From the birth of disco (it was 1953!), capital raising, the tortoise and the hare, businesses blessed by bountiful accounting principles and the banking of the future. Steve covers a lot of ground in this episode.
We spoke about Markel Corporation (NYSE:MKL), a diverse financial holding company, that markets and underwrites specialty insurance products in the United States, Bermuda, the United Kingdom, rest of Europe, Canada, the Asia Pacific, and the Middle East. Steve and I did a deep dive into this company in an episode in February.
The Markel Ventures segment provides equipment used in baking systems and food processing; portable dredges; over-the-road car haulers and transportation equipment; and laminated oak and composite wood flooring, tube and tank trailers, as well as ornamental plants and residential homes, handbags, and architectural products.
The company’s other segment provides healthcare, leasing and investment services, as well as operates as an insurance and investment fund manager offering a range of investment products.
“It's been a poor year for a lot of tech and growth stocks. It's a lot of people rethinking how they do things and it's a tough environment. Some people say this is the hardest environment for tech and growth since the dotcom crash. And that was slightly before my time. I was a high school student when that happened, but it's been tough to watch the ferocity of the declines and the short timeframe over which a lot of these high growth tech stocks have pulled back and multiples have compressed. And it's been pretty painful for a lot of people to watch money seemingly evaporate.”
Discussion moved on to SoFi Technologies NasdaqGS:SOFI. You may remember this company as the naming rights sponsor of the SoFi Stadium where the Superbowl was held earlier this year. SoFi provides digital financial services. It operates through three segments: Lending, Technology Platform, and Financial Services. The company’s lending and financial services and products allows its members to borrow, save, spend, invest, and protect their money.
Steve lives with his wife and three children in Missoula, Montana, where he received a BS studying Computer Science and Mathematics at the University of Montana. Following college, he worked for seven years as a software developer and sales engineer for a machine-learning software company primarily serving military, local and federal government agencies, and defense and aerospace clients.
But he found his passion as an investor. Steve most recently worked for seven years at The Motley Fool, where he wrote nearly 8,000 articles on investing, stock picking, and personal finance topics. His work has been featured on USA Today, TIME, Fox Business, Yahoo! Finance, MSN, Newsweek, Forbes, Nasdaq, Business Insider, Money.com, and International Business Times.
He also served as lead analyst for The Fool’s Artificial Intelligence portfolio, helped pick real-money investments for five years as part of its Explorer subscription services, and worked in a five-person team to build and manage what’s now a multi-million dollar real-money portfolio — after more than doubling in value with an annualized return of 15.5%, beating the S&P 500 by nearly 40 percentage points — under the Supernova Phoenix 2 service.
Steve believes it’s not just possible, but probable that individual investors can consistently beat the market and generate life-changing returns in the process.
TRANSCRIPT FOLLOWS AFTER THIS BRIEF MESSAGE
Disclosure: The links provided are affiliate links. I will be paid a commission if you use this link to make a purchase. You will also usually receive a discount by using these links/coupon codes. I only recommend products and services that I use and trust myself or where I have interviewed and/or met the founders and have assured myself that they’re offering something of value.
So we're talking, kind of, boring companies like bakery equipment and, you know, elevator interiors and car carriers, like the trailers you see on the back of semis that they carry cars, ornamental plants and a leather handbag company and a bunch of different businesses like that, that are, you know, very, very steady, a little bit boring, but that also means it's held up really, really well and all this craziness.
Hi and welcome back to Stocks for Beginners. I'm Phil Muscatello. How can your portfolio balance the companies of the future with venerable businesses that have a long, long history? Steve, welcome back to the podcast.
Thanks for having me. It's been a few months, I think, since last time. February, was it?
I think so something like that just before we even get started, I just wanted to point out just reading in the paper today. This is an interesting business. This is about the, the woman that invented disco in 1953, just passed away and it's her obituary. She started up a discotheque in Paris in 1953, got rid of the jukebox put down a linoleum floor, some disco lights, two turntables, because she wanted the music to keep going, and built an empire, multinational empire by the end of the seventies in discotheques.
