On this episode of Okay, Computer, Dan speaks with legendary tech investor & analyst Dan Benton about tech valuations (1:00), interest rates (16:30), FOMO investing (21:00), earnings models (28:30), semis as an early indicator (33:00), and Elon Musk/Tesla/Twitter (38:00).
Check out Dan Benton’s 20 rules for tech investing from the 90s: https://bit.ly/3O5BkDX
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Show transcript:
Dan Nathan: [00:00:37] Current Ad. Welcome to Okay, Computer. I’m Dan Nathan. I’m here with Dan Benton, who runs Benton Capital Management. That is a family office. He was also the founder and CEO of Andor Capital in 2001 to 2006, which was one of the best performing tech hedge funds of its time. I knew Dan only by reputation back then. Now he slums it with me a little bit as we’ve just gotten a bit older. Dan, welcome back to okay. Computer. [00:01:02][25.8]
Dan Benton: [00:01:03] Thank you very much for having me. [00:01:04][1.2]
Dan Nathan: [00:01:04] Well, listen, you and I had a great conversation. It was back in the last week of April. It was right before, I guess it was going to be that deluge of big cap tech earnings. Okay. And what was really interesting about that is that, you know, you know, the stock market was making highs the first week of January, all time highs. Okay. And so a lot of people really didn’t want to believe that the Fed, when they said in late November that they’re going to start raising interest rates to kind of battle inflation, that they were going to do what they said they were going to do. Right. And that seemed to be a little bit of a delayed reaction from Megacap tech land. But we saw a lot of those kind of high valuation, more speculative sort of stuff in tech, SPACs, recent IPOs, crypto all started careening lower. [00:01:51][46.6]
Dan Benton: [00:01:52] That started in, you know, the middle of 2021. [00:01:55][2.7]
Dan Nathan: [00:01:56] Yeah, right. And I guess what was interesting to me, we always knew that these top six or seven names made up 40% of the Nasdaq, 100 and about 25% of the S&P 500. And everyone is waiting for them to crack. Right. And so you and I had this conversation. I think a lot of our listeners also know that back when you were at Goldman Sachs and you were big time technology analyst, this was in the nineties, you came up with these 20 rules for tech investing. All right. So I’m just setting the stage here. And a couple of weeks ago, we had Porter Collins on on the tape with myself, Danny Moses, Guy Adami and and Vinnie. And he said, you know, a couple of weeks ago, Dan, you had the illustrious Dan Benton on your podcast. And why are you buying tech stocks here when his 20 rules clearly don’t line up with buying them here? All right. So that’s the backdrop. Dan, welcome. [00:02:44][48.5]
Dan Benton: [00:02:45] Thank you. [00:02:45][0.3]
Dan Nathan: [00:02:46] So after this Q3 earnings period, we had Amazon gapped down, we had Microsoft gapped down, we had Facebook gapped down. Right. We had Alphabet gap. These were massive gaps, right? Like multiple day moves. So I started buying some of these stocks. Okay. So that’s when Porter pushes back and says, Dad, why are you buying this? So talk to me a little bit. You’ve seen lots of tech cycles here. Okay. How did the culmination of these stocks finally missing, guiding down and investors wholesale selling? How did that feel to you as just thinking about it is like one thing. [00:03:19][33.1]
Dan Benton: [00:03:21] It felt like it was the second or third inning. And look, I have throughout my career did a much better job at calling tops and bottoms. I’m always late getting back in. At a top you see, the market does. It shows you it gets narrower and narrower and narrower. And we saw that back in 2007, fourth quarter of 2007. I mean, that was Jim Cramer’s and Jim Cramer’s Four Horsemen. You know, so if you look back at the fourth quarter of 2007, you know, Jim Cramer’s Four Horsemen year, you know, Rimm, Apple, Google and Amazon, they were kind of the only things that worked in the fourth quarter of that year. We lost everything in our portfolio outside of those names, you know, in the second quarter, the third quarter of 2007. So by the time you got to the fourth quarter, it’s like this very small percentage of our portfolio was working. And then you were just tuned into you get this negative data points that started in in January of 2008, and you’re just ready to pull you’re ready to pull the report. And that’s what we did. We bailed and frankly got the portfolio net short, but it’s a whole nother story. I don’t find. And look, you’re going to go over the top, right? But you’re going over the top by ten, 20%. You’re not going to you’re not going to go down with it fighting. And, you know, the first rule is sell technology stocks when estimates are going down. That’s when we really started seeing estimates going down was, you know, kind of obviously ahead of the financial crisis, but that’s what led to the financial crisis. So, you know, so where are we now? We’ve just started cutting numbers now, you know, back to the you know, what were the early warning things to your point before SPACs? Companies without revenues, companies without earnings, you know, fancy software names that I don’t really even know what they do, but they were trading on, you know, some metric that wasn’t earnings or cash flow. You know, those disappeared really starting in the fall in the second half of 2001. You know, every new IPO broke price some by a lot. So we had that backdrop going in. And yet, you know, we had we you’re right. I mean, the top you know, the fang stocks, you know, through Microsoft in there were still doing very well. They didn’t miss numbers. They were fine. Now you’re seeing the first Amazon, I think estimate just before. But we’re really seeing, you know, early rounds of estimate cuts, at least with Apple at least with Google, you know, so my, my, my, my, my glib answer to when you start buying is you you buy after the last estimate cit unfortunately. [00:06:03][161.7]
Dan Nathan: [00:06:06] Nobody will ring the bell down there. [00:06:06][0.2]
Dan Benton: [00:06:06] It’s like NBER, you know, telling you that. Oh, yeah. The, the, the recession started three quarters ago because we changed our numbers. [00:06:13][6.4]
