TIP807: Portfolio Review: Analyzing Holdings and Watchlist Companies for 2026 w/ Daniel Mahncke, Shawn O'Malley, & Kyle Grieve | We Study Billionaires - The Investor’s Podcast Network

You're listening to TIP.

Today, we will look at our portfolio.

We will discuss our biggest positions, sell to companies and add to one where we feel like the opportunity has become even better.

We're also going to look at some of the watch list companies that listeners have asked us the most for updates on, including Trade Desk and FICO, which have dropped enormously despite being some of the best businesses out there.

So let's see what changed with them.

We'll see you next time.

All opinions expressed by hosts and guests are solely their own and they may have investments in the securities discussed.

Now for your hosts, Sean O'Malley, Kyle Grieve, and Daniel Manka.

Today's episode will be a somewhat new format for many in our audience.

And for anyone who doesn't know me, please allow me to introduce myself.

My name is Sean O'Malley, and I've been with the Investors Podcast for four years now.

But this is my first time stepping into our main podcast feed to be a host and not just a guest.

And so anyways, over the last year, my colleague Daniel Manka and I have worked to publicly build a portfolio of long-term stock holdings that we refer to as the intrinsic value portfolio.

And so Daniel and I would deep dive into one company a week on our show, condensing about 40 hours of research into a 60 minute or so podcast for you to listen to.

On our show that was fittingly called the Intrinsic Value Podcast.

And so at the end of each episode, we would then decide, after doing our financial modeling and talking through the thesis, whether we would like to include the company in question in our portfolio or pass on investment.

And so fortunately, we are still doing that, but now for a bigger audience.

And so every Wednesday on this feed, we will deep dive into one company and decide whether it deserves a spot in our portfolio.

And what has also changed is that it's not just Daniel and me anymore.

We are proud and excited to announce that our friend and colleague, Kyle Grieve has now joined us on this journey.

And so, of course, usual followers of this podcast feed will know Kyle very well, but we are excited to be working with him more directly and to give both him and you, the listener, an introduction into what we have done in the last year on the Intrinsic Value Podcast.

We thought it would be a good idea to start with a portfolio review.

And so, of course, it's not going to be easy to summarize a year's worth of work and research and portfolio building into 90 minutes, or maybe a little bit more, but we'll do our best.

And more than ever, we need to prioritize what actually is important today.

And I will mainly focus on the companies that Kyle told me he would be interested in as well, of course, as some listeners feedback.

And there's some companies that we discussed at length and then others that we have discussed way less.

Those are usually the ones that I want to cover today and give an update on how our thesis has changed, if the thesis changed at all.

But before we do that, I guess it makes sense to give some more context on how we actually set up the Intrinsic Value Portfolio and also what our philosophy has been doing so.

The general idea has been to run a portfolio with about 15 to 20 names.

And that means that in theory, every position would be about 5% to 6% of the portfolio.

And there are obviously different levels of conviction and risk profiles depending on each stock.

So, for example, Alphabet has been one of our earliest additions to the portfolio and it has been our biggest position ever since.

So especially after it doubled for us when it got past the AI fears.

I think it's currently close to 14% of the portfolio.

And then the next biggest stocks are Airbnb at 11.5%, Uber at 10.5%, and Adobe at close to 8%.

And all of these companies are long-term holdings for us as well.

Well, at least as long-term as they can be when we only started this project about a year ago.

But I can already spoil that we will decide today that we make some changes to our portfolio.

We'll get to those changes over the course of this episode, of course.

And for anyone who hasn't followed what Sean and I have been up to on the Intrinsic Value podcast, which is a show that we used to do separately, but we're now merging here into this feed,

We will have links in the show notes so you can review all of the corresponding podcasts, newsletters and the financial models that we did for all of the companies that we discussed today.

So generally, I highly recommend that you subscribe to the newsletter.

Of course, it's free.

And since there's a time lag between recording these episodes and then publishing them, the newsletter has all of the most recent updates, if things change in the meantime.

And we can also dive deeper into the valuation section and the numbers.

And we can also make the valuation models downloadable for you.

So I do think it's a great value add.

And again, the link to the newsletter is in the show notes.

Yeah.

So I've been really excited to follow your guys' show over the last year.

But there's just so many companies that you guys have covered on the show that it's really hard to track them all at kind of this close range.

And I know that you guys own a lot of really, really interesting companies and some that also I've covered on our feed as well.

So One of those examples is Copart, which is a company that I highly respect, that I think we're going to be going over in a little.

I'm most interested in are Airbnb, which I think everybody knows.

So I haven't covered that on this feed, but we have looked at bookingcom in the past which was very interesting in learning about that industry.

And then a couple that I really liked are Exor and Reddit, which I find really, really interesting.

So, you know, we've discussed Ferrari a little bit on the show.

And as far as I know, Exor is kind of your Ferrari proxy in the portfolio with the idea of getting a bit of a discount compared to just buying Ferrari stock outright.

Yeah, yeah, it is.

Exor is a really interesting company, if I have to say myself.

I actually pitched it as my stock pick for 2026, but it's not aging all that well so far.

But that was back in January.

And we have it as a 7% holding in our intrinsic value portfolio.

So it's definitely one of the larger investments.

And yeah, like I said, it's had a bit of a rough start to the year.

And it's not totally surprising since such a huge chunk of their net asset value is in Ferrari.

And Ferrari stock is down about 15% year to date as well.

And so A very simplified mental model for Exor is that it's like an Italian Berkshire Hathaway.

And I want to be clear that I'm not comparing John Elkin, Exor's CEO to Buffett, or their track record to Berkshire's.

And what I mean is the structure is similar.

So Exor is a holding company, a company that owns other companies.

And so they don't have their own operations, really.

Like I said, it simply holds stakes in other businesses and it's been run by the Agnelli family for well over a century now.

And this is the same family that founded Fiat back in the 1920s.

And so the crown jewel of everything they own in their portfolio is Ferrari.

And Exxon holds around 20% of Ferrari's total shares outstanding.

And they actually have extra voting rights attached.

That gives them about 30 control over the governance of the company.

So they are easily the largest shareholder in Ferrari.

So essentially you're buying Ferrari exposure just through a holding company wrapper, kind of similar to what you can do with, for instance, you know, like a 10 cent through owning it through process.

That's the idea.

Yeah.

And so what makes this even more interesting is that Exeter's net asset value the total value of all of its investments minus any debt is somewhere around 33 billion euros.

And the market cap of Exeter itself is only 13 billion euros.

And so that means you're buying those assets at a 60 discount to what they're actually worth on paper in the public markets.

And so if you just look at the Ferrari stake alone, which is about two-fifths of XR's total net assets, it's worth almost the entire market cap of XR because of that 60 discount.

And then everything else, so C&H, Stellantis, Philips.

They also have stakes in Juventus, the Football Club and then Christian Louboutin, as well as the Business Magazine The Economist.

You get all of those for free, more or less.

And so it's like baked in, call options on those businesses that are included in your purchase of Ferrari.

It's one of the few investments in our portfolio where you could actually argue that it's a classical value investment, where you basically buy a dollar for 40 cents.

I know that Clay kind of joked that when you pitched it for your top stock pick for 2026 and I pitched MercadoLibre that he would expect that basically you pitch Melly and I pitch Exxon, just because I'm more of the value guy.

But yeah, it's a company that you really like.

And just for context, Holding company discounts are not at all unusual.

You basically discount them because you are also forced to hold assets that you're not that excited about.

And there's a lot more friction if you were to hold those companies yourself.

And if XR wants to sell a stake, for example, they first have to pay taxes.

And it's also quite difficult just given the size of the positions that XR actually holds.

So you can't just sell your entire stake, or even large parts of it, when you own a third of a company, which is true for many of the positions that XR actually has.

And in XR's case specifically, they really own some assets that are just massively out of favor.

And at the same time, they're kind of tied to their family history.

You kind of alluded to that with them owning Fiat.

And that kind of makes it significantly less likely.

Solantis and CNH are two examples of that, because they're both spinoffs or in some way derivative of that original fiat business.

And CNH, which is basically an alternative competitor to John Deere.

It's a very, very cyclical industry and it's currently in a down cycle.

And then Stellantis is really not only in a historically bad industry for investors, which is automotive, but they've also struggled operationally too.

So it's sort of a double whammy.

They bet big on electric vehicles.

And, unfortunately for them, it just has not been as much demand as they expected from consumers for those products.

And Solantis is a company behind brands like Dodge and Jeep and a handful of other automotive companies that are very recognizable.

So Exxor does own some more exciting companies, I should say.

The Christian Louboutin and The Economist are sort of bright spots in the portfolio besides Ferrari.

And then generally, since you essentially get all of those assets for free on top of the Ferrari position, the only way that this bet could really materially hurt you over the long term, in my opinion, is if John Elkin decides to throw good money after bad.

So a worst case scenario would be basically selling Ferrari shares to dump money into trying to save Stellantis.

I don't see that happening, but that is very much the bear concern.

But I do believe that Exor has actually started to sell parts of that Ferrari stake.

Am I right?

So I believe they rationalized it publicly as kind of reducing concentration and maybe freeing up capital for new acquisitions.

But given the fact that Ferrari has been by far its biggest winners, I think specifically as that Ferrari proxy, but obviously it's not necessarily the best signal for the market.

I actually think of that as one of our informal exit rules for the position.

If Exeter starts dramatically reducing its Ferrari stake without reinvesting in something we have equally high conviction in, then that would be, to me, a reason to exit the stock.

And so I want to mention though, that trimming a position that had grown to represent almost half of the company's net asset value, and doing so at what was effectively an all-time high in Ferrari stock that has now fallen 40 since, does not look like a bad decision at all in hindsight, despite the fact that the market has very much punished Exxer for trimming that Ferrari allocation.

Robert Leonard Right.

So I don't want to spend too much time on Exor here.

As I know, we already have a couple more companies to cover.

But what do you think about Elkin himself?

It seems that he's a pretty vital part of the thesis, given that he's kind of the main guy responsible for capital allocation.

The market has been really unwilling to give him much credit, as I was alluding to.

And so his track record, though, is better than what this discount implies.

From 2009 until 2025, Exxon's net asset value compounded at around 16 per year, against 11 for the MSCI World Index.

And so that's 500 basis points, five percentage points of annualized outperformance every single year over 15 years.

That's a huge difference.

And so now critics will pretty much just say that is primarily because of Ferrari.

And Ferrari was not an investment decision that he made.

The Agnellis have been invested in the Ferrari since the 1960s.

And I think I would push back on that just a little bit.

I don't want to give Elkin too much credit.

But holding onto something through 15 years without flinching, never selling in moments of fear like the great financial crisis, never doing anything really silly to diversify away from your best asset that is a form of capital allocation discipline that a lot of managers fail at.

