Third Quarter 2024 Review — ft. Aswath Damodaran | Prof G Markets

Corporate taxes as a percentage of GDP have fallen to their lowest level since 1938, indicating a long-term erosion of corporate tax burden relative to historical norms

“corporations are paying less as a percentage of GDP in their taxes uh since 1938 so lowest level since 1938”

Tesla's recent earnings pop of 21% was disproportionate to the actual good news in the report; the market was pricing in a relief rally based on the expectation that margins would continue collapsing and the company would report worse news, so meeting expectations (not declining further) was perceived as good news; consensus numbers have become less important than market-specific expectations for evaluating whether a company has 'won' the earnings report.

“as a Tesla stockholder it was good news for me but I did think it was out of proportion to the good news in the report it's almost was a relief rally because we've had so many bad Surprises with Tesla earnings reports that people heed a s of relief saying thank you for not seeing the margins drop even more and Reporting more bad news”

California should expand tax incentives for movie and TV production from $350 million to $750 million annually because for every dollar in tax credits, the state receives $1.08 back in tax revenues (net neutral on revenue), plus every dollar of incremental tax credits generates $8 in incremental wages and $24 in incremental economic activity, making it stimulus that works; Los Angeles' production is down 30-40% in recent years and the city's deep talent pool in set design, CGI, and acting gives it an unmatched advantage that only needs to match, not exceed, other municipalities' incentives to recapture market share.

“for every dollar in um tax credits that California gives to the motion picture industry or the TV industry they get a108 back in tax revenues so it's net neutral it's not it's not a net positive”

Despite various reasons brand moats fade, 'brand name as standalone competitive advantage' remains one of the strongest and longest lasting competitive advantages a company can have

“if if you look at brand name as a standalone competitive Advantage it remains one of the strongest and longest lasting competitive advantages a company can have”

Brand moat may be outdated as a concept because companies become too reliant on their brand, rest on their laurels, convince themselves the brand is the moat, then become lazy, leading to brand depletion

“maybe that phrase is outdated because what it looks like is happening is the companies are becoming too reliant on their brand they're sort of resting on their Laurels and they're convincing themselves that the brand is the moat and then as a result maybe they get lazy and the brand sort of depletes in value”

Capital raising by major tech firms (Microsoft, Amazon, Google, Meta) is being driven by massive capital expenditures on AI infrastructure (purchasing Nvidia GPUs and building data centers), which is effectively making Nvidia's top-line revenue dependent on these companies' capex decisions rather than on actual end-user demand for AI services; simultaneously, the cloud business of these companies is growing rapidly because the same AI investment enthusiasm is driving demand for cloud computing.

“we'll see Microsoft alphabet Amazon meta a lot of the story there is interestingly actually about Nvidia because their capex is basically nvidia's Top Line that's a spending for those companies with revenues at the same time the server business for all these companies are going gang busters because the same AI Zeal that's causing them to spend the money on these AI chips is also causing demand for cloud”

Large public company acquisitions as a growth strategy have historically and systematically failed to deliver returns justifying their premium prices; if Uber acquires Expedia, the stock price will drop substantially upon announcement because the market is skeptical that the acquisition will generate sufficient value to justify the price premium paid.

“I know I I know I I just don't like them I don't like them because you pay a premium on the market price and you got to deliver on those on that market price so from a strategic standpoint from a marketing standpoint you might say this is great news but I'm you know the price they have to pay to get it I don't think it's worth it I mean that and that's my bias playing guard I do not like acquiring large public companies as part of my growth plan because historically it's almost never delivered enough returns to justifi it”

Galloway made the mistake in 2016 after Trump's election of selling most or all stocks out of conviction that the market would crash, took a tax hit, then had to buy back in at higher prices—one of his worst investment decisions.

