Are we in a recession or not? What is the Sahm Rule Recession Indicator? Why does Claudia Sahm herself not trust its conclusion at the moment?
Are we no longer in a capitalist system? A preview of an upcoming conversation about techno-feudalism and the contradictions of capitalism. Blame Monkey for this one.
Did Luke get lucky selling Airbnb $ABNB before earnings based on local anecdotal evidence from his visit to the Paris Olympics? When and what is anecdotal evidence good for? We consider some examples: $AAPL $NFLX $TSLA.
Luke reaches 12,000 followers on X on the strength of his investing success and meticulous record keeping. We answer a few questions from listeners, including what company could we not pull a trigger on despite wanting to: $META $PLTR $AAPL.
Badger provides an update on Axon’s $AXON latest fantastic earnings. Meanwhile, Monkey explains why he thinks $EOSE will be the better investment in two years’ time despite his own enthusiasm for $AXON.
We talk about the perceived risk of Eos Energy $EOSE and its new partnership with Cerberus: friend or foe? Can we know for sure?
Segments:
[00:00:00] Introduction
[00:00:58] Are we in a Recession?
[00:12:19] Why Luke Sold Airbnb BeforeEarnings
[00:20:49] Luke’s ‘Ask Me Anything’
[00:33:15] AXON Earnings
[00:35:53] EOSE vs Axon
[00:38:09] EOSE Earnings
WSW E40
[00:00:00] Introduction
Luke: On today’s Wall Street Wildlife, we discuss are we in a recession and whether we are or not, how did I play a blinder and sell my Airbnb shares hours before earnings?
Krzysztof: Horseshoes were stuck up in places that don’t shine.
Luke: We are also going to revisit our Axon versus EOS bet. The, uh, the tables have turned. My man, Krzysztof, your, uh, your champion is floundering.
Krzysztof: And I will try to defend EOS’s honor against, uh, villain number one, the Badger,
Luke: I have also hit a bit of a Twitter milestone. 12, 000 followers. I did an Ask Me Anything yesterday, and I got a bunch of good questions. So we might recap a couple of those questions, and you can challenge me on my answers, if you like.
Krzysztof: Excellent. All right. So shall we get to business badger?
Luke: Let’s do it.
[00:00:58] Are we in a Recession?
Krzysztof: I think it’s worth talking `about. Are we in a recession or not? And I’d like to preface that by saying, macroeconomics, it’s a fascinating area of study, but I’ve said this ad nauseum that what we’re dealing with is complex systems that can’t ever be perfectly predicted.
So you have like probabilities and you have, it’s kind of like the weather, right? Like at this point, we’re pretty good with the weather, But then there are days where it’s, uh, you know, my app says it’s sunny, but it’s, you know, raining outside, so it can’t ever be perfected.
Luke: it’s nice that you raise that, because it’s an interesting comparator. Because the recession is a bit like the weather in that, you’ve got these actual shaman who like shake their things, do a rain dance, and it actually rains. Like if you, think there’s going to be a recession, that actually creates the conditions for there to be a recession.
It’s this kind of self fulfilling, uh, situation. So very interesting.
Krzysztof: a little bit of a preview for maybe next week’s episode, or some episode not long thereafter, I’ve been digging into, fascinating economic theory that we are no longer living in capitalism, but we are now living in something called techno feudalism. I’ll talk more about that, but the idea is that In capitalism, uh, the markets really do operate freely for the benefit of the individuals, right?
Free competition so that the products get better and so forth, but that’s no longer really happening due to giant tech tech platforms like Google, like Facebook and yada yada. but what’s interesting about this idea is that. The numbers in terms of say, GDP might be going up the big companies continue making lots of money, but the feeling on the ground of individuals is not in fact getting better.
Sort of like in the old system of futile surfs working the land there’s profit being had, but the people don’t feel it, and the people or the workers, so to speak. Continue to suffer. So the reason this is relevant, I think, is because I feel a tension right now in in the broad environment between looking at on one side.
Oh, yeah, growth is there and businesses are doing well and GDP is going fine, right? And where’s the recession? But on the other hand, more and more reports of Man, my budget is tight. But reports, meaning self reports, but also conversations I’m having, and you know, just, right? Budgets are tight. Debt is going higher.
Defaults are higher. And now, of course, when we talk about recessions, employment is a key factor. And this is what the SAM rule indicator looks like. leads us to. it’s another one of these, tools sort of like the inverted yield curve that historically, if you look at patterns, when the bond yields the two and the 10 cross, it’s a high probability predictor that what we will get next is a recession that has not yet happened.
In recent months, but now you add the Sahm rule recession indicator, which, which essentially states that if you take the trough of the lowest employment levels in the last 12 months. And then you see the unemployment rate, rise by half a percentage point from the trough.
Then that gap, because it basically happens quickly enough and is significant enough of a bump that when we have seen that in the past, We are looking at, increased likelihood of a recession. So you put some of these indicators together, right? And you start seeing these flashing warning signs that, uh, things are not in fact as good as maybe the feudal lords, the technocrats say they are.
Luke: And let’s bring it to life a little bit more as well. So it is the Sam rule because it was proposed by a US economist called Claudia Sam. So she’s suddenly like hot topic and being interviewed everywhere because her rule has just triggered for the first time since 2020. And she, uh, she’s come out and said.
