Quants Should Move On From Value

During their recent episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle discussed Quants Should Move On From Value. Here’s an excerpt from the episode:

Tobias: I don’t have a particularly long topic here. I’ve just noticed there’s quite a few death of value type articles around which does warm my heart to see them because I know that the end of value’s underperformance is near because narrative follows price rather than the other way around, which it should be. I just think it’s hysterical that– BlackRock has come out, Justine– I think I said Christina before, I’m sorry about that. But BlackRock has come out and said, BlackRock’s co-head of systematic active equity, quants should move on from value. Stock valuations are essentially unknowable and rather than scale a data set by price, just see if it predicts returns. Aside from the gobbledygook in the second part, which I don’t really understand, I’ve seen that argument a few times.

Jake: Explain that to me as if I was a five-year-old.

Tobias: No, I can’t.

Bill: Yeah, I think it means stocks go up, stop trying to care about fundamentals.

Tobias: Well, there’s a lot of that going on at the moment.

Bill: [crosstalk] –that is what I translate that to.

Tobias: Even FAATMAN, I mean, I can’t believe I’m going to say this but it’s FAAT, just before I trigger anybody. FAATMAN. When I look at FAATMAN’s valuations, FAATMAN’s stretched, I think FAATMAN’s expensive. Don’t misunderstand what I’m going to say here. But FAATMAN, they’re not–

Bill: Are you claiming that 60% up year to date is stretched? How dareth thou?

Tobias: The percentage performance of the prices is irrelevant. What is it relative to the underlying business? I think if you look at those things– somebody sent me some analysis yesterday saying, if you’re looking for a 4% nominal return in Amazon, you’ve got some pretty bullish assumptions you got to make these days, like 30% growth, got to return a lot of capital. In a 4% nominal, that’s not much in this kind of– I mean, I don’t really know.

Jake: I started with my line down here and I draw through where it went. And then I just keep going. And [crosstalk] to the end point, dude, we’re rich, I don’t know what–

Bill: I’m going to piss some people off of this, Lord Almighty, please forgive me. Amazon’s the one I like the least. AWS, I like, I get it. I get that Bezos is a genius. I don’t know. I’m really, really interested to see operating leverage flow through Amazon over the next three years if I’m even moderately directionally correct on the economy, and I know somebody’s going to be out there. “Well, they deliver the lowest price.” Okay, let’s see. AWS is a monster though. It is a monster, but you’re paying a lot for it.

Tobias: And there’s some competition there too. But you think Amazon– of the businesses in FAATMAN, which business do you–

Bill: Well, T is the worst by far, but I don’t even consider that. It’s only there for the acronym.

Jake: Yeah.

Tobias: Well it’s been FANG, it’s been FANMAG. But we’re FAATMAN now because–

Bill: Microsoft, I like the most. Facebook’s probably the best business, but God I can’t get over how much I don’t like Zuckerberg. Google Search is incredible if they can figure out how to allocate capital, that’d be a hell of a business too. It already is, but take care of my friends over there. But other than that, stop this other bets nonsense.

Tobias: [laughs] Dude, that’s how they stop the people with the pitchforks and the torches from coming for them.

Bill: Netflix, we’ll see, but I think Disney is a much, much better business than Netflix. And if you’re comparing the two of those, I just think that– I’m not as convinced on Netflix’s ability to scale spend as some people are, but I’m also not some huge Netflix hater. I get it, global scale is important.

Tobias: What’s your favorite, JT? I think I know the answer, but just let you articulate it.

Jake: Well, if I just have to own one of those businesses, my entire network–

Tobias: Yeah, you can own the business. You don’t have to pay the price. Do you know what I mean? You get them all at the same valuation.

Jake: I’m taking Google.

Tobias: Yeah. Me too. Why?

Jake: And I’m just going to cash checks because it’s just a money-printing machine that will continue to– is the most likely to keep printing money for a long time, I think, relative to the other ones and is less likely, I think, to be disrupted than the other ones.

Bill: Also, the people out there are awesome humans. I only met with a select group that’s into investing, but they’re thoughtful, they’re intelligent. They ask questions that I wish–

Jake: I don’t think that has a lot to do with the money-printing machine. I agree.

Bill: Yeah, well, it helps over the long term.

Tobias: In one sense, to me, Google is the most frightening of all of them, which means it’s the one that I want to own the most. Google is in every part of your life. Google’s got YouTube. You probably use Gmail. You most likely use Search. It’s just too hard to use anything else other than those ones. You just don’t even notice that it’s all Google collecting all of your information all the time. Whereas you do notice Facebook, like there’s an ick factor when you go to Facebook, I don’t use it a lot. I think a lot of people don’t use it a lot. Google, like much more embedded under your skin. It would be very hard to get that removed and survive. And people don’t really think about it that much. Somehow, it’s crossed that uncanny value where you trust it–

Jake: Benign cancer.

Tobias: But then, on top of that– it’s good bacteria or something like that. Beyond that, it’s disguising discussing how much it makes. They’ve got all this other bets nonsense, they’re just like, “Yeah, we’re just going to do some stuff so nobody knows how much money we make.” And so, they’re just hiding out there, camouflaged in plain sight, totally embedded under your skin and nobody knows what’s going on. Google’s a scary beast.

