In this podcast, Motley Fool analyst Jason Moser and host Dylan Lewis discuss:
- Nassim Taleb’s recent calls for a market drop and why he’s focused on the U.S. dollar, domestic debt, and S&P 500 concentration.
- What investors can learn from someone focused on tail-risk hedging.
- The peace-of-mind hedges investors can put in place for their own portfolios.
Motley Fool analyst Asit Sharma and host Mary Long discuss Sonos‘ ongoing recovery after rushing to release an app before it was ready for prime time.
To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our beginner’s guide to investing in stocks. A full transcript follows the video.
This video was recorded on Oct. 21, 2024.
Dylan Lewis: One of the most notable voices had something spooky for the market. What does it mean for investors? Motley Fool Money starts now. I’m Dylan Lewis. I’m joined over the Airwaves by Motley Fool analyst Jason Moser. Jason thanks for joining me.
Jason Moser: Dylan. Happy to be here.
Dylan Lewis: Happy to have you. In particular happy to have you break down some recent comments from Nassim Taleb. He had an interview with Bloomberg this month. The author of Black Swan had what I’m going to characterize as some Black Swan type comments [laughs] for the market and for investors. I’m going to kick us off at the attention grabber here, and I want to get your reaction. “My focus would be more on being hedged against an eventual market collapse because we’re more fragile than we were at probably any point in the last 20 years, if not 30 years.” Jason if your morning coffee didn’t wake you up, I’m guessing that one might have just a little bit.
Jason Moser: A little bit. Listen, I think Taleb is a fascinating guy clearly very intelligent, well read, great writer. I think a lot of us have read a lot of his stuff. Now with that said he also strikes me he’s a professional domer. He’s always taken that glass half empty perspective. I’m not surprised to hear this. I think for me maybe it’s an issue of semantics.
When he’s talking about a market meltdown I wonder, is he talking about a correction or is he talking about everything is just going to hell in a handbasket? I don’t know which. What I do know is if we go to zero, we have bigger problems than just our portfolios. I look beyond that and think, well then if he’s talking more about some a correction or even some a major correction, that’s a little bit of a different story. That’s not something that should scare people out of the markets. When I hear him talk about this top, I think it’s always interesting to understand the drivers behind his ideas there. Why does he think this? I think he raises some good points. Some of it is related to the state of the dollar currency. Other parts of it are just related to the condition of the economy inflation and things like that, valuations as well. Absolutely understand things like the state of the dollar and market valuations. I try to be a little bit more the Tom and David Gardners of the world and take that glass half full approach and look at these as potential opportunities instead.
Dylan Lewis: We’ll maintain the optimistic point of view, but I think maybe zoom [laughs] in on some of the topics that Taleb brought up as an opportunity to check in on some different things that are maybe moving around or getting attention in the market. You mentioned the dollar and that is something that he brought up in the interview and something that we actually really don’t talk about all that often, but was interesting. One of his main points was that the US has intervened in some geopolitical issues abroad, and really use a lot of economically focused sanctions as part of those interventions, which has hurt global confidence in the US as a pure reserve currency, Taleb essentially saying there would be capital that would be coming into the dollar and into the US stock market that otherwise is going elsewhere now because of that lack of confidence.
Jason Moser: Well that probably is the case. I think it’s always important to remember that when we look at things through that geopolitical lens we have to remember a couple of things, Number 1 it’s very complex issue. It’s not always just, one plus one equals two. It’s also always changing, particularly here in the US our political landscape is ever changing. It feels that way probably now more than I can recall in my lifetime. I definitely get the state of the dollar. When we start talking about the dollar and a weak dollar, for example. Again it can be a complex issue.
But typically when you see that dollar weaken it’s going to increase the cost of imported goods and services. We’re going to see companies that rely on those imported materials. They can potentially face higher costs because of that. That’s going to affect margins. That’s going to affect profitability. You mentioned it can make US assets seem a little bit less attractive to foreign investors. We don’t see that incoming investment like we might otherwise. Ultimately it can absolutely then impact interest rate policy. You could see a state where maybe interest rates go a little bit higher in order to combat those costs, those inflationary costs. I get it. Now that’s not something that lasts forever. We could talk about this over the last 40 years. It ebbs and flows. But I definitely understand his perspective when it comes to the state of the dollar today.
