On this episode of Okay, Computer, Dan is joined by Guy Adami for a talk with Mark Mahaney, head of internet research at Evercore ISI, about the biggest lessons from a horrible year for tech and growth stocks (1:45), if Meta is ready for a comeback in 2023 (4:30), how a potential ban of TikTok in the U.S. could impact social media stocks (11:30), Elon Musk’s Twitter value destruction (15:00), Mark choosing Netflix as one of his top stock picks for 2023 (16:20), why Mark is still a long-term bull on Amazon (23:00), how Uber is finally getting traction (27:30), and if Yahoo can “rise from the ashes” under Apollo Global’s ownership (32:45).
Later, Dan and Current CTO & co-founder Trevor Marshall discuss the impact & aftermath of the Ethereum merge on ETH and crypto (38:45), if investor confidence can be restored in crypto after its recent price collapse and scandals (40:45), how Current is navigating current challenges for the fintech industry (45:20), Trevor’s outlook for 2023 (56:30), Visa’s dominance in financial services (59:00) and if Google is preparing to enter the fintech space (1:02:15).
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Show transcript:
Dan Nathan: [00:00:00] All right. Welcome to Okay, Computer. I am Dan Nathan. We got a big show for you today. We have Mark Mahaney. He is a senior managing director and head of Internet research at Evercore ISI. We also are bringing in the big guns. My co-host of On the tape podcast, Guy Adami, is going to join us for this conversation. And also stay tuned because after we talk with Mark, I have Trevor Marshall. He is the CEO and co-founder of Current. And we’re going to talk all things crypto and fintech. All right. But first, Mark Mahaney, you are a legend. Welcome to Okay Computer. [00:01:16][75.9]
Mark Mahaney: [00:01:18] Good to be here, Dan. Good to be here, Guy. [00:01:19][1.3]
Guy Adami: [00:01:19] I mean, you bring it in like a peashooter when you bring me in this conversation, but I’ll do the best I can. [00:01:24][4.5]
Dan Nathan: [00:01:24] All right. Here’s the deal, Mark. You were last with Guy in me about a year ago. You had just published a book called Nothing But Net ten Timeless Stock Picking Lessons from one of Wall Street’s top tech analysts. You are our top tech analyst. But I got to tell you, in the last year that’s transpired, you probably got another ten timeless stock picking lessons. Talk to us a little bit about when volume two comes out of nothing but net. And also just put some context on the year that was in 2022 in your space. [00:01:59][34.7]
Mark Mahaney: [00:02:00] I don’t know Guy and Dan, if you speak Latin, there’s this expression called annus horribilis, which means horrible year or crappy year or whatever you want to use. This has been the worst year for growth stocks, tech stocks since at least 2008. So that’s going back, whatever, 15 years. Last time we were about to enter in a recession, there’s some similarities, but mostly differences. It’s been a terrible year for growth stocks and tech stocks. I think I published my book right at the peak of the tech market, so you darn straight there’s some lessons to be learned. We went from an easy money to a hard money environment, so we had really low interest rates and we’ve had this gap up in interest rates. We never really seen that in our recent professional careers. Then, not surprisingly, we’ve had inflation along the way. You rack up rates like that. It’s massive strengthening in the dollar for multinational companies like Google and Facebook, Meta and Amazon. You know, you just hit their revenue growth rates. You had these funky COVID comps. And I do find it a little surprising, but it goes like this. Google had its worst quarter ever in the June quarter of 2020. That was the Kobe quarter. And then the year later, of course, it has its fastest revenue growth in 15 years because they had such easy comp. And then the year after that, it has single digit percentage revenue growth. So it’s a lousy quarter. You got to work through the comps and think through them. But anyway, you had funky comps in the first half of the year. And so yeah, there’s a lot of reasons. And you had some structural changes, by the way. So things there were some new elements. It’s not just macro for names like Meta and even for some names like Google or definitely for names like Snap, you had the rise of TikTok, then you had these apple privacy changes which kind of gutted performance marketing. So there were some structural changes and now you’ve got macro that’s just starting to bite and it’s really been a really tough year. I describe myself as being muted and cautious going into ’22. That wasn’t right. The right calls to be utterly bearish, and I wasn’t. Now we’re going into 23. I think the set up is very different. We can talk about that. But that’s what’s happened this last year. It’s been one of the worst years I’ve seen for tech and growth stocks in well over a decade. About 15 years. [00:03:57][117.2]
Guy Adami: [00:03:57] Yeah. And I’d love to hear your prognosis for 23, without question. But I find me the most interesting about this year, at least in your world, is as much as it was a macro thing. In other words, as you mentioned, Fed pivoted in November of last year. And quite simply, if you overlay when the Fed changed course with many of your names, that proved to be the top. But in a lot of ways it was also company specific. If you think about it, Facebook’s problem or Metas problems were Meta related. Google to a certain extent. You see what’s going on with Amazon. A lot of the Amazon woes are specifically Amazon. So you have this macro backdrop and then have companies that quite frankly, tripped over themselves this past year. [00:04:40][43.1]
Mark Mahaney: [00:04:41] You’re right, I tried to lay that out with Meta because the Apple privacy changes were a real deal for all performance marketers, including part of Google. But definitely for Meta. You know when Meta said sometime in early 2021, they said they thought there’d be a $10 billion negative impact from the Apple privacy changes. There’s a good number of us, including myself, thought thats BS is not going to be that much of an impact. Turns out it pretty much was. So I give Meta some credit for at least saying, Hey, we got a problem here and this is how big it could be. Very few of the companies actually did that. But then there were other company mistakes. Analysts did this, investors did this, and companies did that. They over extrapolated from covid. And Amazon to their discredit over extrapolated. To their credit, they were the first company in April of this year off the March quarter earnings call to say, hey, we over hired and overbuilt because of covid. We came up with a series of demand scenarios and we built to the high end of those demand scenarios, post-covid, and those didn’t come through. So we’re going to freeze hiring and we’re going to cut back on some of our distribution center capacity plans. So credit to them for being the first to kind of acknowledge it. I still don’t think they were aggressive enough. And I think this is the case kind of across Silicon Valley. I mean, Google just went five quarters in a row of record hiring ads. So in other words, every single quarter of the last five quarters, they added more employees than they had ever in any prior quarter. And just every single quarter was more they added 30,000 employees in the first nine months of this year. The first three quarters. And Google, if anybody should probably know that there’s a recession coming because they can see what people are typing in that the search box, the sector is over hired, overbuilt. That’s not necessarily across the board, but you’ve heard it from a lot of different places. Facebook has said it, Amazon has said it, DoorDash has said it. Then then there were companies that just had to take out half of their cost structure. That’s Peloton. And then there were companies whose cost structure got gutted because the demand got gutted at beginning of the COVID crisis. That’s like Uber and booking and Airbnb. That’s kind of one of the interesting setups, by the way, about 23 is that we’ve had an unprecedented level of cost cuts, rifts reduction of forces across the Internet space. It’s one of the reasons why I’m more tactically constructive going into next year. [00:06:51][130.4]
Dan Nathan: [00:06:52] Well, Mark, let’s talk about Meta, because here is a company, like you said, a handful of own goals there, but you gave them credit for what they thought that 80 might do to their business early on. And a lot of people might have been skeptical of that. They thought maybe they were kind of lowering the bar a little bit. But here’s a stock that’s down 65% in the years, down 70% from its all time highs as the $300 billion market cap. Revenues and sales expected to be flattish to down for, let’s call it, the next year or so. And so I guess my question to you is we have declining margins, but we also have that riff that you just talked about there laying off, what, 13% of that 87,000 workforce. And it seems like the next shoe to drop is really just a pretty precipitous slowdown in the spending as it relates to Metaverse, I also think that there’s probably a really good chance that they start to pull some of those levers that they never did, monetizing things like WhatsApp and maybe it’s due payments and some sort of B2B functionality. So my question to you is here is that while there’s been a lot of focus on a lot of these other names, Meta trading, what, 14, 15 times next year is expected, unless you think that there’s further earnings declines, further margin declines, further headwinds from all the things that you laid out does Meta present an unusual value opportunity when you consider the scale of their business and their different levers they have to pull to monetize nearly, what, 3 billion monthly active users across the platforms? [00:08:23][91.0]