Steve (1m 20s):
She was onto something, an innovator right? In her own right.
Phil (1m 23s):
Yeah. Interesting though, that she was so disruptive in terms of she never put a dollar of her own money in. When she started up a new club, she tapped the elites in each of those cities and get them to pay for it. So she didn't put up any of her own.
Steve (1m 36s):
Yeah. Capital raise, right? Capital's important these days and it's becoming harder to raise too. That's actually something we've been talking about over with my 7investing colleagues, is how tough it's getting or going to be to raise capital. And it's going to be more expensive now for people and companies that didn't do it last year when rates were low.
Phil (1m 53s):
Really? So capital raising is, well, it's obviously not like you just go and meet all the hobnobs in any particular city and say "Invest in my disco"
Steve (2m 4s):
A little different these days.
Phil (2m 5s):
Yeah. Why is that? Why is it suddenly becoming hard to raise capital?
Steve (2m 9s):
Well, I mean, A) you've got interest rates climbing, so I mean, those are indirectly down the vine, I guess it's going to make a debt more expensive to raise if they go for purely debt. And also the fact that the capital markets in general are so depressed for a lot of the companies that need that cash. And there were a lot of businesses that raised a lot of money by issuing new shares last year. And when their shares were extraordinarily elevated, overpriced, we can say in retrospect. And so you have a lot of businesses, you know, Lemonade is a one that comes to mind. I think they ended up raising a bunch of capital when they didn't necessarily need to. And a lot of people scratch their head and it was interesting to watch because their shares were trading, I think around over $160 a share at the time.
Steve (2m 53s):
And now we're back down in the 20s or 30s or 30s, there's somewhere in there, right? But it looked like a precedent move in, in retrospect with a lot of those capital raises and yeah, so a lot to be said for companies that raise capital when they can, rather than when they need to.
Phil (3m 11s):
So with capital raising, sorry, we've gone onto a rabbit hole already in this, but that's great. That's great. That's good. With capital raises, companies can raise capital by issuing new shares or tapping, like you say, the credit market. So Lemonade, the example they issued new shares, is that how they did their capital raise?
Steve (3m 30s):
Yeah. Well, it's funny because Lemonade, I think they only just went public in 2020, right? Or in late 2019, I can't remember exactly. So they obviously raised capital by selling shares to investors in that offering in the IPO. And then, yeah, it was, I believe, if they're the ones I'm thinking of right, and there's several companies that did so it could be a number of them, I know there's a few companies I follow that did, but yeah, you wish you knew shares. And it's a dilutive offering, but it also shores up the balance sheet for businesses that are still burning cash and hopefully have a pathway to positive cash flows that can kind of help spurn the need to raise cash in the future because they're generating their own.
Steve (4m 10s):
But it's very important for capital intensive industries right off the bat, like insurance or space economy, you know, you see a lot of like rocket launch service businesses and such that are very, very capital intensive and they raised cash as well last year. It also, you know, if you didn't or you're trying to go public now, the market for IPOs is just thrashed now. So if you're trying to go public or if you're trying to raise cash, it's a lot harder now than it was a year or two ago. So anyway, just sort of one of those underappreciated advantages that some of the businesses that actually got through the pandemic and kind of traveled through those extraordinarily elevated multiples that a lot of growth stocks saw the companies, some of the companies that took advantage of it, actually it looks like brilliant moves when you're looking back now.
Steve (4m 54s):
Maybe they weren't thinking so much in those terms, but they said, "You know what? Our stocks are expensive and we're going to take the opportunity." So yeah, kind of interesting to watch. And some people frown upon it too. They're like, "Oh, they diluted us already." And it's like, well, if you're diluting us, when the price is eight times higher then, hey fine, you raised a lot of cash and in really dilution, it wasn't all that bad." So yeah. Big rabbit hole to start, but an interesting one nonetheless.
