there. I upgrade my iPhone in a couple years. My iPhone 13 works just fine. I won't upgrade it.

[00:45:01] I won't speed up the upgrades just because of this. You're not going to jump to the Apple store when this comes out? I'm shocked. I will not. No sorry Tim. Sorry Tim. Sorry Tim Apple. Nice listening folks. See you in a few days. Bye bye. Thanks for watching.