And so then separately, the Sergio Marchionne hire at Fiat was Elkin's decision, and that worked out really, really well.

And so, without going into detail, I mean that was arguably one of the great CEO selections of the last two decades in really any European industry.

And He also was the one to help push Ferrari to spin off as a standalone company back in 2016, which also unlocked a lot of value for investors.

The buyback program is also worth mentioning, right?

I mean, Axo has been buying back shares at quite a meaningful rate.

And they use this reverse Dutch auction for a 1 billion euro program, which is basically kind of a clever mechanism for maximizing the cost effectiveness of a buyback.

So if the stock is trading at a 60 discount to net asset value, which it currently is, and you're buying back shares, then every single euro that you spend is basically creating significant value for the remaining shareholders.

And that's exactly what you want to see from a management team when your stock is arguably undervalued which, of course, is our thesis for AXA.

And to me, the biggest thing with this bet is that you don't need anything heroic to happen for it to work out well.

I mean, historically, the company's discounts on NAV has traded at closer to 20 to 30%.

So in theory, as sentiment balances out, mean reversion alone could generate very attractive returns as that gap narrows.

And then, at the same time, Exxon's portfolio of assets should also just keep compounding in value over time too.

And so if the company continues to lean into buybacks, they can also force that NAV gap to close, or at least narrow, on their own.

And so it's something they're well aware of.

But as they've accumulated cash and made their balance sheet more conservative to weather the uncertainty they see around the world, whether that's with the war in Iran, to the implications of AI,

They're also just similar to Berkshire in that they're sitting on this huge pile of cash as they're looking at this uncertain world around them.

And so The difference is and rightfully so the market has a lot of faith in Berkshire being able to deploy that buildup of capital well, whereas with Exeter the cash is something like a source of anxiety.

If you don't trust management to know how to allocate it and you don't think they really have a record of making good fresh capital allocations.

It's one thing to hold onto Ferrari, but what have they actually succeeded in allocating capital to is sort of another question.

And so there's a fear that that value could be destroyed because it's sitting in the hands of people who maybe know how to sit on their hands and not sell too much at Ferrari, but do they actually know what to invest in next?

And so I don't know what they will do with the cash.

But once they make really any kind of decision, either on what the next investment will be or whether they're just going to continue to increase buybacks even further, I do think that will reduce much of the uncertainty that's fueling this NAV discount.

And again, since you're buying at such a large discount to the value of the underlying holdings, the only thing that has to happen for you to make money is for that discount to narrow.

And through buybacks, Exxer controls that to an extent.

They have an ability to force that gap to narrow if they want to.

So another company that I found interesting was Transdime.

So Clay covered Heiko on this feed before.

And despite some differences in how they operate, the industry is pretty much the same.

And I think it's just such a great industry to operate in, specifically for companies like Transdime or Heiko.

So they just have so much pricing power in these gigantic moats.

Transom has been a fascinating company to cover.

It's one of those that always trades at a premium, which is why we only dipped our toes into it.

And it's a small 2% position.

We actually have to reflect on that one a bit more, because we always said that either we gain conviction in it and we basically bump it up to a full position so let's say 5 or we will eventually sell it.

And it's not an easy choice because Transom's business model is quite extreme.

And I actually mean that in a positive way, but it does also come with some risk.

Heiko, for example, is this disciplined operator with a reputation for being a good partner to its customers?

And then Transderm is way more aggressive, especially when it comes to pricing its product.

So to give listeners an idea of what Transderm actually does, I kind of call them a conglomerate of 100 small monopolies, because what they do is they acquire businesses in the aerospace industry.

So let's say an aircraft is designed whether that's a Boeing 737 or maybe an Airbus A320, every single component included in that design has to be certified for use on that aircraft.

So the FAA or its international equivalents.

They certify specific parts from specific manufacturers.

And then once your part is on that design, it has to stay on that design.

So you cannot substitute it out, even if a competitor builds something functionally identical.

Even the seatbelts.

If Transat makes the certified seatbelts the next 30 to 50 years basically the entire operational lifespan of the plane has to come from TransTime.

So there's no bidding process.

There's no competitive tender.

The customer has one choice, and that's either you pay the price that TransTime wants, or you have to ground the aircraft.

And grounding an aircraft is more expensive than basically all the parts that TransTime actually sells.

A single 737 or an A320 generates somewhere between 15000 and 30000 of revenue per day for an airline.

So depending on routes and also load factors.

And then you have these bigger aircraft, so white body aircraft, which is doing long haul international routes and that can easily make 50000 or more per day.

And that's basically just the direct revenue loss, but not having it flying out.

So layer on top of that the rebooking costs, the money that you have to spend on the crew, also the reputational damage with passengers if your plane just is canceled.

And then the knock-on effect of pulling a plane out of what is really like a carefully optimized schedule.

So the real economic cost of a grounded aircraft for even just a few days can run well into the hundreds of thousands of dollars.

So, the way I understand it, when Transdime quotes you a price for a replacement part that might sound eye-watering in isolation, you just have to compare it to the alternative and the opportunity cost.

So 10 thousand dollar component that gets your plane back in the air in 24 hours is actually cheap relative to having a week of lost revenues.

And because the airlines know this, you really never hear them actually complain about these prices.

And also, because of that, the aftermarket.

So this is basically the parts that TransTime sells when something has to be replaced.

That is where the business model gets really attractive.

And so TransTime already earns money with the initial sale, but then the pricing power and margin and really just kind of the recurring sales of the business occur in the aftermarket with replacements and repairs and maintenance.

You see that with a lot of the best operators in an industry, that a lot of the times, for example, if you talk about the gaming industry, a lot of the players there sell their consoles at a loss before and then try to make up for that money that you basically lost in the years ahead of that.

But the best players, like Nintendo, for example, they immediately start making money selling the console.

And Transtorm, in this case, is immediately making money selling their parts.

And yet TransLime's aftermarket exposure is about 30 revenue, but 75 of adjusted EBITDA is coming from the aftermarket.

So it's really the main profit driver.

So I think the general idea here has been to take kind of like a private equity approach to aerospace find a small, highly profitable niche business that are already making these certified components with not really any real competition, and then just apply a rather ruthless approach to what they call this value creation model.

One of the most controversial parts of that value creation model is the quote-unquote pricing for value.

And that's pretty much a polite way of saying raise prices, because your customer has absolutely no alternative, no other option that they can do.

So On average, Transom has raised its prices by 6 to 8 per year per product, but there have been significantly larger price increases.

So the result of these price increases is operating margins in the mid-40s and returns on invested capital that are among the highest any industrial business on the planet.

But that also comes with some risks.

So that pricing strategy has gotten them into trouble from time to time.

There's been this one incident where basically, the Pentagon's inspector general ordered a selection of trans-time defense parts a few years back and found markups of over 1000 relative to the production costs of these parts.

And those were several components.

And since the money spent on defense is tax money, that obviously caused a huge public outcry.

Transom eventually refunded around 16 million to the government voluntarily, which was honestly only a rounding over to the actual revenue.

And Transom hasn't really changed anything in the practices that it uses.

Ultimately they are a monopoly and they basically can set these prices because there is no real alternative.

And if the government or any of the private players want their parts, they have to pay.

To some extent you have a similar dynamic with FICO, which is a watchlist company for us that we will also talk about later.

So generally, the margins on each product can just be astronomically high.

And then the overall cost of these products for the airplane are still relatively small.

So nobody really cares about most of the parts that Transom sells.

And the outcry is mostly for a couple of weeks, and then you see it in the papers or in the news.

But then it gets more quiet, and Transom just does what it did in the past.

It's sort of a funny thing to say, but one of the key arguments in Transtem's favor here is this idea of career risk.

And so if Transtem's parts work and the quality is great and on the other side of that nobody wants to be the one to take on the responsibility and burden of looking for another supplier.

Because there's just very little to win but a lot to lose if you're the person who suggests trying a new part and then, God forbid, there's an accident with the plane or something less catastrophic than that.

And so it's not only about how good the part actually is, but it's also about fast supply and the ability to deliver the best maintenance service, which Transom is very, very good at.

That's where the scale is basically important, right?

So you have a lot of these smaller manufacturers that basically can deliver the part but they cannot deliver the same amount of maintenance service.

You know, that's the most important part, because we just talked about how important it is and how expensive it is if you have to go on an airplane.

So I think to me the most likely outcome is that Transtem will basically keep its strong market position and can take even more price in the future.

However, when we do build a startup position in the stock Again, the idea was to own it for a while and then kind of figure out whether we would gain more conviction over time.

Because, in the long run, Transom is not the type of company that we would want to have as a 1 or 2 position.

So those should be companies that we see as these long-term asymmetric opportunities.

So companies that are early in their life cycle and that might work out great, or they won't even exist five years from now.

So you could call them moon shirts if you want.

And then companies like Transtime or also Copart, which have a similar position size in our portfolio right now.

They need to either upgrade to full positions or they have to leave the portfolio.

And personally, I really can't say that, while my conviction isn't lower than before, it isn't higher either.

At the same time, we do have companies in our portfolio, but personally I think I feel much better about and Amazon would actually be one of them.

I originally planned to talk in a bit more detail about both Amazon and MercadoLibre here today, as those are two of our most recent additions.

But I just recalled in an episode with Clay recently, which we published a couple of days ago.

So I would actually refer you to that episode if you want to hear our thesis on those two companies.

The point being, if I have to choose between upgrading TransLime and maybe Copa to full 5 positions or selling them and taking Amazon from 5 to, let's say, a 9 position, I would actually go for the latter.

Yeah, Daniel, I actually kind of agree with that.

I really, really like the Amazon thesis.

Demand for Amazon web services is huge.

And even if there's a chance of a little overcapacity within the next say, two years, we already know that AWS is going to grow into those investments anyway.

And then you add to that the fact that the long-term thesis on robotics and AI is is just so bright.

And so that will probably help restructure Amazon's cost structure as well.

And I think that's another great opportunity for them.

So I personally, I really like Copart as a business.

And while I know less about TransTime, it also seems like an incredible business too.

But I think I would probably expect much better returns from Amazon going forward compared to Copart and probably compared to TransTime as well.

So to me, it's just kind of about risk management.

Transdime is still trading at pretty premium multiples here.

And while you do obviously have some regulatory risk and this private equity strategy that have these special dividends and debt usage, it kind of makes it difficult to fully understand what's going on in that business.

I see it the same way.

And I feel like some people will listen to this and feel like okay, this is a rejection of Copart and Transdime or some sort of implicit prediction that we don't think the businesses will do well, which is not the case at all right.

It's just a question of when we're managing our portfolio...

If we can exchange two companies on the margins that we have to do all the same amount of work to track and keep up with for one company, or a bigger bet on one company that we know we really, really like.

It's just a lot easier to manage.

And sometimes investing is a game of just not making things harder for yourself than they need to be.