Phil (5m 19s):
No, that's okay. Because just the other rabbit hole, that's a part of that is that you mentioned credit markets. So capital can be raised by offering corporate bonds as well. And you were saying that that market is collapsed as well.
Steve (5m 32s):
It's going to be more difficult because a lot of those bonds are tied to the live or plus, you know, three, 4% or something like that. So a lot of the capital raises for corporate bonds are tied to interest rates in the broader markets. So down the road, they get more expensive, but that's something that you really have to watch. This is kind of the cost of raising capital because you hate to do it when your back's against the wall and you have no other choice, but to raise capital on unfavorable terms. So that's, that's one of those. I saw a really good thread. I wish I could remember. It was just yesterday that somebody posted on Twitter that was talking about kind of the merits of raising capital when you don't necessarily need to, but you could use it down the road. And they said, don't raise it when you have to, because that's never a good situation and just has terrible implications for your share price in the process too.
Steve (6m 17s):
Phil (6m 19s):
Okay. Let's introduce you and get back on track with this interview. Steve Symington is a lead advisor for 7investing. He covers a wide variety of industries and publicly traded companies, but loves finding disruptive responsible businesses, chasing massive addressable markets. So tell us a bit about your career history, how you got to this point in your life in Missoula,
Steve (6m 39s):
Right? Yeah. I live up in Missoula, Montana and I was a computer scientist. I was a software engineer in college, straight out of college. I worked for a software developer doing machine learning. We're building neural networks for feature extraction from LiDAR way back in like 2016.
Phil (6m 55s):
LiDAR there was LiDAR isn't that the technology they use in Teslas and yeah. Self-driving vehicles
Steve (7m 1s):
Like detection and ranging is what it stands for. L I D A R. Usually the acronym has a lowercase i. Yeah. So we were doing LiDAR and aerial and satellite imagery and we were writing neural networks and stuff way back in the day for extracting features, the product that the company that I worked for kind of started out on a NASA contract and anyway, big rabbit hole there, but a machine learning AI that sort of has formed the kinds of businesses that I tend to follow because of my expertise there. And, you know, we had a lot of fed civil clients and government military contracts that we were working on. But I worked after that, I realized I liked investing more than I liked software engineering.
Steve (7m 43s):
So I worked for The Motley Fool for seven years, wrote about 8,000 articles for them and, and syndicated all over in the, it was, it was a fun job and I'm excited for what we're doing now at 7investing. We have seven of us? And, and we provide our top stocks each every single month and we focus on the longterm and that's something that's especially important in markets like the current market environment where there's a lot of panic.
Phil (8m 11s):
Yeah. Well, let's talk about that. But before that let's date stamp, we're recording on May 6th, 2022. And this week has been a pretty poor week for returns on the markets.
Steve (8m 24s):
Yeah. And if you zoom back farther, it's been a poor year for a lot of tech and growth stocks. So yeah, it's a lot of people kind of rethinking how they do things and it's a tough environment. Some people say this is the hardest environment for tech and growth since the dotcom crash. And that was slightly before my time. I was a high school student when that happened, but yeah, it's, it's been tough to watch in the, the ferocity of the declines and the short timeframe over which a lot of these high growth tech stocks have pulled back and multiples have compressed. And it's been pretty painful for a lot of people to watch kind of money, just seemingly evaporate.
Phil (9m 1s):
That's a good experience to go through those psychologically because it's a way of testing yourself. And I remember during the March, 2020 crash, the COVID crash that I talked to another investor and I was feeling a bit panicked myself. And I said, well, what are you feeling? What are you thinking? And he just said, situation normal.
Steve (9m 18s):
Yes. And that, that really is it, you know, that the hardest part of investing is psychological. And it's kind of keeping your wits about you when things seemingly go crazy. And there's a, a tweet that I, I tweeted back in the March 20, 20 crash first, I think. And, and I read tweeted every once in a while when the markets are going crazy to hopefully encourage people. And, and it's something that, that I try and remind you that it goes something like the stock market declines by 10% around once a year and by the stock market, I'm talking about the broadly followed indexes. So NASDAQ, S and P 500, Dow on average, they fall about 10% from their peak once per year, 20% every five years or so, 30% once per decade and 50% a few times a century.