Jake: All right, I’ve got to go place some buy orders– [crosstalk]

Tobias: [laughs]

Bill: I argue they mismanage some of their competitive advantage in YouTube too. I don’t understand why YouTube isn’t much, much bigger. I don’t understand Google Music. There’s some weird things. On one hand, they completely pivoted the business to mobile search and released Android, and that was an insanely good business move. On the other, they’ve had some assets that they’ve really squandered, and I’m not sure why.

Tobias: They kill assets all the time. Like the RSS feed, the landing page that I used, homepage, RSS feed. They’ve killed something else recently too.

Bill: You know what they should bring back is like Google history, used to be able to google like– I don’t know, like a search phrase and then you could see all the times in history that it’s come up. So, like Ken Fisher used to write about that back before he was a sexist pig all the time. He would google his topic that he wanted to write about and Google would return to him all throughout history different dates that a similar headline had come up. And it was like, look at how often people have complained about this and look at what stocks have done since then. That was a cool feature.

Tobias: There’s still something like Google Trends, is that the same thing?

Bill: No, it’s different. This is more of a historical thing. I think Trends more picks up like what’s currently going on.

Tobias: No, you can go back over a few years, it might go back five years.

Bill: This is a lot of history. Also, sorry, Ken, I didn’t mean to throw you under the bus. You did it to yourself though.

Jake: Played yourself.

Bill: Played yourself. I learned a lot from that dude. I feel bad that he turned into somebody that’s sort of a pariah.

Tobias: Aggressive marketing.

Jake: Hey, while we’re on FAATMAN, a few Tesla numbers.

Tobias: Yeah, have they come out?

Jake: No.

Tobias: You got something.

Jake: Yeah. This is actually from Jonas at Morgan Stanley recently talking about what does Tesla look like at the $300 billion market cap relative to what did Apple looked like when it crossed the $300 billion threshold and what did Amazon look like at that same threshold. Apple, twice as much revenue and five times as much EBITDA as Tesla at the same 300 market cap.

Bill: Hey, wait, real quick follow-up. Can we get a free cash conversion to EBITDA calculation on this because pretty sure Apple’s a cash machine and Tesla isn’t.

Jake: Fair. Tesla is 70% smaller than Amazon on revenues and one-third of the EBITDA that Amazon had at that same valuation. As far as forward EBITDA, Apple was at 11 times, Amazon was at 22 times, Tesla’s at 61 times.

Tobias: Oof.

Bill: Yeah. [crosstalk]

Tobias: Doesn’t matter.

Jake: Everyone who is so saying that Tesla is the next…, you’re praying for an incredibly optimistic future even relative to those guys that were total outliers against every base rate that’s out there.

Bill: Dude, and what are your returns on capital in the growth?

Tobias: Well, I know that because I went and had a look at it. Do you have those numbers?

Bill: Low to quite low.

Tobias: So, I looked at Amazon at the request of Samson Narokobi. He’s often on here, I don’t know if he’s on today, but he wanted to know what Amazon and Tesla look like since inception over the last decade. This is on a gross profit on total assets. This is the Novy-Marx measure. Joe Weisenthal tweeted this out like five or six years ago saying Amazon is the top earning on this metric of Novy-Marx, which is like a substitute for return on invested capital. It’s just one of those return on equity, return on assets [unintelligible [00:43:09] measures. Variety of reasons why it might be a slightly cleaner measure this one, but he looked at its gross profit, revs minus cogs on total assets. So, what did it cost you to get here? What are you earning before you feed it through the machine?

Amazon for the first decade, 49% on assets, which is pretty good, that’s a good business. Over its full life, it’s earned 35 or something like that. 35.4, very, very good. Tesla has earned 10.2 over its full life. So, it’s less than a third as good as Amazon. It’s currently twice as expensive on a variety of different measures. So, it’s like 6x relative to Amazon at the moment in my estimation. Tesla’s very best year, it earned 18.9%. Amazon’s worst year, earned 23.1%. So, Amazon has never been– even in its worst year it’s better than Tesla in its best year. Amazon is the better business.

Bill: I’d be interested to know what Zooplus is doing on that metric? I bet it’s pretty good. Zooplus is an interesting asset. I don’t know how they go tangentially, but it’s basically e-commerce for pet stuff. But dog food is like–

Jake: pets.com?

Tobias: It’s Amazon’s for pet stuff.

Bill: No, it’s not that. It’s European and it’s a better business than I pitched it as. [crosstalk] no, it’s just I’m telling you, man. The delivery of dog food, it removes a lot of friction from your life. You don’t want to carry like a 50-pound bag of dog food.

Tobias: But now you’ve got to ship a 50-pound bag of dog food, and our dog ate Purina Pro Plan food.

Bill: You need some efficiencies there. Carvana thinks they can do it with a car. I think you can do it with dog food if you get enough people going but I don’t disagree with your– [crosstalk]

Jake: Value to weight ratio is totally [crosstalk] that.

Tobias: I think there’s a lot of VC money subsidizing a lot of this stuff and you’re not going to know until we come out the other side.

Bill: It’s a reasonable possibility. You’re correct.

Tobias: Throw your questions in, folks. We’ve got 15 minutes to go. I wonder about a lot of that stuff because I think we’re in the golden time of having stuff delivered to you. Or getting picked up from your house. I think Uber, probably the prices have to go up or– I don’t know how it works exactly. But I think that it’s just hard to see how you can– Uber is one example of just VC-subsidized taxi rides. I think a lot of these things are just VC-subsidized food to your house. I mean that’s true.

Jake: Can I read you guys something real quick?

Tobias: Yeah.

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