Welcome to Episode 51 of The Transcript Podcast.
This is a special episode of a recording of a Twitter Spaces conversation we held on Thursday, 24th February with Sam Ro as our special guest.
In this episode, we discuss the key themes that we took note of in Q4 2021 earnings calls.
We are making this week’s episode and transcript available to all our subscribers, both paid and free. Become a paid subscriber to enjoy access each week:
Show Notes:
[00:00:00] Introduction
[00:03:67] Covid and geopolitics
[04:10:27] Inflation
[00:08:27] Labour market shortages
[00:13:28] Supply chain challenges
[00:18:45] Crypto-trading and interest rate hikes
[00:22:51] High valuations and massive earnings growth
[00:29:54] Subscription fatigue
[00:33:38] Independent content creators
[00:35:54] Technology cycles
[00:37:34] Inventory
[00:40:22] Travel dynamics
[00:41:11] 2021 key themes and 2022 outlook
Episode Transcript:
Introduction
[00:00:00] Scott: Welcome to our Twitter Space for The Transcript where we're going to be going through insights from last quarter's earnings calls. It feels like the world has changed quite a bit in the last 24 hours. So I'm sure we'll start to think about what the world looks like going forward a little bit here too. I'm Scott Krisiloff, the editor of The Transcript along with Erick Mokaya, who is the lead author of The Transcript and co-host/co-founder and we've got Sam Ro on here as well. He's been a big supporter and we're happy to have him on the line as well. How's it going, Sam?
[00:00:32] Sam: Great. Thanks for having me on.
[00:00:34] Scott: Cool. Let's start with the way that the transcript is structured each week, we have the sections that are the same thing each week. And we start with the macro section. Let's start with the macro and the rundown there. I think the biggest change that happened in the first quarter is that we have the big Omicron wave that we all went through. And then on the other side of that, it feels like the era of COVID having a psychological impact on all of our lives is over. And I feel like that kind of got cemented today with the Russian invasion of Ukraine. I feel like that in and of itself is just an indicator that we're ready to turn the page on COVID being a dominant factor in our lives. Hopefully, that's the case and no new variants pop up that make us go back. But that's the way it feels to me right now. Erick, Sam, any thoughts?
[00:01:23] Sam: Erick, you go ahead.
Macro
[00:01:24] Mokaya: I think the main takeaway from the macro section is the same, especially in the past four weeks, suddenly geopolitics has sort of started being a key factor that a lot of companies are mentioning. We haven't seen that in a while where there's a unanimous kind of a discussion around companies concerned about an event in Ukraine or around the world generally. A lot of companies were mentioning that. I would agree that this is kind of the quarter you could tell, a lot of companies have shifted from maybe using COVID as a reason for anything and more discussing now issues to do with geopolitics. Sam, did you see anything similar?
[00:02:00] Sam: Yeah. I was going to say the same thing, and I might add a little bit of nuance to that. One of my favorite quotes from this earning season came from Boston Properties, the commercial real estate manager. There were talking about how even amid, the Omicron wave, and yes, there are so many disruptions tied to COVID variants and stuff like this that a lot of leisure activities and entertainment types of activities were at full capacity concerts, amusement, parks, restaurants to the degree that these businesses could serve their customers. But they did say, and I think a lot of us and a lot of the listeners can sort of appreciate this. They did say that one area where there continues to be a sort of weakness in terms of activity is office spaces.
While companies are certainly open and having workers come back activity around offices continues to be kind of low. I wonder to what degree COVID and variants are affecting behavior because of people’s concerns about getting infected, which certainly exists. But to what degree these other things are going on, like for instance the way people think about work and lifestyle and stuff that are making them more reserved about going back to the office. Using COVID as an excuse to not go back to the office as opposed to being concerned about COVID. So yeah, I think it's some really interesting stuff that came out in terms of how companies performed in light of what was expected to be very disruptive.
[00:03:41] Scott: Yeah, that was super interesting, Sam. We picked up the same thing in terms of people not going into the office, but still living their lives, going to restaurants, traveling, and stuff like that. For me, even in the first quarter business travel fell off a lot but it started to pick back up. I feel like I'm seeing more people going back into offices more regularly and in LA mass mandates are coming off completely even at schools. So I think the world's getting back to normal.