But it's not in any way a condemnation of Transdam or Copart, but really just a reflection of, like I said, it's sometimes it's nice to simplify things.

And sometimes you just have a lot more conviction in one business than others.

And why not double down on that business when you have that feeling?

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Slash, TIP companies, Copart and Transtime will not just be left for that.

We'll actually put them on our watch list and still follow them, still listen to the earnings calls.

And if we do see maybe a lot more price action or something changing in the business that we like very much, we can still revisit them, get them for our portfolio.

But I think currently I feel much better if we say Amazon is now a 9 position and both Copart and Transtime For now, leave the portfolio.

Yeah.

So I also see that Berkshire is a part of the portfolio.

So as value investors, I guess it just has to be, right?

I mean, we couldn't help ourselves.

I covered the company a couple of months ago.

I also think that Berkshire is actually attractively valued, but it is a position that we mostly use as a cash proxy to some extent.

So when a better opportunity comes up and we lack cash to invest, we do sell some Berkshire and basically deploy that capital in the new position.

We've actually just done that recently with our additions of MercadoLibre and also Netflix.

And, by the way, speaking about Berkshire, Sean and I are actually very excited about this year's Berkshire meeting because on Friday, May 1st, we will host the Intrinsic Value Conference in Omaha during the Berkshire Hathaway shareholder weekend.

So we will give a special stock pitch presentation on stage, followed by a QA session, with a private dinner for members of our Mastermind community on Saturday.

So for the Friday conference members will also have reserved VIP spots, but there is a limited number of free spots for the conference available too.

So we will keep it on basis.

So if you want to be there, make sure to come early.

And the conference is at Hotel Indigo, I-N-D-I-G-O in downtown Omaha from 1pm to 4pm local time.

I really liked last year's Omaha and you know just meeting all the people there talking to everyone.

But I feel like this time will be a lot bigger and we will meet even more people from the community, but also listeners in general.

So I really look forward to it and I hope that as many as possible will make their way there.

Daniel had the effect of going to his first Berkshire Hathaway shareholder meeting, and then Buffett promptly retired.

So I don't know, maybe that's he kind of jinx things, Daniel, but we'll see what happens this year.

And yeah, I mean, I think if you have any doubts about whether it's going to still be worth attending the Berkshire Hathaway shareholder meeting without Buffett as CEO.

I can absolutely assure you we are personally going to make the weekend worthwhile.

It is going to be a ton of fun.

We're really excited to network with folks from the audience.

And there'll be just a lot of events outside of the shareholder meeting itself that are really important for value investors to be involved with.

But next, I want to bring up Reddit.

Since it's been such an incredibly volatile stock and yet we've done very well since we first entered it at around 80 per share.

And so Reddit was one of those companies that I had some biases against, and it just kept surprising me as I dug deeper into it.

Usually you have sort of a gut feeling when you start researching a company, of how you're going to think about it.

And since I have been a long-term user of Reddit and simultaneously never fully understood how they made any money, I did not think that the business would turn into one of our portfolio holdings.

Honestly,

But the company was so much more compelling than I expected.

And even though it had operated at a loss for a very long time, there has been this real inflection point in the last year, after the business went public.

And the growth has just been absolutely off the charts ever since.

Yeah.

So, unlike you Sean, I'll admit that I'm not really that big of a user of Reddit, although I have used it on and off over the years.

So kind of before listening to your episode I'd never really even crossed my mind as a potential investment, But then, after listening to you pitch it, I kind of had a similarly skeptical view of Reddit, simply just because it lacks many of the advantages that I think other successful social media platforms have.

Meta, for example, just has a ton of data on every single one of its users.

And I think that's why its advertising is just so effective and therefore attractive for advertisers.

But then when you look on Reddit, users are anonymous and that makes it much harder to target them compared to users on things like Instagram or TikTok.

So I think a lot of the traffic ends up coming from Google and from users who aren't even logged in.

But I just browsed the internet and I ended up on Reddit.

Is that correct?

Yeah, that's right.

And the simplest way to think about Reddit is that it's a network of communities.

And so Reddit has around 100000 different communities or subreddits, which are these individual forums, forums that are each organized around a specific topic or type of interest.

And some of them.

Are these really enormous topics, with a good example being Wall Street Bets that everybody who listens to this is probably quite familiar with, from the pandemic and the whole GameStop episode?

And then Other forums are much more niche, right?

You have a few hundred or maybe thousands of people that are very deeply obsessed with a specific thing.

And what makes Reddit different from every other social platform is, as you mentioned, the content is largely synonymous and it's community governed.

So users vote posts up and down, and then that content rises to the top completely organically.

There's not really an algorithmic feed built around personal data in the same way that Facebook and Instagram work.

Reddit actually about who you are, but it knows a lot about what you're interested in and where you like to spend your time when on the internet, what you like to talk about and how you connect with other people.

And then it uses that context to serve very valuable advertising in the moment where you're talking about a specific topic.

And then, all of a sudden, there's an ad, There's a product related to that topic that they can present you.

I still believe that this is incredibly valuable information to have.

Of course, nobody predicts Reddit ever making as much money as Meta, but I do think they have a huge runway left for monetizing the data they have.

What I've come to appreciate even more about how Reddit works is is that there's little incentive and also opportunity to become a big account and then basically make money off of posting on Reddit.

That's one of the reasons why you have way less AI slot than on any other platform.

And it just doesn't really make sense.

There's no need, no incentive or anything to gain from posting AI content on Reddit.

And paradoxically, that's why the platform is so valuable to LLMs.

As the internet floods with AI generated content, human content used to train LLMs just becomes more and more valuable.

And Reddit basically has 20 years of such data and billions of posts and comments, and I think that's why the data licensing business exists.

And AI companies need high quality human generated text to just train their models.

And Reddit's archive is one of the richest such data sets.

So licensing that data has been another nice little boost to profits.

It's not a huge thing.

It's not the core business of Reddit.

But I kind of like it that with all these companies that are basically threatened by why I currently with Reddit, you basically have somewhat of a hedge because they are so valuable to all of these LLMs.

Your Reddit CEO likes to say and I think there's real truth to this that Reddit has the largest corpus of authentic human interaction anywhere on the internet.

And when you contrast that with X, formerly Twitter, they've had all these scandals about large accounts not actually being run in the places that they claim to be.

And it's sort of this model that incentivizes just getting compensated for maximizing impressions.

And so I think it can create a really perverse structure where you have people kind of Feeding into the worst of human instincts and fake news and AI manipulated content just to get as many views as possible so that your account gets paid for that engagement.

And Reddit, as you were alluding to, Daniel, has really no such market. model.

And it's a lot of people on small accounts going into niche forums that in aggregate form, this very large corpus of data but individually does not really translate to this centralized feed like you get with Twitter, where you have really large accounts that are making up a huge percentage of the content that everybody sees.

And then One of the craziest changes when looking at Reddit has just been the inflection and the margins of the business.

So net income margins in 2024 were negative 37%.

And by 2025, a year later, they were 24%. in the positive direction.

So in Q4, we actually saw margins hit 34%.

So I do think it's very likely that continued margin expansion will happen as the company continues to benefit from its operating leverage and economies of scale.

And I'm not sure if I've ever seen such a margin turnaround for a company in one year or two years, even if some of that negative almost 40 2024 number is definitely distorted by one-time IPO costs.

It's still, I mean, it's breathtaking.

And then you add to that the revenue growth that they've had being close to 70%.

And you can really see why Reddit is just one of the most exciting companies we own, without a doubt,

Yeah, I kind of really resonate a lot with what you guys said, specifically about how Reddit is so powerful in this kind of non-AI related way.

Because when I use Reddit, which again, like I mentioned already, is quite... quite rare.

It's specifically not to be, you know, entertained.

It's specifically to find information about a very, very specific subject.

So for me, I like Brazilian jujitsu.

Part of how I learned Brazilian jujitsu is by watching these instructionals by.

You know professional, basically athletes who are just teaching you specific things.

And so one thing that I like to use Reddit for is I'll just, you know, hop onto Google.

I'll search for the name of a specific instructional that I want to learn more about.

And then generally it'll take me to a Reddit thread and it'll just be people talking about whether they liked it or not.

And I found that very, very useful for me.

So the other thing that I've also found interesting about Reddit is that they have this kind of international expansion.

So on platforms like Instagram, it doesn't really matter where you live, because there's just so much local content that everyone benefits from.

And it also doesn't really matter whether that content is coming from your region of the world at all.

On Instagram you're going to follow some specific individual that you like, or maybe if you watch memes.

All those companies just can show their content globally.

But when you're discussing these more niche topics, they're often dependent on more local factors.

So if Reddit is dominated by American content, there's relatively little to use it in for international audiences.

And I know that building an audience obviously isn't as easy as on something like Instagram or TikTok on Reddit either, because you specifically need people from within the community to host a subreddit.

I think maybe a tangible example of that is there's a lot of subreddits devoted to cooking.

And so if you have an Italian language subreddit where people are sharing their grandmother's passed down family recipe on how to make the best risotto in the world and you think about that information being isolated only to people who can speak Italian, well then that's kind of a net loss for society.

I think the whole world can benefit from grandma's recipe being shared in as many languages as possible.

And so that's why you've seen Reddit invest in machine translation and localization features that make these various localized subreddits more accessible in different languages globally.

And as the only non-native English speaker here on the call, I can actually say that it works pretty well.

I don't really use Reddit as much as Sean, for example.

I think I probably use it as much as Kyle.

But since we own it, actually check it from time to time just to see how ads evolve.

And there were multiple instances by now where I was basically reading what I thought was German content and then, only five minutes in, I realized that what they talk about just makes little sense, and not because of the translation that has been great, but simply because it makes no sense in the German context.

And then I realized that this was originally either English or Spanish content, and it was just translated into German.

So, for example, if you have a recipe from your Italian grandmother, that makes a whole lot of sense to share with the entire world.

But if I'm looking for a certain place and what I can do there, and apparently there are little German villages that have the same names as little German villages in the US, then they don't match up.

And those were threats that I once or twice stumbled upon, but It speaks for the translation, which works pretty well.

It can be confusing at times, but I do think this is a very good step for Reddit to actually become a bigger part in other countries that are non-native English.

It's really interesting you say that.

And now that you pointed out it, I can see how that happens.

But I do generally think that it's a great thing to have these translation features and that it mostly works pretty well.

From what I've heard,

And you see in the numbers that the strategy is working too, right?

Users internationally are growing at three times the growth rate as US users.

And then the next big challenge for Reddit and we see this across a ton of companies we've covered is to make international ARPU so average revenue per user converge closer to what they earn with US users.

So currently a US user is worth about 11 to Reddit, while an international one, in terms of the amount of advertising revenue they can generate, is only worth 230.