Dylan Lewis: One of the things that’s interesting to me is he pointed to a specific reason why he feels that confidence is waning. I think you could tell a similar story by simply just looking at the inflation picture for the United States, and some people saying, You know what? This is an economy that’s experienced a lot of inflation over the last couple of years. There’s been a lot of dollars printed. It’s only natural to want to be a little bit more interested in alternative stores of value for things that you’re not transacting in, but are trying to hold and ideally have appreciate or not lose value.
Jason Moser: I think we’re seeing that play out. For one example I think look at the crypto for example. I think longtime listeners no, I’m not a big crypto guy. It’s just not for me. I’m not sitting here and popoing. It’s not something that I’m terribly interested in, but we’ve certainly seen a flight toward things like crypto. In one of the questions we’ve debated or at least deliberated over the last several years is the role that crypto serves. Is it a medium of exchange, or is it a store of value? We definitely have not seen it take off as the medium of exchange for the masses.
It clearly can be used that way, but it’s not something that most people do. It’s just not something that most people really opt for. We’re starting to see it now really maybe make that argument for a store value. It’s hard to argue with the numbers. Bitcoin obviously has performed very well over the last several years. Once you weed out some of those pretenders in the cryptospace there is an argument to be made that it can be a store value. At least here in the near term, you look at other options as stores of value. I mean, talk about precious metals, things like gold and silver, and obviously, those are considerations as well.
Dylan Lewis: I want to go over to one of his other major points of concern, and that is debt. Specifically our debt relative to the GDP in the United States. Currently clocks in at 124%. It has been over 100% for the last decade. Historically it has been below 100%. The concern here is, if you have been following the story at all that debt load also comes with interest payments and servicing that debt, and that that may get unruly over time.
Jason Moser: Absolutely can, it is. I think we could argue now that it is a bit out of control, and you want to talk about politics. This has been a political football that’s just been thrown back and forth here over the last several years, and I don’t think it’s going to stop anytime soon. It’s absolutely needs to be a focus for our government in whatever form here over the coming years and hopefully, it will be. It takes me back to something. I remember at Fool Fest. We had Fool Fest recently where we had all of our members join us for a great event here. For a few days and we had Morgan Howell spoke one day, and he brought up this point.
He’s talking about when things get out of control seemingly out of control like they are now, how do you get yourself from under that weight. Oftentimes the answer is simple. You grow your way out of it. Typically that’s what we’ve done historically. When those interest payments become so heavy when it becomes such an issue. It’s not something that we can’t escape. Think you probably need to see a little bit more fiscal responsibility on the government’s part, but then you also have to look a little bit further down the road, look a little bit more long term, and growing your way out of it is an option. We’ve seen it historically in the past. It is something that can be done. Now how exactly you do that? I guess that’s another conversation entirely. But I think it’s important for folks to know that. There is a light at the end of the tunnel. It may not seem that obvious right now, but it definitely just requires a little bit longer term thinking.
Dylan Lewis: It’s the way that we would look at a business that is taking on debt with its own operations. If they’re able to take that debt and bring it back at a higher rate, whether it be in top line or in shareholder returns that’s something we’re happy to see. If you’re concerned about that growth and what you’re able to do with that debt you’re going to have more concerns about that piling debt load. I think that’s a terrific way to look at it. I wouldn’t put it any differently.
Keeping it on the investor side and thinking a little bit about the market and companies. One of the other major concerns that he brought up is one that we have talked about quite a bit on the show. That is, we are currently in a bit of a cloudy macroeconomic period, and the majority of market returns have been driven by relatively few companies. I think last I check, Jason, 10 largest companies make up over 30% of the S&P 500, that is without recent precedent. That is high if you take the long view. It’s something that I think a lot of people have grown a little uncomfortable with.