[00:04:09] Mokaya: Yeah, I think definitely on that end. Another theme that we checked out in earnings calls is about inflation, of course. I know Scott you have a lot of historical perspective on this since you've handled this a lot and the issues may be to do with the company's expectations around raising rates, going into this new year. I mean, raising rates from the perspective of the Fed. This is also the quarter where you see a lot of companies who've mentioned inflation being a major concern, but again from what we could gather is that the consumers so far have been able to take the price increases well. Maybe going forward, there could be maybe a little worry around if the consumer can keep taking this more price increases as maybe costs and labor become a big issue. Did either of you see something like that?
[00:04:55] Sam: Yeah, sure. I'll go ahead and jump in. It's interesting. There's sort of two things to hit on there. First, the matter of inflation and cost increases and all of this stuff and I think you mentioned this too briefly, but one of the things that a lot of these companies, if not all of these companies that are sort of facing these challenges with cost inflation, whether it's rising raw material costs or higher labor costs have all almost universally talked about how they are at least passing some of this cost pressure off onto their customers. And, they're very specifically noting that there's very little resistance to accepting those price increases.
Some of the commentary that's been coming out and I think this is something that's sort of changed in this recent quarter, as opposed to earlier quarters where maybe consumerism businesses were sort of surprised by these price increases and maybe there was some more resistance. Now, a lot of the conversation seems to be, well, the customer now knows inflation is everywhere. And so when we raise prices they know that this is not us like trying to screw them, but that this is just a part of every other business and everyone trying to deal with inflation as a problem.
It's almost like the customer, whether it's a consumer or a business is now understanding at least in the short run that inflation and price increases are just part of the deal. And so they're moving on with it. And on the other side of it, this is also an acknowledgment of the fact that consumers and businesses from a financial perspective are pretty healthy. Their capacity to service debt and cash levels is extraordinarily high. And so we have this interesting dynamic of limited goods that are leading to higher prices but customers are paying because they have the financial capacity to pay for it. So yeah, some interesting dynamics there.
[00:06:54] Scott: Yeah. Adding to this again, consumers have so much money they're flush with from stimulus spending, generally healthy economy, strong stock market, and all of that. Historical perspective, it has in many ways felt analogous to me, the period post World War II, that was the last great deflationary period that we experienced as a country. It was the 1930s, and then you had this big international calamity event in World War II, where the US government took on a massive amount of debt, put money straight into consumers' pockets through really hiring back then. But people came out of World War II, there was a scarcity of production and the supply chain, we were making cars or tanks and planes instead of automobiles. So people came back and just started spending a really large amount on consumer goods.
And you saw a large amount of inflation throughout the economy during that time. And originally the US government tried to fight that with price controls. That's what they had done during World War II. And then kind of like in late 1947 the Fed decided, Hey, wait, maybe monetary policy has something to do with this, and we should be using monetary tools to address inflation. And so they finally started to do that in ‘48. And then in ‘49, you had kept the inflation more in check and you got a huge bull market from ‘49 through the 1950s, really through the 1960s. So similar to that with the exception that in this time around financial markets, asset prices are extremely elevated. We're not exactly low multiples facing this inflation.
[00:08:26] Mokaya: A quick one on labor markets. One of the quotes we picked up was from Ark restaurant CEO saying that we have labor problems everywhere. We can't find people, our labor costs are going up significantly well beyond minimum wage for certain functions that used to be minimum wage. So I think this is picking up in the trend that has happened in the pandemic where people are going away from jobs that they didn't like now into jobs that they want, or just staying off the job market because they have some money in their account. Anecdotally, or at least on the ground, what have you seen as regards labor market issues? I think from what you pick up in their earnings calls is that companies are stressed in terms of getting labor to meet the demand that is out there. Sam?
[00:09:07] Sam: Yeah. I think that's probably one of the more interesting things that are sort of flying under the radar in terms of macro right now, and it's sort of an extension of supply chain issues too. But because of the shortages and the inability to meet the actual demand that customers are bringing there are so many companies that keep telling you that the business could have been better if we had more people on the assembly line or we had more servers or if we had more line cooks or whatever. There was like 30% year-over-year earnings growth in Q4 and sure.
People expect that to decelerate a little bit, but it still seems to be the case that pent-up demand is still not being fully addressed. And this has to do with the fact that Scott, you mentioned this too, that there are shortages just all over the place. So, the fact of labor shortages is that there aren’t already enough goods being made, or they aren’t already enough tickets to sell at Disney world or what it might be. And I think that sort of speaks to what could be a longer-term sort of bullish potential. That's still sort of, built up in that the consumer and the business is doing these purchases they're still not able to fully spend as much as they would like because of these shortages.
