Title: These Power Stocks (Not Semis) Are The Real AI Beneficiaries, Say Investing Brother Duo Up 1,300% Show: Monetary Matters (host Jack Farley) — The Monetary Matters Network Guests: Dean Pernas & Deiya Pernas — Pernas Research (brothers; Deiya, CFA = ex-Deputy CIO of a ~$3.5bn manager, covers software & payments; Dean = chemical engineer by training, covers hardware & energy) Date: 2026-08-07 (published) URL: https://youtu.be/cUO79k97pJ8 Length: 71:20 Note: YouTube auto-captions. Fillers (um/uh/"you know"/stutters/false starts) removed; wording otherwise verbatim — no paraphrase, no reordering. Auto-caption garbles are LEFT IN THE BODY and mapped here. VERIFIED mappings: "Dea / Da / D" = Deiya Pernas; "Perus / Peros / Peris / Parnas / Perinas / Pernos / Purass / PNAS / Prinus" = Pernas (Pernas Research, pernasresearch.com); "Skhinx" = SK Hynix (KRX: 000660); "chatbt / chad" = ChatGPT (OpenAI); "Kimmy / Kimmy 3" = Kimi (Moonshot AI's open-weight model); "Jeb Jevans paradox" = Jevons paradox; "Capstone Energy" = Capstone Energy+, formerly Capstone Green Energy Holdings (Nasdaq: CEPL since 2026-JUL-08; previously OTCQX: CGEH); "Stabilist Solutions / establish / Stabilus" = Stabilis Solutions (Nasdaq: SLNG); "Smart Optics" = Smartoptics Group ASA (Oslo Børs: SMOP) — Norwegian-founded, HQ relocated to Sweden; "RITA" = Arista Networks; "Viche / Vich / Vshology" = Vishay Precision Group (NYSE: VPG) — explicitly NOT Vishay Intertechnology (NYSE: VSH); "Tennal / Teneal / tenable" = Tenable Holdings (Nasdaq: TENB); "Crowd Strike" = CrowdStrike (Nasdaq: CRWD); "Sprout / Sprouo" = Sprout Social (Nasdaq: SPT); "fiverr" = Fiverr (NYSE: FVRR); "Procore" = Procore Technologies (NYSE: PCOR); "Back Blaze" = Backblaze (Nasdaq: BLZE); "Yan Lun" = Yann LeCun; "CXML" = CXMT / ChangXin Memory Technologies (Shanghai STAR Market IPO, 2026-JUL — debuted +466% to ~RMB 3.3tn, China's most valuable listed company; China's largest DRAM maker); "Wise" = Wise Group plc (primary listing moved to Nasdaq: WSE on 2026-MAY-11; secondary LSE: WISE); "Remittly / Riley / Remilli / Remitty" = Remitly (Nasdaq: RELY); "Payafe" = Paysafe (NYSE: PSFE); "Brainree" = Braintree (PayPal subsidiary — not separately listed); "Adian / Adians / addins" = Adyen; "Worldpay, Fiserv" = Worldpay / Fiserv; "circles" = Circle Internet Group (NYSE: CRCL); "Zuck Zuckerberg" = Mark Zuckerberg; "Jake" = Jack (Farley). UNVERIFIED / left as spoken — NEVER turned into a ticker: "Jagu" (in "poached Jagu and Anthropic employees" — probably Google, not confirmed); "TIC solutions" (a pass-note name, company not identified); "air hole" (garble); "bogeies" = benchmark/bogey; "bip" = basis point. Timestamps are the video's own caption cues.
00:00 Today I'm sitting down with Dea and Dean Perus of Peros Research. We're going to be talking about some of the most important themes and trends in investing such as energy powering data centers, software, AI, cyber security, payments. The Peris brothers are good not only at generating compelling investing ideas.
00:15 They're also great investors. They have an audited track record and their audited portfolio has returned double the S&P 500 since inception in 2017, over 1300% gross or 32% annualized. If you want to actually make money in markets, it's really important to listen to and learn from successful investors who've actually done investing well, not just talking well or writing well.
00:34 And this often means paying attention a lot, not just to macro and thematics, but also single stock fundamental analysis. I am a real believer in what I just said. Monetary Matters listeners can get discounted access to Parnas Research or 20% off for one year build quarterly. Link in description. Let's get into it.
00:49 I am joined today by Dea and Dean Pernas of Pernas Research which manages money and also has an investment research firm. Dean, Dea, welcome to Monetary Matters. Good to see you. >> Pleasure being here again. >> Thanks Jack. You guys have followed a lot of stocks, a lot of themes in the market.
01:11 We're going to get into cyber security, AI, the data center buildout, and single stocks that you've invested in, many of which successfully. I'll be honest, I consider myself who knows a lot of stocks. I don't know these stocks well. So I think it's a very different perspective than most people will get on almost any other interview.
01:28 But gentlemen, how about we start off with a broad view of the hyperscaler spending on AI, the consequences and your thoughts, because I know you really think this is a very big deal. >> Yeah, it's very timely. I think SanDisk, Skhinx, that entire memory complex and AI complex has been down I think 40, 50% over the last month and the market's really questioning if ROI is there anymore.
01:56 And especially with openweight models coming into play we believe open weights are bullish for the AI ecosystem. If you think about the AI ecosystem it's roughly about four different layers. So you have the chips layer, the infrastructure layer who are the cloud providers, and then you have the frontier models who are like chatbt and anthropic, and then you have the application layer.
02:16 And so previously the frontier models were essentially capturing a lot of the unit economics of AI and now with openweight essentially there's a theme called commoditize your compliment. So if you're in a technology stack and if your compliment gets commoditized, demand increases to all the other layers.
02:36 And so if you're a cloud provider for instance, enterprises are going to be using more AI given the fact that it's cheaper to use. They don't have to pay $10 per million input tokens for anthropic or chatbt. So demand is going to increase and if you're a GPU provider that's going to translate to higher GPU prices and the economics are going to increase for you.