Mark Mahaney: [00:08:24] Well, my answer to you is yes. And it’s one of my top picks for next year and prefer Netflix and Uber over it. But I think just the risk reward on Meta is highly asymmetric. So on that p e multiple, this thing is trading actually more like 12 times and this company has a chunk of cash. Even in a depressed demand environment, they’re still generating 25% gap margins. It’s just fundamentally a good business. It’s a high gross margin, cash generating business, and it’s got a valuation that you can really easily defend. Now, look, if it’s a deteriorating asset, I don’t care what the valuation is. This thing will be like the next Yahoo! It’ll just fade and bleed over time. But I look at the user growth and it kind of continues. I look at the engagement growth, the amount of time that people spend with Facebook and it continues. The company’s got a lot of product shifts that they’re undergoing, the most risky of, which is this metaverse, you know, reality labs, that they’re spending 10 to 15 billion a year. It’s a big number. And most investors hate that, the scope of the investment. But they’ve also got some other makeshift product shifts that I think are actually smart long term investments, like bringing in more short form video sets. That real product, you’re on your Facebook newsfeed, you’ll notice that there’s just a lot more content in there that’s not relevant to your friends. It’s specifically relevant to you that they pull from the Internet. So they kind of opened up the graph on Facebook. I think that’s also leading to more engagement. My sense is that numbers are actually low enough now. Like the reason I like some of these stocks is I think multiple 70 risk estimates have been the risk and cost actions have been taken and that’s Meta. They took out, as you mentioned, the 13% risk estimates. Now the street’s looking for 4 to 5% revenue growth next year. I think in a modest recession. I think those numbers are actually doable. And then with all the cost cuts and revenue growth, I actually think this is the first time in a while I can say. I think there’s upside to street EPS estimates next year. And in terms of the multiple, has it really been de-risked? Yeah, you’re at a trough multiple, whether you look at it on EB to sales or even to EBIT or PE, this is about as low of a multiple as you can get. So you just need one or two things to get right. And look how quickly this thing whipsawed around the quarter. It wasn’t because it trade off 25%. It wasn’t because revenue missed. It wasn’t because the user numbers came off. It’s because they sounded so damn cavalier about expenses for next year, stock smack down 25%. Then it came back in the fastest two week pivot ever in corporate history and said we were wrong. We’re not going to spend as much as we said we would. And here’s our risk. And the stock is almost if you normalize for the market, it’s pretty much back to where it was at that print. So to me, I find that kind of reversal to be relatively bullish if they do more cost cuts and the revenue numbers are low enough now that they can be met. All you have to do is make those numbers. I think the stock can re rate. [00:11:05][160.9]
Guy Adami: [00:11:07] Mark, I’m with you. And it’s interesting, when it did have those trough lows, the amount of volume that changed hands in the stock, that reeks of capitulation to me. And the other thing I mentioned, and you sort of alluded to it, though, something we’ve talked about for a while, the chorus to been TikTok in the United States seems to be getting louder and louder. I don’t know what that looks like, but I’ve said on the show and I’ve said it on our podcast, that if in fact that were to happen, I think Facebook goes up regardless of the level that it’s currently trading, at 25% in a straight line. Is that accurate? Am I looking at it correctly? [00:11:41][34.0]
Mark Mahaney: [00:11:41] I agree with you that 25% is a lot, but I think clearly it goes up 10% plus. And you probably know the actual percentage is better than I would. So I’ll take your word for it. I think about smaller cap names like Snap would definitely also trade up a lot. There’s no question that TikTok has been taking time away from Instagram, time away from Snapchat, time away from YouTube. Were it really to be banned? You know, honestly, I thought six months ago that would be a really small likelihood of happening. But based on a series of checks we’ve done recently in webinars, it seems like the risks are much greater. I think the U.S. security complex, including public statements by the FBI, the head of the FBI, clearly view TikTok as a national security issue. So you not only have these Social Security issues, by that I mean, you know, the health of teenagers. So Social Security and national security, you put that together. And I just don’t think that there’s an easy negotiated solution between Bytedance, the owner of TikTok and the US government, which means it’s almost impossible for this not to be a forced divestiture. And I don’t think Bytedance will sell TikTok. So I think there’s a not great 50% chance, but it’s like a 30 to 40% chance that there’s actually a banning of TikTok. It’s happened in other countries, by the way. There’s actually a banning of TikTok. Then that would be a huge catalyst for a Meta. [00:12:54][72.4]
Dan Nathan: [00:12:54] Well, let’s talk about Snap for a second here market in the context of what Elon Musk paid for Twitter. When you think about Snap than 90% from its all time highs that it made late last year, like this time last year, when you just think about that I mean for you and me and Guy to put that in some sort of context you’d have to go back to the financial crisis and think of some banks that basically lost 90% of their equity value and almost went to zero or go back 21 years or so from the highs of the dot com. And so here’s a company that the product in the service is still pretty widely used. Advertisers are pulling back a little bit just because of the environment, but also some of the competitive sort of issues. But talk to me about this, a $13 billion enterprise value, they had nearly the revenue that Twitter had. They monetize better. It’s not nearly as a divisive sort of space. They had more monthly active users than Twitter. Why is this thing $13 billion enterprise value? Is it just such a mess? And this company is really cutting to the bone? Right. When they did their restructuring a couple late last year, they announced massive layoffs, non-core businesses. I mean, the list goes on and on and on. And so when I think of this as a unique social asset, that’s much less divisive than some of the other platforms out there. What do you think here, man? We’re going to see some M&A. What’s going to happen with Snap? [00:14:18][84.0]
Mark Mahaney: [00:14:19] I don’t expect to see M&A. And I think you have to be careful about making that analogy, whatever with Twitter, because I think Twitter was a once in a lifetime acquisition. I mean, that wasn’t a strategic buyer for Twitter. That was the ideological buyer of Twitter by the world’s richest person. You just don’t get that happening too often. So I don’t think Musk is going to look back on this in a positive way. [00:14:41][21.3]
Dan Nathan: [00:14:41] What do you think Twitter is worth right now? He paid $44 billion for it. And when you think about that, to fund that deal, his other company that he is a CEO of, he was selling that stock that’s lost a couple of hundred billion dollars in market cap. What do you think Twitter is worth right now? Just all of the divisiveness around the platform, the loss of certain advertisers, which is not likely to lose any time soon, maybe the loss of a lot of users who are forced to become subscribers and didn’t mind being the product. I’m just curious when you think about that, because again, we all know the wrong price was paid, but when’s the last time you’ve seen so much value destruction, like by the operator of the company or the platform like this. [00:15:26][45.2]
Mark Mahaney: [00:15:27] When AOL bought Time Warner, maybe that was an example. Look in anguish must the best of success. Twitter’s a really important platform and I hope we can improve it. I really do. It was. Would be worth a lot less. And he obviously made a bid at a time without due diligence and then the market fell off and there are laws and contracts. And so he had to live up to it, and he did. My guess is that would be worth a lot less. The question is whether it would actually be worth back to that level in a few years based on changes he may bring. I just never thought that he had a dramatically thought out business plan, but he dramatically thought out ideological plan for the platform. And I wish him a lot of success. [00:16:01][34.1]