Dan Nathan: [00:06:13] So second or third inning and so again, so if we kind of go back, you know, just, just a few months here at the time, you know, we’re saying that we’re seeing so much devastation that the bulls would point to it and say maybe it’s different this time. Maybe these five stocks have these tremendous moats and managements and monopolies. Right. And they’re going to be able to weather this much better that say, than some of these companies, like you said, that were losing money, that were reliant on the debt markets and in a rising interest rate environment, that sort of thing. And so I guess that was kind of the narrative back then. And just to be clear, I didn’t find any of these major mega moats, if you want to call them that interesting then, because all of them were trading at multiples. Apple was trading at 28 times, you know, for expected earnings and sales growth next year of, let’s say, mid-single digits with flat margins. Right. And again, not even anticipating the fact that demand might come in during a weaker environment. We’re not talking about supply chains. We’re not talking about inflation at that point. So to me, that was kind of the narrative for me across all of those massive names here. But here we are now. We just had the first cuts and even the apple couldn’t even get themselves to materially guide lower. They had to wait two weeks for a headline about some COVID lockdown in China to do it. So what does that tell you about the kind of mentality of these massive managers? And again, we’re going to go through it. I mean, Amazon just announced today 10,000 layoffs, right? We’re seeing Google basically halted hiring will be firing. You know, we saw Meta last week, 11th hour. I mean, the list is going to keep on going here. So to second or third inning even for these big guys. [00:07:51][98.2]
Dan Benton: [00:07:52] What’s unemployment, 3.7%? I mean, it’s hard to think that we’re anywhere near the bottom when we need to push. You know, unfortunately, we need the Fed. The Fed’s job right now is to push unemployment up. And, you know, guess what? We are now seeing layoffs at the most resistant companies in our economy. Well, let’s see what happens in the rest. [00:08:13][21.5]
Dan Nathan: [00:08:14] But the pull forward, I mean, can you think about it if you’re going to look at like the hiring of 2020 and 2021 versus the firing in 2022, that will likely bleed into 2023. And you’re still going to be above those kind of 2020 midyear numbers once they’re done cutting. So they’re taken off some of the excess. It looks like the housing market, it looks like commodities, it looks like all that stuff that massively overshot its mean reversion. But it might still stay on that kind of uptrend, if you will. [00:08:44][30.5]
Dan Benton: [00:08:44] So my, my, my comment, which has been quarterback to me, so I even kind of forgot I said it was there not there are no cheap technology stocks. There are only wrong estimates. And you know, let’s see let’s let’s I you know, and to your point that goes through the entire economy. This isn’t just this isn’t just tech. The other thing that’s interesting is that every one of those companies you’re talking about is way past their peak revenue growth rates. We’re talking about, you know, about 20% maximum growth companies, single digits for for for some companies. Didn’t didn’t Amazon have down eCommerce sales? You know, I think that’s right. You know, Apple doesn’t grow. How can Apple keep growing quickly? I mean, they’re so big and, you know, the cellphone market doesn’t grow. So but other businesses that can. But it’s hard to move a company with that. [00:09:45][60.2]
Dan Nathan: [00:09:45] Well, and to your point, I think this is the one thing that kind of spooked investors, whether it be AWS Microsoft or Google Cloud, is that you’re decelerating growth in those kind of core growth engines when there are other businesses are a lot more mature. [00:09:58][13.1]
Dan Benton: [00:09:59] Right. So, you know, so these companies went from, you know, rapid growth companies to GARP companies, frankly. But then it didn’t then, you know, during the course of this this period with rates of zero for so long, I don’t know how you I don’t know how you define the reasonable price part of Garp. You know, apple trading you know close to 30 times earnings not growing very quickly. And that’s the correction. So you’re right, we’ve had a massive valuation correction. We still haven’t seen the numbers go down. Tech is an interesting animal. You know, cyclicals are supposed to trade at trough multiples of peak earnings, tech trades at peak multiples on peak earnings because there’s some, you know, idea that these are these are making secular changes. It’s not a cyclical. These are secular stories so that when things look great, they’re just going to get better. [00:10:57][58.2]
Dan Nathan: [00:10:58] It’s funny, you know, you mentioned the unemployment and the thing that the Fed is trying to do. And they’re clearly, you know, over the course of 2023 with basically Fed funds going from zero to about 4%. So we had four consecutive 75 basis point hikes expected in December to be 50 basis points. That’s what the CME Fed watch tracker is suggesting. And then, listen, if they do their job well enough, that means that they put the economy in a place that’s much slower than where it was at the start of this year. And then you’re going to see the expectations for rate hikes in 2023 just kind of fall off the map a little bit. Right. And so I kind of feel like we’ve gotten at least if you look at the way the ten year U.S. Treasury yield acted on that softer than expected CPI number. And when I say softer than expected, mildly softer that we saw last week, you saw the ten year yield dropped 30 basis points in a straight line, which you’ve been doing this a long time. That was like an insane move. Unprecedented, right. So I guess I’m willing to say and I’m not some brilliant macro mind, I’m just some kind of bozo who talks all the time about this sort of stuff confidently. Okay. I think that we probably have seen the peak in yields for the cycle. That’s my bet. Okay. And so maybe there is a scenario that’s kind of softer than the worst case scenario as far as a landing, is that if the Fed is now trying to bring inflation back to first mid-single digits and then low single digits, remember pre-pandemic their target on the upside was 2% inflation. Okay. And let’s just say that if major employers, some of these big tech companies take off some of the excess of the last couple of years, maybe unemployment doesn’t really get meaningfully above four or four and a half percent or something, and maybe that would constitute a soft landing. And then we get back to these major tech companies doing what they do, which is very deflationary. [00:12:47][108.6]
Dan Benton: [00:12:47] What tech companies do is very deflationary if we are on a global basis or reversing Tom Friedman’s The World is flat. If we are on shoring, which is a terrible word. Yeah, reshoring can be sort of a friend to shore eventually. Yes, right. I mean, it’s unbelievably inefficient and it’s going to, you know, drive. It’s an efficient for productivity perspective. It also means we’re rebuilding a lot of stuff. So, you know, I’m not a commodity expert, but one would think there will be an underlying bid there. [00:13:21][34.0]