Steve (10m 6s):
So arguably faster, maybe now, given the pace that the markets tend to move, it's been harrowing to watch some of these really, really steep declines as we change, but we also had some unprecedented quantitative easing, and then a lot of money pumped into the system. And they're kind of scaling back asset purchases and raising interest rates to try and slow the economy down now a little bit and things are too hot and there's a lot of dynamics and a lot of, a lot of good lessons. I think that we're learning in the process, but maybe most key is just keeping your wits about you while all this craziness goes on and not panic selling at the bottom. That's I think really, really key is focusing on the long-term adding money continuously to your portfolio, as you can, you know, whenever your capital allows, just add that money and buy businesses that you think are reasonably valued with good long-term prospects.
Steve (10m 60s):
And, you know, that's the key. And over time, the rest kind of tends to work itself out, but you really do have to shrug off however much. It hurts times like this when the markets are seemingly going crazy,
Phil (11m 16s):
We're going to talk about a couple of companies. And the first one we're going to talk about, and this is the complete opposite of your high growth tech stock. And it's been around for nearly a hundred years, I believe. And it's Markel we'll point listeners because we have spoken about this in a previous episode. So we can get more detail by pointing listeners to that, but just give us just a little bit of a quick overview again about this company.
Steve (11m 39s):
Yeah. So, I mean, if you want a more comprehensive overview, you can look back at it. It was, I think February 11th, I looked just, before we popped on that, we talked about Markel last, this is a stock, one of the oldest stocks in my personal portfolio, both the company itself and how long I've owned it. I think I bought my first shares in the 2009 crash actually. And I've been kind of steadily adding to it. It's a good cornerstone stock. People call it a mini Berkshire. Berkshire Hathaway of course, is the company that Warren Buffet has kind of built over the past several decades. And Markel is kind of similar, very similar in that it has a three tiered sort of engine that it uses to compound its book value, growth per share book value over years and years and years.
Steve (12m 23s):
So those three tiers are, of course it's insurance business. It has a number of very large insurance and re-insurance businesses. It has an investment arm just like Berkshire Hathaway. Again, they invest in publicly traded securities and fixed income investments as well. So you can keep track of their portfolio. And it has a diversified group of other businesses. It calls Markel ventures, and these are usually non investing non-insurance businesses that it's acquired over the past couple of decades. And they're very, very predictable, profitable steadily growing businesses. And often they leave management in place. They say we acquire businesses to basically keep them forever. So we're talking kind of boring companies like bakery equipment and, you know, elevator interiors and car carriers, like the trailers you see on back of semis that have they carry cars, ornamental plants in a leather handbag company and in a bunch of different businesses like that, that are, you know, very, very steady, a little bit boring, but that also means it's held up really, really well and all this craziness.
Steve (13m 25s):
So, you know, Markel is kind of one of those cornerstone stocks in my portfolio for a reason, you know, you need to kind of balance out. You don't want to go all in on GameStop, for example, like go super high growth, you know, super high risk, high potential reward, obviously in some cases, not necessarily GameStop, but you know, kind of balance it out. And Markel is kind of that for me personally,
Phil (13m 46s):
And it's growth through good accounting, isn't it, it's all about the accountants and the way that they read the numbers at Markel, isn't it?
Steve (13m 54s):
Yeah. And actually Tom Gayner, the co CEO Richie Witt is the other co CEO with him. But Tom Gayner is this sort of quasi famous value investor. And he was actually a CPA before. So yes, as far as accounting it's led by an accountant. So he understands all too well how this works and, and yeah, it's held up really, really well. You know, as the markets have crashed, I think it's, it's down maybe 10% from its highs just last month. But you know, it's still up a modest 10% so far this year is the markets are kind of crashing and, and that's kinda how it goes. You know, it actually almost does better when the wind is in its face. And, you know, you look back at it's per share growth and book value.