And so there will always be a gap, but closing it as much as possible will be really important to Reddit, to revenue and profit growth story in the years to come.

A company that has already reached global presence, at least to most extent, is Airbnb.

I guess we shouldn't skip that one, since it is currently our second biggest position, at about 115 of the portfolio.

So just to give a brief recap of Airbnb's business model.

It's kind of like bookingcom, as you Kyle alluded to in the beginning, but with a focus on alternative accommodations.

So Airbnb is a pure marketplace, just like booking.com.

They don't own any properties.

They basically just sit in the middle of a transaction between a host and a guest, and then they're taking a fee for facilitating it.

So I think hosts pay roughly 3% of gross booking value to Airbnb, and then guests pay around 12%.

So the blended take rate works out to be approximately 14% to 15% of gross booking value.

And the strongest mode that a company like Airbnb has is the two-sided marketplace.

So by connecting guests and hosts you basically benefit from huge network effects, because for hosts it only makes sense to list your properties where a lot of guests are.

And then for you as a guest, it only makes sense to look at websites where a lot of hosts are, so you can actually find what you're looking for.

Yeah, to me, Airbnb and Uber, which is one of our other favorite companies in the portfolio, are very similar in the way that they've created value for society, right?

They both created these what we would refer to as two-sided marketplaces, and they brought totally new ways to book a trip or travel through a city.

And the market that they now serve really did not exist at the same scale or anything close to it before.

And you saw this change in behavior where people who really never took a taxi in the past might be frequent users of Uber.

And I probably fall into that category.

And then Airbnb did the same thing for accommodation.

People are taking trips that they just wouldn't have taken before, staying in places that they would have never booked previously.

And then they're going to communities that they never would have experienced through a hotel.

Because hotels are usually concentrated downtown, in the commercial district of a city, and Airbnbs can be anywhere.

And so that address travel market is genuinely larger because Airbnb exists.

People are willing to take trips to visit places and stay in neighborhoods or stay on cliffside villas and just do things that they could never do before with a hotel.

Yeah.

Now one thing when looking at Airbnb stock chart that I noticed is that if you look at the stock price, it really hasn't done that much since it IPO'd.

And I think that really begs the obvious question, okay?

Is Airbnb a great business model?

Probably.

Is it a great brand?

Yeah, probably.

But is it a great investment?

And if you look at the stock chart right now, the answer to that, I think, would probably be no if you're looking backward.

But obviously, we tend to look forward.

So maybe you can tell me a little bit more about what's happened with the stock since it's IPO'd.

Yeah, I think that's a great question, because I don't know if you've seen one of Stanley Druckenmiller's most recent interviews, but in one of them he actually said if all the news is great and the startup is not acting well, just get out.

And in the spirit of this lesson.

I always like to ask why stocks behave in a certain way, although all the news or the fundamentals are bullish and doing well.

And of course you can't do that for too short of a timeframe, because in the short term anything can happen.

But in Airbnb's case, we are talking about half a decade now.

So that should be enough to ask this question in this situation.

I think the answer is relatively simple.

Airbnb was just massively overvalued at its IPO.

I mean, we are talking about a company that traded at over 100 times price to operating cash flows.

And since then, the valuation has come down massively.

And just in the last two to three years, it sits in this high teens to low 20s range.

So by now, the fundamentals have caught up with the valuation of the company.

And I do think that makes it a lot more attractive.

There are a few specific things that weighed on the stock beyond just valuation normalization, but I definitely agree with you, Daniel.

And firstly, it was a post-pandemic travel dynamics were just messier than anyone expected.

And so there's this enormous boom in travel in 2021 and 2022 as you had pent up travel demand.

And then you saw this real moderation in growth in 2023 and 2024, which made it look like the business was decelerating, even though what really had happened was you had this baseline lifted up and inflated by a one-time catch-up effect, as everybody was racing to get out of their houses once the vaccines became available for COVID.

And then secondly, the perception that Airbnb had hidden fees really did hurt the brand.

And so there was this sustained period where users, particularly in the US, were complaining so loudly about hidden cleaning fees and excessive checkout chores and just the overall cost of booking versus hotels that it did make headlines and it went viral on social media and it put Airbnb on the defensive.

And so rightly so.

The stock was revalued to reflect some of that pessimism and potential risk from a consumer revolt.

I actually remember that time that when I browsed through Airbnb with some friends to book a vacation, we also heard about this narrative of these hidden fees.

So we didn't really trust the prices anymore that they listed.

We still booked every single trip since then with Airbnb.

So I think it was not that big of a deal, but it was certainly something that hurt the entire reputation of Airbnb.

And then once again, kind of similar to Uber, there has been somewhat of a regulatory overhang too.

So every time a major city announced restrictions, which for example happened in New York City but also in Barcelona, it kind of reminded investors that Airbnb's supply is ultimately dependent on regulatory tolerance.

And that basically creates this uncertainty premium, that a business like Bookingcom, for example, which aggregate hotels that are obviously already legally same degree,

And I do think that's uncertainty that investors just never like to see.

That's right.

And I can actually speak to having a recent experience with this.

So my wife and I booked an Airbnb in Paris with one of the most incredible views of the Eiffel Tower that you could ever imagine.

But it was actually the worst Airbnb experience that I've ever had, like hands down.

So first off, we get into the building and and we make our way up to the apartment.

As soon as we get up to our level, we see signs plastered all over the wall claiming that Airbnb was illegal.

And if you were there in an Airbnb, you'd be prosecuted.

So our hosts told us that not all these signs were truthful, but it still was just kind of a strange thing to see.

And it definitely gave us a sense of unease.

And our vacation had been so good up until this point.

So next we dragged our luggage to our apartment, where we struggled to get into because the hallway power was out as well.

So once we ended up getting into the Airbnb, we got settled in and we wanted to put the Wi-Fi on to find somewhere nice to eat, but the Wi-Fi wasn't working.

As soon as we tried figuring out what was going on there, we learned the entire power for our apartment was off.

So, just given the signs and the fact that power was off, my wife and I both wondered if maybe the power had been deliberately sabotaged by someone in the building.

I mean, who knows?

It's just pure speculation.

But either way, we had to leave.

We had to find a hotel and it was really the only stain on the entire vacation.

So similarly in Vancouver, where I live, I know there's a lot of pushback against kind of just short-term rentals in general, just because we have this housing affordability crisis in Canada, where prices keep going up and it's becoming harder and harder for especially younger people to buy houses.

So even though Airbnb, I think, has a lot of good things going for it that you guys have gone over already, it's not necessarily the most perfect narrative, in my view.

I think these experiences are also why hotels are still favored or the favored option for families.

Unfortunately, I have never had such an experience.

But even if I did, it's probably not as bad if you are only there for a short trip with your friends, for example.

But if you're there with your wife and your little kids, for example, that can quickly become a nightmare and also very expensive.

I think to some extent that's why Airbnb has even more doubled down on delivering an experience that is as close to what you would imagine by seeing the pictures and also the description.

And they also changed how they advertise, where you now oftentimes see families shown in the ads and go on vacation.

So it's certainly a market that they want to double down on.

And then, on the other hand, one thing that we love about Airbnb is most of its users.

Once they actually use it, they feel like they just can't go without it anymore.

And I'm one of those.

I think that's not a single trip that I or any of my friends have not booked over Airbnb in.

I guess the last eight years.

And because that brand strength is so high, you just have a lot of traffic coming directly from and to Airbnb.

So compare that to Verbo or Bookingcom, where roughly 40 of traffic comes from generic Google searches kind of similar to the experience that Reddit has.

I think those companies are mainly paying for that traffic through Google Ads every single quarter.

And that basically goes on indefinitely because that's the way they find new customers.

And it also opens up, But the question about AI and what happens if the traffic for travel is no longer coming through Google but perhaps through some LLMs that you cannot at least yet pay through an ad system, the way that you can do it with Google.

I think especially for Bookingcom, there has been this term of paying a Google tax, just because they pay so much money to Google for the advertisements.

Well, to your trip experience Kyle.

I will say that Airbnb has made this huge top-down effort to purge thousands of listings that they've deemed low quality inconsistent, bad reviews.

It sounds like maybe the Airbnb host who you guys stayed with, maybe their listing will be taken down right.

That's really the intention is finding these bad experiences and taking them off the platform as soon as possible and being really, really aggressive about it and using AI to assist with that.

And that was something that they weren't able to do as quickly in the past.

So-

Generally, from what I've heard, those experiences are becoming more and more outliers.

But still, all it takes is one bad experience to ruin your perception of the platform.

If that was your first time ever using Airbnb, you probably would never use it again.

And then One of the other advantages that Airbnb has is they have this degree of supply exclusivity.

And so a large part of Airbnb listings are exclusive to the platform.

They're not on VRBO or booking.com.

And that's especially true in newer markets like Latin America and in the Asia Pacific region.

And so the vast majority of Airbnb hosts are individuals with one or two properties, and it's a side income for them.

It's not their primary business.

And so managing calendars and bookings across multiple platforms ends up being more hassle than it's worth.

So they just pick Airbnb and stay there.

And it also helps that Airbnb has this really smooth user-friendly interface.

And that stickiness means a guest searching for a specific type of property in a specific location genuinely cannot always find it elsewhere.

And they're truly very special experiences that are only available on Airbnb.

Yeah.

So the points that you made there, Sean, regarding the exclusivity of supply are really fascinating.

So when Clay and I covered bookingcom on this feed, that was actually a point that we discussed a lot in depth.

So personally, when I travel, I like to use a mixture of hotels and Airbnb.

But if I'm looking for a hotel, it's very rare that I'm just going to hop onto something like bookingcom.

Instead, I'm just going to head over to Google and just type in a place that I want to go to and type in the date.

And then Google was just going to serve up a whole bunch of different you know places.

Maybe it's bookingscom, maybe it's something else, but either way, you know, I'm not beholden to that one listing.

Whereas obviously Airbnb, if I want to find an Airbnb, I'm not using Google.

I'm obviously I'm using airbnb.com.

So I think that's a huge, huge part of their business model.

So the brand discovery of Airbnb actually connects to something that I've also been really, really curious about, and that's the push into experiences.

So as far as I know, Airbnb has kind of gone into this direction previously, but it didn't really work out.

But now Chesky, the founder and CEO of Airbnb, has started another attempt.

So how has that played out so far?

It's probably been a longer road than the Bulls expected.

Honestly.

I mean Airbnb experiences is where local hosts offer activities tours classes, cooking lessons and that kind of stuff.

And so it was originally an idea launched back in 2016.

It was supposed to be a major second leg of the business.

And the idea was really compelling.

If you're already booking your accommodation through Airbnb, why not also book a surfing lesson or a wine tasting through the same platform and basically plan your entire trip in one place?

And the cross-sell opportunities there just seems incredibly obvious.

But for years, experiences remained this relatively minor contributor to revenue.