Guy Adami: [00:16:02] Somebody that’s had a pretty thought out business plan is Reed Hastings at Netflix. And you look, I think people really started catching on to the stock. I want to say mid 2014 or so is when you started to hear people talk about it in earnest. It had a huge run into the summer of 18, probably sold off 40% into the winter 2019. It finally got its footing again and then it everybody loved it into its all time high. But and I’ve said it a number of times outside of a couple missteps. Netflix has done everything right. Once again, it found its footing. And for the first time in a while, you can make a very compelling case for Netflix on valuation. We’ve had this run where the stock has gone up, I want to say north of 80% from those lows that we saw. And here we are now. I think you can make a very compelling case for Netflix. I think you believe that as well. I think Netflix is one of your top picks for this next year. [00:16:55][53.1]
Mark Mahaney: [00:16:56] I like the way you set it up Guy I mean Reed Hasting I mean, this guy founded Netflix on the idea of streaming video when that wasn’t even physically possible. So this guy is a true visionary, has made a couple of big pivots. He’s made some major mistakes. You remember that Quickstep fiasco, which led to a wonderful Saturday Night Live skit and they’ve mistakes of hubris before they were huge COVID winter early on, but had a lot of that. It was demand for it. They were late to embrace advertising, but that’s all the past. It’s always about the next play. Then the next play is I think they’ve got a winner on their hands with an ad supported solution’s obvious make you to simple points here which is, one of the survey work I’ve done on Netflix over the years. What I’ve seen is rising price sensitivity among Netflix consumers. We shouldn’t be surprised by that. The company raised fees every other year for about eight years in a row, so they constantly raised fees. And you found that the number one reason that people started to churn was price. Therefore, you come at them now with the cheaper offering. 6.99 So they solve the problem. The second thing that’s so interesting here is this is the first time I’ve seen this in business history, and it’s a big statement, but it’s true. A company cuts its price by 30% from 9.99 to 6.99, but yet can generate higher ARPU or revenue per user because they layer in ad revenue on top of that subscription revenue. Like when do you see that you cut price by 30%, but you generate more revenue per user and I’m pretty certain that they can do that. They can generate materially more revenue per user because we’ve got plenty of examples of streaming companies that are generating all this ad revenue. So I like Netflix here. I know it’s had a big run off the bottom. Now there’s some debate about how well this advertising launch is going. Look, it’s very early days. I just know they’ve got a solution that addresses a real problem and it can be done with really positive unit economics. I haven’t even seen them advertise the service yet in the U.S., but over time I think they’ll do that. They’ll put a little wood behind the arrow, and my guess is that they’re going to do pretty well with this service. And the other thing is you made a point about valuation. This is the first time ever you could buy Netflix on a PE basis. I mean, this thing used to trade at 20 times sales and then 20 to 30 times EBITDA and now it’s trading at 20 to 25 times earnings. And I think you’re going to see a street estimate start to move up as people realize how successful they can be and will be with this ad supported service. So it just seems to me like I like the asymmetric risk reward on this name. And then the last thing, if we’re going into recession, you want cheap entertainment and you can go 9.99 or 6.99. So is that one latte or two lattes and then flat you get Netflix and that huge library of content for a whole month. I think it’ll hold up really well in this recessionary environment. Got a new revenue stream and they’ve already taken costs out of the business. So yeah, I like Netflix as my number one thing. [00:19:32][155.9]
Dan Nathan: [00:19:33] So Mark, going back to your book, The Ten Lessons you just mentioned, the move that Netflix has had off the bottom. And I have to tell you that with all the new lows that we saw in the S&P 500 and the Nasdaq over the course of the summer into the fall, Netflix put its low in on it’s like third consecutive negative guidance downgrade. Right. What does history tell us about being a little bit aggressive on that first move off the bottom after a crash? And we could use Meta as the same example. You know, at its lows, it was down 75% in such a short period of time last year. Netflix had that same sort of move and now Meta is up 37%. Some people like I don’t want to chase it right here, as history has shown you that sometimes when you had capitulation, possibly on a price and volume standpoint, and then you’ve seen a turn in the fundamentals, like you can see the future. What lies next for Netflix? You just laid it out. So buying it up 75%, you’re still buying it 50 or 60% lower than its all time highs this year. I’m just curious, are there any lessons that you have from looking at these stocks and following these stocks for over 25 years. [00:20:39][66.2]
Mark Mahaney: [00:20:39] Well, if they’re really good franchises, they all make mistakes from time to time. The stocks always get dislocated. But if they’re really good management teams, you know, they’ll kind of figure out plan C, D and E down the chessboard or however you say that. That’s kind of what Netflix did. I think they were complacent about the ads business. Then they got pushed into it a little bit, but Dan, they rolled it out in six months. A global advertising business. That’s really impressive. Maybe that’s kind of a lesson that, you know, you get really good management teams. They usually are better than just one company. You know, they usually got a couple of tricks that they can roll out. And Netflix kind of proved that. And I guess that’s one thing. And then there are these advantages they have. So what we’ve had is these scale advantages, and I guess that’s one of the things I’ve kind of learned the hard way or the easy way over 25 years of looking at these stocks like scale solves almost anything in Silicon Valley. I think they say revenue solves almost anything, but I think scale solves almost anything. The advantage Netflix has now is they’ve got 230 million paying subscribers. When you have that kind of customer base and a loyal customer base, you can start layering in new revenue streams or you can just decide to tap into advertising revenue. So, one, you get the chance to roll in more revenue streams, but the other one is you have a cost advantage. Because the irony of all this is that the only global streaming company that’s generating positive free cash flow is Netflix. And now at a point now where the industry is starting to consolidate. So when there’s heightened competition in industry, that can be a really tough time for an investor. But eventually that competition starts to fade. It starts to get rationalization in industry. You want an example of rationalization in the streaming industry, a CEO of Disney gets fired for spending too much on streaming. That’ll kick off rationalization for you across the industry. And guess who’s sitting at top now? It’s Netflix when the other people in the industry are trimming their sales. So that’s another reason why I like Netflix. I think competitive intensity has peaked. The Disney firing was great evidence of that. [00:22:32][112.9]
Dan Nathan: [00:22:33] A bunch of those themes that you just mentioned, they’re kind of all wrapped up in Amazon a little bit. You talked a little bit about some of the mistakes that they made as far as overbuilding over hiring during the pandemic. And the stock is down. It’s been cut in half, basically. Andy Jassy took over from Jeff Bezos in July of 2021. That was really the high for the stock. But when you think about streaming they’re there, when you think about advertising, they’re there. It’s a big business. I know that we’ve looked at some of the some of the parts and they’re basically valuing the North American retail business at zero. We’re seeing some headwinds. These are just kind of more economic. It’s not competitive at the moment here for us, but investors are kind of shooting first, asking questions later. The stock made a new 52 week low, nearly two year low today. It is quickly approaching mark its March 20, 20 lows. So my question is, they’ve done some of the heavy lifting. They’ve cut costs. They’ve narrowed their focus in some areas here. What has to happen for Amazon to make a bottom, especially if we’re not valuing their retail business at all? It just seems like this is approaching unusual value relative to itself on a historical basis from a valuation standpoint. [00:23:45][71.5]