Dan Nathan: [00:13:22] Just you know, you mentioned that in our April pod. You just said that a lot of the stuff that would really benefit from globalization, it was really that’s something that stuck with me. Some some really good macro minds have been saying that. And again, we know that the disruption of these supply chains globally and how our tech companies, at least from a manufacturing standpoint, are so oriented with China, you know, that was already put in motion from the trade war in 1718, you know, during the Trump administration. So again, it just became abundantly clear that U.S. multinationals have to kind of rethink the focus on Chinese labor and the way that their supply chains are oriented. So your point is, is that if a lot of that manufacturing is going to come back to the west and hopefully it would come back to the U.S., those are good jobs. It really is that, you know, listen, talk to anybody who had a cat tractor dealership or whatever when Amazon was building all of this go on any highway in America. And you see those huge warehouses, right? That was good for the local, you know, if you were in manufacturing or, you know, heavy moving equipment or anything like that. So it was good. [00:14:27][65.0]
Dan Benton: [00:14:28] So is this thing we also need to think about what parts of tech are deflationary? You know, electric cars aren’t necessarily deflationary. You know, the latest iPhone probably costs more than the last iPhone. You’re getting better price performance right there. But it doesn’t mean your price is going down. It just means you may get, you know, a product that in the case of phones, probably 10% better. But in general, you know, you’re trying your new generation, you want it to be, you know, 50% better or 100% better than the last generation. Doesn’t mean taking the price down. You know, when we think about and we may have talked about this last, we think about something like cloud. I don’t know what percentage of the workloads out there are on clouds on, you know, some sort of managed cloud. I have to believe it is minuscule what percent of the government. [00:15:13][45.8]
Dan Nathan: [00:15:14] This is a multidecade [00:15:16][2.2]
Dan Benton: [00:15:17] This is a multi-decade secular theme. So and the beauties of secular themes is that they’re not they’re not economically sensitive. They’re interest rate sensitive interest go down. You put you put a higher valuation on a secular theme. They they’re supposed to grow throughout them. So one of the interesting premises that we’re talking about, I don’t know what Netflix’s long term growth, what’s what’s what’s the advertising growth rate at meta going to look like or at Google? These companies are now the industry. So they’re going to look a hell of a lot more cyclical than secular. They have businesses with inside inside them that are secular. [00:15:52][34.6]
Dan Nathan: [00:15:53] That’s a great point. If you think about Amazon, they’ve had this ad business that’s been growing really fast. It’s over $30 billion a year. And again, you could say that they were benefiting from a secular shift to digital ads. They’re a huge retailer. Right. And so a lot of these consumer packaged companies are advertising on there. You see that growth decelerate meaningfully. Investors who are looking at that and saying, well, we want to price this or that helps us get to that valuation better. You start thinking about that a little differently and then you think about AWS and to your point is like this is, you know, the public cloud is a massive secular shift, but it’s been going on now for a decade. Right. And so market share gains by Amazon are going to look less aggressive as more competition comes in and they compete on price a little bit. [00:16:36][43.0]
Dan Benton: [00:16:36] One of the most frustrating things is that there aren’t any pure plays, aren’t there? Every important tech innovation I’m exaggerating that we see right now is part of a giant company, you know, how do you play a are you can’t this hard you know Google owns DeepMind it’s a great great great resource. You can own Google for DeepMind. [00:16:58][21.7]
Dan Nathan: [00:16:58] Well, let’s talk about the interest rate thing because you just mentioned that, you know, again, when you think about I think you said this in April, the most important, you know, defining factor for for stocks evaluations is interest rates. So here we are. Okay. We just talked about the pace in which the Fed has been raising interest rates. I know that there’s a lot of people out there, at least investors or in the pundit class who, you know, said you’ve never seen anything like this. What we’re seeing in inflation, the Fed can’t stop. You think they’re going to be done with Fed funds somewhere between, you know, four and a half and 5%? And that’s where the kind of the futures are kind of looking at. But this is going to high single digits. What do you think the likelihood I mean, I think you were probably started this year. You might have thought, okay, we can get back to the prior cycles highs, which is in Fed funds, you know, about 4%, that sort of thing. I’m just curious how you’re thinking about it now. I think the calls for some of these like high single digits, you know, Fed funds, I think they’re kind of going away a little bit, you know, and and maybe rightfully so. I don’t know. [00:17:55][56.8]
Dan Benton: [00:17:56] I you know, it’s a fascinating area to to focus on for a extremely long period of time. We have had a low interest rate environment. And so you have an entire generation of investors who kind of you know, I don’t know I don’t know what this means. We’ve had an extremely low inflation environment. I don’t remember the last time inflation was was talked about as something important a long time ago. And so what happens when you all of a sudden we got we’ve got 8% inflation. It’s like, you know, and it goes, you know, five, six, eight and and and we see what’s going on with commodity prices. We have, you know, the the reshoring or whatever it is of the secular theme. Oh, and we have a war in Ukraine. That sounds pretty friggin scary. This guy is threatening to use nuclear weapons. I mean, and you were, you know, trying to come up with a coalition. And Europe had you know, Europe had had weak knees, you know, I mean, they were all worried about about not getting gas and they’re putting all these things in. So it will you know, we’re going to we’re going to do everything but this it’s kind of a terrible bargaining position, by the way when you’re fighting a war to still tell the opposite tale, to tell the enemy what you’re not willing to do. I think as we’ve rolled forward, I’m not a I’m not an expert on and on global events. Ukraine is clearly seized the momentum. Putin is on his heels. There really isn’t any sign right now of the West capitulating and saying, oh, no, we need to negotiate something. And so that inflationary fear, part of that inflationary fear, I think, has been dissipated. I really would like to see unemployment go up. I mean, I think one of the things that we are you know, we started out by essentially saying commodity price inflation. Right. We’re seeing wage inflation. You know, I mean, every not for profit I’m working with when I look at the budgets, we’re seeing wage inflation, you know, five, 6%, you know, cost of living increases. Yeah, we just saw, what, 8.3%? Social Security was the number. I mean, staggering numbers. [00:20:17][141.3]