And then during COVID it just essentially went dormant, because most in-person activities were shut down entirely.

But last year, Airbnb revived this experiences idea.

With the key change being that the integration point of the experiences had moved.

And so previously, experiences were essentially listed on a separate tab in the app that hosts had to go looking for.

Whereas the new approach embeds these experience recommendations directly into the accommodation booking flow.

So if you're looking at a beach house in Portugal, Airbnb is immediately going to suggest surfing lessons and boat trips and local food tours that fit your dates and locations and based on what other people who have stayed there have been interested in doing.

So if you don't have to take an extra step to look for it and it just appears right in front of you at the exact moment when you're planning a trip well, that is hopefully better positioned to be a successful product that actually creates value for people and exposing them to things that they wouldn't have otherwise thought thought to do, and just making it really simple to book it all in one place.

It's incredible how much of an impact these small changes have.

You would kind of think that as soon as you integrate these experiences into your app, they either work or they don't work.

But sometimes you just have to do these little twists like integrating them into the process and not having them as this standalone product.

And that works out significantly better.

And they actually also expanded the category significantly beyond what experiences originally covered.

So I think it now includes what they're calling services.

So we're talking grocery delivery to your Airbnb before you even arrive, airport pickup, mid-stay cleaning, basically all that sort of stuff that makes your trip a bit more pleasant, a bit more comfortable, and you don't have to think about all of these things as soon as you're there.

But you can do that before that.

And Chesky, who is the CEO of Airbnb, has also said publicly that this services marketplace alone could be around a billion dollars in annual revenue once it is fully rolled out.

I think it's fair to say, though, that the rollout has not yet been a huge success.

I think, if that were the case, I think they would, for example, report this segment standalone instead of just bundling it with these nights booked, which basically makes it impossible for us, as investors, to know how exactly these new services or experiences actually perform.

Long term though, I think there's plenty of room left to grow for Airbnb, both in their main business, which is the Knights Book, as well as with experiences and services.

I think just 70% of its revenue still comes from just five countries.

That's the US, that's Canada, the UK, France, and Spain.

And if you consider that they by now operate in over 200 countries and travel is also growing every single year, I think there should be way more opportunity to penetrate at least another five countries to kind of the same extent that they do with the five biggest markets they currently have.

And that surely goes hand in hand with growth and experiences, right?

Once more people use it and Airbnb gets more data.

You get a flywheel going that has Airbnb better able to match what experiences are likely to be a great fit, based on the place that you booked, people who have booked that place prior and what they were interested in doing.

So, for example, Airbnb can see what people who maybe look at a more pricey luxury stay in Italy tend to book on their experiences.

And so that might be more likely to be an exclusive wine tour or a sailing trip rather than a surf course and jet skis.

And the better personalization works across the entire trip, from booking the place to booking experiences.

And so the bigger that value add becomes that Airbnb can deliver to users.

And the other thing that we haven't even talked about is a big part of bookingcom's business model is sponsored listings, right.

So when you look for places to stay in Lisbon, hotels can essentially pay to rank at the top of those search results.

Airbnb does no such thing, but there is probably a huge advertising opportunity for them catering to the professional hosts on the platform.

So that if you Google Airbnbs in New York City, that you can find top suggested ones that also happen to be sponsored.

That would be a huge source of revenues for Airbnb.

And it's something that they're working on rolling out.

And I very much think it will happen in the coming years.

And so, just to summarize, we are still very confident about this company's ability to grow revenues for probably the next 10 years and longer, at double digit rates, while it's trading at a mid 20s multiple on an enterprise value to EBIT or operating profit basis per share.

And so that seems like a very, very reasonable price to me for a product that has such strong network effects in its favor, is so widely loved by consumers and is also just getting more profitable as the business continues to scale, because it is this traditional tech platform marketplace ecosystem where you can essentially grow earnings faster than revenues.

Revenues might grow 10 and earnings might grow 15 as profit margins expand as the business gets bigger.

There's one more portfolio company that I want to introduce to Kyle before we get to some of the watchlist companies.

And that position I want to talk about is Universal Music Group.

That's a company where, Kyle, you let us know that you don't really know what they're doing.

I mean, Obviously, you know, it's one of the biggest music labels in the world.

But the investment case behind it is not as clear to you yet, right?

And I think that's completely normal, because I don't think there are that many people looking at this stock.

And in part, that's because it's not a US company.

So how about we go over the investment case here briefly and then basically discuss why we think it is an attractive stock to own right now?

So the starting point for understanding Universal is understanding what they actually own, which is the rights to roughly a third of the world's entire recorded music catalog.

So that includes Taylor Swift.

Drake, The Beatles, Kendrick Lamar, Billie Eilish, Bad Bunny, Elton John Rihanna BTS, Olivia Rodrigo, and the list goes on and on and probably could cite another 50 names.

And so it is, without question, the most valuable music catalog on earth.

And the way Universal makes money from that catalog of music is through royalties.

Every time one of Universal's songs gets streamed on Spotify.

Used in a movie on Netflix, plays in a commercial, is featured in a TikTok video licensed for a film soundtrack, whatever it is, Universal gets paid.

And there are two ways to profit from this.

The first is with what's known as recorded music.

So that's the actual sound. of the recording.

And when you stream a Taylor Swift track I know Daniel loves Taylor Swift Universal earns a royalty on the master recording of that.

I'm just teasing Daniel.

But then secondly, is the music polishing, which covers the underlying composition and the melody and the lyrics.

And so these are separate rights to own and they generate separate royalty streams.

So if someone covers a Beatles song or samples a hook from Rihanna, Universal Publishing earns a cut of that, entirely independent of the recorded music royalty from streams or whatever it is.

Then, on top of those two revenue streams, you have merchandising and physical media like vinyl, which has actually been making a real comeback in recent years, and licensing for live events and experiences as well.

Let's take a quick break and hear from today's sponsors.

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All right, back to the show.

So there's no shame about listening to Taylor Swift, although I think I couldn't list a single song.

I've never listened to any one of them in my life.

But getting back to Universal, I think what makes this business model so attractive from an investment standpoint is the cost structure.

Because once you own the rights to a song, you essentially own a perpetual royalty stream with almost zero marginal cost of production.

So you don't need to manufacture anything.

You don't need to run servers.

You don't need to reprint the music every single time that somebody plays it.

And that's why their free cash flow conversion is so astronomically high.

I mean, we are talking about north of 80% of operating profit that actually converts to cash flow.

And I think another advantage that you mentioned to me earlier is just how the catalog doesn't really depreciate the same way most assets do.

Is that correct?

Yes, that's actually one of the most underappreciated things about this business.

So more than 70 of music streams today are catalog, which means they're older music and not new releases.

And social media has created this incredible engine for reviving old music with completely new audiences.

There's this famous example that I think, Sean, you mentioned your pitch back then.

So basically, there's a TikTok of a man skateboarding while drinking cranberry juice.

And that brought back Fleetwood Mac's dreams.

And, you know, back to the charts nearly 50 years after it was released.

And actually, I think it came out in 1977.

And I have never heard of it before.

But now I know that song pretty well.

And, you know, that kind of Optionality is embedded across millions of songs in Universal's library.

So some of those songs will have a second or even a third life that nobody can predict.

And Universal just participates in all of it without doing anything for it.

The comparison I'd make is Disney, right?

When Disney owns a character, whether it's Mickey Mouse or Spider-Man, they don't have to reinvent it constantly.

They just have to make sure it stays accessible and culturally relevant, and then it should keep generating value for them.

And so Universal's catalog is the music industry equivalent of that in a way.

The difference is that Universal does not have to build theme parks or run cruise ships to support the monetization of that IP.

The assets are entirely intangible and essentially free to distribute globally at a very, very low cost once you own those music rights.

Right.

So let's look at the competitive structure and how that looks.

So you mentioned that this business is in an oligopoly, which is also why Spotify and other streaming services have these kind of structurally lower margins when compared to other tech companies.

So they just have very little negotiating power, because losing one of the big labels means a third of your entire music catalog is gone.

That's exactly right.

And so there are only three major labels Universal, Sony and Warner Music Group and together they control the rights to something like 98 of the top 1000 singles globally every year.

And Universal alone has a roughly a 30% market share in both recorded music and publishing.

And it's substantially bigger than Sony and Warner.

And so then the structure is really self-reinforcing because Universal is the biggest.

It has the most leverage in negotiations with streaming platforms, the largest network for finding and signing new talent, figuring out who the next Taylor Swift is going to be, and then has the deepest pockets to make catalog acquisitions.

So to buy the rights to these albums and songs from whoever may own them, usually other music labels or private equity firms.

And so emerging artists want to sign with Universal, because Universal can launch their career globally.

And also signing with Universal sort of signals that as an artist, you've made it.

And so that helps make Universal's pipeline of future catalog value just self replenishing to an extent.

The relationship with the streaming platforms is also structurally favorable in a way that I think is easy to miss if you don't know that much about the business.

So when Spotify or Apple Music raises their subscription prices, which they have been doing in the past and we just looked at Spotify Universal gets a percentage of that increased revenue almost automatically.

So that's basically additional revenue for Universal that comes at almost zero cost to them.

So that's a sort of an unusual kind of pricing power, because it's one that's partially outsourced to a third party who is itself incentivized to maximize revenue.

And then you also have the additional benefit that Spotify and Apple Music are making all the investments to drive more music consumption generally, per capita, while the labels are just these passive beneficiaries of that, just owning the music and not having to do much else, of course, beyond delivering their service to the artists.

Yeah, I found myself getting more and more attracted to a variety of different royalty businesses.

So like there was a business such as Natural Resource Partners, which primarily owns royalties on thermal and metallurgical coal.

And that's one that I found really, really interesting.

And I'm pretty deep in another business right now that looks at royalty specifically in the movie industry.

So I just really like the music royalty angle.

And the great thing about UMG is that most of the music that I listen to isn't necessarily even new.

So I love the long-term royalty aspect of UMG.

And I can just easily see how there's many new artists today that are probably going to still be generating pretty hefty royalty revenues.

You know one two, three plus decades from now.

And the valuation has also become even more favorable since we owned it.

So it has calmed down a bit.

And it has also some of the same reasons as they were for Airbnb, where they basically had an IPO where the stock traded at quite high multiples.

And since then, it has calmed down a bit.

And also, again, it's not listed in the US yet, which is a plan for the future.

So I think that's in part also what kind of limits the amount of exposure to investors that this stock has.

So all of these are parts that are part of our bull thesis.

And again, if you want to listen back to any of the episodes that we have on these companies, you can do that.

We have the links to all of them in the show notes, both the episodes that we recorded and also the newsletters.

With that, I would say that we have covered most of the important companies in our portfolio.

And we might now talk about the most interesting and also requested watchlist companies.

So how about we start with TradeDesk?