Steve (14m 37s):
I think it's been like 10% over the past five years or nine or 10%, just nice and steady. You sleep well, owning a business like this. And you know, you look at all, all the three arms of its business, they're super healthy, you know, combined ratios at the insurance. We're 89%, which means basically for every, every dollar in premium, they wrote, they made $11. Anything under a hundred percent is a profit for insurance businesses. I think Markel ventures saw revenue climb 35% year over year, again, nice steady businesses,
Phil (15m 7s):
The float, that's what they call it. Isn't it? The float.
Steve (15m 9s):
Yep, exactly. And yeah, for the investment portfolio, you know, they can take a lot of the float for their insurance flow and it's that money that you're holding onto that you don't necessarily need to pay out, but you are holding onto it for the long-term so they can invest it. It's a, I think Warren buffet, I forget the term he used, but he, at the time it was a couple of years ago. He had like $80 billion that he could basically invest for free at no cost. It's like borrowing $80 billion. You can invest in, in relatively conservative stocks and Markel does something similar like that. I think I was looking just before we came in, because I was like, what the one sort of like I saw in their most recent report was actually a, a, a net investment losses for the quarter.
Steve (15m 53s):
I think they took, they took a net investment loss of, I can't remember what it was. It was like $500 million. It fell or something year over year. But that was just because of the unrealized losses in the value of their equity portfolio. So as stocks fall, there's these funky rules for GAP accounting GAP is generally accepted accounting principles for anyone who doesn't know that, but funky rules for companies that invest in equity securities stocks, where they actually have to report the value of their equity securities on a quarterly basis. So if the value of those stocks goes down, even if they haven't sold, they have to recognize it as a loss on their income statement, which is just wacky kind of weird accounting stuff.
Steve (16m 34s):
So it looks like a loss, but it's not. And actually when you look at Markel's equity securities line, it's kind of funny under their balance sheet, you can look at their equity securities and the value at the end of the quarter was 8.65, $5 billion. So a little under $8.7 billion, and you could see their cost basis for those $8.7 billion in equity securities is about just under 2.9 billion. So unrealized gains, right? So until they sell, they don't have to pay taxes on that. And that's kinda, the beauty is it's almost almost like a Roth IRA, right? And that's just, I guess the beauty of investing in general, you don't pay taxes until you sell. But if the value of your $8.7 billion equity portfolio goes down by half a billion dollars in a quarter who cares if they haven't sold it and they're great businesses, they want to hold forever.
Steve (17m 23s):
So incidentally, you can also look at their 13F filings, which is basically a filing where you can see all the stocks that they hold as long as their value of an equity portfolio is above a hundred million. So there's a couple of companies I follow where I want them to file a 13F, but they still, their portfolios are less than a hundred million. So I'm like bothered because I want to see what they own. But the biggest stock in Markel's equity portfolio is actually Berkshire Hathaway. And we all know Berkshire is, is just churning along. And it's kind of funny because you see all these charts, you know, comparing Berkshire to ARK, you know, for example, the most famous ARK ETF and Berkshire's outperformed, you know, since inception at this point. But you know, a lot of people a couple of years ago were talking about how badly virtual was getting crushed by all the growth investors.
Steve (18m 7s):
And I don't know, slow and steady, right? The tortoise analogy is what, what comes into play here. So, yeah. Look at Markel's, equity portfolio, Berkshire, Google, Amazon Deer, Home Depot, DHEO Disney, bunch of big stalwarts. They kind of use to ride the market higher and sometimes lower, like in this quarter where you have a lot of the big tech stocks and indexes falling up and down, that's how investing goes, right?