Ah, actually, I’m kind of, I’m kind of not very happy my name’s associated with this, because suddenly everyone thinks I’m the villain, because I’ve predicted the recession. I’d much rather have had an economic measure that predicted something fabulous. But she’s also said, actually, maybe my rule doesn’t apply in this case, because of COVID and a sort of fairly extraordinary things that really haven’t happened.
in many, many decades have happened in the last few years. So she believes, although unemployment is up and her rule has triggered like that, we are more than half a percent higher than the last rolling 12 months. She thinks it doesn’t apply this time. The Achilles heel of this indicator, she said, because actually the net, essentially the net number of jobs is growing significantly.
So you’ve got rising unemployment, but there are many more jobs. So maybe like people who are unemployed may be able to find a job more easily. You would think because there’s more supply of jobs, or more demand for labor. it’s interesting. And if you’re an economist, you could probably spend, you could probably write multiple PhDs about this and look at GDP and.
Is it relevant though? I don’t know. Cause I think it really comes down to what you just hinted at, which is just like, how does, does stuff feel cheap or does stuff feel expensive? I actually had this conversation in the hairdresser’s chair about an hour ago. And we, I was chatting with my, my buddy, my hairdresser, Mario about the podcast and what we’re chatting about today and the Sam rule and like, he’s put his prices up, at the start of this year.
Because he was feeling the pinch in terms of, his costs and his rent on the building and things like that. So he had to put his prices up for customers. You know, this is really , this is the recessionary forces in play and how it bites the man in the street, because my haircut now costs like a few extra pounds than it used to.
And it’s, it’s not haircuts, but it’s, you know, loaves of bread and a tank of gas and a pint of milk and all the other stuff that you have to spend. And you have to pay for month after month, like your insurance, maybe your medical care, uh, and it’s these costs that go up. And suddenly you don’t have enough expendable income, like if you’re in a very bad situation, you can’t actually make ends meet, and you’re having to cut back on essentials.
But even if you’re relatively affluent, you’re probably going on a few less vacations, you’re probably, you know, maybe you’re not going to update your iPhone this year, or maybe you’re going to put off replacing the car till next year, things like that.
Krzysztof: Yeah, so I am putting the cart in front of the horse by going back to this techno feudalism idea. Maybe it’s because it’s on my mind, but what you just said describes the situation that I’ve, this theory that I’ve been looking at. it’s not that everybody’s going to suffer. It’s just that the sort of, I mean, Marx would, would jump all over this, that in the system, capitalist system that has two classes.
The owners and the workers, the people who own the stuff will continue to do better and everybody else in a sense gets screwed over because the owners by definition are squeezing them for more and more value at lower and lower labor costs, right? And so,
Luke: I’m not sure that’s entirely true because what we’ll talk, we’ll talk about Airbnb in a bit, but like we’re in earnings season and we are seeing some significant companies materially reducing their forecasts for upcoming quarters because this reduced buying power that individuals are having at the moment because of high rates.
is meaning they’re buying less with the companies I buy from. Maybe Amazon, you know, you might be spending less on Amazon and then Amazon has less money to pay its, suppliers. And so, you know, this does, it starts with the consumer and it cascades through the entire economy.
And I don’t know that any company is really truly immune.
Krzysztof: right. Well, this is another, we did not plan to talk about this stuff, but there I, here I am bringing in marks, right? So this is what we get, but I think this is without spinning off too far, maybe into, you know, economic theory, here’s the, here’s the troubling contradiction within capitalism that the whole system works because you have Somebody at the top, the CEO or the, the owner, right.
In order to make maximum profit, they have to lower prices that I mean, the weight, the labor wages that they pay, the lower they could lower them, the greater the profit, right. That makes sense. Right. That piece of it. And that’s how it works because you have greater competition for the jobs. And then with greater competition, the demand is up.
Therefore job wages go down. And that’s why you have things like unions, right? unions exist to protect the labor from. other extortion. However, the contradiction is that if you as a laborer no longer have much money because your wages have gotten so low, how are you possibly going to buy the goods made by the capitalists?
So the capitalists are in this, the owners right are in this weird position where for their own company, they need their wages to be as low as possible so that their profit is maximized, but they want all other companies. to pay their workers as much as possible so that there’s money going in the system to buy goods.
And of course, that’s a contradiction that that makes no sense. Every company wants to maximize their profit. So all I think I’m saying to kind of zoom out in this moment, Is this tension between are we in a recession or not it’s not that it’s contradictory, but I see signs in both directions.
But the reason I’m paying attention more and more to these indicators that sometimes might show up as false positives. or often or right and we can’t ever know is because the feeling on the ground by I would say the majority of the people is a feeling that things are in fact tighter and worse and that employment is in fact going up and whether or not as you said Luke there the jobs are being created much faster than they’re being lost I don’t buy that And I, I mean, I, that maybe that’s just a feeling, maybe that’s just, but I’m seeing job cuts everywhere and I’m seeing, you know, the AI, phenomena taking jobs.
So defining maybe what we mean by a job is necessary, but I don’t feel good in this moment in terms of the, the, that we’re not in a recession,
Luke: And I agree, I’m saying the same thing, like whether these technical indicators confirm it or not. If it feels like a recession, you’re probably in a recession.
[00:12:19] Why Luke Sold Airbnb Before Earnings
Luke: okay, let’s bring it on to Airbnb because it was exactly this line of thought that essentially paid for my Olympics as it turned out.
Like I was in Paris with, uh, with my wife and some friends and we rebooked our accommodation like a few weeks before because hotel prices had gone way down because there’s massive oversupply. And the reason it was oversupply was, I think all the, this is highly anecdotal by the way, all the Parisians probably left the city.