Mark Mahaney: [00:23:46] Well, you’re right. It’s look, it’s at a trough multiple either EBIT sales or EB EBITA over the last five years. The response to that is what the things have changed for Amazon. And by the way, if you notice, the rates are higher than they were five years ago. Okay, I get that. But in terms of whether anything has structurally changed for Amazon, still about 20% of retail sales that are online and that’s going to keep rising over time. And Amazon is still there actually at the margin gaining share in retail. They grew 20% last quarter in terms of us online retail sales, nobody else is growing at that level and they look at the scale they’re doing that also the clearly gaining share in online retail and I think they will even more so during a recession in cloud computing growth is slowing down for AWS as it is for Azure and so will it for Google Cloud. And I don’t see any major market share shifts there. So you still have with Amazon the market leading position and two of the biggest categories out there, you could find that they still are layering in more and more advertising revenue. You’ve got what I call the best makeshift story in tech because the highest margin businesses, AWS in advertising, are growing materially faster than the low margin retail business. It’s a matter of kind of cleaning up from some of their overbuilding over hiring errors. I still think they need to cut more. I think fundamentals are going to soften. I think demand trends are going to soften the next two quarters because Amazon is consumer discretionary spending. It’s not staples, it’s discretionary spending. So trends are going to soften sometime in the middle of next year however, back half of next year, I think fundamentals stabilize and then they have what I call these unlocks. If Amazon’s got 80 billion in cash on the balance sheet, every once in a while we buy back some stock. I think it’s a possibility that they implement some major share buyback sometime in 23. That’s catalysts number one. Catalyst number two is everybody looks at their retail business and always see their losses. But that’s because they throw into all their retail businesses. They throw in that Alexa spend and that Hollywood spend and this autonomous vehicle spend. But if they were actually to give you new disclosure, which I think is a possibility this next year, and actually show you how profitable the retail businesses that would be catalyst number two. And the third thing is, we talk about Netflix. There’s now only one global streaming leader that doesn’t show any ads against all of that content. That’s Amazon, Amazon Prime video. And like, it wouldn’t kill you Amazon to put like a 1/32 or two of 32nd ads before the show is you can have much lower ad load, but that’s like, give me money for Amazon. And I think there’s a chance that we’ll see something like that in the next 12 months. Like kind of these three value unlocks at a stock that’s at a trough multiple that there’s no structural changes. TikTok doesn’t matter to Amazon. Apple privacy changes don’t matter to Amazon. The core business is just as strong today as it’s been in the past. We just have to work through the macro. So if you’ve got a 2 to 3 year time horizon, you can make money buying Amazon here. And I think it’s going to double in 18 months. And if you really want a time that you can wait for the economy and maybe that’s the middle of next year, but all three of us know how quickly the market anticipates fundamental inflection points. So I don’t know when that fundamental inflection point occurs. I think it does occur at 23. It’s a timing call. It’s a win not off call when it comes to Amazon. [00:26:48][182.7]
Guy Adami: [00:26:49] Yeah. And despite the fact that Amazon is if you look at it in the aggregate, if you go back five years, the stock’s effectively trading where it was. I mean, to the point you just made about we have seen moves of that magnitude both higher and lower. And I’ll add a third variable in there when they seem to want to dial up the operating margin spigot, they seem to be able to do that when necessary. And when you see those improve, that’s typically when the stock starts to get back on its rails. We’ll see. I happen to agree with the call. One name that I don’t think people I certainly can’t figure it out. Is it a covid play not a covid play, and you can make an argument either way. Uber. And as we sit here $24 stock, I think the recent low was south of $20. Another name that I think the street has trouble figuring out and in terms of the stock just really can’t get out of its own way either. [00:27:37][47.5]
Mark Mahaney: [00:27:38] You’re right. It hasn’t done anything since its IPO. Now, I actually think the stock was breaking out. Look at the tape early 2020 and then, boom, that business got gutted, the mobility business got gutted by COVID and that forced them to take out a lot of costs. By the way, that made the company more efficient. The couple of these gig economy names Airbnb too, that were pretty cost complacent. Nothing like a pandemic to slap it out of you. I don’t mean to be rude about it. Or anyway, I take it seriously the impacts of the pandemic. But it did really gut the fundamentals of both businesses. But here we are post-pandemic and the mobility business now has reached bigger scale than if they finally just in the last two quarters, are now bigger than they were pre-COVID. That’s how long it took the business to recover. But it’s recovered. And guess what? In the meantime, the business is now more efficient. It’s generating higher margins than it was before. And the eats business, the delivery business is now profitable, too. So for the first time ever since you and I last talked, you know, the big thing that’s happened to Uber, it’s generating positive free cash flow. Did it in the June quarter, do it. Did it again in the September quarter. And if they keep adding up those positive free cash flow quarters and get close to this 4 billion in free cash flow goal that they’ve laid out in 2024, this stock will rerate. So that’s why Uber is one of my top picks. I also think the mobility part of the business is probably a utility. I just, you know, we’re all going to keep commuting during the recession. We’re going to still use our social ride, you know, going out on Friday and Saturday nights and ubering a couple of airport trips, too. So I think the use cases are still going to be there. I worry a little bit about the delivery side of the business that could weaken in a recession. But I think the larger part of the business mobility part of the business has pretty sticky demand. And I think the company got the memo. We cut costs, we drive towards free cash flow. And we proved that we can reach 4 billion of free cash flow. And if they do that, I think the stock’s got a lot of upside because that gives you like a 7%, 8% free cash flow yield for a name that’s kind of a global utility that’s got 90 billion in bookings growing close to 30% year over year. So you’ve got growth and profitability and scale. That’s a rare combo. [00:29:38][120.1]
Dan Nathan: [00:29:39] So Mark, the comments that you made about Amazon, you said if you can be patient, if you’re going to buy it on weakness in the not so distant future, you think it’s a double 18 months, two years out. But some of the caution about Amazon in the kind of economic headwinds they have can easily be extrapolated to your entire coverage here. And so my question to you is, are we in for a January with a handful of negative preannouncements followed by a bunch of calendar year 2023 guide downs when we get the earnings officially in late January, early February. And is that going to be the realization that it might be a really difficult year, even in 2023, to make money in some of these high valuation stocks? We just talk about a handful that look really cheap relative to themselves. But if they were to guide down meaningfully and not have the growth materialize, that we might expect then they’re going to look really expensive. So you’re history following this sector. We had a protracted bear market. After the dot com, there were fits and starts. There were 75% rallies in stocks like we just saw in Netflix, only to go back and maybe retest some of those lows. So I’m curious, do you think we’re in that post dot com crash mode? Because a lot of the stocks have had similar moves, but is it just a different sort of environment? And do the tailwinds, the secular tailwinds, are they just too strong right now? [00:31:06][86.5]
Mark Mahaney: [00:31:07] I think it’s a different environment, but I think your setup question is the right one, Dan. And I think the answer is, I think most companies are going to be guiding down. I think demand trends are deteriorating. We tracked that just in October and November. Online advertising, weaker, online retail, weaker, cloud computing demand, softe,r travel, just looking like it could tip over. It hasn’t yet, but it’s kind of hard to think that it won’t. And so I think most companies are going to be guiding down. So you want to be super tactical here, but it is the stock pickers market and those trends you and I could have talked about those two months ago, there’s still been some outperformers. So you want to find companies that have got somewhat recession resistant revenue models. I don’t cover defensive stocks. I’m sorry, I don’t. But I got some names that are less consumer discretionary and a little bit more thrifty names. And again, I Netflix for 6.99 a month. That seems like a pretty cheap way to keep entertaining during a recession. Uber, I think with its mobility business, is a utility that people aren’t going to cut or they’re going to cut only modestly. So I think there’s a few outliers in there. Those are the two at the top of my hit list. And then I got Meta in there just because I think the numbers have been down so much. I just think the risk board is so asymmetric with the valuation is it’s not a high multiple name trading at 12. It’s got a dramatic discount to the market. I just don’t think it deserves. So I’ll fall on my sword die on the hill on those. But the other names, including names I really like for the long term names like Google and Amazon, I think their commentary is going to cause pressure on those shares. I find it hard to believe that those stocks are going to outperform near-term 3 to 6 months when revenue growth trends are still decelerating and margins are going to be under pressure. [00:32:41][94.1]
