Welcome to Chit Chat Money’s Sunday Finds + 3 Thoughts From Last Week. In this newsletter you will find three topics I thought about last week, links to shows we’ve recently released, and links to some interesting articles, podcasts, and tweets. Check out the archive here.
1. Big Tech earnings. Are they afraid to stop hiring people?
The big (or in the case of Meta, not so big anymore) technology companies all reported earnings this week. The consistent theme across the conference calls and communication with the public has been frustration over the lack of operational discipline. Frankly, investors are perplexed as to why Meta, Alphabet, Amazon, and others continue to hire so many people.
The strangest part is that earlier this year big tech executives either hinted at or explicitly stated that hiring would slowdown. And yet, they continue to bring in thousands of new recruits each quarter? I don’t understand what is going on, and why all these companies think more employees = better execution.
At the end of the third quarter, Alphabet had 187k employees. At the end of Q2, that number was 174k. Unlike Amazon or Wal-Mart, Alphabet has minimal to zero labor workers, making all these 13,000 new hires expensive knowledge workers. What are they all doing?
Makes you wonder how profitable Google Search could be if it was run more like Visa…
MT Capital had a great write-up on Meta and its recent troubles. This quote stuck out to me in relation to all the big technology companies":
What was failed to be mentioned within this short-essay was how the book’s author, Clayton Christensen, actually proposes going about said dilemma. More specifically, Christensen suggests that the company should assemble the smallest team possible to continue to work on a piece of technology that is being deemed silly to many, keep said team siloed within the rest of the organization, and have them build their own culture therein.
Hopefully, this is just a slow-moving train and through 2023 we’ll see the pace of hiring slow down. Eventually, the stock price will force these companies’ hands.
2. Nicotine pouches and the future of cigarettes
I tweeted this question out after Swedish Match (RIP, nix the acquisition Lars!) reported earnings this week:
For those that didn’t click the link, those charts show nicotine pouch market share vs. cigarettes in the United States. Nicotine pouch usage has rapidly grown on the west coast and is about 2 - 3 years behind throughout the rest of the United States, but on the same trajectory.
Altria Group (the MO ticker) is the owner of Marlboro cigarettes, making it one of if not the largest cigarette distributors in the country.
If I owned Altria, I wouldn’t be worried that nicotine pouches kill cigarettes completely. That does not seem plausible. But what does seem plausible is that it accelerates the cigarette volume declines that have been going on for decades. Historically, Altria has been able to raise prices in the face of these declines and actually consistently grow its bottom line.
But what if volumes start going down by 2x the current rate each year? Could they raise prices twice as quickly? I harbor some doubts, especially with these risk-reduced products like nicotine pouches selling for a much cheaper price (under this scenario).
A lot of smart investors replied to this tweet stating that cigarettes have faced tons of enemies over the years (both political and business) but have been extremely resilient. History would tell you to go with the tobacco companies and that volume declines will not accelerate. But for some reason, I think there is a good chance this time is different…
3. I cannot wait for the consumer surplus in Electric Vehicles
Here is a fascinating chart:
Automakers have now committed over $1 trillion to invest in electric vehicles (EVs), up from under $200 billion in 2018.
This should scare the bejeezus out of you if you are invested in companies that sell electric cars. Too much investment is going to flood the market with supply, making it extremely hard for any company to earn extra-normal profits.
However, anyone looking to buy an EV should be cheering. If all these cars come to market over the next five to seven years, we could have a really nice consumer surplus on our hands.
This will clearly be good for the world. But for investors in the space, I harbor some doubts. Why should this capital cycle be any different than others in history?
For some reason, I don’t think our new overlord at Twitter will have the same attitude five years from now if $1 trillion truly does get invested in EVs:
See you next week,
Brett
***Our fund, Arch Capital, may own securities discussed in this newsletter. Check our holdings page and read our full disclosure to learn more.***
***Want our FREE weekly wrap-up delivered to your inbox each week? Subscribe here***
Catch up on Our Shows From Last Week
3 Good Reads
The Inexorable Descent of China - Bill Mann
Following the Chinese Communist Party's 20th Party Congress, Xi Jinping -- breaking from decades of precedent -- will remain as the head of the CCP for a third five-year term. In fact, there has not been any one person to have as much power in modern China since Mao Zedong.
This is a pretty stunning consolidation of power, and longtime China watchers like Professor Victor Shih of University of California, San Diego note that Xi not only stacked the centers of power within the party with allies, he also insured that anyone who may have seemed a likely successor was sidelined. Xi gave priority to loyalty in making appointments to the seven-member supreme Standing Committee, which is a decided break from the collective leadership even powerful leaders have depended upon in the past.
Scaringe expressed concern that society seems to have lumped together all different types of autonomy, so he broke it down into two systems — hardware-heavy systems, which involve spending hundreds of thousands of dollars on perception and compute in a vehicle to achieve a very high level of autonomy where the vehicle drives itself and often eliminates the need for even a steering wheel; and hardware-constrained systems, or advanced driver assistance systems, where automakers only need to spend thousands of dollars on sensors and compute to achieve a lower level of autonomy.
Welcome to Hell, Elon - The Verge
Twitter is a disaster clown car company that is successful despite itself, and there is no possible way to grow users and revenue without making a series of enormous compromises that will ultimately destroy your reputation and possibly cause grievous damage to your other companies.
I say this with utter confidence because the problems with Twitter are not engineering problems. They are political problems. Twitter, the company, makes very little interesting technology; the tech stack is not the valuable asset. The asset is the user base: hopelessly addicted politicians, reporters, celebrities, and other people who should know better but keep posting anyway. You! You, Elon Musk, are addicted to Twitter. You’re the asset. You just bought yourself for $44 billion dollars.
1 Good Listen
Alex Morris - TSOH Returns - The Business Brew
This episode features Alex Morris of TSOH Investment Research. You can find his Substack at https://substack.com/profile/10489671-the-science-of-hitting. In this episode, Alex and Bill have a casual conversation; mostly about media and cable.
Through the conversation you will hear how Alex thinks about partnering with companies and management teams for the long term. You will also hear how Alex thinks about competitive positions and strategic decision making.