So like, Oh man, I don’t want all these foreigners to come and, you know, mess up my city. So you get out of town and Oh, we can make a fortune by putting our apartment on Airbnb. So they did that. And it was massive. Massive oversupply on Airbnb. I got a ton of properties to choose from. And I was happy at the time booking it because I got a great place in a superb location at a really reasonable price.
But I came back from the Olympics. And actually, I think it was like Monday, we recorded the last podcast. And maybe the next day it was Airbnb earnings and going into earnings. I was thinking, hang on, like the markets on, I had to look on X, uh, on Twitter and everyone was pumped about, Oh yeah, the Olympics was great.
And it’s a headline thing for Airbnb. And there were so many more properties available. Like that’s a good thing, I suppose, because of more supply, but the reality on the ground was the prices of those things are falling through the floor and there were a lot of vacancies. And so. My anecdotal view then came together with my, in fact, my buddy Albert’s voice of caution in my ear saying, we’re in a recession.
and it just seemed like, Airbnb was Maybe not in trouble right now, unarguably a discretionary product, right? You don’t have to spend money on Airbnb. You could stay home, you’ve staycation, whatever, you could do other stuff. And so if money gets tight, like Airbnb will be one of the first companies to suffer.
And it’s estimates, it’s forecasts that drive the value of companies like Airbnb, like growth stocks. And so it seemed to me that Brian Chesky, their CEO, he’s a relatively prudent guy. It seemed to me that probably the market was too buoyant about where their forecasts would be. And so I sold my stock like two hours before earnings and Holy F am I happy I did because they tanked.
yeah, so I didn’t make any money. In fact, I lost a decent amount of money on my Airbnb holding over the last couple of years, but I definitely saved way more than the Paris Olympics cost me.
Krzysztof: so many interesting things there. I’m trying to find right now, Airbnb’s market cap. It is 73 billion. glad you brought this company up a few things. I was an Airbnb host for. Hmm. Six years. So I know the business and the platform inside and out. And it’s interesting when they went public, they treated hosts, I think as first class citizens by giving us pre IPO prices and I, uh, bought the maximum number.
Then it shot up something like hundred percent, I think from the original number, but I sold all of those shares immediately. Which is interesting as a long term investor who really likes and believes in the platform, but I had this intuition and this goes maybe to the role of anecdotal feelings and a little bit of a Peter Lynch Ian, you know, way of investing, I was skeptical of the market cap being as big as it was. And my experience with Airbnb is what you were talking about. It feels like there’s cycles where at the beginning of the early curve, it was like almost, it was like such an incredible alternate option to hotels, but then a good thing, right? Too much of a good thing doesn’t last long. Then you have everybody buying properties and pissing off the neighbors and the local communities.
Then there’s a pushback against it. Then there’s all the complaining, right? And then it kind of dries out, but then people realize, Oh, yeah, we don’t like, you know, there’s issues with hotels too, and it comes back this way of investing anecdotally, if I wanted to be a real dick, I could say, how’s that different from gambling, you know, especially in the long term investor, you know, if, if we, if we’re long term investors, as we preach, and you get a feeling in your tummy, That’s not backed by numbers.
Right. And we know, right, correct me if I’m wrong. We know, all these cases where one anecdote is not representative sort of like going on, what’s it called? trust pilot or the glass door employee reviews. Who, who are the people that read really negative reviews? They were the people that were fired or there’s some incident, right?
So one anecdote is very, very. You just cannot draw, conclusive,
Luke: I, I totally agree. Uh, and you are absolutely right, like I definitely saw this as an anecdotal view, but I think like my job now is a pr, I’m a freshman investor. Like the only thing I really do is I make the podcast with you. I travel the world and have fun and I manage my portfolio. And so
Krzysztof: know, that should be, we should make that a tagline. That’s gotta be a poster. All I do is professor, invest professionally and travel around the world and have fun.
Luke: and, and like I try and be a sponge for information about stocks I own or stocks that are on my watch list. Or stocks that are potentially interesting fodder for the podcast. And like sometimes a good part of the job is just letting your subconscious soak up a ton of stuff. Like I might be out running for an hour.
I’ve got a podcast rattling away. I may not even take in, you know, 20 percent of the actual information, but it’s in there somewhere it’s in there somewhere like bouncing around. And I think if you do that enough, and if you go out of your way to seek out. All every side of the argument, you deliberately avoid, confirmation bias and you look for conflicting opinions.
Talk to people who have conflicting opinions from yourself. I think this is what the human brain is good at. Synthesizing all this information and then forming conclusions. A view and that’s, I mean, that’s probably how I invest. That’s how I’ve invested for the last 20 years, relatively successfully.
Krzysztof: This is so, such a rich topic. There’s lots of times where we’ll be wrong doing just what you did, right? we let’s acknowledge that but I also think there’s something incredibly powerful about the The method you described I used it for so long with regard to Apple like I was I’ve been an Apple User since since I was a you know in middle school And I knew like this intuitive feeling like this is a great company and eventually people will catch on kind of thing before the numbers outnumber right but but with some of the great companies you just know right or you you because you live you you’re alive in the world so it’s interesting in this case with Airbnb Badger that both I as a user of the platform was not interested in owning it as an investor and you sniffed out something local and real that in this case happened to be timely.
Luke: And let’s be clear, like I still, I actually think it’s a fantastic product and I love being a customer as a, as a guest, not a host. Um, and I do think it’s a good investment. But this is a bad market for that kind of company. So I’m going to stay off. I’m going to stay out of play with it for at least a year.