So I think there's a lot of fuel for demand in the coming quarters because of these actual shortages. But whether something like labor shortage gets addressed is a really interesting one because if you look at stuff like the JOLTS survey or data from like the Indeed Hiring Lab, the US economy at least has had 10 million unfilled open jobs for months. And this is happening as companies are increasingly increasing wages but these jobs are continuing to go unfilled. So, there is this lingering question of are companies able to increase their capacity to the degree that they would like so that they can address all of this demand? Those are unanswered questions, but I think, at the very least, the pattern seems to be the case that there continues to be pent-up demand.
[00:11:23] Mokaya: Maybe I jump in and ask Sam, I know you've written a little bit about this, but then what are some of the reasons why there's a lot of jobs that are remaining unfilled?
[00:11:31] Sam: Well, I think the first and foremost one is it seems that people have a lot of financial sort of flexibility. And this is not uniform across the board but folks who are homeowners are folks who have had money in the stock market, people who were on the receiving end of stimulus payments and stuff have had kind of a buffer when it comes to their financial situation. So maybe it's the case that people are still sort of not ready to go back to work for whatever reason. We still know that childcare continues to be a huge issue. It's not hard to find someone, whether it's someone in your own family or your own family or friends or whoever, but everyone is struggling to understand how to address childcare issues, especially with school systems having to deal with all of these kinds of problems.
I think as mass mandates and stuff like that evolve we could probably see more people go back to work because childcare issues sort of naturally get addressed. But yeah, I think those are the sort of the two biggest things. People do sort of have some financial flexibility. I mean, there was another survey a couple of months ago, or I think this gets updated by the Indeed Hiring Lab. There's also a big chunk of this population of people who used to work who aren't working now may be living off of the other spouse's income. So, suddenly there are two-income households that become one-income households, and while that might be more of a stretch from a lifestyle perspective that might work out better for them as people sort of reevaluating how they live their lives in this sort of post COVID era. I think those are the big factors, incomes that are up, savings levels that are up, and then two childcare issues that continue to linger.
[00:13:21] Mokaya: Perhaps now to wrap up on the macro section Scott, any thoughts that you'd want maybe to give on that section?
[00:13:27] Scott: Yeah, I was thinking about asking both of you guys, is there anything contrarian that we picked up in any of the quotes on the macro section. And I was trying to think about what my answer would be. I think there were some quotes talking about supply chains getting better, but it wasn't a resounding thing. I think the one that stuck out to me most was a quote from Walmart that talked about supply chains getting slightly better for them. And especially unload times at ports were getting better. That was a big source of supply chain disruption during the pandemic. So if that's getting better, that's something that could on a contrarian basis be surprising to the market. So that's something that I keep an eye on. Either of you guys has something to add to that.
[00:14:10] Sam: Yeah. That's something that's starting to come up in ISM and purchasing manager surveys where supplier delivery times are starting to improve. It's still taking forever for people to get their goods from manufacturers and stuff but there are signs that sort of improving broadly across multiple industries. But yeah, no, anecdotally there is no shortage of companies that are complaining that supply chain problems continue to be a huge problem. But one thing that's kind of interesting and I wonder how this affects profit margins and efficiencies structurally going further down the road is all this talk about like bringing processes in-house.
Rather than outsourcing certain aspects of the supply chain, they’re actually building that out, and then related to that, companies are increasingly onshoring/reshoring, whatever you want to call it, manufacturing capacity as opposed to being too reliant on vendors that have to ship products and stuff through ships and go through customs or whatever it is companies that are building plants in their home country. So I wonder to what degree that might help loosen the supply chain issues for certain companies, but what does that mean for costs and competitiveness down the road?
[00:15:36] Mokaya: Maybe I can jump in a little. I think last week's earnings newsletter was sent out and we noted this issue of trying to deal with supply chain issues by retaining some of the manufacturing inside the country. And I think one key area, this has revealed separately is with Intel where we looked at it more like a geopolitical play because everyone wants to make sure that they’re manufacturing some of these semiconductors within their country. Their target is to move from 10% currently semiconductors being produced in the US to around 20 to 25% in the next decade. It's shifted from where it was before, where the US was the one which is manufacturing, and then they outsourced it to Taiwan. And now they wanted at least to bring some of that manufacturing back. One of the companies to watch out for in that regard in terms of supply chains and in terms of sourcing of components is Intel definitely. And we talked about it a lot, Scott this week, right?