Dan Nathan: [00:20:18] Let’s let’s take a step back because that’s really important. So you said five or 6% wage gains when inflation is 8%. So it’s still not that impactful. [00:20:26][7.9]
Dan Benton: [00:20:27] So. So the only people that have seen this before are the people that were around in the seventies. Okay. And there was no threat of a world war in the middle of that as well, you know, frankly. But in the seventies, we did have a we had two massive oil shocks in 73 and 79. We had, you know, we had double digit inflation. And as we all know, Volcker came in and raised rates to the they go to 21 or 18 wherever they went to. Right. So, yeah, I mean, immediately that’s the playbook because there’s nothing else to compare it with. You know, it’s not like the Fed hasn’t been kind of warning that we’re going to stop this and it keeps going up. We’re going to keep raising until until it stops. Yes, I do think I do think the you know, the ten year bear market that we had in the seventies. I it doesn’t feel like that’s on the table right now, absent some exogenous shock. [00:21:19][52.3]
Dan Nathan: [00:21:20] It’s funny. So to me, it just seems like you look at our lives, everything’s been financialized, right? Everybody has got a stake in something that’s financialized. And obviously, you know, we’ve seen this huge boon just with low interest rates, whether it was in housing, whether it be and just personal expenditures. We’ve seen, you know, consumer credit go up at a time where, you know, like consumer savings were going down as a percentage of all that. But then the pandemic happened. Right. And that kind of fix the balance sheets of consumers to some degree. I guess the way I think about it is, you know, I’ve been in the business for 25 years. And to your point, I don’t ever remember inflation being a concern. I remember pre-pandemic, actually, deflation being a concern. I remember talking about universal basic income. These were things that politicians were kind of actually starting to kick the tires on here in the U.S., not in Iran. Here. I’m like a big mean reversion guy, and I think we’re going to see a lot of this stuff come back. And so when I think about the potential for what I think is a soft landing and I think, you know, anybody’s got a bug up their ass about the Fed and what they do and how it hurts savers and how it hurts middle class or lower class. Well, you just said it for the first time in a very long time. Okay. Wage earners on the lower end have gotten a raise. And so if the Fed is successful in cooling down the economy with these rate increases and you could say normalizing rates, you know, go back to 2018 in Jerome Powells, first year, he was on autopilot, raising Fed funds, 25 basis points. And what happened is, when we got into Q4, we had a global growth scare primarily like China. And then all of a sudden, the stock market here went down 20% in the straight line and he stopped. And then what happened? The stock market took off. And I guess the scenario that I would say is that, again, you know, back then we had unemployment below 4%. The Fed’s balance sheet was much smaller than it was right now. So that was a better cocktail, I think, for, you know, like growth and returns on risk assets. And so I guess the question I would say is like, does all this debt, sovereign debt weigh down potential for future growth? Maybe, though, there’s this one component that you’re mentioning is that if the if the worker here has more power, all the sudden, okay, because of reshoring, deglobalization? And then all of a sudden we have this huge movement where jobs are coming back here. There could be could there be some sort of equilibrium where maybe, you know, maybe maybe there is a soft landing? Does that does that make some sense in a way? Because I don’t know, man, like right now, unless we have [00:23:50][150.4]
Dan Benton: [00:23:51] Doesn’t it feel like like demand for labor is going to outstrip supply? [00:23:55][4.4]
Dan Nathan: [00:24:00] Cross Talk [00:24:00][0.0]
Dan Benton: [00:24:00] I mean, this is a this is a thorny matter. Okay. So bottom line is, when do we buy them? This past July or August, we had a we had a pretty big snapback rally. Right. And then they set lower lows. That reminded me. A lot. And maybe maybe that was off. It was it was that off the July earnings or something there. [00:24:19][18.9]
Dan Nathan: [00:24:20] You know what it was? It was inflationary. So so so what happened was in mid-June, we had a CPI reading that was slightly softer than expected. And, you know, the market was at the lows, sentiment was really bad. And then we were getting into, you know, like the end of Q2, we’re going to get to Q2 earnings season [00:24:37][17.3]
Dan Benton: [00:24:38] And then the earnings came out and crushed the rally. [00:24:39][1.7]
Dan Nathan: [00:24:39] Yeah, and essentially but we had rallied too far. We rallied almost 20% from, you know, kind of mid-June to kind of that late July. [00:24:46][6.8]
Dan Benton: [00:24:47] Bear market rallies are a bitch. Yeah, right. Because you don’t want to get left behind. Yeah. And you really feel like, you know, it’s a form of you feel like. Yeah, I mean, it’s when everyone’s losing money together. Yeah, well, misery loves company. Hate losing money. I’m losing less than this person. Fine. No one wants to lose money when the market’s going up. And, you know. So you’re right, it’s a FOMO of thing. [00:25:06][19.6]
Dan Nathan: [00:25:07] So what was something that’s changed, though, year over year from 2021 is that obviously last year was a great year. The stock market closed up 28%. Okay. So there was a lot of retail investors who actually though they were in all the crap. Right. They were in the Roku and the zoom in the SPACs and this and that, whatever. They were already getting hurt. So come into this year, I think retail has been taken out, throw crypto in there and it’s like lights out. And so when I looked at what we saw last Thursday and Friday with nearly a 10% to day rally in the Nasdaq, that was off of basically a low it was basically off of a 52 week low. Sentiment couldn’t have been worse. And so to me, that is not viable. I wanted to be buying stocks the weeks after like the week or so after earnings when everything felt horrible. I don’t want to be buying them when everyone and their mother and they’re generally hedge funds, either covering shorts. Right. And then and then people tripping over each. [00:25:58][51.9]