I want us to get out of recession, or at least see the end in sight, see discretionary spending picking up again. And I’d happily buy back into Airbnb if that was the case. I do think it’s an excellent leadership, a great company. It’s just going to, they’re going to have a tough time for the next year.
Krzysztof: Right. And I’ll repeat that valuation matters and I’m eyeballing here, but The valuation always felt high. And we know that it’s competitors, hotels are, you know, giant monoliths that, that their, their competition is not, not a friendly foe. So, okay.
Luke: All right,
[00:20:49] Luke’s ‘Ask Me Anything’
Krzysztof: So a big thing happened over the weekend, our own, humble badger reached 12, 000 followers on X. And I think that’s mostly on the back of. You posting your historical investing performance and success coupled with. Recently, the deep dive you did about axon and, as professional investors, people want to see, you know, results. And this is where you’ve done a phenomenal job, keeping all of your receipts and tracking, uh, You know, all your successes.
I, failed miserably at doing any such thing similarly. So I can’t show my receipts. Right. But you
Luke: let me just cut in
Krzysztof: people are loving.
Luke: like, I’ve had a crap ton of failures as well. And I do think it’s helpful internally, to be honest with yourself about those. Like I did a really big Twitter thread of over the course of 50 days earlier this year, and I just shared every stock in my portfolio and like the first 25 days of that was miserable because I was having to recount.
Like errors and failures and stocks that have gone badly wrong. Like, coming back to that intuition conversation we just had, you don’t have to be right every time in this game. If you’re right, well, Peter Lynch used to say, if you write six times out of 10, you’re doing great. To be honest, you don’t even have to be right six times out of 10, because the upside on one successful investment probably pays for the downside on 10 failures.
So in some ways, you’ve only got to be right, like, once or twice out of 10 to be successful. If you’re, when you’re right, you’re really right. But anyway, yes.
Krzysztof: Right. And, and this, this was just reiterated to me for the 50 millionth time. You have to have the patience to most of the time, not overreact as we were talking about, right, or succumb to your own conformational bias. In other words, there’s, there’s, it’s so, uh, intangible, but it’s so crucial. The greatest mistakes often are not whether you choose wisely in terms of the company, but whether you were able to do the correct thing by most of the time doing nothing.
So anyhow, patience. Yes, patience. That, that old, uh, virtue that continues to pay dividends.
Luke: I might use that just to quote one of the Q and A’s from the AMA today or yesterday. Poobra Hunt said, Is there a single company in the world that hasn’t made a mistake in its journey? And like, how is everybody so stupid? They always buy the shares up to perfection, only to be disappointed.
And he lists like NVIDIA, CrowdStrike, Shopify. He’s bang on the money. And I kind of like my, I sent this response. I think I was half asleep in bed this morning. It’s human nature to act like a herd and allow emotions to dictate action. The traits of a
It’s a skill set that can be practiced. Like it is, it’s in our nature to, like, all these guys over here, like Cramer, or his own Mad Money, whatever that show’s called. And he’s like, buy this thing. And everyone’s like, oh, buy, buy, buy. you follow the herd and you’re like, the lemming jumping off the cliff.
Often in investing, you need to form your own opinion.
Krzysztof: we have to remember that not everybody is on the X You know, and not everybody is ingesting all the amounts of information we do about finances and the economy and companies. But it is true that programs like Cramer, if you think about it, it’s the poker adage that I’m thinking of, if you can’t find the sucker at the table, it’s you.
And you know, you know, we know that there are quant factories out there, you know, like guys sitting at desks with computers, way more computers and algorithms and trading, all this stuff. It’s like this enterprise, it’s this giant massive system that is going to beat you. in the same way that human chess players no longer have a chance against any AI program, right?
The world’s best chess players, a game of information will not be computers. So you think if you think you’re, you know, by following the ups and downs and the hurrahs and the boos that you’re going to succeed, you absolutely will not, you will basically buy high and sell low,
Luke: this is why I’ve always kind of scorned technical analysis, because people think, oh, I’ll put together these models, like there are billion dollar funds that have like armies of PhDs and like incredible leverage and just so many things in their favor in that world long term, I think you’re running, fighting an uphill battle. Whereas it’s inverted. If you are just buying great quality companies and holding them for a long time, because then the odds are in your favor because the hedge funds have to manage their liquidity.
They have to manage their own book that, you know, some, if they’re public companies, they have to report, maybe they’ve got shareholders, maybe they’ve got investors they need to show results to. It’s hard for them to take a truly long term view. Whereas you’re managing your own money.
Like you only have to convince yourself. You don’t have to convince anybody else. Uh,
Krzysztof: divert back to, you know, me trying to defend technical analysis. Uh, we’ve, we’ve talked about that quite a bit, but, your point, if you’re doing it in the way that computers do it, you’re, you’re probably not going to do well, maybe there’s, maybe there’s some genius people that, you know, just have that kind of mind, but that’s probably not you.
But there’s the longer term ish way to use technical analysis. That is, uh, a useful, uh, tool. tool in the toolkit. So anyhow, what other questions were you asked?
Luke: a bunch, maybe, um, pick on one that made me sit and sort of stare into the garden for half an hour before I answered it. Uh, it was from one of our seven investing members, Ed, and he said, uh, Your investing track record speaks for itself, Luke, you’ve certainly got an eye for a company. I’d like to know what strategy you employ to find those disruptive and innovative companies that often result in years of glorious compounding.