[00:16:34] Scott: Yeah. We did talk about that a lot and I think it could potentially become an even bigger theme going forward, especially if geopolitical stuff continues to heat up with Russia and Ukraine. And I think what most of us are probably really worried about is China and Taiwan, especially from a semiconductor standpoint. If we put the same sort of sanctions on a Chinese invasion that we did on a Russian invasion, the supply chain challenges that we've already been experiencing and are maybe starting to heal will probably get much worse again, and all of the inflationary impacts and stuff like that. So I think that's something that is like outstanding questions and things that we're watching into Q2 and going forward.
[00:17:15] Sam: Just on that point, Scott, I think it's interesting how we're talking about geopolitics right now and sanctions on Russia and how that stuff impacts the economies who have something at stake here. A lot of the talk that we hear from Biden and other policymakers when they're talking about sanctions against Russia, hand-in-hand, we'll talk about how they're trying to do this in a way that has a limited/minimal economic impact on their own countries and their economies. And so, maybe it's the case that, I mean, listen, I'm not by no means, am I a geopolitical expert, but this is something that I'm going to pay attention to should things escalate in other parts of the world.
I want to word this very carefully because I don't want to offend anybody, but it seems like it's easier to impose sanctions on an economy when you have very little exposure to them from a trade or economic perspective. I feel like these types of conversations become very different. To your point, Scott, but it would be much more of an issue for the US economy and other economies that are exposed to semi-conductors and Southeast Asia if similar types of sanctions were imposed on China, should that sort of escalate to those kinds of levels. I guess the other way to put this is that the more international economies are sort of reliant and intertwined with each other, everyone has an interest in sort of keeping the peace so that they don't have to go down these roads.
Financials
[00:18:45] Scott: Yeah. Those are very good points. That probably covers the international section. The next section for us is the financials. I think crypto's been very interesting and hot web three throughout the fourth quarter. It feels like crypto has died down a little bit with Bitcoin falling, but curious to hear any other trends that you guys are keeping an eye on the financial side.
[00:19:11] Mokaya: I don't think there was much right about in the financials. Banks are just doing the same thing they'd been doing for a while, releasing reserves. And definitely, there's a cool down in terms of the crypto thing that has affected companies like Robinhood, which rely a lot on that trading volume. That's been a major trend, this Q4 and full-year 2021. Sam, yourself?
[00:19:33] Sam: Yeah, from a lot of what I feel like we used to hear about when it came to stuff like crypto was overwhelmingly about trading and I guess from a more traditional financial services perspective, the degree to which banks were bending over backward so that they can meet client demand but it seems like the hottest that ever was may perhaps be behind us from a trading perspective. though it seems like interest generally speaking persists. The other thing, and I think this goes back to macro stuff that we were talking about earlier in this whole matter of interest rate hikes from the Fed and I guess sort of just the interest rate conversation more broadly.
And I think at least a couple of banks we're talking about these on their earnings calls about how they're pretty bullish on this especially if all this means a yield curve that potentially steepens, even though the exact opposite of that has been happening. But I think something that gets banks perked up is the prospect of higher interest rates. And then the other thing too, being, especially with short term rates something that I guess anybody with cash on their balance sheets will benefit from is higher short-term interest rates because so much of that cash and cash equivalents or specifically cash equivalents are exposed to short term interest rates. So we could see cash levels for companies increase as the short-term interest rates go up.
[00:21:06] Mokaya: Quick on that. Maybe I could ask a question. How do banks do when interest rates rise? That's a common question I've seen most of the banks getting asked in Q4. And then also how do banks position themselves in times of rising rates? I know a lot of us have not been in periods where banks or at least financial institutions experience rising rates. Since they hold deposits and they have to pay upon them. And then as they have mortgages and the issues around refinancings and all that's your take on that? Maybe Scott.
[00:21:35] Scott: Yeah. I think Sam hit the trends well in his comments that I think there's some perception that banks would benefit from rising rates. At the end of the day, Erick, to your comments, it comes back to the net interest margin, right? You have to be lending at a higher rate than you're paying your deposits. And I think psychologically depositors have become so used to earning no interest on their deposits that banks have become really asset sensitive. So if interest rates go up on a short-term asset side of the portfolio, you could see better earnings growth from these banks, and that definitely would be a catalyst.