Dan Nathan: [00:32:42] All right. Last question before we get out of here, Mark. Are we going to see one of your old favorites from like 20 years ago or so, Apollo bought Yahoo! From Verizon Media. Jim Lansdown was brought in to be the CEO of that company. I know Jim and I know some of the people on the board, a real serious board here. He’s a real serious operator. This is a company that has a huge audience. And I have to assume when they look around, they never had anything really in social. They bought Tumblr. That was a big zero. It wasn’t social. You got to think that as they see the landscape changing here, as they see how disruptive TikTok has been and then how disruptive some of the other things have gone on from a competitive standpoint or how disruptive Elon is being at Twitter. They have to see a lot of opportunities given the audience that they have right now. Is that something you’re tracking? You’re tracking this company, and will they rise like a Phoenix? That was a long ass pause Mark Mahaney. [00:33:39][57.1]
Mark Mahaney: [00:33:41] We’ve seen very few examples of companies rising like a Phoenix, like I’m trying to think of one in the Internet space. Maybe you could argue that was Amazon. Maybe they were roaw in n the Phoenix from 2000 to 2003 to where they are five years later, 17 years later, maybe, maybe the rise from the Phoenix. I mean that’s probably the exception that proves the rule. It is very hard to rise from the ashes in this industry. You have to convince people you’ve got something that’s materially better than what’s out there. So look, I hope it works, but I think the odds would be clearly stacked against them. [00:34:15][33.9]
Dan Nathan: [00:34:15] All right. Well, listen, Mark, we really appreciate you being here. One year, I guess, from the publication of your book, and I just want to do this. We didn’t do this at the time, but for the first hundred listeners who leave a review on on the tape or okay Computer in the podcast stores, you know what to do. Email us the review at contact@riskreversal, a screenshot of it and we will send you for free a copy of Mark’s book Nothing But Net, so please do that. Listen, this is a great investing book. I read it last year before Mark we talked about it there. There it is. Nothing but net. So Lieber review in the Apple podcast or take a screenshot, email it to us and we will send you a copy of Mark’s book with your address on the email. So Mark Mahaney, thanks so much for being with Guy and me today. Guy thanks for bringing it buddy. [00:35:05][50.2]
Guy Adami: [00:35:06] I love it. Mark You know, I’m a fan. Thank you for your time. I think we’re lining up in some of the thoughts we have for 23, so I hope they pan out. Thanks, Mark. [00:35:14][7.5]
Mark Mahaney: [00:35:14] All right. See you guys. See you Dan. [00:35:40][25.4]
<BREAK>
Dan Nathan: [00:37:37] All right. Welcome to Okay Computer. I am Dan Nathan. I am here with Trevor Marshall. He is the CTO and co-founder of Current. You’ve heard him here before on Okay, Computer. And to be very frank, I am his guest today. I am sitting in Current’s offices. I am in RiskReversal media’s brand new podcasting studio. We have an expanded partnership with our friends at Current and we’re going to be here every day producing a lot of content. You’re going to be hearing a lot more from Trevor Marshall. You’re going to hear a lot more from his co-founder, Stuart Sopp, who’s the CEO of Current. And so, Trevor, thank you for having us here. [00:38:16][39.5]
Trevor Marshall: [00:38:17] Oh, my pleasure. And again, this is this is thanks mostly to Spotify, who was in here years ago, they left this place in incredible shape. We just threw a couple of mics in and brought some good partners along. [00:38:27][10.0]
Dan Nathan: [00:38:27] All right. So it’s really funny because the origin story of this is that you guys have been a sponsor of okay computer for all of 2022. And I think I was over here over the summer with you and Stuart and we were having a drink and we’re just walking around the offices. And you said, you know what, by the way, there’s something that you might be interested in seeing. And we went in this back room and it’s where all this storage, you just guys like old computers and old furniture and everything. And it is a really tricked out audio and video studio. And you said this was left over from Spotify a few years ago. And then we started thinking about, okay, maybe we can put this thing to use. [00:38:59][32.2]
Trevor Marshall: [00:39:00] Absolutely. Couldn’t be happier. Got it going. [00:39:02][2.0]
Dan Nathan: [00:39:02] Well, it’s really cool. We’re really excited because I know that Stuart’s going to be spending some time with us on on the tape. You’re going to be spending some time with us on okay. Computer. So we’re pretty fired up for that in 2023. But we got to do a little bit of a look back on 2022 because you’ve been on the pad a handful of times over the course of the year. We talked about a bunch of different catalysts in the fintech space, in the crypto space, and the convergence of the two of them. I think the last time you were on it was in late August. We were talking about the ethereal merge and what sort of catalyst that was going to be. And I remember, I think Meltem was on with us from Coinshares and you know, we were talking about how a lot of people out there were thinking of as a catalyst for the coin, and it did end up being one. It was the probably the last time eth touched 2000. But what did it mean for the actual blockchain? You know what I’m saying? Because if you want to separate the coins and I think one of the reasons I love talking to you is that you separate all the hype around the tokens and the price of the tokens from underlying technology and what’s happening in the background. [00:40:00][58.1]
Trevor Marshall: [00:40:01] Yeah, absolutely. I mean, looking back on this year, there’s been some awesome stuff actually that has come out, especially in crypto, definitely in fintech too. And then there’s been the overwhelming market trends which I’m sure we’ll get into and that have really dominated a lot of what we think about. With ehtereu, in particular, yeah, the merge went way better than I was expecting. I was curious to see how it would actually play out, especially in the dapps that are built on them. There’s still two big concerns that I have going forward. There’s this Shanghai upgrade in March which basically will remove, as far as I can tell, major coordinated incentives to for all the validators to stay up to date. Previously you had the difficulty bomb, which would basically say, Hey everyone upgrade. Otherwise your version of Ethereum’s going to break with the ability to withdraw the staked eth coming in March. I’m just so I want to make sure that it’d be very bad if there wasn’t similar types of coordinated incentives in the future. I want to see if there is move as quickly as it should and then you still haven’t solved the sharding problem. There’s a couple of different ways that they’re looking at it in. A couple of different ways that seem likely, particularly with the Zero Knowledge Rollups, looks extremely promising. It was great to see that pivot from a technology standpoint of an actual scalability solution that that made a ton of sense. It’s just it’s hard and there’s still a lot of work to be done. [00:41:19][78.3]
Dan Nathan: [00:41:19] Talk to me a little bit about the fact that bitcoin and eth, the whole ecosystem was above 3 trillion. We’re just talking about the market cap of the coins and we know that the biggest ones outside of those two were these stablecoins and they’ve had a tough year. And you use that term confidence, you know, a little bit in that really is at the heart, I think of what people are really challenging about this as an asset class or an underlying technology. [00:41:43][23.3]
Trevor Marshall: [00:41:43] Yeah, combined less than half a trillion. I do remember when we crossed a billion for the first time sort of in the total market cap and that felt like we finally made it right. Like. [00:41:53][9.6]
Dan Nathan: [00:41:53] I think billions. Yeah, yeah. [00:41:55][2.2]
Trevor Marshall: [00:41:56] I’ve taken a pretty long term view on all of this. I think underlying the primary innovation of all of this is true digital ownership. And that’s that’s a concept that it’s a Pandora’s box is open in terms of this is a path for financial autonomy. This is a path for truly changing the way that information can be converted into value. It solves the problem of as the world deglobalized economically but becomes more globalized from an information perspective, there’s this gap that’s being created which right now is artificially not allowing value to flow properly, but in a system that lives purely in a digital way, you can you can bridge that gap. These are decades long changes in the way that we look at money and the way that we look at value. So for the market cap coming off 80, 90%. It’s like the seventh or eighth time I can remember it doing that, but I can still also see the fundamental changes, like I’m encouraged by the direction of the ethereum roadmap. I’m encouraged that Bitcoin still remains a very clear alternative to a fiat system. I think it’s important that it exists, even if it doesn’t become the primary financial system of the world. [00:43:10][73.8]