Phil (18m 32s):
So let's have a look at technology stocks at the moment and talk about one that you wanted to have a chat about. And that's SoFi, which I didn't have a chance to even look this up. It's a compelling FinTech, according to you. So tell us about so far,
Steve (18m 46s):
SoFi, it's been a painful ride. So this was actually a Chamath Palihapitiya SPAC that went public June, 2021. So a little less than a year ago, actually it went public, you know, for as much as some people have disparaged, SPACs these, your special purpose acquisition companies that kind of went public in an unconventional way, not through your traditional IPO's. We could do an entire podcast on SPACs later, if you want to and talk about that.
Phil (19m 13s):
Yeah, yeah, no, that's right. I think we should, because yeah, it's something to really understand about how companies list on the exchange,
Steve (19m 20s):
Right. And, you know, cause you have direct listings and then regular IPO's initial public offerings and then special purpose acquisition companies where they go public by merging with a shell company, basically. And anyway, SoFi it's short for social finance and social finance technology. And so five is sort of best known as a student loan refinancing company. That's kind of the way most people think of it. And that's what it was when it was founded. I think, what was it? 20 12, 20 13. And that's kind of how they broke ground. And that's part of the reason that they've been pummeled so badly is their student loan, refinancing businesses been operating at about 50% of their pre COVID levels since the student loan repayment and interest accrual pause that took place starting in March, 2020 and has been extended six times twice by president Trump and his administration.
Steve (20m 12s):
And then four more times by president Biden. Most recently last month, he extended it through I think the end of August. And so, so five student loan refinancing businesses suffered because of it. But what's interesting about SoFi is they are no longer just about student loans. So they want to be this one-stop finance shop, where you can basically handle all of your money matters through SoFi and their app. So they're very, very focused on mobile first and younger consumers. And they know, you know, it's no longer just student loan refinancing, but they have a SoFi invest platform, a brokerage, they have a checking and savings. They do home loans.
Steve (20m 52s):
They have a credit card rewards programs that they've launched all this over the past three years or so. So while student loan refinancing is still a pretty hefty chunk of their business, it is no longer a crucial piece of their pie. And when it comes back, not if, but when the student loan pause ends, that'll kind of be just the icing on the cake for them at that point, because they've gone so far to diversify outside of that. And they're growing very, very quickly. I think last quarter was a record. It was something like 400 and some thousand members that they added. I'd have to dig up the exact numbers. Yeah, 155% year over year, a hundred million accounts for Galileo, which is another thing member's record growth.
Steve (21m 38s):
87% year over year growth. They added about half a million members last quarter alone of about 3.5 million is what they ended at. So they actually report earnings in a few days here. I don't know when this is going to be published. It's May 6th, but I think they report on the 10th. It should be pretty interesting. So we'll be doing some interesting things when we post this. But basically what happened is after the latest student loan refinancing extension, they restated their guidance said, you know what? We're not going to assume that student loan repayment is coming back.
Phil (22m 8s):
They're just wiping that out of the revenue. Are they?
Steve (22m 10s):
Yeah. They said, you know what? We'll keep assuming that we still get some, because there are some people who still refinance their loans, but they just basically said, all right, we're not going to assume the repayment pauses going to end this year at all. Because we see midterms coming up. We see some politicizing of the student loan repayment stuff. We might get some forgiveness of federal student loans, which wouldn't apply to Sophia's book of business. You know, the government can't forgive private student loans that are owned by companies like so far,
Phil (22m 37s):
You would assume. So. You're just hearing. That would be the case wouldn't you?
Steve (22m 41s):
Yeah. Well, that'd be a little bit of a executive overreach fear, but what's really interesting is even with the assumption that the moratorium on student loan payments doesn't end this year and they have their refinance business operating about 50% of pre COVID levels. They're still growing the revenue about 45% year over year. Their adjusted EBITDA is going to triple this year to a hundred million and they just turned adjusted EBITDA positive EBITDA is earnings before interest taxes, depreciation and amortization for anyone who's unfamiliar and their margins gross margin, operating margin, net margin. If you look down the balance sheet, that's another podcast. I think their margins are going to double even assuming none of that happens.