Banks have perpetually traded pretty low multiples relative to the market since the financial crisis. And, it's been like 14 years since the financial crisis now. So I think we can all leave that behind psychologically. And maybe inflation is, again, we're kind of exiting this psychological period of deflation and going into potentially more of a psychological period of inflation. Banks could refer to more of a normalized inflation environment from an earnings perspective and also an investor multiple perspectives. So that is something that could happen. I would say that's probably a contrarian thing to watch.
[00:22:50] Mokaya: And maybe on that notice, it's good to ask because the public markets have been on a downtrend that past month. And a common question in earnings calls for financial institutions about whether that impact in public markets is flowing into private markets, especially in terms of valuations, and the common answer is, of course, very little has changed. I think companies like Blackstone don't see it. They're still raising record amounts of money and still processing demo that money into some of the small startup companies that are out there, or at least in the space that they invested in.
So I'm curious to know, a lot of companies are coming out in Q4 and full-year results like Facebook they reported their earnings and if you disappointed just a little, you got punished a lot by the markets and if you even beat the targets or the estimates out there, you still got beat up in the market. So I don't know what's been happening in the markets lately, but the observations that you've seen maybe as regards the public-private impact in terms of valuation and all. Maybe we can start with Sam.
[00:23:55] Sam: Yeah, sure. I think it's interesting how investors and traders have reacted to the beats and the misses. To your point yeah, it has been the case. And I think there are some charts and data about all this too, that better than expected earnings were either not rewarding too much in terms of share price or if the guidance wasn't particularly strong then investors were dumping the stock. And then of course, if you were disappointing on the bottom line not only would the stock sell-off, but we see trillion-dollar companies lose eight, 10, 12% of their market cap in a day.
I think that's probably a combination of things. One, evaluations being very high and not to mention the fact that stocks had been climbing for so long, especially coming out of the early phases of the coronavirus pandemic and that initial crash. It also has to do something with this expectation for higher interest rates and how higher interest rates suddenly make other types of securities more attractive and it means the cost of capital is going up. And it would make sense that valuations would contract. And then sort of tying all that stuff together is maybe, I hate to speak like this because it's all purely speculation, but maybe some investors and traders are looking for a reason to liquidate some positions on book profits or whatever.
Again, speculation, I hate even speaking to stuff like that, but it would make sense. It would make sense that stretched valuations, rising interest rates, and massive unrealized gains maybe that's a reason why people are selling a little bit more aggressively than they used to. But on the other side of that though, relates to valuations and specifically with public markets. I think what's interesting, still is the expectations for forwarding earnings like 2022 and 2023 earnings. Even after all of these under-earnings announcements and guidances have been issued forward earnings have been pretty stable as far as expectations are concerned.
So a lot of the seller seems to be somewhat detached from expectations for earnings. Yes, earnings growth is decelerating, but none of the expectations for absolute earnings have changed. If anything in recent months has just only changed for the better as they have been upgraded. You put all that stuff together and valuations are slowly becoming a lot more attractive than they used to be. And, it could soon be the case, it might be next week or whatever, but we're going to start seeing a lot more strategists talk about, well, valuations are attractive now. We can no longer talk about bubble-level evaluations because of how much prices have come down despite earnings holding up.
[00:26:48] Scott: Yeah, I think you make a great point, Sam, and the earnings growth has been so massive over the last couple of three years, that valuations that looked an extremely high couple of years ago have kind of been eaten away by the earnings growth. And so as stock prices have fallen, the multiples don't look quite as high as they did. And I think a counter to that though, is part of that major boost to earnings for these companies has been inflation. And when you have that large CPI, seven and a half percent of the earnings growth, I think there are a lot of indicators to say that inflation has been even higher in other segments.
But when you have inflationary periods, you would expect to have rising interest rates offsetting that. And so multiple it could go much lower, an average multiple for the S&P 500, I think it's more than the 14, 15 percent if you go back through the 20th century. So yes, earnings could be growing a lot and multiples could be falling more than what we've been used to in this extremely low-interest-rate environment. So that's something to keep an eye on too. One other point on earning seasons, I think two of the big earnings miss company that stands out to me are Netflix, Peloton, a third being Facebook.