Dan Nathan: [00:43:11] Was there a time that you thought it had the potential of doing that? And again, this is maybe when every other guy on Twitter had like laser eyes and other pfps that seemed to be like this religious nature of the true believers. Right? Like the last guys with their laser eyes, you know, the Jack Dorsey’s, the sailors. Are you less interested in that? Who people think there’s like it’s like one ring to rule them all the sort of situation and more thinking about what is the sort of innovation that continue to develop. And these, you know, protocols can can lead to it given the lack of trust in fiat currencies. And I know that, you know, one of the pillars of the bull case for Bitcoin is like censorship resistance. And I think that’s what you’re talking about, too. [00:43:52][40.6]
Trevor Marshall: [00:43:52] Yeah, there’s an element of that. I don’t think I ever thought that Bitcoin would be the only financial system. Even when I was like far more naive about the way that systems and markets work, I was fortunate enough to start my career on a foreign exchange desk and learned pretty early on sort of how interconnected financial systems are. And I think at most and still kind of where I’m at is probably it becomes part of a government’s reserve as an alternative to dollars [00:44:19][26.5]
Dan Nathan: [00:44:20] And what would it serve there? So gold, a lot of governments hold a lot of gold. The Chinese this year, they’ve been selling dollars and buying gold. Is it governments ex the U.S. who are looking for something to diversify against the U.S. dollar? Is that how you see it? [00:44:34][13.6]
Trevor Marshall: [00:44:34] I think that’s definitely a component to it. I think you go back to kind of what I’m saying around the ability for value to be transmitted globally. It makes sense for central banks just everywhere to have a little piece of this global exchange network. Now you get into all sorts of hairy questions as that starts happening, but I think that’s still a function for Bitcoin over the long term. But I think like most of the payment innovation, it’s not going to it’s not going to happen in Bitcoin. Like Bitcoin the way it exists today is very unlikely to change. I think it has enough value on its own. It’s definitely sort of demonstrated itself as the primary proof of work mechanism and an alternative. I think a lot of the innovation is going to happen around proof of stake and delegated proof of stake systems. [00:45:19][44.8]
Dan Nathan: [00:45:19] So is that part of the plan for Bitcoin? Because right now people say it’s slow and it’s expensive and proof of work is onerous and really do get mass adoption. Does it need to do kind of eth just did here and moved to a proof of stake and can it really scale like that. [00:45:35][16.1]
Trevor Marshall: [00:45:36] Yeah I don’t think it should. Again, there’s no incentive to move away from what how bitcoin exists today. There’s no coordinated incentive. The last time that bitcoin hard forked is because of there was a huge bug. Even though there have been some some scalability attempts, I think most people have kind of come to the conclusion that Bitcoin can have alternative scaling solutions built on top of it. But fundamentally, it’s not going to change at the protocol level and nor should it. [00:46:02][26.1]
Dan Nathan: [00:46:02] So you just mentioned that, you know, you and Stuart were FX traders at Morgan Stanley. This is what, ten years ago, years before you started Current. Your macro traders, right. You looked at a lot of different risk assets and they all kind of had an input into your overall thesis in the way you probably traded your underlying that you were charged to do. It seemed to me that some of the really smart macro traders over the last few years started to view Bitcoin as a macro asset, not as like this is a market that I want to trade. Like I have friends who like created funds and they were just trading all these different types of coins that were doing all this stuff with the stablecoins and the yield farming, and they’re doing all this stuff. And those are the guys, I think, who’ve just really had a difficult time. I think if you were one of these macro traders who viewed Bitcoin and possibly eth as a macro asset like that, you would treat like the 15 other largest macro assets and these guys were really small relative to them. Then you’re still in the game a little bit. You probably learned a whole heck of a lot in a very volatile couple of years. I’m just curious what you think about that, because I can see a lot of these dedicated crypto funds which were born of people who are in the macro investing world, maybe coming back to it, but really just treating it as a one of a few dozen macro assets. [00:47:17][75.2]
Trevor Marshall: [00:47:18] When I was at Morgan Stanley, I was an analyst. I wasn’t really responsible for anything, but I learned a ton, you know, sitting there and being there [00:47:24][6.6]
Dan Nathan: [00:47:25] You Were Stu’s analyst? [00:47:25][0.1]
Trevor Marshall: [00:47:25] I was Stu’s analyst, absolutely. [00:47:27][1.3]
Dan Nathan: [00:47:27] And he told me a story one day that you basically I think you printed it out to you printed out the Bitcoin White Paper. What year was that and you showed it to him. [00:47:35][7.3]
Trevor Marshall: [00:47:35] Would have been probably 2012 when I first met him. [00:47:37][2.0]
Dan Nathan: [00:47:37] And you were like a young guy, right? And so what interested you about that white paper at the time you’d already been on Morgan’s desk I’m assuming for a little bit? [00:47:44][7.1]
Trevor Marshall: [00:47:45] Yeah, well, this was actually when I was an intern at that point when I first met Stu. But it actually connects to the second part of what you were saying, which is, I think the only way to really understand a lot of like the implications of these things is to get to the technology. It’s like you wouldn’t expect someone in commodities to not have a firm grasp of the actual mechanics of what it means to take gas out of the ground or what it means to transport cows or whatever it might be like for really great traders and macro traders included. They understand the mechanics of whether it’s like the interest rate environment at the central bank or the micro market, things that might be a play in options market and how that relates to pricing around certain times. It’s the same when it comes to sort of the crypto asset class. And so I think understanding and having at least a little bit of fluency around what the differences between consensus mechanisms are and what the implications of certain initiatives that are upcoming. Those are the fundamentals of ultimately the pricing. Everything around it is really behavioral in the market and sort of following what seems to be hot. But I think getting down to the fundamentals is mostly what’s informed me when I look at everything that’s out there. But it does require a little bit of that technical look, which is Bitcoin’s case. Why is proof of work such an amazing innovation and why is it important, which is, you know, in the white paper. [00:49:09][84.7]
Dan Nathan: [00:49:10] Let’s talk about the price here. You just mentioned something. I mean, like, you know, Bitcoin’s still above 18,000. And given what we’ve just been through over the last few months or so with the implosion and this goes back to confidence. Right. And you know, there’s always all the FUD about tether, right? And we’ve seen some issues with Stablecoins this year, so it doesn’t seem like we’re done here. And if you think of just some of the issues as it relates to FTX and what might be the case with binance, I’m not asking you to opine one way or another, but there’s a lot of people really skeptical about binance. And then I don’t know if you’ve seen how Coinbase has been trading. It’s making new 52 week all time lows right now. There seems to be some concern about decentralized exchanges. Okay. And really what some of the holdings are backed with and the ability to have them audited. You’d think given the scale of fraud at FTX that Bitcoin would be trading much lower. I mean, if you think about it, it went to 20,000 at its highs in December of 2017, at its lows I think in 1920 it was like 3000. Why do you think it’s still trading at 18,000 if if you are of the mindset that the fraud is not done, is not an indictment on Bitcoin, it’s an indictment on some of the players that came into it. [00:50:24][74.9]