Dan Benton: [00:25:59] Buy ETFs or something just for exposure. So, you know, and we may have talked about this last time, when do companies have easy comps? Companies haven’t had easy comps yet. Right. When do the easy comps start? The summer is going to be a crappy quarter and it was a strong quarter last year, March quarter we started. People didn’t beat numbers that much in March. Right. And by June, people missed numbers. So we know that the June of 2023 are easy comps. We know that companies will look like they are accelerating. And it’s ridiculous because you just, you know, the denominator small, but the growth rate seems higher. And people people love acceleration. One of the things that the market has taught me in the last few crises is that it discounts things really quickly. I mean, comfort, for crying out loud. The markets break down and spike right back up in six weeks. The market discounts really quickly because there is a lot of money that want that doesn’t want to miss. And in that case, they were we were, you know, investors who who bought the COVID dip, if you will, made a lot of money in 2000. So, yeah, I want to I want to get back positioned in the market three months, six months before the before the the the the numbers looked like they’re accelerating. And what I said to you before is you want to buy, you know, you want to buy the last estimate cut. The problem is you only know what the assessment cut was in hindsight. [00:27:29][89.7]
Dan Nathan: [00:27:30] How long would you expect? Let’s just say that this was the first material estimate cut for like those major tech names. Okay. And again, you know, analysts have been lowering their estimates like low single digits. You know, I mean, just a little bit on the margins here. Right. And so the companies finally guided down. And that was, to me, the first step in acknowledging you have a problem, admitting you have a problem. Right. And it’s not that they have a problem. It’s just like they’re coming out to the street who they have not had to guide down since it was the throes of the pandemic back in that period in 2020. And everybody was given a mulligan back then. Right. And so now they’re actually saying, okay, we’re going to actually have to cut costs here. We’re seeing lower demand. The demand thing, especially in the enterprise, it’s not something we had heard until, I think late July, maybe August, that demand was weakening. And to you and I, if unemployment’s going up and the way that we’ve seen this secular shift towards SAS sort of products, it just makes sense. Then you’re going to see lower licenses for seats, you’re going to see lower demand for cloud services, all that sort of thing. So to me that’s really important. So I guess my question is how many quarters I say this on CNBC or this podcast all the time. These are not one quarter events like they’re just not right. And so usually when you have a company miss and guuide down, they’re going to do it again. [00:28:46][75.6]
Dan Benton: [00:28:46] That’s one of the rules. [00:28:47][0.5]
Dan Nathan: [00:28:47] So that’s one of them. [00:28:49][1.1]
Dan Benton: [00:28:49] No such thing as a one quarter problem. And when everybody in the industry has a one quarter problem, that’s called an industry slowdown, right? So in my experience with, you know, I love doing earnings models because you made your money when you’re the high assessment on the street and they beat the numbers or you, you know, you made your money when when you had a low assessment on the street and they fell short of your numbers. So I you know, my. Career. That was one of my one of my major focuses was was, you know, we need to model better than other people. And one of my frustrations with financial analysts is that they model things as a percentage of revenue. They don’t model expenses as dollars. They they they manage expenses as a percentage of revenue. Companies can’t control revenue. Revenue comes in where it comes in. I mean, you may have, you know, companies that close in less than a quarter, whatever it is, but revenue comes in where it comes in, expenses can be changed, which is why they’re rather cutting costs now. But companies missed big time because they because they are growing expenses. Revenues miss massive margin compression. Analysts don’t they don’t model that correctly because they think R&D is going to be 7% of revenues. Revenue comes down. R&D comes down. No, it doesn’t. It keeps growing until they start firing people. You know, revenue comes down and never comes down. Right. But if you model as a percentage of revenue, you’re never going to capture the margin compression, just like you’re never going to capture in in positive revenue. Surprise. You never capture the the margin expansion, I don’t think. And so and that’s a that’s a that’s a flaw in the way people model. I don’t think that we have reached the stage yet where people are forecasting companies to be so bad that they’ll come out better. Right. That the actual numbers will come out better than people are modeling. [00:30:52][123.0]
Dan Nathan: [00:30:53] So you use the example of 2000, 2001, 2002. And it was interesting because, you know, the question is, when do you start buying? You really actually, you have to decide first. When do you stop selling? Okay. Because I remember, you know, you know, 2002 felt a lot worse than 2001, in my opinion. And there were still like some uncertainty whether we were in a real bear market, whether the bubble had popped. 02 It was definitely it was just a series of lower highs and lower lows. But then there was a point in late in the year and I think you probably remember this and I think it was Yahoo’s earnings, it was their Q3 earnings in October, the stock was low single digits. It was the poster child for the dot com, you know, kind of bubble, if you will. And it was like trading at cash. And I mean, like every analyst hated it, you know what I mean? Like people were still talking about it being a zero. And when a stock is, you know, five or six, you can see it going to zero. Right. And, you know, they come out with a quarter, they miss the guide down. But it wasn’t as bad as everyone expected. And then that was report and that was it. And I’ll tell you this, people tried to short it when it doubled, you know, after two months and you got killed, yet your face ripped off there and then you started seeing that mentality move to other parts of the market. So not the things that were first hit or hardest hit. Then you started seeing and then you started seeing relative strength with some of these other sectors that have been left for dead in value. And so that to me could be a good analog for what we see late this year into 2023. I’m just thoughts on that a little bit because we will discount what we discount. [00:32:31][98.4]
Dan Benton: [00:32:34] The problme is you know, we’re going to discount ten of the next one. True turning points. Okay. It’s what we saw back in back in June. It’s what you saw in the last two days. And one of them will be right. So one of them will be that Yahoo! Thing that you remember. But the six things that were false signs, you forget them now, right? And so, yeah, one of them will be right. I just don’t know when it is yet, but [00:33:04][29.7]