Jason Moser: Well and that’s understandable, and it really a lot of that I think, is based on the excitement behind AI but it’s worth remembering. As you noted a lot of those returns are being driven by a handful of companies, and that handful of companies, they’re the ones that are really making inroads on this AI narrative. There’s a lot that we don’t know in regard to AI and exactly how it’s going to impact us in our lives. I think we’re starting to see at least some ideas there. But when you look at current valuations. I think the current S&P forward valuations around 24 times earnings. Not crazy. Definitely overvalued, compared to historical norms. If you look at the period between January of 1971 to June of 2017, the S&P 500 PE averaged around 19.4 times. The median was around 17.7 times. You compare that to what we’re seeing this forward valuation around 24 times now.
That does seem a little up there. Now I think somebody to keep in mind too though as you noted a lot of these returns are very concentrated within a handful of companies. That can be scary. By the same token, this could also be good or at least less bad. If you think about it in the sense that maybe these valuations, they might seem expensive today, but they might not be as far reaching across the market, given that they’re so concentrated. Maybe that indicates their pockets in the market where valuations are a little bit more reasonable. When we look at that overall picture today of the S&P 500 that tells one story, but there are plenty of sort of sub stories within that story.
Dylan Lewis: Since you brought up AI, Jason. Taleb did mention AI is going to be a great investment, but that it may not be the Microsoft, Amazon, Alphabets of the world that wind up being the true winners. I think with respect to the everyday investor, they may not be able to participate in some of the major gains that we see. It’s interesting to pair that perspective up with some of the moves that we’ve been seeing in the private markets recently with open AI and with perplexity.
Jason Moser: I think we saw the news perplexity talking about raising money here at somewhere in the neighborhood of evaluation. I think around 160 times sales based on the most recent financials that we’ve gotten regarding perplexity. For those new to the game. Yes 160 times sales is quite expensive. Now I think I would push back a little bit on his perspective there regarding the big tech players in the space. The main reason why. Number 1, you look at these companies. We’re talking about Microsoft, Amazon, Alphabet, Apple, Tesla, to a degree Nvidia, of course. These are companies that have done at a lot of stuff over the years. They’ve been very successful for a number of reasons.
They’re very successful for the fundamental businesses that they’ve built through the years. I think the interesting part about these businesses as well, is that not only are they making investments in themselves in their AI capabilities but they also are making investments in those smaller companies within the AI opportunity that we, as public equity investors, wouldn’t necessarily have the opportunity to own, perplexity. I think it’s a good example. You and I, we can’t go out there and just buy shares of perplexity today. It’s not a publicly traded company. But we could go out and buy something like Invidia. Invidia does have a private venture wing of the business that is making investments in a lot of these smaller companies and trying to participate in the opportunities that they are uncovering as well. It’s not just AI, we were talking recently about Chipotle and their little private venture wing of their business. They got $100 million that they put aside to invest in the restaurant space and how they see that segment moving forward and absolutely, they are viewing AI as an opportunity in that segment as well. They made an investment in a small little Mediterranean concept, but they also made an investment in an AI company that is assisting in supply chains, understanding the sourcing and the quality in the supply of the ingredients that these restaurants need. It really does span markets.
It’s not just these big tech companies. I think it’s a really fascinating part of a lot of these larger, more successful companies that have a really long track record of doing well, now they’re taking it to the next level and utilizing some of that capital that they’ve been able to raise over the last several years, decades and put that capital to use in this sort of new fangled AI opportunity.
Dylan Lewis: Earlier, you talked about how Taleb is a bit of a doom ser. I think he might prefer the term someone who does some tail risk hedging. Part of his book of business is Universal Investments. They are a hedge fund that focuses heavily on having pretty good downside protection when things hit the fan and having asymmetrical opportunities. That is a very different investing style than what we do here at the Fool and really what is available to most retail investors.