Um, and, uh, yeah, like much, much musing and cogitating. I think it’s because I’m like a Star Trek science fiction guy. I’m just going to read my answer. Um, it might be my innocent hankering for a Star Trek society. Vulcan hand. Uh, post scarcity, unlimited free energy, universal healthcare, eliminate economic systems, a society based on inclusivity, rationality, and respect for all.
So that’s centuries away. But if I see a company that seems to be taking us like one tiny baby step towards that, chipping away at all the ills and problems in the world, then like that’s a company that I think is building a better future. And that’s certainly going to get favored when I start digging into the financials, the valuation, the leadership, the culture, all the other things that make up a great investment.
Krzysztof: I’m thinking for myself four examples. I found Amazon early. NVIDIA, I was a shareholder over the years, though sold too early. Apple and Tesla and Netflix. As just examples of right. Had I held all of those, but I found them. So, so how did I find them? And I think with each of them, there was a little bit to what we were going back, uh, talking about before the anecdotal stuff. You know, Netflix excited me. I’m a cinema phile, and the thought that all of a sudden I could get movies delivered to my door, as opposed to the blockbuster experience. Tesla, I was just enamored with the idea of saving the planet, and having a car that’s even better than the gas car. Apple, we I talked about, a little bit earlier.
Luke: Yeah. Bang on. And I, I, I had the same feeling about all of those companies too, and was in all of them. At one point or another, I’ll add one to the list because it’s the next company. I’m going to deep dive. I just did a, uh, a free deep dive of Axon Enterprise a few weeks ago, uh, for August. I’m going to do Intuitive Surgical, and I truly think Intuitive Surgical is almost like the perfect example of one of these companies that’s sort of science fictiony.
Just building a very interesting future for all of us.
Krzysztof: So another question you
received from the ask me anything was from ship of fools gd looks like a dead head. Uh, what’s a stock you’ve wanted to get into but couldn’t pull the trigger for whatever reason? And I want to know the reason.
Luke: there aren’t many of these, right? And I think I’ve learned in life generally to change my mind about stuff, not get into like, You know, get my head stuck in some furrow and then not be able to look, look at what else is happening around me. And I think on the AMA, I said, like, the ability to change your mind can be a superpower in life.
I definitely feel that’s true. So, like, the reason I was talking about that was I have changed my mind on stuff. Like, I used to say I would never touch Palantir. With a barge pole because it’s like an evil company, but I think there’s probably a call for companies like that. It’s now in my portfolio. The world is different.
I had, I owned Facebook Facebook and then I sold it and it became meta. And I’ve said, even quite recently on the podcast with you, I’d never, this is like a company I’ll never own because of like the ills of social media. My God, like Zuckerberg is just such a boss. So, and I love what they’re doing with AI, like the llama three open source model.
They’re doing, they’re just, they’re taking their. Delivering AI in a different way to everybody else, I think. like, I do think actually they’re, although Apple has a superior product with like the Vision Pro, like the Quest headsets and some of the stuff they’re doing with their partnership with Ray Ban, I just kind of like the direction of the company’s going.
And so like, I’m on the verge of buying Meta. Like I said, I’ve never would. If there’s one stock that maybe has got away from me a little bit is probably Apple. I did actually own Apple. Then I sold it in 2019, I think, with a pretty decent return. and my view, I wrote in my investing diary at the time.
So it’s like five years ago now, like their innovation is behind them. The best days are behind them. And that’s clearly been proven to be factually untrue. They’ve just done incredibly. and like what they’ve done in terms of monetizing the app store and like. All of the other hardware, realms of hardware is just incredible.
And Tim Cook has done an amazing job of leading that company. So, like, I’d love to buy it back, it’s just been too damn expensive. So it’s, yeah, maybe I haven’t, maybe this is my, I can’t pull the trigger on it right now.
Krzysztof: I have a more recent example,
Luke: Oh,
Krzysztof: Badger visiting monkey in Austin, not long ago. Uh, and we went on a run and on that run, you started pounding the jungle leaves about Axon and
Luke: yeah.
Krzysztof: I’m a fan. I mean, I, I really am a fan, but I, you know, instead of, and then you did your exquisite deep dive and I’m like, I want this company in my portfolio, but because in this moment, I’m still Uh, married to my proposit you know, value proposition in, uh, Coherus and EOS.
I did not really have the, uh, it’s such a stupid mistake. Instead of, say, buying a couple of shares, you know, like a normal, you know, like, like a reasonable person. I was like, well, if I can’t buy, You know, a boatload, I’m not going to buy any. And so, uh, yeah, that, that didn’t work out well, especially given Exxon’s most recent earnings.
Yes. Would you like to talk about those?
[00:33:15] Axon Earnings
Luke: Yeah, they did pretty well, didn’t they? I put out my deep dive. well, maybe two weeks ago. So just, just before earnings, like a week before earnings. And that was deliberate, like I, I did think they were going to knock it out of the parking earnings. They’ve always, they’ve had a history of, not sandbagging, but generally beating and raising their forecasts relatively consistently.
And I thought we were going to see that again. And we did. and the stock was up, uh, I don’t know, like over 20 percent on earnings. It’s pretty nice. And you and I will talk about it at the end of. The discussion today, because we do have a bet on axon versus EOS, which I was losing quite substantially, but I think I’m now winning.
Um, anyway, what did the axon do in their earnings report? So nothing’s really changed. Like if you go look at my deep dive, it’s two weeks old. Uh, it’s like, it’s still. It’s bang on, right? Nothing’s really changed with the company. They’re still delivering great revenue growth. Annual recurring revenue is up again.