Dan Nathan: [00:33:05] One thing thats really important right now. So like we just talked about, you know, kind of inflation and interest rates. Think about this. Let’s just say that we’re kind of near the Fed being done with raising interest rates. We’ve already seen shipping rates rollover. We’ve seen a lot of industrial commodity prices roll over it. You mentioned wages. Those are going to be sticky. We’ve seen housing rollover, right? We’ve seen we’ve seen a lot of things kind of come back, you know, towards that kind of mean, if you will. Right. And so I guess my my point is, is like maybe there is a scenario, though, where, you know, we we basically the macro does enough to kind of get us back to a place where these companies don’t have to cut to the bone, you know what I mean? Like just, you know, just trying to be a little silver lining this year. [00:33:48][42.5]
Dan Benton: [00:33:48] So the group that turned us in 2003 were semis. And the stocks, I think was down 80% off the peak. I mean, had just gotten crushed. And they were you know, and these are these are these are companies that sell physical things. It’s nothing ephemeral about this. There’s no clicks. There’s no, you know [00:34:02][13.8]
Dan Nathan: [00:34:02] Eye balls [00:34:03][0.3]
Dan Benton: [00:34:03] Yeah. No, there’s there’s no, you know, priced to, you know, off balance sheet revenue or whatever the stuff that happens with cloud companies. And there was this massive glut of semis because everybody had built up all this. Infrastructure picks had gone bananas, cell phones were going bananas. And, you know, Nokia was a massive consumer I remember back then and, you know, they had this massive amount of inventory and it was if they buried, you know, tens of millions of phones in the Sahara Desert or something in the summer of 2020 sorry, summer of 2003. And they had a transition. I mean, you remember this back then, right from black and white cell phones to color. And you got a little product cycle story in phones and the whole semiconductor industry came roaring back. And that’s an industry where you do see that massive margin expansion that happen. [00:35:00][57.2]
Dan Nathan: [00:35:00] Because you have the fixed costs. [00:35:01][1.0]
Dan Benton: [00:35:02] And and it’s another one where you had trough multiples and trough earnings. Yeah. So I tend to like to look at semis as an early indicator of things getting better. [00:35:11][9.3]
Dan Nathan: [00:35:12] If you’re really focused on it right now. I mean, if you look at the SMH, for instance, it’s up 35% in the last I don’t know, I want to call it a month or so. And that is pretty astounding. At its lows, it was down maybe 48, 49%. You know, sometimes it’s hard to look at a group like that. Intel can’t get out of its own way. AMD is still down, you know, 55% or something like that. But a huge contributor to the weight of it is Nvidia, which is going to report earnings this week. And I think that’s going to be really an important one. That stock is up 55% off of its lows in that period. So it’s driving a lot of that semi performance. So we’ll look at semi because of the cyclical nature, because of basically the leverage that they do have, they’ll kind of move first. I’m with you on that one, these big mega cap companies. Again, it’ll be interesting to see if some of the cuts that they’re making on the cost side give them the opportunity to not guide lower, maybe make some of the lowered estimates. Okay. So we won’t know that until January. A lot of the SAS stuff to your point, I think that seems like you got a little bug. That’s a that’s a new wrinkle over the last 20 years that didn’t exist because it’s a generally a different model here. But how do you think about that? Because a lot of those companies, again, were trading 30 or 40 times sales, many while they were still going lower. And those multiples are they’re getting to high single digits, you know, now ish. But they probably have to overshoot, don’t they, to somewhere, you know, mid to low single digits. [00:36:40][87.7]
Dan Benton: [00:36:41] I have never made money in SAS. I have never made money on the long side or the short side, so I just stopped participating. I’m good at stuff that you can touch, so I’m good at the device, I’m good at semiconductor. Interestingly, I’m good. I’ve been good at Internet related things, skills, and we’re like different business models. Software and SAS have package software, right? When Microsoft used to sell stuff in a carton, that was good. [00:37:07][25.9]
Dan Nathan: [00:37:51] Current Ad. Masterworks Ad. Slash okay. Taboola Ad. Let’s talk about Tesla really quickly before we get out of here, because we spent some time talking about Elon and Tesla. And, you know, that week that you and I had our last pod, he had just made his bid for Twitter. Now, at that time. Yeah. Was it that day? Okay. So 44 billion. It didn’t change. He bought it for 44 billion. He took about $13 billion in debt from these banks. And I got to tell you, if you’re looking at the debt that he took in, you’re looking at the terms in which they negotiate, where interest rates were then, where they are now. That debt is going to be a huge problem for Twitter and for him specifically, given what he wants to do with the company. Less reliance and advertisers. Advertisers are leaving. He wants to go to subscription models. There’s no reason to believe that users are going to kind of buy into that. Revenues are going to be much less. He’s cutting costs fairly dramatically there. Now, again, I’m talking about Twitter, but you and I wanted to start out talking about something you could touch your beautiful Tesla car, your investment in the company, which you did a very early level. You were a huge believer in the secular move. You’re a believer in his ability to do what he did. But now all of a sudden, when you think about Tesla below $200 down from over, this is 400 last year. I got to think that this company, you know, again, it was not going to be immune to all the issues that its tech peers were. But he’s making it worse. And his huge challenge that he’s taking on with Twitter, it makes absolutely no sense. If you are a Tesla, die hard here and you’re in it. You’re in the Tesla story. If anything, it is like an anchor around your neck as a Tesla shareholder. Now, I’m just curious thoughts on that because it’s a big, unholy mess. [00:41:05][194.2]