What would you ask or tell the average investor to do with this, knowing that when he speaks, the market tends to listen?
Jason Moser: I think that’s a good question, and I think you’re right, and he’s playing a different game than we’re playing. I think it’s always important for investors to understand what are your capabilities? What are your resources, and what game ultimately you’re playing? I think most people who are listening to this show are pretty clear how we approach investing, we take that longer term view and look for companies that are just fundamentally succeeding. We’re not investors that are looking to take a lot of action. We like to just park our money in great businesses and just let it go. But hedging is something I think a lot of people want to consider, hedging, it takes many, many forms. I look at, for me personally, I’m not an active trader, I tend to just, I own a portfolio of a handful of companies.
I probably have 34 different companies in my portfolios altogether, and then I own shares of an S&P index fund as well to take advantage of that opportunity, as well. For me, when I think about hedging, you can look at it a couple of different ways. One way investors can do it, if you’re really spooked by market valuations, if you hear what [inaudible] saying, and you’re thinking, man, I got to probably take a little something off the table here. There’s nothing wrong with just going a little bit heavier in cash. You can always do that. You have to understand that comes with a cost, if you look at the S&P 500 returns. Historically, you’re looking at around the 10% average annual return there, the heavier you go in cash, the more you forego that opportunity. But if it helps you sleep at night, then there’s something to be said for that, too.
Now, for me right now, I’m a little bit heavier in cash, but I say that with the disclaimer that I’ve got two girls in college. We’re trying to make sure we’ve got tuition locked down, and that’s like we’ve said, you don’t want to have money in the market that you know you’re going to need within the next three years. Well, I’m in that position where I know I’m going to need this s up in the next three years, so I’ve got some of that cash locked down. If you exclude that, I’m not very cash heavy. But the way I like to look at hedging, more so for me, I feel better about this is I just continued to dollar-cost average into that S&P index fund every time I get paid.
I’ve got my paycheck that comes through. We’ve got a great retirement plan at the Motley fool that gives us a lot of options. I just let that money automatically go into that S&P index fund every pay period that’s twice a month, and so that’s dollar-cost averaging just in its purest form. Dollar cost averaging sounds boring, it is, that’s the point. But the beauty of it is is it takes advantage of those opportunities. It ebbs and flows. You’re buying in some of those peaks. But you know what? You’re also buying in some of those valleys, too, and it really does help smooth out that volatility, and it ensures that you are always investing. I think that what we’ve seen is that just works. We’ve got the proof. We’ve got a business that’s been built on this concept. It’s been working for years, and I know while it sounds boring, I’d like to say it. Oftentimes, the best course of action is simply inaction.
Dylan Lewis: I love that the remedy is the total opposite of Black Swan investing.
Jason Moser: Just be a lazy investor, Dylan. Just be a lazy.
Dylan Lewis: You don’t need to be right at a particular point in time if you’re always putting money into the market.
Jason Moser: Well said.
Dylan Lewis: Jason Moser, thanks for joining me today.
Jason Moser: Thank you.
Dylan Lewis: Coming up on the show, a loyal customer base is an asset until it’s not up next, Motley Fool senior analyst, Asit Sharma joins Mary Long, to talk Sonos, the premium audio company that’s still working to recover from a botch app rollout earlier this year.
Mary Long: Asit, I’ll be honest, this is not going to come as a surprise. I work for a podcast. I care about good audio. But I am not totally sold on dropping hundreds of dollars on the home speaker setup that Sonos sells. Yet you have called this a great company. What is it that makes Sonos different from other players in this $100 billion audio market, many of which sell products at a much, shall we say friendlier price?
Asit Sharma: To my chagrin, Mary, I grew up in an era where being an audio file was a thing and so I’ve sadly burned a lot of money on audio equipment my whole life. So this done sound like too tray an idea to me. But let’s talk about Sonos. I think with this small company, they have a lot of tech leadership, a lot of innovation. They have a patent portfolio that has some 3,800 patents. Big players in the industry like Amazon Alphabet, Apple, try to mimic or reverse engineer, the sound quality that Sonos has achieved. They were a pioneer in a market that’s now called the smart speaker market, even though their products aren’t associated with smart speakers, but the technology underlying that was something they pushed forward. I think when you get these attributes together and you combine that with very sticky brand credentials, you can be, if you said, I said, I probably did. You can be a great company. With their customer base, they have some very interesting statistics.