Steve (23m 22s):
And that was their current guidance that they reiterated just last month after the student loan pause. So growing really, really quickly and a super compelling business, that's going to enjoy some pretty impressive operating leverage, even assuming their core student loan, refinancing business, doesn't kind of bounce back. So yeah, depressed stock that I'm interested in.
Phil (23m 42s):
And where does the revenue come from? How's it generated? Is it a membership fee model or is it the commission on some of the products they're selling? How does that come come about?
Steve (23m 50s):
Yeah. So a number of different things or ways they can generate revenue. I mean, obviously when you have a business like home loans, you have fees associated origination fees and everything. They have a personal loan business where they can get a cut and then earn interest. They can repackage those loans and sell them elsewhere. But lending products are sort of their own kind of chunk. So you make money not only on the interest, but also on origination fees for those financial services like checking and savings, you can earn some money on the balances that you hold. Actually, they just, that's another key thing that we haven't even mentioned yet is they just received their national banking charter. So they actually became a bank, unlike a lot of the other FinTech companies out there.
Steve (24m 31s):
This is an actual bank that's FDI insured, and they enjoy significantly lower cost of capital as a result. So that should kind of supercharge their loan growth and have some really interesting network effects for the rest of their business. And they do make in there so far invest the brokerage business, a little bit of money for payment for order flow, nothing like Robin hood does. It's a little, you know, you have some sort of unsavory are your free investments, really free kind of things that happen, but also securities lending, swipe fees, ETF management fees, fees on crypto purchases also that they have just little bits of money that add up pretty, pretty quickly. And they also, the other part of their business. I, I, I hate to use this also, also also, but there are so
Phil (25m 14s):
Many and there's more and there's more.
Steve (25m 16s):
Yes, but wait, there's more, the technology platform segment is sort of this dark horse that I think a lot of people haven't even considered picking up yet. So what's really, really compelling about what Sophie has put together is that they, for about 1.2 billion a little over a year ago, a year and a half ago now they acquired a company called Galileo technologies. It is a banking infrastructure technology platform, and that is included under what they call their technology platform. Segment Galileo, I mentioned in passing a couple of minutes ago has about a hundred million user accounts. They actually power companies like Robin hood and chime and Vero and a bunch of other really interesting fintechs that Galileo is essentially, they want to build the AWS of FinTech in this sense,
Phil (26m 7s):
The Amazon web service,
Steve (26m 9s):
Amazon web services. So it's basically a bunch of backend infrastructure offerings for cloud services in that case. But Galileo is basically the leading sort of AWS ESC business that they acquired. But also they just acquired another company for $1.1 billion in March. This was an all stock transaction. So a little dilution there called Texas'. So technically this in Galileo will kind of be combining forces. Technically this is a cloud native banking platform that basically fills in all the pieces that Galileo didn't already provide for SoFi. And basically this will help SoFi further vertically integrate its own businesses, the offerings that it has for financial services, but also accelerate the pace of innovation.
Steve (26m 54s):
And they believe, I think they said annual cost savings of 60 to 70 million and there'll be adding, what was it? Something like 800 million in revenue over the next five years from that acquisition as well, but lots of moving pieces here. And I think a lot of underappreciated pieces right now, you have so far trading at well below some of its private valuations from its pre IPO days. And I think super underappreciated.
Phil (27m 19s):
When did the term RPO, when did it come to market?
Steve (27m 22s):
I think it was June, 2021, so a little less than a year ago.
Phil (27m 26s):
And what's the price action look like since then?
Steve (27m 29s):
Bad. If we're going to be honest, it was a super volatile at first. And I want to say, I want to look up its 52 week highs because right now we're trading at about 6 44, a share that makes it a $5.9 billion business. It looks like it climbed is high as well in the last year, $25 per share at the height of sort of the mania for, for growth stocks. It was really, really expensive and it's been very, very volatile in basically drifted lower. And I think a lot of what's happening here in this, this is maybe speculative insight on my part, but a lot of what's happening isn't necessarily due to some fundamental shortfall in the business itself, but who owns the stock and redemptions that a lot of these big institutional investors, hedge fund managers, money managers have gotten and what's happened is they've had to sell a lot of these stakes and other institutional investors have actually been increasing their ownership of so far in the process.
