Bill’s Big Bet $QRTEA v $ZM | The Acquirer's Multiple®

During their recent episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle discussed Bill’s Big Bet $QRTEA v $ZM. Here’s an excerpt from the episode:

Bill: I’ll probably talk about this bet that I’m getting my butt kicked in already.

[laughter]

Tobias: You never go value.

Jake: Yeah.

Bill: Yeah. Two and a half year bet, and I’ve already lost.

Tobias: Would you want to start there? That’s pretty fun.

Bill: Sure.

Jake: You’re already down triple digits. [laughs]

Bill: Yeah, pretty much. I think Qurate’s a reasonably good idea.

Tobias: Let’s talk about what the bet. What’s the bet?

Jake: Yeah, layout the bet.

Bill: Can I get there? Geez. Just because you guys tell a story differently than I do, doesn’t mean that I can’t get [crosstalk] going.

Tobias: You got to start at the start, Bill. That’s how stories go.

Bill: Dude, that’s the fucking start, man. I’ve been researching stuff. I’ve thought that I think Qurate’s a pretty good idea. I followed the company for a while. I think there’s a financial transaction that’s interesting. I might be the idiot at the table. I was talking to my mother’s friends who said that they do not believe in the stock market and that they– [crosstalk]

Tobias: It’s real.

Jake: [crosstalk] -like Santa Claus.

Bill: Yeah, they just don’t think that the incentives are aligned and they don’t think anybody’s out there looking out for them.

Tobias: That part is true.

Bill: So, they don’t ever want to touch any stocks. And then, the wife sort of piped up and she was like, “Oh, by the way, my husband has bought Zoom, what do you think of that?” And I said, “Well, Zoom is sort of hard for me to get my head around. What do you like about it?” And it was literally everybody’s on Zoom right now, so we bought the stock. I’m still sort of old school and thought that you needed to do a little bit more research than that.

Jake: It just goes up, man, who cares?

Tobias: [chuckles] That’s where you’ve gone wrong there, Bill. I’ve identified the problem.

Bill: Yeah, [chuckles] So, that’s obviously– I’ve been studying the wrong thing because I should have just been buying things like Teladoc and all that. I’m in an interesting part, because I actually care about this game a little bit, but I’m getting my ass kicked by all my wife’s friends right now, and they’re pitching her e-commerce, e-learning companies and stuff like that, and they’re buying and it’s going up. So, that’s working nicely for them for now.

So anyway, I had just put out a tweet. And I was like, “Look, I think people are chasing heat right now. And on average, that’s not going to end up well.” And my man, Austin Lieberman, who is long Zoom for– he was really early on it. He’s identified himself as somebody that picks like great companies and sticks with them. He’s not into bailing before the growth story is over. I think he maybe read something different into my tweet than I actually said, which can happen sometimes on Twitter, lo and behold, we’re not exactly speaking the same language sometimes. So, I was like, “Fuck it. Put your chips down. I’ll take Qurate, you take Zoom. We’ll see,” two and a half years. Fast forward two days and I’m trailing by like 55%.

[laughter]

Jake: Well, Zoom did report a monster quarter a day after you placed the bet?

Bill: I mean it’s up 40% today which is fine, whatever but–

Tobias: It’s funny because you’ve set the terms of the bet. You’ve said two and a half years and you’ve done that on purpose because Qurate is going to get two Christmas shopping sessions through that.

Bill: That’s right. It’s a seasonal business. You… in two shopping schedules. I’m not going to do two Januarys. That’s a sucker’s bet.

Tobias: Austin, he thinks that he’s going to win the bit too, because he’s like, “Well, I’ve got it just before they’re going to have this blowout earnings and the stock is going to explode up.” He’s got the first part of the– at the first furlong, it’s Zoom by a length and we need to see over the rest of the race if Qurate can catch up.

Jake: Qurate hasn’t left the paddock yet.

[laughter]

Bill: I said on Twitter– I don’t know now I’m getting like bombarded with Zoom tweets because of this thing. And look, if you’re a listener, please log on if you follow me on Twitter, there’s a link, all the proceeds are going to benefit a charity. So, please go on my page and if you can afford to donate 10 bucks or whatever, it would go a long way. So, I said to him, I was like– Look, it’s basically like I’m playing against Steph Curry and he just pulled up from half-court and beat me. All right, you got to tip your cap, you lost that game, but it’s the best of seven series. So, we’ve got a long way to go. But it is super funny to be this down this quickly. It’s like, “Oh, fuck.”