About 60% of the base are repeat buyers. Folks usually buy another Sonos product, within three years of buying their first one, so they grow by selling more product to folks. I think that for me, is just to keep this brief, what makes this better than just a good company. It’s that high quality sound plus that loyal customer base. Now, you’re going to talk to me, and we’re going to talk about some challenges to that loyalty.
Mary Long: Yes, because loyalty is hard to earn, and easy to lose. This May, Sonos rolled out a new app, an update to its app, and that rollout really infuriated this very loyal customer base. The list of problems with that rollout is long. Basically sound drops in and out. Volume blast high at random times, and then you can’t readjust it. Devices that are linked to the app will oddly disappear and you couldn’t do basic things like set a sleep alarm or a timer. Again, this infuriated this famously loyal customer base. Management has downgraded guidance and response, expects to lose. Is it $20 million as a result of this? The stock has lost a bunch of its value since then? How is Sonos trying to make this right?
Asit Sharma: We can figure out exactly how much they’re going to lose or how much they pulled back on their guidance later. It’s a big number, I want to give you a bit of background on how Sonos got here, because it’s important to the rest of the story we’ll talk about. Sonos had been a leader in the home market. They had these wonderful sound bars. The sound follows you from room to room for many years, and they bought a company called RHA in 2021 to help them break into the headphone market, which they had their eye on for a long time. One of the things Sonos has wanted to provide to the market for a long time is a lossless Wi-Fi based headphone, which there are very few available. At the price point that they’re selling these at, I don’t know, some 450 bucks, it’s actually a pretty decent deal.
But, it was easier said than done. They started hinting about this headphone when they acquired RHA 2021, turn into 2022, 2023, and late last year, the CEO Patrick Spence started saying to Wall Street, we’re going to roll this headphone out in 2024, and then I think it got delayed from a spring launch into a June launch, so this looked and looks on the surface like a classic case of management saying, we’ve made these promises to Wall Street, and they’ve been out there for a while. We got to make this product roll, whether it’s really ready or not. Now, on the technical side of it, the headphones, I think they were ready. The problems, as you point out, had to do with Sonos app, which wasn’t ready to accommodate the headphone, and so they had so many problems. They could have just rolled this out in a Beta and kept the current app as such. They failed to do that inexplicably, and these previously loyal customers were just up in arms. At one point, I think Patrick Spence, who keeps an open email line as some CEOs do, he had 30,000 emails coming in from frustrated customers. What they’re doing to make this right.
First, Patrick Spence went on an apology tour of sorts and talked to home installers who are a very important part of this company. Sonos sells to affluent households and commercial installers recommend their product. That’s a big part of their financial mojo. He talked to them, he talked to customers, and put out a video, apologizing for everything Sonos had messed up. They committed to a few things. I’m going to read some of these big picture items. They are going to approach change with humility. They’re appointing a quality ombudsperson. They’re going to extend home speaker warranties for another year, so that’s good. Relentless app improvement. Everyone knows this app is not up to speed, so they’re going to work on it, and they’re also going to establish a customer Advisory Board.
Now, as I read through that, it may occur to some listeners that some of this sounds obvious. Wouldn’t you be investing in quality control in the first place? Not to say that they didn’t, but with this particular part of the business, the all important glue that ties all these products together, the app they have under invested consistently over the years.
Mary Long: You mention like how pivotal these headphones are to Sonos, and even to this app rollout and how that played a role in things. Sonos did release its first set of headphones out this summer, the Sonos Ace. They can be yours for $449 for a company that’s like built out home audio and that’s long teased the promise of this headphone product. Why is breaking into the premium headphone market so exciting and something that Sonos wants so deeply?