02:55 So we think that it's not as bullish for Frontier models but the argument can definitely be made that it's bullish for all the other layers in the ecosystem. And we can go into whether the improvements that Kimmy has made is due to distillation of clouds models. We believe it is.
03:15 It's not purely due to innovation, architectural improvements. But yeah, we believe that there's still a case to be made for frontier models as well. >> Right. So Kimmy is the model Kimmy 3 that was released by Chinese AI startup Moonshot AI recently which is now number three in the world. So it's kind of a fear that this opensource model is going to severely reduce the pricing power of the AI labs, anthropic and open AI.
03:44 So Dean, you said that it's bullish for the companies that are not the frontier labs, but what about just the layer directly above the frontier lab? So the hyperscalers who are spending it. So that's Oracle, Microsoft, Google, Amazon and let's see who else am I missing? Meta, which announced that they actually are going to sell their excess compute.
04:07 So they may try and become some sort of cloud. So right now we are in a bear market panic in the semiconductor complex. But what preceded that was a weakness in the hyperscalers themselves. So I want to start there, and can you link it to the general idea of why you think that this is the best time in history to beat the S&P 500? >> Yeah.
04:32 Essentially we believe this is bullish for enterprises because they can now spend a lot more with AI. You already heard talks about companies like Uber and whatnot and Amazon pulling back on AI spending because it was getting too pricey. People are blowing through their budgets in a span of a month and that's because they had to pay anthropic or chad significant amounts of capital to use their models.
04:53 So if those can get reduced 90% or so, Jeb Jevans paradox is still in effect and that benefits cloud providers because now the economics translates to whoever controls the GPU. So GPU rental prices are going to increase as a result. So we think overall >> sorry, aren't the main customers of GPUs open AI, anthropic, and is there pricing power that could be, probably will be, hurt by open models? How does that help the hyperscalers? >> So if we go with number one, that openweight models are going to essentially compete in lock step with frontier models, which I think a case can be made against that because anthropic accused openweight models of distilling fable etc. They said that about four million messages were exchanged which Kimmy can then use to train their model.
05:42 So leaving that aside, there would be an air pocket demand for the frontier models because they make up such a large bulk, but that would be replaced with enterprises using these openweight models, and the companies that would host that would be these hyperscalers, leaving aside meta it would be Microsoft, Google, AWS, the usual suspects. >> Okay, and that's a good point, and it's really important that openweight models have a far cheaper cost to use, but
06:12 you have to use your own cloud. And it's not like the open weight models are so much drastically cheaper in terms of how much compute they use. They're just cheaper in terms of the weights are open. >> Exactly. Which leaves more pie for the hyperscalers to absorb. >> That makes sense.
06:34 Dea, do you have any thoughts here? >> Yeah, I think that it's a special time if you're an active manager and let's say you're bogeies and you're trying to outperform the S&P. It's a very top weighted index obviously, you have the top 10 names make up close to 30, 40% of the index weight, and a lot of these names that are hyperscalers you mentioned have, there's a step function change in capital spend and for the foreseeable future they're essentially existentially forced to make these outlays with uncertain ROI
07:08 profiles. So you have a situation where the leaders of the index are being forced to kind of subsidize this spend for the rest of the economy. And you could find other companies that benefit. So yeah, it's a very special time to be an active manager. And not to mention most of these hyperscalers we mentioned are trading at significantly high valuations, roughly 10x EV to sales if you average across all of them, which definitely isn't cheap if you ask me.
07:36 So I think there's a lot of vulnerability in the index right now and it's a pretty exciting time to be a stock picker. >> So a lot of mainstream thinking goes where the hyperscalers go that's where the suppliers to the hyperscalers, so the semiconductors, the powers, many of the names that you're involved with and we'll talk about that, that's where those go as well.
07:54 But you're saying that you could see a world where actually the hyperscalers burn a ton of money and they burn it on spending on chips and all of these power stuff and that's just a huge beneficiary to the companies who are receiving the money. >> Yeah. At the end of the day the demand for compute is going to continue to be unlimited for the foreseeable future.
08:22 Every actor in the economy right now, every business is trying to figure out how to use AI. So you're going to need compute and all that is backstopped by hyperscaler spend. From what we're seeing is that there's companies that are figuring out best ways to convert that compute into economics and a lot of these companies are trading at reasonable valuations.
08:42 They're not having to spend a ton in order to receive attractive economics and that's kind of where we're looking. If something's trading at 10x EV to sales and there's a huge step function in capex and they have to spend all their free cash flow and more, a lot is going to have to go right for that multiple to be roughly correct. So yeah, I think it's a lot easier to look elsewhere. >> We will get into the elsewhere. So Dea, I know you've been tracking a lot of software
09:14 stocks, many of which you talked about with my partner Max recently, and those have done well, many of them, but we're going to start with the hardware. So Dean, tell us about the thematic overview of the stocks in your guys's portfolio allocated towards the data center and almost none, I think literally none, are semiconductor companies but they are involved in various ways.
09:43 So Dean, start off with your holistic approach, the theme that you see that's benefiting all these various companies, and then we'll get into what drew you to the individual stocks. >> Sure. So the largest theme is energy. So especially bring your own power. The infrastructure in the United States is a very aged and antiquated thing and for a good reason.
10:08 For the last 20 years or so essentially the energy demand of the United States has been roughly the same around 4,000 terawatt hours because appliances have been getting more efficient and even though the population has been growing they've kind of counted each other, and now you have AI which is poised to take 20% of the entire US energy grid demand by 2030, roughly 100 gigawatts or so, and the infrastructure, the grid can't do that primarily because of two reasons. The transmission lines are just, it's akin to a two-lane
10:37 highway, which should be like an eight lane highway. And the power fluctuation of these data centers, simply the transmission lines can't do it. And so there's these massive queues to get power from the grid. And it's extending 18 to 24 months. And so all these companies, these hyperscalers have to bring their own power.