Uh, now this, in the most recent quarter, it’s up 44 percent year over year to 850 their net income is up looking really good. They’ve raised their revenue forecasts up to just over 2 billion for full year. It was about 1. 95 billion for full year. So. Like everything is roses. The only thing that’s.
Like ugly and it’s just consistently ugly if you own axon, you have to just kind of suck it up and, uh, accept this is stock based compensation. So that was up as well. Stock based comp is forecasted to be 360, the full year up from like 220, 000, 000 the year before. So up a lot. and there were some good reasons for that, like they’ve taken some initiatives to try and pay underpaid employees, give them like stock benefits, but like the lion’s share of that stuff goes to Rick Smith, the CEO.
and I think the metrics they use to determine whether they’ll pay a stock award, like they’re not great. They include things like adjusted EBITDA. Which is, like, you can just game that. So, yeah, so it’s like the ugly part, and I was kind of hoping, I think I said in my deep dive, I was hoping that we’d see stock based comp trending down, and we haven’t seen that.
It was up, like, 50%, so it’s ugly. Like, would I buy Axon today? If I didn’t own it right now, I would buy it, but I’m not in any hurry to add to it. Like, it was Valuation risk was my highest risk in my deep dive and like, it’s even more valuable, 20 percent more valuable now, according to the market as of then.
So yeah, that valuation risk is even more acute.
[00:35:53] EOS vs Axon
Krzysztof: Okay. So it’s at 28 billion right now. So let’s work backwards here. Let’s work backwards here. I’m going to put you on the spot. Just see, we didn’t prep this. We didn’t prep this at all. So I’m curious how you’re going to answer this. I know and want to own Axon. I believe in your research, you’ve talked my ear off about it, and yet I own zero shares, but instead I own a boatload of shares in EOS. Why do you think I think that EOS will beat Axon? Not just in the contest, but yeah, I mean, we can frame it in the, in terms of the contest because that’s two years, right? Why do you think that I think EOS is the better?
Luke: Yeah. Because of, because of valuation. Right. So like EOS only, I see EOS as being, I don’t think it’s a terrible investment. I think it’s actually a decent investment, but it’s just incredibly high risk. It’s the kind of thing you might, if you have in your portfolio, like I wouldn’t want more of them. 1 percent in, in a company like that.
And I want a bunch of companies like that because most of them are going to fail, but the ones that succeed are really going to succeed hard. and so I kind of see EOS as being one of these, I don’t know the company well, but I see it as being like a bit of a binary outcome stock. I think on the balance of probabilities, again, this is a very uninformed view.
They’re probably going to fail, not go to zero, but they’re probably just going to get forcibly acquired by the guys that. gave them that loan recently. but if they managed to hit their milestones and they managed to actually start delivering product, they’re probably gonna do really well. Like they could be a 10 bagger for you.
or more. And Axon, like that ain’t going to be a 10 bagger for me ever, right? Well, actually not ever, because if I own this for 20 years, it probably won’t be. But I just, the Axon is like this slow, steady, I’m just very confident. Um, That it’s going to continue just to deliver good results, incrementally getting better, whereas EOS, you need all these weird things to happen, and if you get, not if you get lucky, but if the company, I suppose the company gets lucky, but if it executes perfectly, it could be a significant return, but there’s a ton of percentage chance that that doesn’t happen.
Krzysztof: Great setup. Not a bad answer. Not a bad answer. I thought you were going to squeeze, squeeze my shoes harder than you did.
[00:38:09] EOS Earnings
I want to give a little bit of an update on EOS’s earnings, which speak directly to your point. The preface I’ll make is that I think the risk factor, you’re right in the sense that Anytime you’re dealing with a small cap company that essentially is pre revenue, EOS this last quarter reported less than a million dollars in revenue.
Krzysztof: So basically think of it as pre revenue in the way you would with a biotech. It’s risky, I can’t, wish that away. However, I think this is the main point I saw in this latest earnings report that shifted the risk factor into not just that, not that it’s not risky, but that the risk reward is severely in my favor now.
And that’s primarily due to a couple of nuance things, but a few big things, regarding the milestones since you, since you mentioned them, I think there’s debate in the, in the EOS community who follow people who follow this stock right now, whether sir, Cerberus capital, the 65 billion. Uh, shining knight on the white horse comes in, are they partners who want to CEO succeed or are they more like the, the piranhas who gave them this kind of loan and, just so that they could make, force them into bankruptcy and then take over, not force them into bankruptcy.
Right. But that would be an outcome that they wouldn’t mind because then they. And from everything I could tell, it’s kind of more one of these, like the whole picture does not add up for Cerberus to be that kind of partner. Because basically everybody benefits more if they don’t go through chapter 11, including an obvious point, like what company’s going to buy your product if you’ve just gone bankrupt.
So all the pieces together point in the direction that this is not a vulture type situation. Furthermore, to answer your milestone question, as per the last quarter, the CEO said, We are going to not only hit the milestones, but we’re going to exceed them. Now, if he’s incompetent, then he says that doesn’t know what he’s talking about, sets the bar high, and then they fail and then they deserve whatever’s coming to them, but, but that would be such an egregious unforced error to say something like that, that what he’s saying is these milestones there, you know, they’re in place and we won’t have any trouble overcoming them.
So that’s a big update in the sense of, uh, you know, paying attention to the language and, you know, re reading between the lines kind of thing. The other, uh, big update is that this company is really no longer going concern risk because it has all the cash. It has this major credit facilitator backing them.
