Sunday Finds + 3 Thoughts From Last Week (On Monday)
RH + WWE
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.
**Apologies for getting this out a day late, we were at the Berkshire meeting in Omaha all weekend.
1. Go to the Berkshire meeting while you can.
We went to the Berkshire Hathaway Annual Meeting in Omaha this weekend. The meeting itself was not that enjoyable, as Buffett was rambling quite a bit and didn’t get many questions I haven’t heard the answer to before. Also, ask better questions guys. Asking what Berkshire is doing to protect its share price if a nuclear war happens? Give me a break.
Anyway, despite the actual meeting being uneventful, the weekend was great. We got to see a bunch of people from Twitter and the podcast in real life and met even more investors for the first time. With only a few years left at this point (optimistically) under its current format, take advantage while you can. It is an enjoyable way to meet other like-minded investors from around the country.
2. When does Azure pass AWS?
Cloud earnings came out last week, and (shocker) the industry continues to put up absurd growth at scale. AWS grew revenue 37% year-over-year to $18.4 billion, and now has a trailing twelve-month revenue of $67.1 billion. Run-rate revenue is now $73.6 billion. Slap a 20x revenue multiple on that…just kidding.
Microsoft Azure grew even quicker, at a 49% year-over-year revenue growth rate last quarter. Management doesn’t give out a specific revenue number each quarter, but friend of the show Alex Morris at the Science of Hitting (paywall) estimates that the unit is at around $50 billion in run-rate revenue.
Both businesses are obviously in healthy places, but I wonder if Azure will ever catch up or pass AWS’s annual revenue. Playing with some round numbers, if AWS’s run-rate revenue grows at a 20% CAGR over the next five years, it will hit $183 billion. If Azure grows at 30% a year for the next five years it will have run-rate revenue of $185 billion, or right around the same as AWS (assuming current run-rate revenue is $50 billion). I’m fascinated to see what business will grow faster, and why, over the next five years. My bet is on Azure but that is mainly just a feeling and going off of the latest data.
3. Find companies where customers and suppliers work hard for you.
Lately, I’ve been thinking of a new framework for identifying a quality business: when both customers and suppliers are pushed toward you without the need for the company to pull them in.
I think some examples can help illustrate what I mean.
Visa’s customer/supplier relationship is difficult to define. But one way to see it is the banks/financial institutions/merchants as suppliers, and people/businesses spending money through the network as the customers. Both of these stakeholders (especially the card suppliers and merchants) work hard to drum up business for Visa. They are attracted to providing people with Visa products because they also make money in the process. Visa the company doesn’t need to do anything to make this happen because both card issuers and card users are inherently pulled into the ecosystem.
Google Maps has suppliers (users) and customers (businesses). Businesses spend hours making sure their Google Maps listing is optimized, which improves the service without Google Maps spending any money. They literally build Google’s product for them, it’s an amazing model. The people who use Google Maps don’t need any prodding, advertising, or promotions to open the application when trying to navigate somewhere. They are pushed into using it from the business model itself.
Other companies I think fit this bill are Taiwan Semiconductor, YouTube, Spotify, and Costco. But now that I think about it, this might just be another way of describing a “non-zero-sum” company, which just means a business that provides more value to its customers and suppliers than it takes from them. When this happens, I think the incentives align where suppliers and customers both work hard to support the business, creating a competitive advantage.
This is a new idea and feels like a very rough draft, but I think there is something here. Maybe I’ll a longer write-up on it someday.
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.***
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Catch up on Our Shows From Last Week
3 Good Reads
Now I started in the semiconductor industry in 1955. Now, in the ‘50s and ‘60s, and the very early part of the ‘70s, the U.S. was very strong in manufacturing talents. Now, in a speech that I made in Taiwan about a year ago, I said Taiwan had certain competitive strengths in semiconductor manufacturing, and those strengths mainly almost entirely were people related, talent related. Now, the U.S. in the ‘50s, ‘60s and the early part of ‘70s also had these strengths. But then, of course, talents usually migrated to higher profit occupations. And so, the manufacturing talents in the U.S. started to migrate to design aspects, design profession if they stay in the industry. Of course, a lot of them went into the finance industry.
And 1980 was actually the watermark, the dividing line, when banks started to be deregulated and so on in the ‘70s, then after 1980 a lot of young talents went into the finance industry. You could just tell from where the business school graduates went. They used to go to big industrial companies, the GEs, the IBMs, and so on. Some of them used to go there. But now the big companies couldn’t attract very many business school graduates. Business school graduates went to either consulting houses or to Wall Street.
Charter Is Cheaper Than In March 2020 - Librarian Capital
While Charter's share price is still 15% above the trough of $371.70 at the start of the pandemic (in March 2020), its 19%-lower share count means its market capitalization is now 7% lower, despite growing Internet customers by 11% and Free Cash Flow by 63% since then.
My deep understanding of the high-quality businesses that we own is a north star that gives me the confidence I need to take advantage of opportunities presented to us by other market participants. In my view, each of our positions benefits from reasonable valuations, resilient balance sheets, capable and aligned management teams, solid cash generation, strong returns on capital and attractive long-term growth profiles.
1 Good Listen
How to Make Money in Crypto - Odd Lots
The price of major cryptocurrencies like Bitcoin and Ethereum have been moving sideways for awhile. But it doesn't seem like there's any slowdown in terms of money entering the space. Every day, some new fund is being launched or some legacy financial institution is diving into it. But what's all this money going to do? On this episode we speak with Sam Bankman-Fried, the CEO and co-founder of FTX, as well as Bloomberg Opinion columnist, Matt Levine, the money making opportunities that people are exploiting, whether it's directional bets on coins or yield farming or arbitrage, and how much potential profit there is for the taking.
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Smart and Funny Tweets:
"I’m fascinated to see what business will grow faster, and why, over the next five years."
Me too! Thanks for the shout-out guys, and it was great hanging with you at Berkshire 👍