10:57 And the United States is very fortunate that they have natural gas pipelines almost everywhere. And so they can plug in and if they have turbines they can utilize the natural gas to create energy. And so that theme we believe is going to continue to sustain itself for the next 3 to 5 years until more alternatives can be brought to the market.
11:18 So we believe that's still the strongest theme out there. Another theme is data bandwidth between data centers. So you've been seeing these massive data centers being built on the scale of 1 to 3 gigawatts and we believe that's going to be topping out soon primarily because of two reasons.
11:39 Number one, you just can't bring that much energy into a site. And number two, you're seeing a lot of pushback from cities and communities that don't like these massive data centers. They think there's emissions and water contaminations. And so you see these moratoriums cropping up in different states.
11:57 And as a result these hyperscalers are going to have to now bridge data centers in different geographic locations together. So bandwidth needs are going to have to expand almost 15 times to accommodate that. And we believe that that is another theme that we believe is very attractive. >> So exactly what do you mean by bandwidth needs going up? >> So essentially you can think about these data centers as monolithic.
12:18 They kind of operate as standalone silos and now instead of say a 10 gigawatt site you're going to have 10 different 1 gigawatt sites and they all have to be communicating with one another to be creating, to do training runs or to be running inference etc. >> Okay, that's interesting. So let's talk about the first theme which specifically is electricity, power, energy, and is it specifically behind the meter or is it just broadly? >> Specifically bring your own energy.
12:43 Yes. >> Okay. So bring your own energy. Dean, Dea, I associate with bring your own energy names like Bloom Energy, names like Constellation Energy, GE Vernova, many names that people, if they listen to other financial podcasts or television programs, will hear all the time.
13:06 Again, you've got some stuff that almost no one else has. Exactly. Why do you own what you own as opposed to the more mainstream kind of behind the meter names? >> Yeah, you named the largest players. Bloom Energy is a massive one. We have a company called Capstone Energy in which they produce small microturbines.
13:24 Think 50 kilowatts to two to three megawatts. And simply it's also valuation. Bloom Energy is trading at, I think the last time I looked, at 15, 20 times revenue and capstone is trading on the scale of three times. And so valuation is a huge driver in our stock picks and we believe the tailwinds are just as strong.
13:43 Bloom Energy produces fuel cells roughly on the same dimensions as Capstone. They're a bit more efficient. However capstone micro turbines are less costly. And so we just think that the trends are just as strong with Capstone. However, the valuation is much more attractive. >> So Capstone produces turbines that are smaller than Bloom Energy.
14:04 Who would buy these turbines as opposed to, if they're doing behind the meter, I imagine they want to go to Bloom. What's going on with capstone? And also, just step back, what is a turbine? What is a fuel cell? What are we talking about here? >> A micro turbine is essentially just a large turbine shrunken down.
14:23 So you could think about these massive turbines that GE Vernova makes that are on the scale of 200 to 300 megawatts. Why someone would pick Capstone or a Bloom Energy is time to market. So there's massive lead times with these larger turbines stretching on the order of 18 to 24 months. And it's crucial, if you don't have energy, you don't have anything.
14:44 And so you need energy however you can find it. And so that's one of Capstone's biggest assets. Time to market is on the scale of one to three months and it has significant capacity left. That is the large driver. So energy, as soon as you can find it, you want it.
15:02 >> Okay. And so Capstone Energy from when you initiated on August 5th, 2025 to its peak in May 29th, 2026 was up 1,131% roughly. Now, with the almost 50% decline, it's been cut in half. It is still up 545%. How do you think about valuation here? And just how significant do you think the growth in its revenues and potentially profits are going to be going forward? >> It's roughly operating at about 10% capacity.
15:33 So it can produce roughly a gigawatt per year running three shifts. Right now it's 90% less than that. And what we like about capstone is there's multiple ways to win. So number one they can serve a data hall for a hyperscaler. We don't expect it to be producing or supplying 300 megawatts to a hyperscaler.
15:51 I think that's a bit excessive but certain data halls 20, 30 megawatts at a time certainly reasonable. And then there's edge data centers. So edge data centers are just very small data centers roughly on the scale 1 to four megawatts and there's thousands of them in the United States. Those have yet to go from CPUs to GPUs. We think as image and audio modalities become more of a thing, video modalities, latency is going to play much more of a role and so these edge data centers are going to take center stage. That's coming
16:20 down the pipeline. And third, you have all these other manufacturing facilities that can't rely on the grid as much because of all this demand that's being imposed on it. And so we think those three avenues are very lucrative for Capstone. >> Okay. And would I be right in that it's basically made no money at all? >> Right.
16:40 Over the last, so the company's been around for over 40 years. They just came out of prepackaged bankruptcy about three years ago. They hit their first year of profitability last year. >> Say yes. >> Okay. Wait. Sorry. Oh, okay. Sorry. You know what I have? I literally was looking at it in billions.
16:59 So I'm like, "Oh, only 0.1 billion." Okay. Yeah. Okay. Sorry. >> It's a very small company. It's about 300 million, $350 million fully diluted. >> So what else other than Capstone? >> So the second theme, well I guess still tied to natural gas, is a company called Stabilist Solutions.
17:19 We just initiated this position recently. Essentially for data centers that don't have access to a pipeline, you need portable natural gas. So you need a company that can liquefy the natural gas, that can transport it via cryogenic trucks, store it in a tank, then have vaporizers so that you can be able to use it.
17:39 And so establish really operates in this space. It's been consolidating now over the last couple decades. It hasn't been a large space historically. Establish is now one of the few solution providers in it and the environment couldn't be better for it. Primarily driven by two things.
17:58 Number one, they just signed a large contract with a data center. I believe it was a couple hundred million dollars over two years to provide these portable natural gas solutions to it. And number two, via SpaceX. So SpaceX is one of its large customers and the space shuttle has used LNG as fuel and essentially SpaceX launches are going to go from I think 50 or so to 20x that in 5 years time.