Jake: Yeah, talking about like venial sins being punished swiftly. [laughs]

Tobias: Yeah.

Bill: That’s right. I mean 50% in value land, when’s the last time any stock has gone up 50% in value land?. It’s been a minute. So, these Momo things, they can rip on you.

Jake: I [crosstalk] crunch some numbers on it and said… if it does this quarter for three more quarters basically, which is probably not unreasonable given recurring revenue, I don’t know but price to sales will have gone from 115 to 35 and the P/E will have gone from 2000 to 88.

Tobias: That used to be expensive.

Jake: I was going to say like– [laughs] Remember when 35 price to sales was– you’d kind of be like, “Ooh, boy, you guys really like this, huh?”

Tobias: The only thing that could make them go down is if they’re trying to raise some money.

Bill: Yeah. Look, to give them some props here. Their cash flow from operations increase this– the first six months ended July 31, 2019, $53 million in cash flow from operations. This quarter, $660 million. And that’s growth. So, they did it. So, they’ve got to keep doing it. We’ll see. I don’t know anymore. I have no fucking clue. I don’t know why anyone would care about my opinion on any of these companies. I’ve been dead wrong. Tesla is ripping. They’re issuing shares and their stock is going up like it should and then it’s selling off like it shouldn’t. It makes no sense to me. I don’t know what I’m doing anymore. I’m basically a dinosaur playing a new person’s game and I have an ugly shirt to boot, which I actually don’t think is ugly.

Tobias: Some of those are self-inflicted.

Bill: What, the shirt?

[laughter]

Jake: Yeah, the shirt’s an unforced error.

Bill: Yeah. So, I don’t know.

Tobias: I thought Tesla was down in this market. Someone says–

Bill: When I looked at it this morning, it was up. And I thought like, “Oh, it should be.” Dude, if Musk could issue shares up here and then buy them lower, that’s some Henry Singleton type stuff. I think that’s a good move for him. I know that some people are going to think they’re getting diluted. I think they’re delusional.

Tobias: Not much.

Bill: But that’s a whole different issue.

Tobias: It’s $5 billion on like a $400 billion market cap, isn’t it?

Bill: Still money. I would go bigger.

Tobias: Yeah. Well, you do what you can do.

Bill: [crosstalk] –$20 billion or something like that.

Jake: The water on that balance sheet, if you can dilute there, you’re doing the Lord’s work.

[laughter]

Jake: If you’re Elon.

Bill: Dude, it’s not that long ago it was $100 billion company. It goes down to $80 billion, you buy $5 billion in, and that’s actually real money.

Jake: It was like a $30 billion company. Not that long ago.

Bill: Yes, my whole point is like, I totally get it. Oh, dang. What’s up, Trevor Scott? Look… on the big screen. He’s got us on a huge screen. That’s dope. Sorry about the shirt, man. Anyway, I like what Musk is doing here. It makes total sense to me. I would go bigger if I were him.

Jake: I watched that Neuralink presentation just because I’m curious, morbid fascination. But think about that as a recruiting tool and how little that cost to put together. There’s probably incredible ROI on that for just talent finding. He’s doing some things that are pretty smart. Even if some of the claims–

Bill: He’s doing a lot of stuff that’s smart.

Jake: –seem a little bit that’s a little aggressive. Well, we’re going to figure out consciousness finally. Great.

Tobias: He’s a good entrepreneur.

Bill: I don’t know what’s the difference between genius and promotion, it’s pretty thin sometimes.

Jake: This is a perfect time for him to wear– lots of cheap money floating around, low skepticism, pretty much like fake everything is not a problem. We don’t care about the truth anymore. This is a great time to be Elon Musk.

Bill: Well, I think something that’s interesting that was pointed out actually by Trevor Scott earlier today that I read, his point was like, if rates are going to be lower for a long time, these really long duration assets should be quite a bit higher. We’ve said that before. I actually also think, and this is like really tempting the gods here, but I actually think that these really levered businesses should be also worth more, not just because they’re– Well, you laugh. But you refi them down. And you can bring your cost down. You’re almost an idiot if you’re not using leverage at this point. And I mean that’s a–

Tobias: You’re incentivized to do it. They’re telling you to do it. Fed’s telling you to do it.

Bill: Massively.

Jake: January 2008 is calling and they want to say how you have– [crosstalk]

Bill: Yeah, but this is different.

Jake: –easy it is to roll that debt over.