Dan Benton: [00:41:05] I violently agree. Yeah. I mean this is terrible. This is absolutely terrible. And, you know, I mean, we’re supposed to we’re not doctors, so we’re not even held to the Goldwater Rule. We’re not going to diagnose him. We don’t know what his issues are. But this really you know, this is a man who has done some truly remarkable things, changed industries. He’s, you know, arguably, you know, I mean, the Twitter stuff, even before the Twitter stuff, I mean, this is a guy arguably the single most important non country leader in the world. I would argue that. And you know, I know the lawsuit is going on right now over his over his compensation. You know, when they when they announce that you look at the numbers and if you’re a Tesla bull, you think he really can increase the market cap by tenfold. And you knew that he was going to make, you know, $50 billion if that happened. And you said, cool, if I can get a ten bagger, you know, I’m happy with Elon. Yeah. You know, I don’t care what they pay Elon. Right. I mean, so, you know, and you cannot argue that whatever Tesla’s market cap is, Elon is, you know, enormously responsible for this. We’ve had this conversation before about second, you know, Tim Cook has generated a whole lot more market cap and Steve Jobs did. He’s done a great job, but he wasn’t the founder. No question that electric cars are second theme, right? I mean, I pushed back from that even last year, year before, and then it became it’s a secular theme. But Ford’s going to kill him with the Mustang or, you know, there’s a new is a new eco series from Mercedes or what about Rivian and and Lucid? You know, I think it’s pretty clear who the industry leader is. And I think it’s pretty clear that that, you know, electric cars, which are I don’t know, probably still less than 5% of the car market are going to, you know, take over the entire industry at some point. Great. It’s not a competitive issue. It’s not a demand issue. It has been a it is it’s been a supply issue for the company. I mean, what they’ve really been focusing on for the last year is getting these two new factories in in Germany and Texas ramping. It doesn’t you know, I mean, there are people thinking they were going to ship a quarter million units at a factory in 2022. They’re not going to come close to that. So what Tesla needs to do is build more cars, deliver more cars and service more cars. It may not be that exciting, but it’s what they need to do. And yeah, they’re doing a robot thing and they’re still working on autonomous driving. What they have to do is build more cars. Do I like it? Oh, and by the way, the CEO has this other little venture, that space. Forget going to Mars. The entire future of the company depends on the rocket that they have wanted to ship. You know, they wanted to, you know, have the first true demo of, you know, for the last year is supposed to be in December. I don’t know if it gets pushed out again. I don’t know. And I own you know, we own a fair bit of SpaceX privately. I kind of wish you was paying attention there, too. [00:44:26][200.1]
Dan Nathan: [00:44:26] So so as a shareholder of SpaceX and again, I think you could probably reliably think that at some point in the not so distant future, SpaceX will have $1,000,000,000,000 market value, whether it be still in the private markets, because maybe it can. But if it ever goes public, if you thought Tesla was a mania, space will be an absolute mania. And I guess the thing I would just say about Tesla really quickly is that you talked about Giga Germany and Austin. Okay. Well, here’s the deal. He’s never really had to deal with a demand issue because of the secular shift. And you talk about competition. Well, think about Germany, those Mercedes, those Porsches, those Altis, those are hot cars. So on the high end, everybody who is inclined to buy $130,000 sedan. Okay. Is definitely going to look at one of those cars as a competitor to a model S, in my opinion. [00:45:18][51.5]
Dan Benton: [00:45:18] Exceeded a lot of market share in $100,000. [00:45:21][2.5]
Dan Nathan: [00:45:22] Yes. And then focus on the lower end. Now, I think that. [00:45:24][2.7]
Dan Benton: [00:45:25] I think the Model Y was was the number one seller in Germany in the last quarter or. [00:45:29][3.8]
Dan Nathan: [00:45:29] But here’s the thing. I’ll just tell you this, Dan, every time I have the opportunity in as far as Uber or Lyft to take one of those lower end ones, I do, because I just want to like feel how shitty they are. They are not great cars and I know car people, the lower end ones, they feel like they’re rickety. I always ask the Uber drivers what they think about it. They’re just happy that they’re not paying for gas. I mean, like, and that’s purely anecdotal, I mean, but and I get it. So my issue is that I think they will have a demand issue. I think they will have a demand issue in China. I think they’re going to have a demand issue in Europe. I think that Ford and GM are serious as hell about competing with them on the mid to lower end. Then you say to yourself, You just told me you wish he was not tweeting all day. Essentially, you think you wish he was not dealing with the culture wars. You wish he was not going on Twitter encouraging his 115 million followers to vote for Republican Congress people. Okay. So so all of those wrapped up. And here’s the other thing I’ll just say about Twitter. Jack Dorsey, who co-founded the company, was running it into the ground, which is very clear over the last year. He was running it into the ground as the co-CEO of two companies. So this guy is out now. Musk Today in a Reuters article, I don’t know. [00:46:45][75.9]
Dan Benton: [00:46:46] 120 hours a week. [00:46:46][0.3]
Dan Nathan: [00:46:46] Yeah, he’s going to burn out. [00:46:48][2.2]
Dan Benton: [00:46:49] Well, we’ve thought that before. [00:46:50][0.8]
Dan Nathan: [00:46:50] Well, he’s not a robot. He’s a man. [00:46:52][1.5]
Dan Benton: [00:46:54] He tends to focus on. You know, he’s got a lot of things going on. Got the boring company, too, and EarthLink and whatever. He does tend to focus on one of the things pretty, pretty passionately. You know, I used to have a bunch of executives who as close to a Tesla that are, for the most part, gone. But I do remember talking to a very, very senior guy who said that during the Model three or the Model three manufacturing problem, they loved the days that Elon didn’t come into the office because they got a lot more done. So this is our opportunity to see what Tesla does when Elon’s not paying attention as much. What I worry about is the brand. Do you look at Tesla and think of it as an extension of Elon or not? I don’t know. Right. I do. Because I’ve been doing it for so long. But do new car buyers think I don’t want to buy a car from you know, I. [00:47:53][59.2]
Dan Nathan: [00:47:53] I wouldn’t buy a car from him I don’t want to be on Twitter because one thing I’ll just say is that, you know, there’s going to come a time and I know that you’ve used this expression, the Elon Halo effect on the valuation and that sort of thing. The stock’s going to be low enough, in my opinion, and I don’t have a position. I was short a bit this year. It’s going to go low enough where the day that he leaves, whether he’s ousted, whether his stock goes up, I’m just telling you, it’s going to happen. And it used to be the opposite. It used to be that, you know, 20% it would have been an air pocket lower, you know what I mean? [00:48:25][31.7]
Dan Benton: [00:48:25] And so what’s the market cap now? [00:48:27][1.9]
Dan Nathan: [00:48:27] It’s 600 billion. [00:48:28][0.7]
Dan Benton: [00:48:28] Which is I think I think there’s still an Ellen Halo. [00:48:31][2.7]
Dan Nathan: [00:48:32] Yeah, but but I listen, I mean, I’m just telling you. [00:48:34][2.5]
Dan Benton: [00:48:34] So that time has not happened yet. [00:48:36][1.3]