Steve (28m 28s):
So I think maybe once the lid pops off, once the operating leverage becomes more clear and a once we get a little bit more of a go ahead in this market to maybe risk on a bit, then I suspect the rebound for some of these stocks is, can be fast and furious, but that certainly doesn't mean they can't go lower in the near term. This has been such a brutal decline for so many businesses in the technology sector and really high growth, particularly for unprofitable companies that you know, yet to be profitable, even though so far, at least on an adjusted EBITDA base turned profitable last year. And it's in the process of wrapping up its operating leverage.
Phil (29m 6s):
That's kind of what we're caught up in at the moment. It's like this incredible tidal forces that no one can resist and everyone's been basically sucked under by it.
Steve (29m 16s):
Yeah. Indiscriminate selling really in a lot of cases. And I think that is shaping the stocks that I'm focusing on right now is I want to find businesses where the underlying business is better than it was at those highs significantly better, where it's not just a matter of a deteriorating business where I'm betting on a turnaround, right? A Peloton comes to mind, you know, in that case, for example, where you have this business, that's really struggling and they have inventory issues and they're marking down their products. And they're trying all these things to turn things around news that came out today, that they're trying to sell 15 to 20% of the business to shore up their balance sheet because they're burning so much cash.
Steve (29m 57s):
And that is a turnaround bet, right? If you buy something like that, now you hope it doesn't get worse, but this is a business that is only getting stronger. And a lot of the businesses that I'm focusing on right now are businesses with either healthy cash flows already, or a clear pathway to profitability and cash flow positivity. And, you know, I want these businesses to be able to continue kind of growing and leveraging themselves up. And, and I think for investors with long timeframes, you know, if you can focus on those kinds of businesses, you know, we've kind of pivoted to technology stocks in general, right? But not just technology stocks, but just high growth stocks where multiples maybe got out of hand and at the height of February 20, 21.
Steve (30m 41s):
And then again, kind of November before things really took a turn for the worse again, after they tried to stage a rebound, if you can focus on investing with a long-term mindset and I'm talking three to five years, think about where these businesses are going to be in three to five years. And whether you will be looking at a significantly larger, healthier, still growing business in the process, if you can do that, I think there are a lot of values to be had for people with the stomach for volatility in these kind of earlier stages. Because right now it's a harrowing time to be an investor. It's been something.
Phil (31m 17s):
So if listeners want to find out more about you and your work and your recommendations, how can they find you?
Steve (31m 22s):
Oh, they can find me 7investing.com. I'm one of seven lead advisors over there. And we each pick our top stocks every single month. We release them on the first of the month for our paying members. We also have articles that we post every single day that are free to read as well there and our own podcasts there in 7investing Steve on Twitter as well. Social media, you can always find me there, but yeah, shoot me a note. If you have questions about anything I've written, I'm always happy to respond.
Phil (31m 48s):
Fantastic, Steve, thank you very much for joining me today.
Steve (31m 51s):
Thank you for having me. It's always fun
Phil (31m 53s):
And good luck with the markets moving forward. Let's see what next week brings. Well, this week when this is going to wear
Steve (32m 3s):
Yes. Yeah. It's a, it's gonna be interesting. We'll have to touch base every few months and kind of see kind of the state of the market. It's kind of nice to look back and be like, oh, that's where we've come.
Stocks for Beginners is for information and educational purposes only. It isn’t financial advice, and you shouldn’t buy or sell any investments based on what you’ve heard here. Any opinion or commentary is the view of the speaker only not Stocks for Beginners. This podcast doesn’t replace professional advice regarding your personal financial needs, circumstances or current situation.