TradeDesk is a company that you, Sean, covered all almost a year ago.

And since then, the stock has dropped another 70%.

It's almost unimaginable, but from its all-time high, it is now down 85%.

So what do you think?

Is it cheap enough for us to dip our toes into that now?

Oh, man, here we go.

Let's do it.

Trade desk.

I feel like people have been waiting for a long time to hear updated thoughts on it, because our timing could not have been better.

And it was completely random luck.

But I pitched the company and then we were kind of like, we're going to pass on it.

And then the next day after the episode was published, I think the stock fell 40%.

It's just been in free fall ever since.

And so then you have all these people that are saying, oh well, if you kind of liked it but thought it was a little too expensive and then it's fallen so much well, you should maybe buy it.

And the reality is that if the stock price had fallen and the fundamentals hadn't changed, we might think about it very differently.

But I think with the trade desk, it is fair to say that that the fundamentals have changed.

And so, for anyone who's not familiar with what Trade Desk does, the simplest way to describe their business model is that they match advertisers with ad space.

So when a brand wants to buy advertising on what's referred to as the open internet so streaming TV podcasts, news websites, sports apps they typically work through a marketing agency.

And that agency uses a platform called a demand side platform, or DSP for short, to automate and optimize the ad buying process.

And so Trade Desk is the leading independent DSP in the world.

And so their platform lets buyers specify exactly who they want to reach, set how much they're willing to pay per impression, and then automatically bid on and purchase that advertising inventory across thousands of publishers simultaneously.

And what's really impressive is that for every 100 that flows through their platform in terms of advertising spending, Trade Desk takes a cut of about 20 in revenue from that gross spending.

That's a pretty high take rate.

And an important part of the thesis as well is that Trade Desk is independent.

So you have Google, Meta and Amazon, and all of them run their own advertising platforms, but they also own enormous amounts of ad inventory.

So when you buy ads through Google's platform, you're buying from a broker who has a financial interest in selling you their own inventory rather than the best inventory for you your campaign.

TradeTask, on the other hand, has zero inventory.

So they exclusively represent the buyer, which means that their incentive is entirely aligned with getting the advertiser the best possible outcome.

And that neutrality is pretty much a structural advantage that the walled gardens which is a term for these closed-ed ecosystem like Google, like Amazon or Meta, generally can't replicate without actually dismantling their own business models.

I'll make a comparison.

That might seem a bit far-fetched, but up until 20 minutes ago, Copart was still one of our portfolio companies, and Copart operates in a duopoly.

So for a long time, Copart was the much better better operator than its main competitor.

However, insurance companies, which are Copart's main customers, have no incentive to turn this market into a monopoly, because it would give Copart way too much pricing power.

And there is a similar dynamic in the ad market, because if advertisers don't use platforms like Trade Desk, they will be forced to spend even more money with Matter, with Google or with Amazon.

For advertisers to keep allocating resources and inventory to companies like Trade Desk.

And I think there's some pretty major tailwinds for the business as well.

So the connected TV opportunity is a very big part of the thesis.

And right now there's just more advertising dollars that are still being spent on linear cable television compared to streaming.

Now that sounds kind of absurd given how dramatically viewing habits have shifted over the years.

But ad dollars are following audiences very slowly and agencies and brands tend to be creatures of habit.

So the transition of these cable budgets into connected TV, where they can be bought programmatically through platforms such as Trade Desk, is kind of a structural tailwind that has years left to run.

Does that sound about correct?

It does.

And Trade Desk has been building relationships with every major streaming platform and has established what it calls Unified ID 20, so UID2.

And it appears to be the emerging standard for audience targeting and streaming as sort of a privacy safe replacement for cookies.

It gets a little technical and above my pay grade. but hopefully that makes some sense.

And so if UID2 basically becomes the default infrastructure for connected TV advertising, Trade Desk would sit at the center of one of the largest budget migrations in advertising history.

As advertisers move from cable to streaming advertising, that would be maybe the ultimate bull case argument for the trade desk.

But considering these strong structural tailwinds, and when we couple that with the business's exceptional profitability, they got gross margins of 80%, operating margins at 20%, and free cash flow margins at 27%, I have to ask myself, why has the stock been absolutely hammered?

Yeah, that's what everybody wants to know, right?

It all started when, for the first time after 33 consecutive quarters, the Trade Desk missed its own revenue guidance.

So they're almost a victim of their own success, where they set this really high precedent for being able to consistently beat guidance.

And then really the primary issue specifically that caused them to miss was with the rollout of Kokai.

And that is Trade Desk's next generation AI-powered platform That replaced their legacy system called Solimar.

And so the transition took longer and created more friction than management had anticipated.

And there were some scandals around it, too.

And then, you know, agencies had to relearn workflows.

That's a switching cost, right?

And so some functionality they depended on was not yet available in Kokai.

And then the disruption caused some campaign spending to pause or shift out of that quarter.

And so what happened was the Q4 2024 revenue came in at 740 million, which is 15 million below the lowest end of their own guidance, which is usually already a low bar that companies try to meet.

And so that broke this remarkable streak of operating execution.

And then you had the stock fall 30% to 40% in a single day.

And so The problems compounded through 2025 for them when the company first got on our radar.

And you've seen revenue growth decelerate from 25% in Q1 to down to 14% by Q4 of 25.

And then, with the most recent earnings just a few weeks ago, they actually did beat Wall Street estimates.

But their guidance for Q1 2026 implied growth of only 10 year over year and then a decline in the adjusted EBITDA figure that they report.

And so the market reacted by selling off another 16%.

And that's how you get this like 85 decline in what was, for like a decade, considered one of the highest quality businesses you could own on Wall Street.

And so it peaked at $140 a share and now it's trading around 20 or $25.

And I guess after such a decline it's just really hard to find any positive news about the company, because all the bulls have just been beaten into submission a with the trade desk.

And earlier on this episode, we talked about figuring out why stock drops.

And actually, if you would just map revenue growth and the stock price, you would kind of see what the market is valuing here, because the stock is basically correlating to a high extent with the revenue growth.

And as soon as that dropped, the valuation dropped as well.

And you saw the stock prices decline from, as you said, over $100 to only $20 by now.

And back when you pitched the stock Sean, we decided against owning it, Because it also just simply seemed a bit too complex for us.

It's just very hard to judge for me at least how big of a structural advantage the neutrality actually is.

Because on paper, it makes a lot of sense.

But then you just see how fast Amazon's and Meta's ad businesses grow.

And you kind of ask yourself whether advertisers might just not care if there is a monopoly or an oligopoly in the making.

Also, to go back to the co-part analogy once more, there are only a handful of big insurance companies that have to agree and say let's not turn this market into a monopoly.

In advertising, though you have so many players that, So everyone chooses what's best for them right now.

And more often than not, that will be to advertise through Amazon, through Meta or through Google which, by the way, are also growing in the video streaming sector.

So you just have to compete with the best and the biggest companies in the world.

And that's a fight you just don't want to fight and you most often don't win.

So while I think that trade task is probably getting punished more than it should be, I'm also feeling like it still sits on our too hard pile.

I don't think anything has changed with our understanding of the company.

If anything, investing in a business that has seen its fundamentals pretty much deteriorate right in front of our eyes makes it even more difficult.

So what do you guys think?

Sean, especially you, you pitched the stock.

Do you feel more comfortable or less comfortable in owning it potentially?

I messaged you earlier talking about how the company trades at 10 times forward earnings and how, on paper again, that looks really, really compelling for a company that has compounded revenue at 40 a year for a decade.

And that is just a really dangerous way to think about things.

And so it's a company that I have also been very happy to set aside into my too hard basket.

And that did look like sage advice when the stock fell off so dramatically after we passed on it.

But it has come down so far for a business that was in many ways the epitome of high quality in the market.

It is very tempting, but I do think that as the stock price has fallen-

Tradesk has not necessarily gotten cheaper because the intrinsic value of the company has declined simultaneously.

And so, yeah, it's just hard for me to argue that the Tradesk has a clear moat.

And so, for context, in March, a major ad agency in France known as Publicis issued a memo advising clients to avoid working with the trade desk due to this failed audit on their fee structures.

That apparently happened.

And so, while the trade desk denies having failed an audit of their fee structure, the dispute with publicists is really coming on the heels of a bunch of other major agencies like WPP and Dentsu ending their use of the trade desk open path platform over concerns about just a really opaque fee structure.

And so I think it's important to mention that these agency relationships are absolutely crucial to the trade desk growth and their value add.

But those relationships appear to be fracturing in real time, which is what's causing this panic amongst TCD shareholders and leading to a huge evaluation in the company's shares, and also is the reason why I say the company's intrinsic value has declined.

It hasn't just been linearly compounding.

We've seen a fall off in what the actual fundamentals of the business are worth.

And so for the trade desk.

When you have this reality where two agency holding companies account for about 30 of the 13 billion in total spending that go through the company's demand-side platform, you're just really vulnerable, especially with Amazon and Google basically standing ready as these viable demand-side platform alternatives.

And so this is something that I think deserves more attention when we first covered the trade desk.

But when you take such a massive cut of ad spending, you have such a high take rate of 20.

There is a question of how sustainable that is without having massive moats protecting your business.

Yeah.

Can Google sustain a high take rate?

Yeah, I think they can.

Can the trade desk?

I'm not so sure.

And so the takeaway is that it's just looking less and less sustainable for them to maintain that take rate as the company's biggest customers push back on pricing.

And so It is really tempting to say this company looks very cheap on forward estimates, especially compared to the way it was valued just two years ago.

But we're seeing the status quo of this entire industry being rewritten in front of us.

And yeah, I don't know.

Trying to buy TTD right now feels like trying to catch a falling knife.

There's just better places for us to find value at this time.

Not to keep doubling down on Amazon, but I'd way rather buy more shares on Amazon than try and predict what the bottom price for the trade desk is going to be.

Yeah.

I mean for me.

I get very, very scared of businesses that have these rapidly declining revenue growth rates.

I mean, I think with a business like the Trade Desk, obviously it had this massive success.

That massive success and that massive growth is going to attract a very specific investor base.

And now that it's quite obvious, and from what you guys are telling me here, it's obvious that that growth that they had in the past I mean Sean, you mentioned 40 compounded over 10 years.

I mean that's incredible.

But If investors who like that business for that type of growth, if they look at it now, they're just going to take a pass.

And that's just the way it is.

And I think that's probably why you've seen this massive decrease in its price.

So for me, when a business is decreasing in revenue, that's generally a pretty good sign that either the business is saturated in its market Or it's just losing market share to competitors.

And, like you said, all the major platforms are probably laying in wait to try to snap up some of their big customers.

So on the other hand, yes, the margins are looking to re-accelerate.

And there's little reason to believe that the multiple will re-rate upwards that much in the future.

It's just too convoluted.

I would take a pass.