Bill: But this is totally different. You’re talking about a crisis in the middle of the banking system, that’s not this. Secondly, you know the government’s coming to get you. We just saw it in March, they’re not going to let you fail. I don’t understand how you don’t issue super long duration debt. And by the way, if rates go up, you can [unintelligible [00:13:21] at pennies on the dollar because that shit is going to get traded down like crazy.

Tobias: It’s going to get inflated away too.

Bill: And you don’t have any near term maturities. You just need to manage your liquidity in the interim.

Tobias: Who’s buying it? Who’s on the other side of that trade?

Bill: I have no idea, man, I’ve been saying this for years. That said, when everything was crashing in March, and I thought debt might own all the equity, it made sense to me. But, yeah, I’ve said that for a while, like who is buying this paper? I don’t know.

Tobias: Well, it’s got a little yield, I guess.

Jake: What about the argument against that though, with a very tech-led deflation that leads to this debt being completely unserviceable?

Tobias: Tech-led deflation?

Jake: Yeah. You’ve got to read the price of tomorrow.

Tobias: Have you seen the stock market, Sir?

Bill: So, what does the tech-led deflation do? So, rates go negative, you just refi your debt and get paid for having it. You’re never going to pay the debt back is the point. You just keep refi-ing it out. It’s offensive to even articulate but that is what’s going on in the game right now. And I don’t see how people aren’t playing it.

Tobias: It’s funny that the same word is used to describe two different things. This is the deflation– your TV gets faster and better and higher definition and cheaper at the same time. Somehow, that’s deflation. At the same time, assets going down, that’s also deflation. To my mind, those are two different things, but they both seem to count towards the Fed gets to use both of those for the hedonic adjustments and so I don’t get it.

Bill: Look, I haven’t looked into all the covenants on these things. I’m sure they’re like cross-defaulted and everything like that. The Qurate equity that I’m talking about on a pro forma basis is probably going to trade at a market cap somewhere around $2.5 billion. I think that they have a legit shot at printing $400 to $600 million of free cash flow to common equity. I understand people are concerned it’s a melting ice cube. It’s very possible that they really have to change their business. I get that. Their average customer is 50 years old. The average life of the customer is 30 years. The average rabid customer is 17%, account for 78% of the sale. She orders through $3500 of stuff a year. I don’t see a 50-year-old woman dying tomorrow. Expected life of that woman consumption wise is probably 22 years. She’s got cohorts that are continuing to come in over and over again– or not, she do– but they do. The implied life of the equity, you’re looking in my opinion at $400 to $600 million normalized on a $2.5 billion market cap. The debt that they issued is out to 2068.

There is a disconnect between what the debt market is saying. Now, yes, it yields 6.25% and it’s secured. I guess there’s a 2067 note that yields– I don’t know it looks like 6375 is the coupon and it’s got a first lien on some shit. But that is long paper. If that is money good, the equity is hard to lose money on. Now–

Jake: I thought debt was supposed to be smart money.

Bill: I have no idea. I don’t think that you can necessarily like look at where debts trading and say, “Oh, well, then the equity safe. I get that debt is not totally thoughtful, but there’s just a disconnect there. And I think that is a lot of places. So, if you’re a CFO, I don’t see how you’re not pushing the shit out of the debt market.

Tobias: That’s right.

Bill: [crosstalk] uncomfortable.

Jake: It’s right [crosstalk] individual but in an aggregate, it’s problematic.

Tobias: That’s right. Should we move on?

Bill: Yeah.

Tobias: You want to do Buffett and Japan?

Bill: Oh, and by the way, all of the incentives are to inflate the debt away anyway because no one can actually pay it back.

Tobias: That’s right. That’s why we are where we are. That’s exactly wh we are where we are.

Bill: Do you know who could really benefit?

Tobias: Qurate.

Bill: No, not them. But if the dollar goes down, AB InBev is a massive beneficiary because they have a lot of debt and dollars and a lot of revenues in foreign currency.

Tobias: Works the other way too.

Jake: By the way, I was going to– I think if my calculations are correct, this is our 40th episode.

Tobias: Oh, really?

Bill: Yay.

Jake: So, congrats, boys.

Tobias: 40%. We made it!

Jake: We definitely made it over anyone would have thought.

Tobias: The big 40.

Bill: My over was three. I’ll do a couple of these and we’ll see if anybody likes it. [laughs]

Tobias: Still here.

Bill: Still waiting for that money from Google though, send it over and stop loading our stuff with ads.

Tobias: You can also listen to it on the audio. There’s no ads on the audio.

Bill: True story.

Tobias: Do you want to do Buffett? Save the veggies for last, keep everybody around? [laughs]

Bill: Yeah, indeed.

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