Dan Nathan: [00:48:36] I think it’s literally one of the worst stock charts in the entire market. I really do. It is a massive head and shoulders formation over the last two and a half years. November 2020. The stock was just below, I think, $150. S&P announced it was going into the S&P 500 $1,000,000,000 and then it doubled in the next month or so. I think it’s going to probably round trip to that 150 or so and then there’s going to be tons of shareholder lawsuits. You know, listen, a lot of our listeners are getting sick of me ranting about this. I don’t care. I’m not talking my book. I’m just telling you in my 25 years in this business and make no mistake about it, we were in a huge asset bubble the last couple of years. Never have I seen the poster child for asset bubbles or the poster child for. [00:49:16][40.0]
Dan Benton: [00:49:16] You know, I hear. [00:49:17][0.7]
Dan Nathan: [00:49:17] You disagree. [00:49:17][0.2]
Dan Benton: [00:49:17] You guys talk about it that way. It’s the best secular growth story. [00:49:23][5.0]
Dan Nathan: [00:49:23] At the worst valuation. [00:49:24][0.7]
Dan Benton: [00:49:25] Whatever. It’s the best secular growth story in the market that I know of. Okay, this company is growing and. [00:49:32][7.0]
Dan Nathan: [00:49:33] Are you still long Tesla [00:49:33][0.2]
Dan Benton: [00:49:34] This company is growing at 50%. This company has a supply problem. [00:49:38][4.1]
Dan Nathan: [00:49:40] Does it, though? Because I thought that I thought those those delivery numbers and the channel like that’s saying. [00:49:46][6.4]
Dan Benton: [00:49:47] They have said that every quarter they always have this big push at the end of the quarter. And every quarter they say this could be the last time we do this, but they produce more cars than they expect to. What happens to Tesla if they beat the December quarter? [00:50:01][14.2]
Dan Nathan: [00:50:01] Well, I mean, shrots going have to cover it. But do you think there’s a scenario, though, where this company, again, going back to like I’m looking at, you know, revenue growth expectations, they’re going from, you know, 55% this year to 40% next year to 23% in 2024. And if to compete with the infrastructure that like, let’s say the Germans or the Japanese or the Koreans or the Detroit have expenses start going up and those margins start coming in, then it becomes just another car company. [00:50:31][29.3]
Dan Benton: [00:50:31] There is a time where Tesla is a car company if nothing else happens, right? If autonomous doesn’t happen and I’m not a big fan of autonomous, you know, if Optimus doesn’t happen, I don’t know what to think about Optimus. If solar doesn’t happen, I don’t know what to think about that either. But yes, there is a point where Tesla’s a car company. Now, does the industry you know, this is the this is some of the, you know, crazy analysts talk, you know, do we end up with cars as a service right to people? Does the whole model change? They lead with fleets and they’re competing with. I don’t know. I don’t know. You are 100% right. Absent new things, they are a car company, maybe the most profitable car company in history, that the highest margins in the industry. They may be the low cost producer in the industry. I think that you can make that certainly can make that argument. You know, when when when the CEO of VW says we can’t compete with that factory, that’s telling you something. I you know, how many years did I hear about how IBM was going to kill every PC company? Because when they put their full weight behind it, oh, my God. Yeah, well, they knew how to make mainframes. You know, the the the companies you all named are really good at developing internal combustion engine cars that they sell in service through dealers. [00:51:52][80.1]
Dan Nathan: [00:51:52] Yeah, it’s a different model. It’s a different model. And again, you can make the he’s he’s he’s increased adoption of of this, you know, of of EVs and he’s pushed it forward. He has pushed all the others to do it, if nothing else, if that’s his legacy. I’m just saying if you kind of wrapped it up in turn in the keys to Fremont or wherever he is now in Austin, it would be an amazing [00:52:13][20.7]
Dan Benton: [00:52:14] The emission of a company was to accelerate the the move towards. [00:52:18][4.4]
Dan Nathan: [00:52:18] I just question his again I just question you know him you know again but my point is he’s taking on such big. [00:52:27][8.5]
Dan Benton: [00:52:27] We all do I know. [00:52:27][0.0]
Dan Nathan: [00:52:28] Twitter, Twitter is not the thing he thinks it is and and space X clearly is an EV is clearly is I just think he’s full of shit and I you know, again and you know, my New Year’s resolution in 2023 is going to be to stop ranting about it and. [00:52:44][16.1]
Dan Benton: [00:52:45] How many human beings who are not company sorry country leaders are above the fold in the in The New York Times, Washington Post and Wall Street Journal every single to me. [00:52:57][12.4]
Dan Nathan: [00:52:58] That makes him very dangerous. [00:52:59][0.3]
Dan Benton: [00:52:59] 100%. I agree. [00:53:01][1.8]
Dan Nathan: [00:53:01] What I’ve been saying, I think is one. The most dangerous people on the planet bond that he said that he that that the fact that he thinks that he can talk to Putin or his people and try to negotiate, you know, through Kremlin talking points, though, you know, the fact that he embraces free speech, but he actually has to embrace the Chinese most authoritarian regime in the world because he needs the growth and he needs the manufacturing over there. So I think he’s just a massive hypocrite. I think he’s full of shit. I think he’s dangerous. [00:53:26][25.0]
Dan Benton: [00:53:27] One last comment. With Tesla and with SpaceX, he is a chess player who is thought 20 moves ahead and he’s done a better job than the rest of us trying to. He’s been right. With Twitter it feels like he’s thinking one day ahead, one move ahead. [00:53:43][15.9]
Dan Nathan: [00:53:43] No, I agree. I mean, I think he’s in a bit of an echo chamber. I think guys like him don’t really have friends. And I think a lot of people have kind of worked him into a situation that really could be the downfall of his. This is I think this is like his next computer phase. I really do. If you want to equate it to Steve Jobs or sell it. [00:54:00][16.9]
Dan Benton: [00:54:00] It worked out for Steve. [00:54:01][0.3]
Dan Nathan: [00:54:01] Well, it worked out for Steve, but I think he was probably at a very low point. If you read any of those biographies. He was not the Steve Jobs that he was in, you know, in in the seventies and early eighties or again in the late nineties into the 2000s. And it was probably a really dark period for him, and I think that’s probably where he’s going, sadly. So. Listen, Dan Benton, you are one of the most brilliant marketing minds that I know I’ve really enjoyed over the last, let’s say, six or seven years. Becoming friends. Call your friend and I love having you on here. I hope you come back every quarter and give us your download on what’s going on in tech in the market. So thank you very much for joing us. [00:54:35][33.7]
Dan Benton: [00:54:35] Thanks for having me, Dan. [00:54:35][0.0]
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