18:23 And so those are two massive trends that we think are going to drive favorable unit economics for establish. >> So this company supplies natural gas to data centers and also to SpaceX. >> Yes, you can think about it, it's called a virtual pipeline. So if you don't have access to a pipeline, you need these guys to provide natural gas to you via tanks or via trucks.
18:44 >> Interesting. This is a small cap stock. So it's an interesting name and it's a recent addition. You have it, I believe, as a quote unquote speculative holding in your portfolio for Peros Research. You got three ratings going from speculative at 1 to 3%, starter 3 to 5%, and core 5 to 15%.
19:04 So Stabilus is in the speculative category. >> Yes, it's a very small company. It's around a $75 million market cap and so the sizing is smaller with those companies. >> Okay, so we talked behind the meter. Now tell us about bandwidth. >> Yes, absolutely. So like we were saying data bandwidth needs between data centers going to increase significantly and this company called Smart Optics located out of Sweden essentially plays directly into that space.
19:33 Everyone in Silicon Valley knows them. They've essentially, their hardware, they modify it to be able to communicate with other providers in that space whether it be Broadcom or Cisco or RITA, and their software is also best-in-class and so also a smaller company but we believe their solutions are pretty much tailor made for the rise of scale across and data centers. >> And sorry, what do they do? They control the amount of bandwidth going between different data centers?
20:01 >> Yes. So it's only the hardware to be able to essentially convert data into light to be able to send across fiber to other data centers and software to be able to modulate that and make sure that's extremely accurate. >> That's interesting. And interestingly this stock, I guess did it recently IPO?
20:24 Smart Optics? >> No, it's I think listed >> recently recently got listed in the US. Okay. It's been trading for >> Yeah, on Oslo Exchange. Their headquarters I think they just relocated to Sweden. Yeah. It's been listed now for about I think close to four years. >> Okay. So Dean, I think you're kind of the hardware guy. Dea is the software guy of the family.
20:40 Another hardware name you have looked at is Viche. Tell us about that. You first talked about that in June of 2025. The stock tripled to June of 2026, but then it is down significantly from its highs. It's basically been cut in half over the past month. What is Viche? What's its exposure to this trend? >> Yeah.
21:06 So Vich is a play on robotics and so we think that the next step with AI is robotics. So essentially we have the hardware solutions built out but the brain isn't really there. And we believe given high fidelity physics simulations AI can essentially create the brain needed to operate robotics. And so we believe that if that's the case then humanoid robotics might be the largest industry in 10 years time.
21:34 And so Vich essentially makes these strain gauges and sensors that go into the hands of humanoid robotics. And we believe they already have three large customers in that space. It's still in prototype mode. I think Tesla, Figure, and one other one.
21:54 And essentially it's a play on that. If AI can create the brain for robotics, given that the hardware is there, that hockey stick growth is pretty much incalculable over the next several years. >> But to be clear, this is Vich Precision Group VPG. This is not Vshology, which is a producer of passive components. And I myself got confused.
22:16 So people should be aware of that. Dea, do you have anything to add here? >> Just as far as, a lot of these companies that we've owned we've continued to own because we think the upside potential is significant especially when you look out at some of the trends that Dean mentioned. I mean who quite knows how big the robotics trend is going to be in the next 10 years but it's very clear to see the durable momentum just going forward and owning
22:48 these names for a period of time, I think that even if you're paying up in multiple slightly, there's just the opportunity set is just too enormous not to have exposure. >> Tell us about another theme, cyber security, which at a time was grouped in with software. So all these stocks sold off, now the conversation is evolving to something a little bit different.
23:15 Tell us your view on cyber security in the age of AI, Dea, and how you and your brother have chosen to play this in the markets. >> Yeah, I think what's going on in cyber is really interesting and we were ahead of this a little bit and now it's just continuing to gain momentum and you see the narrative of this growing, and really cyber is, we're on the precipice of a new chapter in cyber and one of the reasons why a lot of CTOs and CISOs, really the positions, the people in companies that are
23:50 responsible for tech and cyber, why they're freaking out, is that you're seeing this huge shift from identity based attacks. If you look at the majority of attacks in the recent years, there's like 80% or so are from identity based attacks. Everybody's familiar with phishing attempts and so on.
24:11 For bad actors, it's been a lot easier to try to finagle or steal your identity somehow and walk through the front door with the keys rather than try to find vulnerabilities in the structure of your house and trying to find a way to penetrate your home that way. So what we're seeing now is with the influx of these frontier models and their ability to go through thousands of lines of code and find vulnerabilities is that it's allowing bad actors to find and exploit vulnerabilities a lot easier. So
24:45 the cost of finding vulnerabilities in code has gone down significantly. So really it's like oh my god we actually have to worry about traditional hacking again. As opposed to just, oh let's just try to make sure, let's hire Crowd Strike. Let's get their Falcon agent.
25:03 Make sure that all our actors, all their activities are being tracked by Falcon and nothing disruptive identity wise is happening. Now we're having to worry about a whole new other thing which is really exposures. Where are vulnerabilities, where are all our assets? Where are the vulnerabilities? Which vulnerabilities matter? And what is the potential consequence if somebody were to exploit these vulnerabilities, which is a whole different question that's being asked in
25:31 cyber over recent years. >> So you're saying like over the past 10 years or so, the main cyber security threat was, you have an employee, let's call him Jeremy, and he gets called by a scammer who says, "Hello, I need your thing, blah, blah, blah." And he gives the social security, gives the bank information, all that stuff.
25:51 And cyber security was trying to contain that risk of human error. And now the risk going forward is not so much that, it is literally the computer system itself has been hacked by this extremely powerful AI, which has happened. >> Exactly. Well said. We're still going to have to worry about the identity stuff. That isn't going away obviously.