“I had some experience with Trump Affiliated companies and I thought these people are Village idiots they were some of the worst business people I had ever encountered at business and I thought okay this guy's now running the country that is really bad news and I I think a week after the election I sold most if not all of my stocks I was convinced the market was going to crash the market ripped that year because of tax cuts and other things and the fact that I took a tax hit on the sales and then had to buy back in one of the dumbest investment decisions I've made”

Nike's brand advantage was built on signing Michael Jordan in 1984 when he was not yet a superstar, riding his subsequent fame to success—but this strategy is inherently fragile because celebrity endorsers are human beings subject to foibles and mortality

“that choice of signing Michael Jordan in 1984 when he was not a superstar yet but writing that wave of NBA Michael Jordan fandom to success that is always a tricky tricky place to be because you got to find new celebrities and celebrities are human beings so live and die with those human foibles”

Boeing has thoroughly destroyed its reputation and credibility over the past 20 years to an extent unmatched by any other major company; the company survives only because it operates in a duopoly (with Airbus), and in any other competitive market would be in receivership or bankruptcy; Boeing should not be purchased at any price because the reputational damage (particularly the perception that its products are unsafe for aircraft manufacture) creates an insurmountable pathway-back problem, and multiple future risks (bankruptcy, receivership, asset sales) make investment unjustifiable.

“I've never seen a company blow up its reputation as thoroughly and as completely as Boeing as done over the last 20 years”

Intel has been pursuing a strategy of 'me-too-ism on steroids' for the past 5 years: attempting to outdo TSMC in foundry business, out-Nvidia Nvidia in AI chips, and investing billions in each attempt, resulting in massively overextended capex; a better strategy would be for Intel to accept that it cannot dominate AI (that battle is lost to Nvidia), carve out a niche portion of the AI business, and leverage the Inflation Reduction Act subsidies for US-based chip manufacturing to find a viable pathway back to 'middle age' profitability rather than chasing former glory.

“I call it me tourism on steroids because that's basically what Intel has done for the last 5 years is me too I can do that and I can do it five times more expensively than you can”

Starbucks' original value proposition—bringing the European coffee-shop experience (where customers linger for hours) to the US—was fundamentally broken by the introduction of the online ordering system, which created two compounding problems: (1) the coffee-shop experience itself collapsed as 25 customers pick up online orders and only 3 sit down and linger, destroying the core selling proposition; (2) logistical dysfunction occurred as 100+ simultaneous online orders arrive at 8:30 AM with no queue mechanism to rate-limit demand, overwhelming barista capacity.

“the original Starbucks story was to bring the European coffee shop EXP experience to the US a country which never had that experience and it succeeded Beyond its wildest imagination coffee shops where people came and hang hung out three four five hours a day they brought the laptops that was the Starbucks story”

Disney's management succession failures represent a case study in how not to conduct top-management transitions; the board of directors (ranked among the 10 worst boards in corporate governance) convinced Bob Iger in 2012 that he was indispensable, he initially refused, but eventually accepted the flattery and remained; when he attempted to leave again in 2015, a layer of promising management candidates left rather than wait, leaving the company with 'an empty cupboard' of leadership talent; this made Iger actually indispensable and forced him to reverse his retirement again, perpetuating a cycle of dependent management.

“2012 is when Bob AER went to the board and said you know I'm ready to leave I mean I I actually wrote a very complimentary piece about him then saying this is the way top CEOs should behave is they've made themselves dispensable and he said and I blame the board of directors of Disney which I think has to rank up there among the 10 worst Boards of directors in terms of corporate governance”

Microsoft's cloud business now represents approximately 50% of its revenues, making it a cloud company first and a software company second; this transformation over the past 10 years is profound and under-appreciated by antitrust authorities who focus on older dominance categories (smartphones, advertising) while missing the real competitive concentration in cloud infrastructure.

“you look at Microsoft today and I was looking at it last week it gets about half its revenues from from the cloud business it's more Cloud business than software company now I never thought I would see that day 10 years ago but it's astounding how big it is and how incredibly profitable that businesses”

When Damodaran visited Intel offices 6-7 years ago to speak, he noticed an absence of energy and excitement about the business, which is dangerous in a high-competition industry like semiconductors where driving innovation requires cultural momentum.