Trevor Marshall: [00:50:25] Yeah, I think, of course it’s pure conjecture, but I strongly suspect that a lot of the talk of institutions getting involved didn’t necessarily result in a lot of institutions making purchases. I would argue that the largest owners of crypto at this point are either folks like the trusts that have been around for a long time or miners. It’s kind of how that market has been for a long time. And so I don’t think you have the level of actual institutional ownership that has been reported. That would be, again, conjecture. I think it’s like to kind of recap 2022, it’s interesting that what happened in crypto started with basically the collapse of leveraged incentives, which you could say and leverage growth incentives. So, you know, the way that Luna collapsed was ultimately because they were trying to get growth into something without really enough economics to back it up. It is far less malicious than what happened in other places of the market, but that created holes that were, you know, again, like kind of put in place from companies wanting to get access to those returns without thinking too much about how those returns are being generated, which then created this exposure, which ultimately in the last month we’ve seen the biggest fallout happen with FTX. But that sort of leveraged growth incentive is the same thing that was happening really across fintech too, in terms of a ton of capital coming into the space, a lot of sort of go out and grow at any cost. And that was translated all the way down to crypto. And it just this is the kind of the story of 2022 is that the the deleveraging and the unwinding of things that didn’t actually have an economic back to them, they were all exposed. [00:52:09][104.8]
Dan Nathan: [00:52:10] And when you think about fintech, there was a ton of models that were really exciting in 2020 and 2021, buy now, pay later in the public equity market that just saw a huge amounts of interest. And when you think about it, it’s not just from investors in the public market, but square paid at the time. I think it was the summer of 2020, $29 billion in stock for Afterpay. Right. And so right now, I think square I think their market cap is like in the high thirties. Okay. When. Think about that. Think about what’s happened in a year and a half since they made that acquisition. When you see that all of it coming unwound a little more than a year later. What’s that as as a as a fintech founder, as a CTO, what does that say to you about what’s gone on over the last couple of years? [00:52:55][45.2]
Trevor Marshall: [00:52:56] I mean, definitely like pendulum swings in both directions and Square’s way oversold, just in my personal view. Just given the scope of what they’re doing and current, we were part of that wave in 2021, but we were very lucky to have Andreessen in our last round and they invested in us. They were looking at the long term, which is to say this can be an absolutely massive business that’s going to take many years to get to. And at the same time, we started pulling back and marketing way before the market collapsed because there is all these convergence of factors that led us to think we need to make investments into the core business as much as possible. And for 2022, for Current was really about delivering on those investments. We were able to add 35 points of gross margin through the transition into vertical using our processing stack. These are the types of things that ultimately separate us, in my opinion, from a lot of what’s in the market, which is great unit economics and the ability to actually leverage technology in the finance. It’s not a finance company. It’s a technology company. [00:53:56][60.7]
Dan Nathan: [00:53:57] Well, it’s funny, you know, I’m a customer if you listen to our ads. And so it’s interesting to me what I think is happened in 2022 when I just think of the app, okay. And I have an account, my kids have an account, you guys have a high yield savings account. And so that was introduced I think this year. And this was a year where interest rates started going up precipitously for the first time in a very long time. Also, you didn’t do this at the top, but you did it just quite recently. Now you can buy ETH or Bitcoin via the account. I have a 19 year old daughter who has an app now. She also has a card. I don’t know if she uses the card because she actually I think she uses the app to pay for things the way anyone would with Apple Pay or something like that. But then she actually has ETH that she owns and then she also has money in a high yield savings account. Just think about that for a 19 year old. Think about that. I’m 50 years old. When I was 19, I had what we call the Mac card. I don’t know why we call them mac cards. It was just an ATM card and I had a checkbook and that was it. And then figuring out how to balance all this stuff was really kind of annoying and people just didn’t do it. So you didn’t learn how to bank, you know what I mean? And now kids today are being born into it. If you’re like later stage current customer, you’re doing direct deposit, you’re having all those. So, so it’s just kind of interesting to me. You’re really putting all this stuff at the fingertips and you haven’t been some Johnny come lately is just kind of getting into the next whiz bang really exciting thing at the highs as it relates to I guess financial products. [00:55:24][87.3]
Trevor Marshall: [00:55:25] Yeah I think when it comes down to it, the ones that survive this time are the ones that have really understood what their business model is and have optimized around it. And if you haven’t, or if you never really had a business model, it kind of falls apart at this point because there’s not a lot of money that can come into your hands to kind of patch up a bad business. And so we have known for many years that our businesses and interchange business, we make money when our customers use our cards, and that’s our primary. And we’ve now, especially over the last year, made that a super efficient engine and everything else we offer, we don’t have to charge for it. We don’t have to monetize. All we have to do is increase retention. And so the way to think of it is just generally the whole company and product strategy and technology strategy is optimize the revenue engine and drive retention. That’s like the easiest way to summarize it is just optimize the revenue engine and drive retention into the product. Because if we can increase month 12 retention for our best customers, that has a massive impact on the lifetime value because this is a highly sticky product. Your daughters have been using it, I imagine, for a few years now, and they will probably continue to use it for quite some time if there’s if they’re not having any issues, if it’s a great, you know, consistent experience, if they’re getting more value. And for a business like ours, where we look at 15 year lifetimes, which is sort of the average checking account lifetime across the industry, there’s so much to be gained from just delivering as much value back to the customer as long as your revenue engine is. And for some people, the struggle has been not getting a good revenue engine. So relying on too many partners that eat away at your gross and contribution margins to prevent you from really being able to scale into your business or not being able to be nimble enough to deliver things that retain customers into the into that revenue engine. [00:57:12][107.3]
Dan Nathan: [00:57:13] You guys have been deliberate in 2022, so what are some of the things that excite you about 2023 when you think about how deliberate you guys have been over the last couple of years, you’ve seen booms and busts. You’ve seen the pull forward of certain behavior during the pandemic. And we talked a little bit about this was Stuart on the pod the other day. I mean, some of the stuff the some of the trends we’re seeing in consumer savings, in consumer credit, it’s kind of troubling. Right. And there’s a lot of thought among the economists class and strategist class that there’s going to be a recession in 2023. How do you think about how you position the business and what are some of the things that kind of excite you about how you positioned to kind of deal with a tough economy and a consumer or a customer that’s going to want more from you? [00:57:58][44.4]
Trevor Marshall: [00:57:58] Yeah, absolutely. I mean, our strategy has been to build out the banking platform. And if you look at sort of what digital innovation means and a lot of bigger banks are existing banks, it’s about how do I sell a product in a new way? It’s the same product, but I’m going to deliver it in an app. You can sign up quickly or whatever it might be. It’s new distribution paths, primarily when it comes to innovation. And for us, we are actually owning those building blocks and creating new types of products. So we’ve done that with checking accounts. We’ve done that with savings accounts, we’ve done that with investment like accounts so we’ve got crypto now and there’s other things. [00:58:33][35.1]
Dan Nathan: [00:58:33] So that things coming in 2023. [00:58:34][1.4]
Trevor Marshall: [00:58:36] There’s lots of things we could do over the next few years. I think actually our biggest focus is around credit. It’s the biggest demand that we have for customers, which is how do you, as a current, improve my chances of getting access to money? We do that very literally with our overdraft program, no fee overdraft program, but we’re also moving towards how do we build something that customers can build their credit score and eventually give them a product they can graduate into to help solve their liquidity needs. And from a market perspective, we launched the savings account because of the anticipated inflation that was coming following last year. Like Stuart has been around the block when it comes to macro and when you print trillions of dollars, yeah, inflation will follow. We actually were able to get ahead with that rate at the time when we announced it was market leading rate. It’s still market leading, but a lot of people are starting to sort of catch up on the Fed funds funded. [00:59:27][51.1]