26:08 But yes, on the software side, the vulnerabilities, on getting hacked in general is significantly more poignant now and is going to continue to gain momentum, especially as really the obstacle has been cost, but as some of these models start to become lower cost and some of these bad actors can use these models to find these vulnerabilities and exploit them, it's going to become more and more of a problem.
26:34 And when I say CISOs and CTOs are freaking out about it, it's an understatement, they're losing their minds about, are they prepared for the next shift in cyber security. >> So CTO is chief technology officer, CISO is what? Chief compliance officer or >> chief information security officer. Yeah. So really the person responsible for protecting the company from cyber attacks and stuff like that.
26:54 >> Yes. And so these stocks alongside software have sold off because oh my god AI is going to make this software and disrupt it. You think that's an opportunity? >> So it's a huge opportunity for companies that are able to provide solutions around, hey, I'm a company. Let's say I'm a large company. I have assets.
27:13 I have servers. I have AI solutions. I don't even know all the applications that I'm using. I need a solution that is going to tell me where all my assets are, that's going to be able to scan them, tell me where all the vulnerabilities are, and there's going to be hundreds of them, but then only tell me the ones that really, really matter, and then be able to fix them for me.
27:35 That's where it's headed. So the company that we're really interested in is a company called Tennal that is ahead of the game here. They're the leaders in something called exposure management, which is where the space is heading. They started this in 2022 and it's really about taking their previous solution which was kind of a vulnerability scanning software that has tended to move to a more commoditized direction, and really building out a platform behind exposure management, using, they have a partnership with
28:05 Anthropic, using some of these frontier models to be able to go through all your assets, being able to go through your code, find the vulnerabilities and help you fix them. So they're the leaders in that space. They have an incredible opportunity to upsell all their previous vulnerability scanners into this new platform and the tailwinds are quite durable for this company for a long time.
28:28 And keep in mind that versus some of the larger competitors in space, Teneal trades at four times EV to sales and Crowd Strike and Palo Alto are both north of 20 times EV to sales. So you're getting a huge discount on a player that may be better positioned than some of these larger rivals to do very very well given this platform shift. >> And it is just starting to make money on an operating profit gap basis.
28:53 So maybe those other cyber security companies are making much more money in terms of gap earnings. That is an issue with software, is that some software stocks have sold off so much but they're still not at the level where deep value investors would buy them even if some of these stocks are literally down 80%.
29:15 Dea, broadly thinking about this SAS apocalypse, the apocalypse of software as a service stocks, how do you assess the threat of AI to software stocks? How do you think about the bear case? What is the bear case as you and your brother perceive it? What percentage accurate is it? Where is it correct? Where is it not correct? >> Totally. And there's two things here.
29:36 The first one I want to address is that some of these companies don't screen well. If you look at tenable, if you look at some of the other SAS companies, some of the other ones, their growth has come down significantly, but their stockbased compensation is still extraordinarily high.
29:50 Which is one of the reasons, like a company we own named Sprout, which is one of the reasons why it screens quite poorly. But I would >> by the way, Sprout, you talked about it with Max in April. It's up like 50 or 60% since then. So, >> it was so beaten up. It was such an easy call to make. This thing, everybody is pricing this thing for complete decapitation.
30:12 And it was very clear that the market was wrong on the probabilities. But these companies, yes, you're right, they screen bad on a gap basis, but a lot of that is due to SBC and because some of these growth rates have come down. SBC is just like any other variable expense is how we believe investors should view SBC.
30:31 And if you think that there's reason to believe that SBC as a percentage of revenue should come down quite rapidly over the future, that's an opportunity to get in front of some very attractively enhanced gap earnings just as a result of SBC normalizing. So that's one thing.
30:50 Secondly, I think the market was correct to assess vulnerability. A lot has changed in software. If agents can use software and the cost of producing production ready code has come down by an order of magnitude of 90 to 95%, yeah, it clearly requires a re-evaluation of some of the software companies and what does it mean to have staying power as a software company? Where does the actual moat come from? And I think the market is just starting to figure out, okay, which software companies are vulnerable.
31:18 Well, none of these big software companies have actually seen any sort of supplanting of their products or services yet. None of that has happened. Obviously some small software tools are very easily replaced but if you're a fullthroated enterprise software company there's still, it's still very very difficult to replace, and which ones have the defensibility, and for us it's really around, do they have any sort
31:49 of unique data? Do they collect their own data? Do they provide security compliance, enterprisegrade features? How deep are their integrations? Is there a real world component to it? Are they helping the company solve logistics issues or are they helping the company with giant construction projects like a company like a Procore for instance? Or is it just purely a digital tool? So for us the evaluation is an n of one.
32:19 You have to look at each of them as a case by case deal and not just a broad blanketed, okay, well software is going to get destroyed. And I think the market's getting better at some of the nuance around some of these software names. >> What are some software stocks where you've looked at them and you think, man, the sell-off is warranted.
32:40 And if anything, I think that it's going to go down a lot more. Like this has just been one-shotted by AI, destroyed by AI. >> As far as the bigger names go, not really any. Although, what I will say is I think the sell-off is rational. Not exactly from the "this thing has no terminal value" perspective, but really that I don't think most of these companies should have been trading at some of the levels they were trading at the start of the year anyway.
33:08 >> Why do you think a sell-off is merited in the sales forces of the world? >> Well, it's also the growth rate. Most of these SAS companies, their growth rate has also come down a bit. It's not due to the AI threat, just due to the nature that they were fast growing names and this kind of slowed down.
33:31 So the opportunity in front of them, where's the next leg of growth going to come from, is difficult to answer. These companies, their fundamentals are going to continue to improve and we've seen that this earning season, but it's hard to get investors excited about a larger growth story, whereas with teneable we think it's a completely different situation given what's happening in cyber security.
33:57 >> Yeah. So obviously you are very forwardlooking which is how you make money in markets actually, but just looking optically at the revenue growth rate, they both used to be growing at very high rates and now they're growing at like 10%. So I expect you think growth for tenable is going to accelerate.