And some of the dynamic there is the readjustment from the pandemic where you had really strong growth again from like a Netflix and then the readjusting to a world in which people aren't sitting at home watching TV quite as much. And so you're having now a growth headwind in 2022. And that's interesting, and for a long-term investor that probably actually creates some sort of buying opportunity because the stock may trade sideways. You might have some multiple compression and then earnings growth returns in like 2023. So those are other dynamics. I think Facebook is probably the most extreme example of that. Erick, do you have any thoughts?
[00:28:52] Mokaya: I was surprised by the amount of punishment some of these stocks had to endure, let's say like Facebook losing around 200 billion in market cap in a single day. I think that was substantial. Looking at some of these companies, it's not that something that's fundamentally changed about the company in the past quarter. If anything, some of them had record quarters let's say a company like Salesforce or Shopify, so it's not like something has substantially changed in the fundamentals of the company. Maybe investor psychology has changed.
I just posted one of the charts that shows that most of the companies that missed this quarter got hit a lot more. Or if you miss by a little you got hit a lot more than usual. But again, this also presents nice buying opportunities for those who missed it. Some of these stocks are trading at the same valuations they were just before the pandemic. So it tells you the opportunities to also maybe go into the market with a nice bucket and just collect some of these stocks that you may have missed out on because of the pandemic. Scott, do you have anything? You can also at the same time, segue us into consumer and tech.
[00:29:53] Scott: Yeah, I think you may have been segueing to the same place that I was going to, which you and I have talked about on our podcast a couple of weeks that Facebook's earnings myths are reflective of potentially a very large change in the advertising landscape of the way that advertisers are reaching consumers. And we've picked up quotes not only on the Facebook earnings call but in companies like The Trade Desk, Roku recently. Subscription fatigue is one element of this, like people having to subscribe to a lot of different services and not wanting to pick up an additional service and so gravitating towards more of an ad-supported model like Hulu or something like that.
So there's that, and then there's also the bigger one for Facebook, and some of the other social media companies are the move towards privacy and the move towards not being able to see who is interacting with ads in the same way as you would've been able to a year or two ago. And so that benefits companies like Google on the search side and is a headwind to Facebook and could be large to shift in the way advertising budgets are allocated. And so, again, anytime you have a big shift in money is being allocated that creates an investment opportunity for companies with their buckets in the right place. The Trade Desk is one, I don't own it, but I'm following it closely. It's got a hefty, hefty, multiple on it. But if there's a sell-off, I could see myself buying that. Sam, are you picking up any of that?
[00:31:20] Sam: Yeah, I think you've pretty much said all of it. I come from media companies that relied so heavily on operating as free sites with all paid for by ads, hopefully, that people were clicking through or at least, just sort of seeing through impressions or whatever. But, I'm not gonna pretend like it wasn't surprising to see how much market cap Facebook loses in a day. But when you begin to think about how quickly there could be shifts in terms of industry trends, like specifically for something like advertising, it's unsettling to watch because so much wealth vanishes and that doesn't even get into all the different companies that are impacted by various policy changes, whether it's Apple and their policy changes as well. But yeah, definitely very jarring and I guess it's just sort of a lesson for all investors that things can change just very quickly.
[00:32:17] Mokaya: Yeah. On that issue of submission fatigue, it's the first time I've seen it mentioned by companies. The example we give with Scott is about, you want to watch a show say on Netflix and HBO, let's say you're a regular user of Netflix, and then you want to maybe watch a show on HBO, the challenge is that you have to pay the whole month subscription to enjoy just one movie or series from another streaming platform. And that creates a lot of challenges in the sense that you don't want to keep paying that every month. So there are a lot of consumers who would prefer maybe all the content was assembled to one platform where they can pay for it.
But now that they have so many, they are okay with consuming ads in some of them to be able to enjoy the content that is there. So I think that's what you see. So remarkably, this is a quarter you saw like YouTube revenues when you compare the YouTube ad revenues alone with the total revenues on Netflix, they surpassed that. And I think that's very significant. It shows you that there's a little bit of a battle between the types of business models some of these companies are adopting. Is it optimal business model going to be pure ad-based or pure subscription-based like Netflix or somewhere in between? And I think that's a good trend to keep track of going into this new year, I would say. Any thoughts on that are any other thoughts that you may have noticed in tech or consumer?