I have no insights that you guys have on whether or not that'll happen.

So my vote would be to just take a pass on this opportunity and take a watch, see what happens.

So another company that you guys covered a while ago that has come down quite a lot since then was FICO.

So this is truly one of the highest quality companies out there, and yet it's down 60 from its all-time highs.

Now, to be fair, this is another example of why ultimately, you have to look at the price that you pay.

And as far as I know, that's why you also didn't buy it back then.

So at a peak in late 2024, FICO traded at over 100 times earnings.

So even after a massive drop, it's still trading at 30 times forward earnings.

I think that's the problem with paying up for quality.

I mean, where do you start?

What is still a fair price to pay or a fair multiple to play?

I mean, obviously, 100 times earnings is ridiculous, but it's 40 times.

Technically, that's why we value these companies.

But Trade Desk has actually been a perfect example of a company that just stops growing at exceptional rates from basically one quarter to the next.

And that's almost impossible. to predict.

So if you could know with some level of confidence that FICO will keep growing its earnings at a rate close to 25 to 30 per year, it's obviously a steal at today's prices.

But almost all of that growth came from very aggressive price increases that we have seen since 2018.

I

2018 cost you 60 cents.

And now in 2025, it cost you about $5.

And just recently, they actually increased the price to $10.

So this year, if you want to have a FICO store, you pay $10 per score.

And that's only 60 cents in 2018.

So there's huge pricing power in this business.

But the problem with pricing power in what is still a monopoly and also a somewhat politically relevant industry is that at some point there will be pushback if you go too far.

And I think that's, to some extent, what we discussed with TransTime.

And now we see it play out with FICO.

And to me, FICO is an example of how you can see that dynamic play out and impact the business.

If regulators just decide, hey, enough is enough, right?

For decades, FICO scores were the only model accepted for government-sponsored mortgages.

And that's the loans that go through Fannie Mae and Freddie Mac.

And those account for nearly half of all new home loans in the US.

And I'm pretty sure my home loan got sold to one of those two companies.

So there was this regulatory mandate protecting the ultimate moat for them.

But in mid-2025, the FHFA, the regulator that oversees Fannie Mae and Freddie Mac, officially approved Vantage Score 4.0 as an alternative scoring model for those government-backed And VantageScore is owned jointly by the three major credit bureaus for context.

So that's Equifax, TransUnion, and Experian.

So the very institutions that used to distribute FICO scores now have a competing product that they would love to push themselves.

And so, as of January 2026, the system has moved to what people call lender choice, where banks can now pick FICO or VantageScore when originating a government-backed mortgage, which just means a mortgage that they can sell to one of these government-backed entities that can then get repackaged and sold to Wall Street in a mortgage-backed security.

And so this broke FICO's exclusive mandate for the first time in the company's history.

So it was a big deal.

So do you think that Vantage score will actually gain meaningful share, or is it more of just a negotiating threat that lenders are using to push back on FICO's pricing?

Probably more the latter, at least in the near term.

The mortgage market does not just run on credit scores in isolation.

It runs on decades of underwriting models, risk frameworks and then investor expectations that are all built around FICO.

And so when a lender originates a mortgage and sells it into this secondary market as part of a mortgage-backed security, the investors buying that security have decades of historical data on FICO score, correlations with default rates and economic cycles.

So they know what a 720 FICO score means in terms of likelihood of repayment in a recession.

They know what a 680 means and how that differs from a 720 across the economic cycles.

But generally the FICO score is not even crucial because it's the best way to actually figure out the creditworthiness.

It's more about being a stamp of approval or disapproval, which is something, something that we've talked about with SP Global and their ratings business and the huge amount of value that can be created just by SP Global stamping a company's debt as basically being creditworthy.

Another important part and it's kind of complex is to understand to whom FICO scores actually matter.

That's mostly investors.

So if you bundle mortgages from Fannie Mae and Freddie Mac, they technically need to make you whole if they should default.

So I say technically because since 2008, we all know that doesn't always work.

But if we assume that the system works, then the main risks that you take as an investor is that loans are paid back earlier than they were supposed to.

Of course, that's only a risk when interest rates are going down and you would need to invest money at a lower interest rate than the mortgages would have paid you.

So apparently FICO has the best data on repayments, and that's pretty much what is important to Wall Street investors.

Advantage Score, at least right now, just doesn't have that data.

So you have the stamp of approval dynamic.

And then you also have what's most important to Wall Street investors, and only FICO can deliver that.

If I can maybe speak for all three of us, I don't feel like any of us would say the moat is obviously broken.

But yet FICO has not done itself any favors politically by showcasing its pricing power to the really extreme extent possible.

That they have done and pulled forward a lot of future earnings growth.

And it seems like in this new regulatory environment, that is very challenging.

And then you also have these competitive risks with VantageScore. hanging over their shoulders.

I just don't think we'll see the company trading at these ultra premium quality compound or multiples of 40 to 50 times earnings anytime soon.

This doesn't have to matter when the company can compound its bottom line by 20 or more over the next five years or longer.

If you grow fast enough you can really grow into any multiple and be able to offset any amount of multiple contraction that occurs.

But given that price hikes are more under scrutiny now really than they ever have been, and that's their primary mechanism for growing as a company, it's just hard for me to feel really good about their growth prospects further down the road on maybe a five to 10 year horizon.

So yeah, I would say it has been a great business.

But it's just not one I can get all that excited about at today's prices, even though a lot of people love to tell me about how undervalued it is.

And that very well may be true, but I would just prefer to own companies where their value to society and consumers almost goes without saying.

And it's protected by very wide organic moats, as opposed to having this very, very narrow business model supporting tens of billions of dollars in market capitalization, where I think things will most likely continue to work out for them, but that could change on a whim.

And so that just makes it very hard to have much faith in the intrinsic value estimate I would put together for FICO.

There's just so much uncertainty of what could happen.

And it's such a narrowly focused business.

And I just think about how narrow FICO's business is compared to Alphabet or Amazon.

Those are businesses I can sleep well at night owning, knowing they are very robust to all types of competitive and regulatory pressure, which doesn't mean that they're guaranteed to make money, but they just have so many different business models where they are in a dominant position.

It's very different than FICO, where it just seems like they're very precariously positioned because of the narrow focus that they have.

We tend to always come back to Alphabet and Amazon, which are just two companies that we love, but it's also something that we shouldn't forget.

Both of those companies, especially Amazon right now, is trading cheaper than FICO.

And if you ask me if I want to pay a higher price to own FICO than to own Amazon, I would certainly go for Amazon.

FICO.

I think generally we could see something that we have also seen with Transtime, where right now there's a lot of talk about FICO and the price increases.

Yet if you just look at how much one square actually costs and again that's 10 this year it's not actually a problem to anyone.

Of course, politicians will get behind this and they can frame that in this way that buying a house is more and more expensive.

And they made out that FICO's price increases are part of that.

Well, if you buy a house, a 10 FICO score will most likely not decide over whether you buy the house or not.

So most likely, in five to six months from now, you're not talking about that anymore.

But still, once you introduce such a risk, it's way more likely that the market will not get back to give you a multiple which you had before.

Basically any risk even existed.

So that's why, in part combined with the price of FICO, we just don't think it's as attractive as a lot of people are currently saying.

All right, so there's one other company that I want to cover today, and that company is Nintendo.

Nintendo was actually my first pitch on the Intrinsic Value podcast and it's kind of surreal how long ago that now feels.

And the reason we didn't look at it in a while, Except my thesis actually played out quite well and the stock rallied quickly 80 after we pitched it.

I kind of called it a mistake of omission a lot of times because we didn't invest in it, although I really liked the investment case and thought it was a good opportunity.

However, one thing I said back then was, and I quote In my opinion, the market hasn't priced in Nintendo's business transformation yet, which could lead to selling pressure from those betting on a quick win after a successful Switch 2 release, a pattern that we have seen with past launches.

And if that happens it could create an opportunity to buy at a lower price with greater certainty on the switch to success once the switch to success becomes clearer.

Now we've made calls that haven't aged as well in our 68 episodes on the show, but this one was really spot on, I must say.

The stock came all the way back down to where it traded when I pitched the stock initially actually more than a year ago now and it is even slightly cheaper today.

And in my opinion, That's just not justified by the fundamentals.

I mean, the Switch 2 has been a success, as expected.

And, for the first time in Nintendo's history, a new console didn't mean that Nintendo had to rebuild its customer base.

Well, that's a huge part of the thesis that we should probably clarify for folks.

The Switch 2 is the first console that embraced... an ecosystem-like approach.

And so one major difference being backward compatibility, which means that a new console can play games from older console generations.

So if you own a Switch One and decide to buy the new Switch, then you can still play the same games on your Switch 2 without needing to buy a new version of the game or losing all of the progress within the game.

And for anybody who's ever been a gamer, you know that that is just a huge value add and really simplifies things.

And so that's just a massive advantage, because it means that you don't lose your entire user base every time a new generation of your hardware product drops, every time a new Switch is released.

And Nintendo Switch has more than 130 million users.

And so being able to monetize them, no matter whether they own a Switch 1 or a Switch 2, to me is a game changer, literally.

That's also why it became more and more important to have a well-functioning online store, as the Switch now has.

But games can be bought as software rather than just physically in-store.

So, first of all, the margins are higher for all these software sales, but it's also just much easier to reach the 100 million players that you already have on your console.

And even the people who don't buy the new Switch can be monetized effectively by selling them new games online and enabling them to play with friends who do have the new Switch.

So Switch 1 players can now play with people who own the new Switch, which to some extent also made us think that perhaps they don't sell as many Switch 2 consoles.

It turned out to be the complete opposite and they sold a lot of them.

And as we mentioned in our original episode, none of this is a new business model.

I mean, PlayStation and Xbox switched to a similar model years before Nintendo did.

So the change was long overdue, and it was quite obvious that this would work out quite well for Nintendo.

And one of the greatest things about Nintendo is just that they have one of the most valuable IPs in the world.

And especially in times where IP seems to be worth unlimited amounts of money, judged by the bidding war around Warner Brothers.

This is the first and one of many extremely attractive things about Nintendo.

The thing about Nintendo is that this IP has proven that it can travel across decades and even across generations, which is just unfortunately not true of a lot of entertainment franchises.

So for instance, I really enjoyed the new Mario movies and so is my son.

So I think this is incredible proof that their IP is incredibly valuable over multiple generations.

And, you know, probably once my son is older he's probably going to be begging me to get some sort of console.

Maybe that's a Switch 2 or maybe that's their next generation console.

And also, you know, you can take Mario, you can put him into a movie, you can put him into a theme park, you can put him into a new game that we haven't even thought of yet.

And those can really just help reinforce the others.

Yeah, the Super Mario movie is a perfect example of the Nintendo flywheel.