34:14 >> We think growth for tenable is going to accelerate given the opportunity. Exactly. Like you said, our perspective is that investing is all about anticipating the future. And if you have a variant perception to the prevailing market and you're right more often than you're wrong, you're going to make a lot of money in this business.
34:32 So it's all about forward looking and how you see the future contours of a business evolving. And yeah, for us we think tenable is moving quite fast. There's a significant urgency to that culture to take advantage of this structural shift in cyber to get ahead of the next chapter in cyber and we think they're positioned to benefit from that.
34:57 We're already seeing that in their data, their upsell rates and customers that are moving to their exposure management platform which is the opportunity. >> Okay. What other names in the cyber security or software world are you invested in and why? >> I think one that's pretty easy to own is a company called Upwork.
35:21 It's not really a SAS name. It's a software company. And I think we've forgotten how special marketplace businesses are and how difficult marketplace businesses are to build. The network effects that are involved and just how impossible it is to replace this type of business.
35:40 But Upwork is its own little economy that connects businesses to freelancers. Think of highvalue freelancers. This isn't like a fiverr where you just need a quick logo created or something. There is part of the Upwork platform that does that and that's being competed away by AI which has caused a lot of investors to aggressively sell off upwork stock in fears that oh my god a lot of these freelancers are going to be replaced by AI.
36:12 It connects businesses who need support, whether, think about, oh my god I need help with shoring up my cyber security or I need help with creating a marketing solution for my business or I need help with customer service, whatever your needs are as a business, and Upwork is there, the freelancer is there to be able to serve those needs and it's a platform that's not static, it's not like, just like any other economy there's creative destruction.
36:41 So if a certain substrata of freelancers is no longer being used, that's going to be replaced by whatever needs are in the future. So we're highly bullish on Upwork staying power and especially if you look at it from the perspective of valuation. This thing trades at a little over one times EV to sales.
37:01 It's trading about a little over six times EV to free cash flow, even after taking into account SBC. So unbelievably cheap business that's impossible to replicate that's growing. I don't know where you find a better bargain than that in this market. >> So Dea, I do project some people listening to this and thinking, man, he's talking about Upwork.
37:25 Like that company's going to be totally dead because there are companies that offer consulting services that now really can be done by AI, software development advice, that kind of stuff. Why isn't Upwork going to die? And talk about the business that you think is being competed away versus the broader business that you think is going to be totally fine in this era and the difference between that.
37:49 >> Well, you don't even have to take my word for it. You can just look at their data. The jobs that are underneath 500 or more as far as job goes, which are low value work, they're seeing some weakness there. So they're very transparent about the weakness you're seeing in that lower kind.
38:06 >> What do you mean 500 or more? >> 500. I need a logo created. I'm going to get, you're a freelancer. I'm a small business. I need a logo created. I'm going to give you $300 for it. Those kind of jobs. >> So $500 or less for the entire task, that is seeing strong weakness whereas the other part is not.
38:26 >> Exactly. Which is a lot of Fiverr's business. Fiverr is a competing kind of freelancer platform that has really productized a lot of these lower value jobs and I think they're going to have a much tougher time, but Upwork, the overwhelming jobs on their platform, tasks on their platform, are higher value jobs.
38:48 I need somebody to maintain my website, make the proper updates. I need somebody to, I need some consultative help around my marketing solutions, stuff like that, higher value services. So I disagree strongly, as the market, I don't think that's going away. I think small businesses at the end they want to talk to people, a lot of times they don't even know what questions to ask, so how is an AI going to be that useful for you if you don't know what the right
39:14 questions to ask somebody who really understands your problems and is an expert in that space. That's not going away. You're going to need experts in certain areas. AI can help you and keep in mind AI is also helping the expert that you're talking to.
39:31 So it's making them a whole lot more efficient. And at the end of the day, it's a whole lot easier to just talk to somebody who understands what you're doing and have them do everything instead of having to prompt AI 18 million times to get some iteration of something exactly right. So yeah, for us we think that freelancers especially powered by AI are going to be incredibly valuable.
39:52 We are big users of the Upwork platform and our spend on that platform has continued to grow over the years. It hasn't declined. So yeah, obviously we're an n of one, but there's a lot of the reasons why we think that Upwork has staying power. >> That's interesting.
40:08 I think that could be your most contrarian take so far. I'm excited to see if it works out. I think would you guys say in your portfolio you do have a blend of things that are against the tide versus with the tide? So some of the names that Dean was talking about earlier probably people have never heard of them but they do similar things to the stocks that are up a ton and they're up a ton, whereas Sprouo, it's up a lot from when you talked about it with Max, Dea, but that was a software name that was
40:37 totally in the line of fire. So are you guys aware of that in terms of managing your portfolio, of you want to have some positive momentum and some negative momentum names? >> Really it comes around just having a variant view. So a lot of the names you mentioned with Dean, you can be with the momentum but if you think somehow the trend is even stronger than the current momentum suggests, that's a variant perspective that qualifies.
41:04 There's usually opportunities to make a lot more money the more variant your perception is. So we're just kind of more attracted to contrarian takes. That being said, they don't all, the markets may be right on a lot of them a lot of times. But yeah, for some of these software names, it is a heavily contrarian take and that's why there's an opportunity to make excess returns, is because you think the market's wrong and you're willing to place a significant amount of capital on
41:31 your conviction. >> Dea, you've got several other software names obviously available to Parinus Research clients. I want to take a step back and get your story. So the model portfolio or the portfolio that you guys have been managing since 2017, it's outperformed the S&P since then and actually done double the S&P.