[00:33:38] Sam: Yeah, just one more thing related to this sort of consumer behavior too and this came up during the Facebook or the meta platforms call, there's this gigantic elephant in the room called TikTok and it's not easily comparable to binge-watching eight hours of a great series. And indeed a person's time is finite. And, with all these people spending so much more time on places like TikTok, that's time that isn’t being spent scrolling through Instagram or scrolling through Facebook or looking at some of these other social media platforms, and yeah, maybe that's even taking away potential eyeball time, screen time from places like Netflix or whatever.
I'm sure it's not as material for some of these bigger streaming services but it is something worth noting. And maybe this also speaks to YouTube, where there are a lot of folks who sort of operate outside of these big streaming companies that are sort of independent content creators. I think that's certainly an interesting sort of space to watch. I mean, everything from ring lights to the new iPhone video cameras and stuff is turning average Joes into extraordinary producers of very compelling content. And they're all doing it independent of some of these big production houses. I don't have the numbers or whatever to talk about like how much impact that has but anecdotally as someone who does spend some time scrolling through TikTok I can say that the entertainment space is very competitive.
[00:35:13] Mokaya: It's amazing how much good content is being produced or churned out on TikTok itself. And there's a quote I’ve pinned there from Facebook, of course, citing one of the key issues that they're having is TikTok they don't know how to compete with it. Instagram was the way they wanted to compete with it through their reels but so far they haven't made a dent in TikTok’s dominance in this space. So it was a big worry, and my contention was that if Zuckerberg's hands were not tied in issues to do with antitrust, he would easily have bought up a TikTok because he sees it as a formidable opponent. And at the same time, it would have been a formidable ally, kind of an arrow within the quiver.
[00:35:53] Scott: Maybe just one wrap-up comment and then move on to industrials. One thing we talked about in a podcast was how the social networks are heavily generationally based, and that in the same way, you wouldn't want to frequent the same restaurants or bars that your parents go to, a lot of kids don't necessarily want to go to the same social media channels that their parents are on. So that creates the opportunity for refresh and renewal with each cycle of the generation where maybe Gen Z likes TikTok and stuff more than Instagram. And then the generation after that will like something else.
We talked about how this ties into what Zuckerberg sees with the metaverse. I think he's just trying to get ahead of the next curve and own the next curve of this potential virtual reality world that many of us will be living in at some point in the not-too-distant future. It's just something to look at and watch. And it's interesting because I think especially in tech investing, there's a propensity to believe that wherever we are will exist forever. And the reality is the technology cycle is last for very short periods, where if you own the VCR market and you own the DVD market, you gotta own the internet next. So, these windows are short compared to what gets priced into the securities markets. So something to think about.
[00:37:19] Mokaya: Perhaps something I would add was something we picked up from the earnings calls, Disney was a hundred years old and the iPhones are 15 years old now. So it tells you a lot about how tech has changed. Any perspective on those companies?
Industrials
We segue into the industrial section where I think most of the issues are about supply chains which are easing a little bit in some spaces, but still heavily constrained, especially in areas like semiconductors where everyone is watching car companies still focusing more on the premium side of things and where they can add a little bit more money, where they have some way to be able to produce some of these things. From the industrial section, that's my main takeaway. Most supply chains have constraints for the first half of this year. My worry is once supply chain issues ease some of these companies may be left with very high-cost products. And I think that was one of the challenges that Peleton faced. They sourced their goods at higher costs of production, and that means that, even if they sell them, they are cutting into their margins unless they raise prices. And consumers are sensitive in some of these companies in terms of if they raise prices at the end of the day. Did you see anything?
[00:38:30] Sam: Yeah, I think something that people aren't talking about enough is this whole matter of when the pendulum swings too far in the opposite direction where companies are sitting on a little bit, too much inventory, right? This is sort of like the irony of a company like Peloton and maybe that's something that more companies, or maybe investors just generally should be thinking about a little bit harder. If we all remember from late 2020, one of the hottest stories in business was Peloton not having enough bicycles. They just could not, there was so much demand.
And then what people were complaining about when it came to Peleton was it's going to take four months or six months for a bike to get delivered. And so that was just sort of like the purest form, and this wasn't even before a lot of supply chains sort of rippled across the economy. They just didn't have enough stationary bikes. It's its own specific example, but we do have to wonder what happens because there will be some overcorrection at some point and then, maybe that turns disinflationary and perhaps even deflationary.