Dan Nathan: [00:59:28] Just curious when you think about them now and ask you about stocks, what are some of the fintech products and services that have been proven out in the last couple of years that you think are being under-appreciated? Whatever it is, the valuations in the public or private markets, they’re going to see their day in the next couple of years. [00:59:42][14.0]
Trevor Marshall: [00:59:42] Visa is amazing. People always talk about the end of network card now where it was like, no, they they’ve really figured it out[00:59:49][7.1]
Dan Nathan: [00:59:49] What can end that, you know what I mean? Like, what’s the bear case? If you’re saying that a visa’s like that in five years, don’t get me this. [00:59:54][5.5]
Trevor Marshall: [00:59:55] I think the bear case. So what they do is they disintermediate and they’re not the only ones, but they disintermediate the needs of the consumer and the needs of the merchant and make it extremely convenient for value to be exchanged. I think the only existential threat that is realistic to them is if Apple or other devices come out with a stablecoin wallets on their phone. And merchants have point of sale devices that accept via a direct digital transfer of value. [01:00:24][28.9]
Dan Nathan: [01:00:24] Where it’s a where you don’t need the middle. [01:00:26][1.5]
Trevor Marshall: [01:00:27] It’s effectively a cash replacement. [01:00:28][1.4]
Dan Nathan: [01:00:29] Yeah. [01:00:29][0.0]
Trevor Marshall: [01:00:30] There’s a lot of others. As a consumer, there’s value to using a card because you can call up your bank and say, Hey, I didn’t do that transaction. There’s a whole disputes infrastructure that exists for consumer protection that’s incredibly valuable. And I think that what networks and in particular Visa, who we work super closely with, do you know ultimately what you’re paying for on a per transaction basis? If you’re the merchant, it’s pretty amazing that it’s that cheap. To be honest [01:00:58][28.0]
Dan Nathan: [01:00:59] Good luck disintermediating visa right now. When you think about it, $30 billion in annual sales and nearly 20 billion in adjusted EBITDA. And it’s got a $435 billion market cap, which is acted much better than the S&P in the Nasdaq. I mean, I think it speaks to what you’re saying. And but Visa has kind of dipped their toe in the water. They want to look at fintech acquisitions. They want to broaden out a little bit and they see at least the challenges to the platform, but they probably see it years away. [01:01:26][26.7]
Trevor Marshall: [01:01:26] Yeah, I mean, you could definitely argue that a lot of the fintech rise over 2021 and the excitement around it was from the acquisition of Plaid. Yeah. Visa’s acquisition or per planned acquisition of Plaid. They are a major force in determining the future of fintech just because of their place in the market. And yeah, your question about what’s been overlooked, probably not them because they’re being rewarded in this market. But I come back to it. There’s like, yeah, what they provide is pretty amazing. [01:01:54][27.3]
Dan Nathan: [01:01:54] But that’s pretty fascinating. All right. So you are a VC backed FinTech Company. Okay. And you when I ask you, what are some of the really interesting trends in fintech right now? You’re like Visa. This is like one of the I mean, it just speaks to kind of their market dominance and the dominance of what they’ve been able to create. And so when you think about like that Plaid acquisition, I mean, they want to do a whole host of things that kind of get them rather than just doing the interchange, they want to actually touch their customers in different ways without taking the credit risk. And I think that’s also a big part of this outperformance in let’s say, a visa this year is like there’s no credit risk there. [01:02:32][38.4]
Trevor Marshall: [01:02:33] Yeah, yeah. It’s amazing. I think if you look at innovation and where the a lot of value it is it is in the ability to assess risk in a much smarter way. You know, we’ve done some of this internally in terms of the way that we’re modeling risk for our overdraft. You do get the benefits of things like cloud train models that you couldn’t have gotten up until the last few years. Basically, these these tools have been relatively inaccessible. And now Google has Vertex AI, which allows you to train models pretty quickly and in ways that were not easily done without a pretty large team of data scientists before. [01:03:10][37.2]
Dan Nathan: [01:03:10] That’s interesting that you just mentioned Google. Do you think we’re going to see if they could and maybe this is an area where they can. We know that some of these massive tech platforms, they can’t really buy things similar to them. But could a Google make a big fintech acquisition? Is it out there at Amazon? If they wanted to buy Affirm could Apple, which obviously has set their sights on doing a whole host of things as it relates to banking. You think about it, they have a billion and a half installed base of iOS you know what I mean users, if you think about what Amazon has on Prime and the list goes on and on. I mean, Google has seven properties with more than a billion monthly active users. You think about how they could monetize these users. It’s like through financial sort of. [01:03:52][41.3]
Trevor Marshall: [01:03:52] I think they’re the most likely acquirers of fintech over the next two years as opposed to banks, for example, just because historically banks have not been big buyers, I think. I mean, you’ve seen it better than me, but there’s not a lot of M&A activity due to the uncertainty most likely. And sort of like what financing looks like over the next couple of years. But when that changes and there is more clarity and confidence both from an investor perspective, but also an acquirer perspective, I do think it’ll be Google, Facebook, Twitter. [01:04:25][32.7]
Dan Nathan: [01:04:25] Just real quickly, you saw some of the data recently about the IPO market. It’s slightly down like 96% year over year in 2022. So that has not been a source of exit. But there has been a lot of private equity capital that was raised into the beginning of this year. And we’ve seen some big enterprise software deals. Thoma Bravo have been really active. I suspect we’re going to see a lot of strategic M&A early in 2023 just because it’ll take time for the IPO market to come back. It will take time for people to want to sell at the sort of prices, you know, they mean that they had the market and IPO. But we know that strategics are sometimes less price sensitive because they want an asset. Right. And they want to like grow into something. So I really think it’s going to probably get pretty active in early 2023. All right. Listen, Trevor, this is going to be one of many over the next 12 months we’re going to have. I just thought it’d be a great opportunity to take a step back and just kind of think about a little bit what’s happened in crypto in 2022 where you think some of the stuff is going and then obviously fintech, I mean, the kind of attached the hip at least like from the way you think of things, you’re thinking about a world where you want to take on incumbents or you want to disintermediate and you want to bring. And that’s kind of, I think a bit of crypto thesis, if I’m correct. [01:05:42][76.8]
Trevor Marshall: [01:05:43] Yeah, absolutely. A lot of these things are intertwined. Certainly when you look at what’s happened over the last year, a lot of things are related. A lot of them are market driven. This year, like 2022 is very market driven. But yeah, 2023 should be pretty interesting as well. [01:05:58][15.0]
Dan Nathan: [01:05:58] Yeah. You know, listen, my experience again, being in the markets for the last 25 years and then also just thinking about some of these bubbles that inflate and then they burst. Right. And you think about what rises from the ashes. You know, I can think back in the post dot com period. I can think back to some of the innovations in around, you know, the financial crisis or the things that led up to it. I mean, there are things that were borne out that have become very, very successful. And I think what we’re seeing now, we’re going to look back and be like, Oh, yeah, that was great. The management was really bad, the valuation was really stupid. And it’s not just on the bankers that brought it or whatever. It’s on investors who wanted it, right? It’s on some kind of ill conceived sort of business plans. But some of these things will rise from the ashes and they will be very successful. And I think as negative as you might have been, as skeptical as you might have been, sometimes it makes sense now down 70, 80, 90% in some instances, taking another look and kind of separating the wheat from the chaff, if you will so. [01:06:52][54.1]
Trevor Marshall: [01:06:52] Yeah, from an operators perspective, just build a great business. Just stay focused on that. [01:06:57][4.4]
Dan Nathan: [01:06:57] All right, man. Well, I appreciate it. That’s Trevor Marshall, CTO and co-founder of Current, and he will be back with us really soon.[01:06:57][0.0]
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