41:55 Tell us the story of managing that money, your guys' investment journey, and then we'll get into the philosophy and why you started Pernas Research. >> So the whole concept of Pernas research is really around how we think sellside research has a lot to be desired. There's a lot of biases, there's no real conviction, it's more coverage than anything, and buyside research when done right, with that alignment, is just better. These are people, they have skin in the game,
42:28 they're invested alongside of their ideas, they just care more and it reads with more conviction. Yeah. So for us, it just seemed like a no-brainer, easier business model than sellside research. Obviously, there's still place for sellside research, but we just don't really like any of it to be honest.
42:47 So we decided to create our own research firm around the concept of buyside research. None of these other research providers really have a track record. A lot of these sellside research firms that I talk about, they've made some recommendation or whatever a year ago and whether it worked out or not nobody seems to care, nobody has a record of anything. And yeah, for us, track records are important. Like how has your portfolio done? Are you any good at what you do? If you're not you should
43:11 just go home is how we think about it. So for us track record is everything and we've structured the entire research around that and I can get into the portfolio in a second, but that's really the genesis around why we decided to start our research business. >> That makes sense. Yeah.
43:30 Let's keep it coming on the portfolio. >> Yeah. Go ahead, Dean. >> No, you. >> Younger brother showing respect. Nice. [laughter] >> So yeah, the portfolio is really structured, there's three different sleeves. There's a core bucket and those are really names that we have strong conviction in over the next couple years.
43:50 They tend to have longer time horizons. They tend to have higher, our picks in that bucket tend to have higher batting averages. Usually it's around 70%. And we tend to weight those more in the portfolio. So if you think about, I hate the word compounder, but if you think about compounders, it's kind of like that, companies we have more conviction in in their growth profile, in their financial profile, so on and so forth.
44:12 More established type companies. And then we have another bucket which is starter positions. In this modern market, things can move so fast, you maybe don't have the time to do the three months of research you wish you could do in a name or an industry and you just have to do the appropriate amount of research and take a position because the idea is interesting and it could potentially graduate into a core position.
44:37 So that's really our starter bucket which is weighted around 3%. Each of those is weighted around 3%. And then you have our speculative sleeve where a lot of the names in there have very little downside protection, but the upside, it's really about slugging percentage. It's not about batting percentage.
44:55 You're really trying to take small positions in a name and you think that there's opportunity for multiples of returns in a short period of time. And that's kind of how we structure our portfolio. >> Tell us what's available to your clients of Pernas Research. So you've got the research vault, your pieces on your open positions, your closed positions, pieces you're neutral on.
45:16 You have your active portfolio and you're tracking that on whether it's a core position, etc. whether you're trimming it. You've got the performance and then stock sonar, and theme. So just tell us what people get. >> So really the first thing they get is access to the portfolio and all the research according to every single name.
45:38 So every single name that we put in the portfolio there's an initiation report on and then there's updates we provide on the name and updates on certain actions we're taking if we're taking any actions at all, like maybe we trim something, maybe we add something on some weakness. A lot of times if you own a name and the fundamentals keep doing what you think they're going to be doing and the price is going the other way you have to add to that position.
46:02 Over the years, we found out that that makes up about 20 to 30% of our alpha, is being able to average down when it's appropriate. So any of those actions in the portfolio, there's always research communications associated with it. But that's the first thing they get is the portfolio and then regularized research around each of those names, any new ideas and so on.
46:23 And we have a regular cadence of the research that we produce. Every month we come out with a report on something and weekly we talk about all the types of ideas we're looking at. That's the stock sonar that you mentioned. There'll be three names we thought were interesting. Maybe we passed on them. Maybe we think there's more research needed on them.
46:42 But we try to give our members kind of an inside view into the research process and where we're looking. >> Right. Just looking through, you talk about not just the stocks that you like but the stocks that you passed on. So for example TIC solutions, actually I know that stock, you say pass. Back Blaze, pass.
47:00 You say okay it's a fine company but here's why I didn't own that. That's important. Also I think your work is really short. There's like no fat at all and some of the work is literally like two to three paragraphs and I think that may seem like people are getting less, well they're getting fewer words but they're actually getting a lot more and it's saving time.
47:20 >> Yeah, I think it's both. I think it's bite-sized when it's, like you said, we do publish on when we pass on certain ideas which we think is important, it gives people a deep understanding into our filter process and it also helps, what we found, this feedback we got but we didn't know at the time, that for our members it gives them more conviction in the ideas where we do flag, is like something that's really interesting given all
47:51 the stocks we've passed on. So they kind of already understand our thought process and they're bought in to our philosophy just through the different companies that we passed on. >> I think it's also, people may have listened to Dean say he loves this robotics company, it's important context.
48:08 Well, there's five other robotics companies that Dean and Dea looked at and they didn't like it and here's why. >> Yeah. Exactly. So, and I think it's what every stock picker should be doing anyway. They should be turning over rocks. And if you're not looking at many different companies all the time and trying to evaluate, getting your reps in, it's very difficult to outperform in our opinion.
48:33 We're not believers in the buy and hold forever philosophy for a number of reasons. You've got to be constantly looking at new ideas and making evaluations in your portfolio. >> Dean, anything to add? >> The hit rate for us is roughly like one in a 100.
48:50 So we pass on a lot more companies, but companies that involve some research, we're generally around a 1% hit rate with those. So yeah, we turn over a ton of rocks and it also informs our portfolio construction because if we're not finding a lot of opportunities at company level, we're going to have a higher cash weighting in the portfolio.
49:08 So it informs both. >> And you're mostly in the small and midcap space. >> Yes, exactly. But like Dea likes to mention, it's incidental. There's just a lot more companies in that space. However we do dabble in mid caps if the opportunity calls for. So for instance, Meta was one of our large positions.
49:29 I think back in 2022 or so when it sold off I think 70 or so percent on fears that ad tracking transparency was going to ruin their ad targeting abilities. Tik Tok was going to essentially monopolize Gen Z and Instagram didn't have a rebuttal. On top of that, there was the metaverse that Zuck Zuckerberg was plying 40, $50 billion a year into.