But I think something to watch concerning that is there is a metric, I think it's either published by the Bureau of Economic Analysis or the Census Bureau, one of the government agencies. But every month they publish a stat on business inventories and they also provide you with a ratio for business inventories as a percentage of sales. And that continues to say that inventory levels are just very depressed. So it looks like there is still a little bit of time before that becomes kind of a problem. I think there'll be some morning, but yeah, I agree. It's going to be interesting to see exactly how the inventory and then the supply chain story more broadly how all that stuff unfolds.
[00:40:21] Scott: Yeah. Just one thing to add to the industrial section is that's where we had been chronicling the travel dynamics of the COVID period then the end of COVID and I think travel still has not fully recovered and is slowly on the path to recovering though. But with everything else that's going on in the world, it's kind of become a quiet story within capital markets which is again, an investment opportunity. Cruise ship stocks are still way down, commercial and business travel is still way below where it used to be. And now maybe something that doesn't fully recover, but there are still opportunities just to invest in normalization, post-COVID within the market at those edges. So something to point out.
Key Themes From 2021 and 2022 Outlook
[00:41:10] Mokaya: Scott maybe you can give us your expectations going into the new year. And then you can also give us a little bit of perspective, one key thought from the Q4 in FY 2020/2021, one overall theme that you like.
[00:41:25] Scott: Yeah. Let me start with a theme from 2021, the biggest theme was the earnings growth, just the massive earnings growth fueled in part by inflation, but it doesn't matter when you look at the numbers and they're double-digit numbers and large double digits in the twenties and thirties percent range. That's meaningful, significant growth, even if it's only nominal. So that was the biggest theme and most important thing of 2021. And the flip side for 2022, I think it was not impossible to see going into this year that it was going to be hard to recapture the same level of earnings growth that we saw last year, and that inflation had been bad all year.
And so you've got decelerating earnings growth and more inflation, higher interest rates that all seem to equate to a more difficult year for the stock market. And so we've seen a sell-off at the beginning of 2022, that's consistent with the way that a bear market would operate. The bear market doesn't necessarily have to plummet, but if we were down 20% at some point this year, I don't think any of us would be surprised. And so that's still my outlook for the year and the way that I'm navigating markets is for continued volatility, even though we're probably overdue for a pretty big rally here if only a bear market rally.
[00:42:44] Mokaya: All right. Let's hear Sam and then we can close up after that.
[00:42:48] Sam: Yeah, sure. Scott is nailing it right there. This whole matter of earnings growth, decelerating is something, I think investors are still sort of coming to terms with. So many of these growth companies that have seen their stocks crash still have tremendous earnings, growth prospects in front of them. It's just that it's a little bit slower than what they were expecting in the previous year. And this is something that is sort of being said across the board and then yeah, to Scott's point inflationary pressures on higher interest rates are all sort of headwinds when it comes to the stock market and valuations and all this stuff. But with all that said, earnings expectations are holding up.
And one thing I wanted to follow up on with Disney, and I think this is extremely telling, and this relates to travel too, but one thing that Disney was saying about music park visits is that international tourist has just been completely absent. And a lot of this is going to deal with local COVID restrictions and how people are sort of thinking about international travel and all this stuff. But this whole matter of international travel has yet to come back. And I think it's stuff like that sort of like hiding in the shadows of demand opportunities that might need to get a little bit more attention because all this stuff of course translates to more sales and more people willing to pay a higher price for a plane ticket and all this stuff. And I think that is the sort of tailwind for companies that will offset some of these pressures when it comes to higher inflation and higher interest rates.
[00:44:24] Mokaya: Yes. That's a perfect place to close for the quarter. We'll do this again next quarter, Q1 review in three months again. Thank you, Sam. Thank you, Scott, for joining us, and goodbye for now. Sam, I think you should plug in your substack newsletter.
[00:44:40] Sam: Oh yeah. If you're not subscribed, make sure to sign up for a TKer that's TKer.co. There are links to it in my Twitter profile. So just go ahead and click through there and sign up, check out if you like it, then maybe you'll even become a paid subscriber.
[00:44:55]Mokaya: Great. You can also find us on thetranscript.substack.com we aggregate weekly thoughts from earnings calls and we do partner a lot with Sam on this. So thank you for joining us this week.
Q4 2021 in Review