“I remember going into Intel six or seven years ago I went to their offices and I was talking to their you know they asked me to come in and speak to their as a general audience and what I noticed about Intel as a company was the absence of energy you don't get that sense of excitement and energy it wasn't there anymore and it's tough to be in the business that Intel is in without that driving the choices”

The film and TV production industry globally is up 2% this year; U.S. production decline mirrors the Japanese auto industry's decline in the 1980s—not because the industry is dying, but because it has been globalized and shifted to competitors making better products

“if you look at content spanding across across film and TV it's actually up 2% this year what's happened is it's been globalized so the a industry uh Auto Sales didn't go down in the 80s they just went down amongst American cars because they were making a shitty product and people started buying Japanese cars”

Meta has been dramatically oversold because of hallucinations around its metaverse investment, which Damodaran previously characterized as a cash volcano, making it attractive at depressed valuations.

“couple years ago aswath you essentially said meta distinctive the how much badly had been beaten up because of this hallucination around headsets the massive investment they made there you said look this is just a cash volcano that's been oversold”

With Tesla, you can never rest easy on what you own because the company may announce new businesses and directions before the next earnings report, making quarterly-to-quarterly investment particularly risky.

“I mean with Tesla you never can rest easy on what you're sitting on so I'm going to go earnings report earnings report right now I'm feeling okay but who knows what the next earnings report will deliver and what new businesses they will claim to be in before the next earnings report”

Tesla's automated driving claims and We, Robot robotaxi event represent a distraction from the core business, and the market remains focused on whether Tesla can sustain profitable vehicle production.

“I do think that this automated driving thing is still very much in the mix and I'm not sure whe it's a distraction or an addendum to the story to be quite honest”

When a company is in trouble, the choice between internal vs. external CEO hires depends on the root cause: if the problem is mechanical/logistical (internal operations), hire insiders who understand the business; if the problem is narrative/strategic (loss of core story and competitive positioning), hire external candidates to bring fresh thinking; Starbucks' problem is narrative (the original story is broken), not operational, so the Chipotle executive hire may solve logistics but cannot solve the storytelling problem.

“if you're in trouble because of mechanics Logistics something that's in inside the business then I think it makes sense to go inside the business you want to bring somebody who understands it if your trouble is with storyline You've Lost Your narrative as a company you have to go outside you have to bring in fresh thinking into the business”

Prediction markets (Kalshi, Polymarket, Robin Hood) are skewed toward Trump because approximately 90% of users on these platforms are male, and 60% of gamblers and stock market participants are male, creating a systematic male-skew bias in the aggregated price that favors Trump; Kalshi data shows Trump at 62% implied probability versus Harris at 38%, but this reflects the demographic composition of the betting pool rather than objective likelihood.

“Kalshi actually released their demographic data how many of the what percentage of the platform do you think of men...it's 90% 90% of the users on the platform are men”

Trump Media's extraordinary stock volatility (up 21% one day, halted for volatility multiple times, 16 million shares exchanged in 10 minutes) reflects pure binary option-like pricing on the 2024 election outcome; the company would be worth zero if Trump loses because its only viable business model depends on him either becoming president or avoiding legal jeopardy, with no standalone revenue generation beyond government mandates or patronage similar to his hotel businesses.

“what is the home or the outcome for this company if he's not president it's it's it's worth zero I I don't even understand what the home of the outcome for the company is if he does win”

When comparing Nike, Intel, Boeing, and Starbucks—all fallen consumer/tech icons—there are selective buying opportunities in companies where the market price has dropped 40-50% and where a plausible pathway back exists; Intel and Starbucks have such pathways (strategic repositioning, management change), while Boeing does not (trust/safety damage is irreparable); the best investment approach is selective bottom fishing in fallen angels with viable turnaround potential, not blanket avoidance.