I mean it generated over 13 billion at the box office globally, which is a huge success in itself and would be a great result for pretty much every movie that starts in the cinema.

But not only that, it also visibly lifted sales of Mario games on the Switch in the months after the release.

So basically, a kid sees a movie, it wants the game, and then the parent buys a console, which is kind of how it will probably go in a couple of years for kyle.

And then Nintendo World opens at Universal Studios and creates a whole nother entry point for the IP.

So each of these channels basically feeds into the others in a loop that is completely reinforcing and that Nintendo doesn't have to spend heavily to sustain, because there will actually be another movie very soon.

And it looks like it will be another huge success, just looking at the views that the trailers currently get on YouTube.

So I would imagine that they will probably use this to also then publish new games for the new console.

And that is also how you make sure that the console is not only a one-hit wonder but will actually have people keep coming back to buy new games, but also the console itself in the following years.

And unlike Disney, which has to spend enormous amounts of capital to run their theme parks and then produce streaming content and also build out cruise ships, Nintendo's IP is predominantly monetized through software, which is extremely capital light.

A game costs money to develop.

But once it's done, distributing a digital copy costs really almost nothing.

And so that's why Nintendo's returns in capital have been just absolutely extraordinary north of 40 over the last five years.

And despite the company being famously conservative with its balance sheet too, this is not a highly leveraged business.

So let's talk numbers here because the Switch 2 launch has clearly been a very big headline story.

How has it actually performed though versus expectations?

It's been a bit weird because I saw some conflicting opinions online about whether it was a success or not.

Although the numbers really tell a very clear story.

I mean the Switch 2 launched in June last year and it sold 35 million units in the first four days online.

So that's the fastest launch of any Nintendo console in its history.

And for anyone who listened to the pitch, Nintendo has quite a long history.

And by the end of December 2025, it had sold far more than 17 million units in just seven months.

So Nintendo has now raised its full year forecast to 19 million Switch 2 units for the first fiscal year, which was previously only about 15 million initially projected.

And that's a 25% guidance raise, which almost never happens this early in a console cycle.

And revenue for the nine months through December roughly doubled year over year and net profit was up 51.

Again, that doesn't mean that much because obviously the Switch 1 was pretty old so you didn't sell a lot of that console.

But still, it just shows that this has been a huge success.

So, no matter what metric you look at, the launch looks like one of the biggest successes in the company's history.

While we're talking about it, just to go back to that backward compatibility point that we mentioned earlier, I did want to ask you has that actually played out as expected, from what you've seen with the company?

I would argue, even better than expected because again, Nintendo's own data showed that 84 of Switch 2 owners upgraded from a Switch 1, which is way more than I would have thought.

Because again, if you can play the Switch 1 games also with people who buy the new console, there's not necessarily a reason for you to also upgrade.

But apparently a lot of people did that.

And in every previous console generation, Nintendo had to essentially again rebuild its audience from scratch.

And you would see that reflected in the software sales for legacy games basically collapsing the moment a new console launched.

This time though, Switch 1 evergreen titles like Mario Kart 8 continue to selling steadily through the transition, because Switch 2 players can simply keep playing them.

So I kind of feel like a broken record here, but you know why, with Nintendo, obviously everything seems to be going really, really well.

Once again, why is it stocked down so much over the last year?

Yeah, I feel like while we only look at high quality companies, we always look at the ones where the stock declined 50 or something like that.

So at least that shows that we are still value investors.

But getting to your question, I assume that the first point is what I mentioned before.

So simply that many investors, despite the change in the business model to selling more software, still saw the launch of the Switch 2 as a great chance to just buy into Nintendo and then make a quick gain.

And that's why we were so cautious and I didn't want to enter the stock after it started going up, although I liked the business.

And then a second factor is memory prices.

So the market fears that the production of the Switch 2 would be much more expensive now that memory prices have basically skyrocketed.

I believe that fear is a bit overblown though, because management has already said that they don't expect any impact.

And again, they're quite conservative.

So if they say that, I pretty much believe them.

And to me that means that they have either negotiated fixed prices, which is what they usually do for such an important release, or they just have enough inventory.

I think it's a mix of both.

So yeah, I feel pretty good about this and that they won't have to increase the price of the Switch 2 because of memory prices in the future.

I don't know how interested I am in Nintendo specifically, but...

My perspective is that Nintendo raises like a really interesting investment question for us to consider.

And that is what type of assets you want to own.

Going forward, as a the world becomes more digitalized and as AI becomes a bigger factor in how we consume content and use the internet, is it better to own the IP like Disney, Warner Brothers and Nintendo, since they all do so and also monetize that content differently?

Or do you want to take sort of a content agnostic position, as just a supplier of content generally, like Netflix, where you might license content from all three of those companies but at the end of the day you own the monthly revenue, recurring subscription revenue.

And so Netflix is a full holding in our intrinsic value portfolio.

So I have my biases in favor of it.

But yeah, I mean, it's almost impossible for me to imagine Netflix being displaced Over the next decade and not to say I think Disney or Nintendo's IP is going anywhere.

But there is a lot of cyclicality to their ability to monetize that IP, based on movie releases and video game releases and just virality on social media.

And that makes it just a lot less clear to me how these businesses can consistently compound earnings in the way that Netflix can.

And so I would probably again rather just increase our position in Netflix as another beneficiary of more content consumption than I would want to specifically bet on Nintendo and how popular their IP will be over time.

Yeah.

So for me, I kind of like the Nintendo story here.

And I think if sentiment improves, it could obviously make a really interesting opportunity.

But I have a couple of worries.

So one worry in the back of my mind is just what happens when the console is released, say after year two?

What catalysts are going to continue to drive new interest, both in fundamentals and among investors?

So the recycling of IP will likely be what's going to continue to fuel growth.

But you know, it's also kind of hard to forecast exactly how that's going to affect Nintendo since, you know, while Mario has been a wild success, they could also have a giant flop on some new IP that no one's expecting.

So to your point Daniel, about the chips.

I've read recently that the next generation PlayStation and Xbox consoles could run around a thousand dollars.

And I compared that to current prices.

And that's like it's like a 20 to 30 percent increase in prices, which seems very, very high to me.

I think it's to the exact same reason that you just mentioned, that chip prices are just going up.

And given what's going on right now, I'm not sure that chip prices are going to come down anytime soon.

But I don't know.

So my other concern there is just if consoles are increasing by price by that much, is that going to make any dent in terms of just revenues, in terms of is that going to cause lower unit volumes?

So you know, while obviously it's great to see Nintendo's PE drop nearly in half, I'm still not sure the margin of safety is large enough for me to get interested in investing in it.

Yeah, if you look at past cycles, I think the consoles tend to say quite well, over the next few years after the launch.

And I assume this will be especially true for the Switch 2, because Nintendo hasn't released a major game yet that can actually turn into what is called a console seller.

So I expect they will do that in 2026.

Generally, that's how you keep selling consoles.

So using your IP to create games that then drive people to buy the console in the first place.

And as we talked about the Nintendo, you also have the ability to release movies.

You might have some IP that you can otherwise monetize.

So that's how they do it.

But you're right, overall this industry has a cyclical nature and also somewhat of an asymmetric risk profile to the downside.

So we're always just one flop away from having made a costly mistake, in part because of the money that you spent on that movie or that game, but also because of the damage that you can do to a franchise.

I personally have established a small position in Nintendo at about 13 a stock in my personal portfolio.

But I don't think it's yet at a point where I would tell you guys we need to add it to the intrinsic value portfolio.

Because, as Sean said, if you think about the compounding ability of such a business, it is pretty limited.

And when I pitched the stock about a year ago.

To some extent you have this huge catalyst of the Switch 2, but they only released a new console once in a decade.

So by now, you're really betting on the fact that they can compound by selling software and by selling more and more of that.

And that's not yet a proven model.

So I do think that going with companies like Netflix, who can basically be in a position somewhat similar to Universal with using the IP and then basically make money off of that but you're not involved yourself, is a pretty good business model to be in.

And, just as Sean said, I would probably be more inclined to double down on a company like Netflix instead of owning Nintendo for our portfolio.

And with that I would say, we go to one of our favorite traditions that Kyle is probably not yet aware of.

So at the end of each show we will give some hints for next week's episode, so that you can guess in the comments which company we are going to cover next.

And since, Sean, next week is your episode, which hints do you have for us?

Yeah.

And just for folks on the investors podcast feed who might not be as familiar with Daniel and I yet.

Some combination of me, Daniel and Kyle will be breaking down stocks every single Wednesday for the intrinsic value portfolio going forward.

So get ready for a lot of stocks to be covered and a lot more research on these different businesses that we hope you'll enjoy.

And Yeah.

So next week I'm looking at.

It's a large cap company and it's one that's been particularly stung by the software sell-off in markets recently.

And no, it's not Adobe because we've already covered Adobe before.

It is a holding in our portfolio, but this is a company that I'll be covering.

That is an essential tool for the institutions and its industry.

And also, like Adobe, its customers have sort of a love-hate relationship with the company, pretty notoriously.

So that's very vague, but if anyone can get it, I'll be impressed.

And if you need a bonus hint, I'll just say that the company was founded in the area I grew up in, which is the Washington DC, So I also have a bit of a special connection to the company in that sense.

Okay.

I think we can call it a day then.

Again, thanks a lot, Sean, Kyle, for being here today.

It's always fun talking, investing with you.

And as Sean just mentioned, we will deliver a new deep dive next week.

See you then.

Thanks for listening to TIP.

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[Portfolio Review: Strategic Shifts, Value Investing, and Market Perspectives]-[TIP807: Portfolio Review: Analyzing Holdings and Watchlist Companies for 2026 w/ Daniel Mahncke, Shawn O'Malley, & Kyle Grieve]

📋 Summary

Navigating the Intrinsic Value Portfolio: A Strategic Review

Exor: The Italian Berkshire Hathaway

TransDigm and Copart: The Discipline of Simplification

Reddit: Turning the Tide on Monetization

Airbnb: The Power of Network Effects

Watchlist Updates: The Trade Desk and FICO

Conclusion: The Nintendo Flywheel

🎯Key Sentences

📝Key Phrases

📖 Transcript

[Portfolio Review: Strategic Shifts, Value Investing, and Market Perspectives]-[TIP807: Portfolio Review: Analyzing Holdings and Watchlist Companies for 2026 w/ Daniel Mahncke, Shawn O'Malley, & Kyle Grieve]

📋 Summary

Navigating the Intrinsic Value Portfolio: A Strategic Review

Exor: The Italian Berkshire Hathaway

TransDigm and Copart: The Discipline of Simplification

Reddit: Turning the Tide on Monetization

Airbnb: The Power of Network Effects

Watchlist Updates: The Trade Desk and FICO

Conclusion: The Nintendo Flywheel

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🎯Key Sentences

📝Key Phrases

📖 Transcript

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