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TIP838: Google, Reddit, Amazon – Are Our Biggest Winners Still a Buy? w/ Daniel Mahncke & Shawn O’Malley
· Summarized
Key takeaways
- Invest in high-quality, durable businesses and be patient, allowing winners to run their course.
- Market narratives can shift rapidly, significantly affecting stock prices, often disconnected from fundamentals.
- Valuation models are useful but imperfect; always consider qualitative factors and the long-term earnings power of a business.
- Companies like Google, Amazon, and Reddit have benefited greatly from AI advancements, but each faces unique risks and opportunities.
- Diversification and continuous re-evaluation of portfolio holdings are crucial to adapt to industry and macroeconomic changes.
Summary
Introduction and Overview of the Episode
Hosts Shawn O’Malley and Daniel Mahncke set the stage for the episode by reflecting on the recent focus on stocks that underperformed, and highlighting their decision to analyze winners instead. They discuss recent market dynamics, the importance of patterns in successful investments, and the challenge of assessing current valuations of companies like Google, Amazon, and Reddit. The episode aims to learn from top performers in the portfolio over the past two years and revisit some companies they considered but didn't buy, emphasizing the star performances and their lessons.
Deep Dive into Google (Alphabet)
The hosts analyze Google's remarkable stock rise, driven by their strategic investments in AI, cloud, and CapEx increases. They discuss past concerns about search disruption, antitrust investigations, and their valuation method, which suggested fair value around $180-$200. They note how narrative shifts — from search threats to AI leadership — greatly impacted the stock, with new innovations like Gemini and AI integrations boosting confidence. They also explore Google’s large CapEx plans, their effect on free cash flow, and the importance of holding quality businesses for the long term despite short-term valuation stretches.
Amazon’s Investment Case
Hosts compare Amazon favorably to Google, noting Amazon’s attractive valuation and strong growth in cloud computing, chip manufacturing, and e-commerce tailwinds driven by AI. They highlight Amazon’s diversified revenue streams, from Prime to AWS, and its strategic investments in automation and infrastructure. While acknowledging the high CapEx, they emphasize that Amazon’s integrated business model and innovation in chips and logistics position it as a top contender. The discussion considers their recent price gains and potential for continued upside.
Reddit’s Performance and Risks
The discussion reviews Reddit’s explosion in value, driven by AI relevance and ad monetization improvements. They reflect on their decision to trim profits after a significant rise, citing valuation concerns, but remain bullish on its future growth potential. Key challenges discussed include user growth metrics, dependency on Google search traffic, and the risk of management’s opaque communication about user metrics. Reddit’s unique value proposition as a community platform remains central, especially in an AI-driven future where authentic human interaction is valued.
Review of Companies Not Included in the Portfolio
The hosts examine insights into companies they considered but didn’t invest in, such as TSMC, Dell, and Comfort Systems. They discuss the rationale (geopolitical risks, industry dynamics, margin profiles) behind their decisions, lessons learned from these investments, and how macro factors and industry shifts could influence future performance. They also reflect on their approach to managing and revisiting watchlists, emphasizing the importance of adapting to macroeconomic changes and company-specific developments.
Lessons and Final Thoughts
The episode concludes with observations on the importance of patience, understanding a business’s earnings power, and not blindly trusting valuation models. They emphasize letting winners run, especially great companies with durable competitive advantages, and recognizing that markets tend to overreact. The hosts highlight the significance of pattern recognition, long-term focus, and humility in investing, inspired by quotes from Buffett and Lynch. They reinforce that successful investing involves identifying a few big winners and riding them over time.
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Show notes
After looking at companies that tanked in recent months in the last episode, Daniel Mahncke and Shawn O’Malley now take a look at the best-performing stocks of the pitches of the last two years. Google, Amazon, and Reddit are companies that generated great returns for the Intrinsic Value Portfolio, but there were also companies on the watchlist that turned into multibaggers in the past year.
Daniel and Shawn discuss the patterns of the stocks that gained most in value, what one can learn from that, and how they think about selling and holding positions that went up past their fair value estimate.
IN THIS EPISODE YOU’LL LEARN:
(00:00:00) Intro
(00:03:51) About Google’s stock rise and valuation
(00:15:32) How the massive capex changes the Mag7
(00:29:08) Why Amazon might be more attractive than Google
(00:40:48) Why Daniel and Shawn decided to sell some Reddit
(01:03:07) Why Remitly wasn’t added to the Portfolio
(01:11:57) How TSMC, Dell, and Comfort Systems became multibaggers
(01:24:09) What the future holds for the AI trade
Disclaimer: Slight discrepancies in the timestamps may occur due to podcast platform differences.
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