And they announced close to one gigawatt, uh, letter of intent from a company, which basically was brought in by. Cerberus as a customer, and they’re probably going to be the ones that help finance that customer. So it’s like a working partnership that’s, you know, on the ground floor that leads to the next big update, the big sort of surprise.
was that EOS was no longer emphasizing the Department of Energy loan, which remember when I got into this investment, that was the whole thing, right? That the tax credits and right. We need this loan in order to make the margins superior, yada, yada. Well, that didn’t play out because, uh, everything got delayed government structures, right?
And then he also was running out of money. Then the stock hits 60 cents. Then everyone’s worried about legit bankruptcy. And all of a sudden, uh, Cerberus comes along and fixes the financing in the sense that they benefit and. Uh, EOS is no longer dependent on the department of energy. I think the market at this moment, is adjusting to the reality. that EOS no longer needs the Department of Energy loan. But what would happen if they didn’t get it? How bad would that be? And I think it would be bad. It would be pretty bad because the thesis wasn’t just to have a company that does okay. Right. And sells these batteries. What I’m banking on is that the department of energy makes the financing so superior in terms of margins and the cost out.
And because of the tax credits that the DOE loan now is an accelerator for building lines two, three, and four, which the market right now is not valuing at all because they don’t exist, right? Zero revenue exists. Line one was just built. So the situation to go back to the main point, I think in terms of risk is now very different. The risk right now, as you said, is about execution. Of course, if they don’t execute, they they fail. But with all the customers, all the letters of intent, all the backlog, the battery’s actually coming off the line. The financing being secure, milestones need to be hit. The DOE loan is now nice to have, but not fundamentally about the company’s survival. On top of which, by the way, one little nice shiny note, with regard to earnings, EOS was selected as the BNEF tier one energy storage provider company.
You basically, if you’re going to buy a lot of product, you want the top tier provider and there’s industry insiders that know who the top tier providers are. Right. And that it’s always in flux. He also made the list now along with Tesla and Samsung and a couple and three other companies as. These are the best battery companies to buy from now.
That’s a huge deal that opens up the sales gates, in force. So I left. Those earnings feeling like the risk is now behind us in existential terms, not in the way I think you were thinking about the company and maybe still are, despite what I’m saying, the reason this investment will be axon is because the probabilities are now much higher.
That EOS will get to say a 1 billion valuation, which would be a three X. Then Axon will get to a hundred billion dollar valuation in two years. I see my possibility is as generally, I would say probable as opposed to Axon. Uh, I would say that’s nearly impossible in two years.
Luke: When you said you were disappointed that I didn’t squeeze your shoes on EOS. So I’ll do that now, a bit later on, uh, so I, I don’t know why you were, why you were chatting. I don’t know anything about, uh, Cerberus. I mean, well, for sake, right. If you’re, if you’re running a, if you’re running like a private equity firm and the fact you just called your company Cerberus, like says a little bit about your intentions.
Uh, so, uh, anyway, this is.
Krzysztof: Well, okay, well,
hey,
it’s the three headed dog, right? Uh, at the, uh, that’s at the river.
Luke: how That’s right. Yeah.
Krzysztof: Yeah, well,
Luke: here’s a, here’s a, here’s a nice news article about Cerus, unregulated and ruthless stop vulture fund seus destroying lives. So evidently they did some sort of takeover. I’m, I’m literally just reading this as we, as we chat of a UK bank, Clydesdale Bank.
Many years ago, and then went after, um, individual account holders. They’re not, I don’t think they’re nice guys. I don’t know anything about them. There’s just one, uh, one little anecdotal, new story from history. But if I were you, I wouldn’t be super optimistic and think that they are these good guys riding in on their white horse to save the day.
Like that, those white horses might be towing like a, The war machine behind them.
Krzysztof: this is, this is a great point. I would never be naive like that to think that these guys work with distressed assets, right? So, so in, in that game, of course, of course, there’s, no one’s being nice out of virtue. However, my point I think stands. The way they make the most amount of money will be with EOS succeeding rather than failing.
So basically out of good old capitalistic, you know, how do we squeeze the most juice out of this lemon? They want EOS to succeed. And that requires working on their behalf. And they have the EOS. I mean, it’s a huge operation. So the other thing is you don’t mess with a little podunk company. That’s pre revenue, like EOS, investing massive amounts of due diligence and manpower and your own capital for, you know, tiny little chunk of change, right?
That’s not what these guys, I think that how they really operate. So what I’m saying is really that, that, that bridge has been crossed in terms of survival. And now it’s in everyone’s best interest that EOS succeeds beyond wildest assumptions, and we’re getting evidence. Now I call this the inflection point has been passed we’re sort of off to the races and I will be eating my shoe three months from now.
if three months from now, after the line has been running for three months, we get no news of. Orders that would be very, very bad. Right. Or they missed some milestones in which case the dilution comes in. And then I’d be like, damn it. Badger. You were right. Like,
Luke: Okay.
Krzysztof: I don’t see that happening.
Luke: Let’s see. Let’s see. Well, it’s a, as we were recording today, it’s the 12th of August. So the bet’s been live for, I don’t know, maybe two or three months. It’s a two year bet. You were materially in the lead. But my good Axon results and some EOS news has dinged them. So right now on the 12th of August, Axon is plus 27 percent from the date of our bet.
And EOS is plus 21%. So actually you’re happy if you owned either of those stocks when we recommended them. Um, you’ve done very well. You’ve beaten the market by a good margin, but you’ve beat the market a little bit more if you’re a team Luke,
Krzysztof: Okay. We’ll check in next week.