“I think that know as I said buying these selectively buying these companies which have dropped 40 or 50% might actually be a pathway in fact the last four companies I bought of all been mid middle-age or declining companies where the market price has dropped much more than I think it should so no I that's where I would look if I were an investor is look at look at companies that are down companies which had glorious path don't just jump into them and ask yourself is there a pathway back for these companies and I think there is for Intel and and Starbucks”

Elliot Hill should not go after the youth market for Nike without risking the core 35-40 year old market, as the Gap discovered in the 1990s when it went young and lost its khaki-wearing core market.

“while he's going after the young Market he's got to make sure he's not going overboard it's one thing for an on you know young company going after niche market to go after the young it's another thing for Nike the largest company in this space to go after the young Market without in some way risking their core market”

Breaking up Google/Alphabet is unlikely to be an effective remedy for its antitrust violations because: (1) the actual monopoly power lies not in any single division but in the core online advertising business, which is subject to network effects that make consolidation economically natural; (2) YouTube and cloud businesses, while large, are heavily subsidized by advertising revenues and may not survive as standalone entities; (3) the fundamental problem (Google's dominance in search) cannot be solved by structural separation because it reflects the underlying economics of the business, not a remediable organizational choice.

“the consolidation that you see in online advertising is reflective of the networking benefits that you can't make go away through you know justice department actions so I don't think it's going to be effective”

Markets are not currently pricing in the economic consequences of either presidential candidate's stated policies; if the candidates were serious about implementing their plans (e.g., 200% Trump tariffs or major Harris spending programs), markets would show much larger sectoral rotations and dislocations; the absence of these dislocations signals market skepticism that either candidate will execute their stated economic agenda.

“the more I look at what markets are doing the more I'm I'm getting the impression the markets don't believe that either presidential candidate is serious about what they're saying on their plants because if they were you'd see much bigger contortions in the market”

Tesla's We Robot event was a public relations failure disguised as a product announcement: the company showed AI humanoid robots that were being manually puppeted / controlled by people off-stage and voiced by people, not operating autonomously; this was overpromising on AI capabilities and misrepresenting the state of automation technology, though Damodaran stops short of calling it fraud.

“the AI humanoid robots which are supposed to be the future it's what's fueling this huge valuation of the company they were being controlled by people they were being voiced by people they were basically being puppeted by people um I'd love to get your view on that and how bad is that are we bordering on fraud here”

The entertainment business is structurally broken because Netflix disrupted the entire industry with the streaming model, but even Netflix hasn't benefited financially from the disruption; no company in entertainment (Netflix, Disney, Warner, Paramount) currently has a healthy, sustainable business model with predictable long-term profitability; disruption is easy but monetizing disruption is extremely difficult; consolidation is coming as the industry rebalances.

“the entertainment business is broken I mean I don't I haven't talked to a single person in entertainment who feels secure about what the future will deliver we know who broke it Netflix did with with the streaming model but even Netflix hasn't benefited from breaking the business”

Robin Hood (the investment platform) is explicitly a gambling/wagering platform, not an investment education platform; its entry into political prediction markets is consistent with its core business model but the marketing/positioning around it attempts to legitimize what is fundamentally a gambling product (similar to FanDuel and DraftKings) by associating it with prediction market language.

“Robin Hood is not where you go to invest it's not where you go to learn it's where you go to gamble and that's fine you're allowed to there's FanDuel there's DraftKings they're a gambling site and there's no reason they shouldn't be in this”

Damodaran has underinvested in Chinese companies because China's government role makes China story inherently political; mixing politics with investing creates poor outcomes, so he avoids China sector entirely

“and that's one reason why I've never I I underinvested in Chinese companies because I've talked about how China is part of every Chinese company story I don't like mixing my politics with my investing and I know I'd prefer to keep it that way”

When Nike hit $72 per share (near its low), the market was building in the expectation that Nike's best days are finished, growth will not return, and margins will continue sliding—expectations Damodaran partially agrees with

“when Nike hit 72 which was the I think pretty close to its low I said look you know the Market's building in the expectation that Nike's best days are done that um that growth is not coming back that marges are going to continue to slide and I agree with part of that statement”