Asit Sharma: This is going to sound crazy after all the criticism for how bad their app was. But Mary, they wanted to do something that’s insanely difficult, and they wanted to provide their customers with something they couldn’t get elsewhere. For them, to be able to have ambition and prove it out, even though it’s taken some time, I think in the long run is going to be a great move for Sonos. The reason they did it, why they wanted to break into this market, you’ll probably read in the financial press that they want to compete with the likes of bOS and Apple. That’s true in some other Hi-Fi headphone purveyors. But really, it’s more about extending into their market because they have these repeat buyers who tend to be more affluent, it’s a natural extension. If you love Sonos products, if you love to listen to Sonos on your sound bar, downstairs, upstairs, you’re a ripe target market for a pair of headphones that will work theoretically, seamlessly with a great app. Everything about this makes sense. It’s not really a big jump into a lateral market for them. It just with their business model is the next logical progression or thing to sell to their high end customers who tend to be audio files.
Mary Long: This company’s got a pretty strong balance sheet $470 million in cash, no debt. How would you like to see the management team put that capital to use?
Asit Sharma: Don’t touch that money. Don’t touch it. I would like Sonos to just keep that cash pile as it is and to spend their resources on developing internal software, making that text stack better, capitalizing it on the balance sheet, and even not looking at their tech as an expenditure, but in the accounting world, just going balance sheet to balance sheet, so turning cash into internal product that will keep the app where it should be, it should be a seamless experience and once upon a time it was. I don’t think they need to do any acquisitions. Now is the time to just keep that money there and as they launch new products, maybe you dip into that balance sheet a bit for some marketing purposes and that goes on the PNL. But basically, don’t worry about it. Now, this has come to a point where it’s got to do right by customers, and it’s got to keep focused on great products and making up for all the bad will that’s out there.
Mary Long: How do you value a company like this? Because when you think about competitors, you’ve got Apple and Amazon. Both of those companies are playing a lot of other games. They’ve got a lot of other irons in the fire as well. Currently, Sonos trades at a forward PE ratio of about 18 Apple and Amazon closer to 40. If you look at a comparison basis, it looks less expensive, but is that the right way to look at this?
Asit Sharma: It can be. Basically, those companies as big as they are are valued in the marketplace at a higher premium because they’re growing faster. Sonos as small as it is, has hit a roadblock, it had a sugar high from COVID, and then the housing market slowed, so a core source of their revenue became a little bit of an obstacle. Now, the rapid product introduction cadence they want to do, which is two products a year should help solve for that. Also, just taking a look at their financial statements, this is a company that’s near break even at a $1.6 billion sales level, so if you’re an investor, you want to look ahead 3-5 years because with their gross margins, which they’re right now around 45%, they should push up to about 48-50%, which is just where you want to be as a manufacturer at the minimum. Well, they could really scale their profitability if they just added a little bit to the top line.
You can see just doing a little bit of back of the napkin math here, it wouldn’t take a lot for Sonos to really be valued more in the marketplace and there’s no reason why a company like this also shouldn’t be able to grow at at least a 10-15% cadence. With their technology, with their experience in dedicated sound engineers, I think they have a shot at doing that. But for me, it just comes down to looking at that Ford‘s free cash flow. Maybe if you want looking at Ford estimated earnings per share, if the company just grows a little bit because actually, their financial position, as you mentioned, is quite clean, and they’re very close to profitability. It’s I think a favorable setup if you believe that the customers are going to come back and they haven’t been driven away permanently.
Mary Long: Asit, thanks so much for taking a look at this company with us and keeping an eye on how Sonos can climb back up the slide that it’s since run down.
Asit Sharma: Thanks a lot, Mary. This was a lot of fun.
Dylan Lewis: As always people in the program may own Stocks pension and the Motley Fool may have formal recommendations for or against [inaudible] selling think based solely on what you hear. I’m Dylan Lewis. Thanks for listening. We’ll be back tomorrow.
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