Luke: unregulated and ruthless, honestly. Cause look, I don’t know, like we’re doing long podcasts these days. Right. I don’t wanna, I don’t wanna like wear this, this story to death, but, um, like if you’re, if you specialize in distressed assets, right, and you structure these deals, You’re going to structure them in such a way where you don’t lose either way, right?
Again, I, this is from no position of knowledge whatsoever. I know nothing about the terms of the, the contract and the milestones. They probably see an upside either way. Sure. They’d be happy to own like a good chunk of EOS and they’ve got a convertible, whatever the form of the loan is. And if EOS does well, that’s great.
Like you barely had to put any of your own people in, take any real action. You just gave them some cash and they turned it into something and you own like a great asset. And if they fail. Like you’re buying them up at essentially like 0 price, probably the way these contracts I imagine are structured and then you’ve got something you can have a crack at turning around yourself.
So, you know, I imagine they’re smart guys, uh, if they’re that sort of market cap and they’ve got that kind of money in play and they probably structure this in such a way that, uh, I wouldn’t say they’re neutral. They probably want EOS to succeed, but they’re probably perfectly happy if EOS fails.
Krzysztof: Exactly. So I think you’re right. just that there’s more money to be made if they succeed. So that’s just important to note. And, uh, this, I forgot to mention this, the real big, interesting story about EOS right now, I did allude to it is that the DOE loan seems to be delayed even further out. And some folks are saying that might be delayed out until even as far as 2025. One way of seeing that is it doesn’t matter because really, This, the, from the perspective of EOS now has the capital. Now it’s about building the batteries and selling them. That has nothing to do essentially with the D O E loan. They’re not going to run out of cash. Right. And so whether the loan closes tomorrow or three months from now, it really won’t matter because all of that is about lines two, three, and four.
Right. So that’s 0. 1. but what’s interesting is that why would it take so long? Well, because. You come along and basically Cerberus restructured the whole capital stack. Like who won’t, I mean, I don’t know what’s inside those documents. Nobody really does. Right. But we know the terms have significantly changed and the CEO and CFO said they’re going to DC this week to continue renegotiating what it will take to close the DOE loan.
I think this is one reason the stock actually. Might not be higher than it is today because there are a lot of people saying oh shit Well, there’s now a non zero chance of the loan not closing at all That’s not the messaging we got from the CEO obviously, you don’t go to DC and announce that publicly if you know if it’s completely fell through the cracks, but It’s an interesting Moment of tension not knowing with clarity what’s going on with that and how soon it might close.
Luke: Yeah, fair enough, fair enough. So, uh, big, long topic again today.
I hope you’re enjoying, if you’re listening still, like we’re probably, I know I’ve lost track, we might be like an hour in. I hope you’re enjoying these longer form conversations, a bit more rambly, but we’re exploring our ideas in a bit more of a thorough way compared to our first. I know 25 episodes, which we tried to keep nice and tight.
Let us know in the comments, drop us a comment on YouTube or on the X I’m at seven Luke Hallard.
Krzysztof: Um, uh, seven flying platypus.
Luke: and I will say a quick shout out to some folk who’ve commented. I’m going to shout out Paul. Thanks for giving our, giving us a thumbs up on Spotify. Paul says Kristoff for president, apparently.
Krzysztof: God bless all,
Luke: You’ve got a fan, you’ve got a fan. But he loves the podcast.
Krzysztof: but be careful what you wish for that.
Luke: Dritt said, he wants Krzysztof to give an update on his technical analysis voodoo experiment. Has it helped you avoid more losses or made them even bigger? Maybe that’s one to think about for our topic, for our agenda next week. on the YouTubes, we’ve had a lot of thumbs up on my Axon deep dive, but also on many podcast episodes.
So I’ll call a few names out here. Uh, make six, seven 66 past the chronic. Uh, buyoutwallstreet, ArtTagger, thanks guys, uh, we appreciate your, uh, engagement, like do keep the comments coming, and we do read all of them, and we do try and reply to them when we’ve got something intelligent to say, so, uh, yeah, let us know,
Krzysztof: Yeah. And if you are not following Luke on X, make sure you do that. We need his Twitter account to go, uh, to what 15, 000 as in that nice little milestone. Next he’s put, you know, uh, he, he does, uh, such a, an amazing job of being thorough and presenting. his honest views about the companies with just polish and diligence that, uh, if you’re not looking at his stuff, you ought to be.
And one way of being, you know, up to date on it is his ex account. So give him a follow there, please.
Luke: And I will say, like, my Axon Deep Dive, that is representative of the work that we all did, Krzysztof as well, for 7investing for many years. So, there are. If you like that deep dive and that level of detail and analysis, you’ll find hundreds of similar deep dives if you go check out 7investing. com, who Krzysztof and I were lead advisors for, but we’re still closely affiliated with.
Krzysztof: And, uh, correct me if I’m wrong, your axon deep dive. Luke is best viewed on YouTube, right? Because of all the slides.
Luke: Yeah, I’ve actually posted the slide deck itself as a PDF, so you can find that on Twitter, on my ex, but, uh, but yeah, the whole, the whole presentation is about half an hour long, and it’s on YouTube and on ex.
Krzysztof: Awesome. And we also have the PDF about the 10 laws of the investing jungle, uh, wallstreetwildlife. com, where you can check our up to date king of the jungle portfolio challenge results.
Luke: Superb. Are you ready to become a beast of an investor? Your journey starts here.