49:53 And we thought that the selloff, I think at its bottom is around $90 a share from 300 something, was just throwing the baby out with the bath water. Essentially we think Zuckerberg is one of the more talented CEOs. He's had a couple missteps with Meta and AI. I'm actually a bit disappointed.
50:13 We sold out of meta I think last year just as their AI open source llama was not at the level that we thought it would be and we believe that had to do with several things like Yan Lun was head of AI research there and he's been a massive opponent against LLMs, he thinks it's kind of a localized, a local maximum as opposed to kind of global maximum, he thinks it's a cul-de-sac for AI and so I think there's been some cultural mishaps there that's slowed the progression of AI, but we do look upon
50:46 him very very favorably as a CEO. He's taken Facebook from what it was. He was able to monetize on mobile when it was very hard to do so and he's able to copy Snapchat and take market share there. So we believe that the sell-off was drastic. However, when it recovered to 700 plus, we got out of it given the valuation along with progression of AI.
51:11 >> That is interesting. So monetary matters listeners can get a 20% discount to a subscription to PNAS research and the subscription is a quarterly subscription. The link is in the description. There's no code. All you have to do is click the link. Tell us more about Meta.
51:34 This stock is probably the biggest spender relative to the revenue that it's actually generating from the spending on AI capex. Like they're basically just spending for themselves. They've announced they're going to sell into the compute. What are your thoughts on Meta now? I admit that I'm pretty bearish on Meta because to me it kind of seems like they don't really have a plan or they're very bad at communicating their plan.
51:57 But I'm curious what you guys think. You guys know it way better than I have and have done tremendously well in the stock. >> Yeah, Meta. So the first strategy of Meta was open source and so Meta is not in the cloud business. It wasn't in the cloud business. That might change in the future, but they're in the content business.
52:14 So if they could make AI open source, make it cheap, people would produce more AI content which would benefit them directly having the largest network in the world. So that was the strategy that we thought they were going after and we thought it was the right strategy. Now it seems like they're just floundering and trying to find the best use of the thousands of GPUs they've acquired.
52:38 Cloud could be very profitable for them, especially if there's an acceleration in demand given open weight models and enterprises using them. But yeah, seems like they're floundering. They did a lot of head-hunting and poached Jagu and Anthropic employees for hundreds of millions of dollars and that didn't really yield anything.
52:57 So unless they came out with an amazing model, it's hard to see where they're going from here as opposed to just being a cloud provider. So yeah, at the beginning we liked their strategy, we liked where the puck was going, but that seems to have been a lot more murky now. >> If you don't like the strategy, how are you not bearish on the stock or quite negative on the stock given that if they're literally just wasting hundreds of millions of dollars, how is that not going to be really bad and
53:26 this is going to end in tears, not for the entire AI, I think, but just for Meta? It sounds like you're a little bit measured. And I want to know just the scale of your skepticism. >> Yeah, we no longer have a position in Meta. Just to be clear, we sold out of it last year.
53:41 Yeah, at the moment we are more bearish on Meta for sure. We don't have a bullish view on it. >> And does it give you concern for the broader space if one of the players is spending so willy-nilly with so little of an idea of how to make money? And I'm sure they would say they do have an idea, but we'll see.
54:00 >> We believe capital allocation with Meta is a bit different than Microsoft and Google who are in the cloud business. So that spending is a lot more measured and a lot more rational. And you could say for instance Meta is doing it as a defensive measure against Tik Tok and other incumbents that could build out GPUs and then they hit some type of app where it's magical and AI is being produced on there and it attracts people's attention which directly hurts Meta. So you could say that it's
54:27 somewhat defensive along with other hyperscalers of course. But yeah, I would say the outlook for Meta is definitely negative going forward. >> Have you guys looked at semiconductor companies? I can't help but notice their absence broadly in the portfolio. >> With semis
54:48 it's a lot harder to play. Especially given China. We've learned that quite the hard way. China is very competitive and they're no longer just a producer of $1 widgets. They're very technical. They already have a monopoly pretty much in EVs and drones and essentially they're going after ASML.
55:10 They're going after memory providers. CXML just IPOed. I think it has a half trillion dollar market cap now. So just the threat of China in there and their ability to produce whether it be DRAM or CPUs or lithography machines for much lower cost definitely gives us pause regardless of how bullish the overall industry looks.
55:31 >> Now, let's go on to payments. Dea, what is going on in payments? You got several holdings in payments. It is a space where there's been a massacre in many names, names like PayPal come to mind that actually I got mixed up on it. It was bad. You passed on PayPal. So congratulations on that.
55:50 But the pricing power and the perceived pricing power that investors see has just really gone down, the multiples have gone down. The only stocks that have not seen a huge multiple compression are Visa and Mastercard, which kind of the king and queen of the space.
56:05 What are your overall broad thoughts, Dea? And then we'll get into stocks. >> Yeah. So payments is a pretty broad term. The part of payments that we are interested in, we like, is money movement cross border. So if you just look at banking in general, if you look at the history of banking, really banking is a national enterprise.
56:31 If you're the government, you're trying to set up a banking infrastructure, you're not thinking about any international transfers, you're just trying to create a banking industry. So traditionally banking systems are heavily nationalized and the whole international transfers is an afterthought, or how to move money across borders, and then you have this very clunky correspondent banking system that has been developed and swift and so on.
56:56 All of this is pretty esoteric but all people need to know is that it's very antiquated and it costs a lot of money to move money across borders using the traditional banking system. One of the areas where fintechs have been so impactful is driving down cost of international transfers. So if you look at the companies that we really like are Wise and Remittly, they've created the infrastructure to circumvent correspondent banking, to deliver crossborder transactions a lot more cheaply. So that's
57:29 really a huge part of it. Correspondent banking really expensive. If you look at the average cost is about $5, or sorry 5% or so. Using some of these fintechs it's a lot closer to 2%. So they've really improved not only the cost, but the experience as well. Being able to track your transaction, being able to gain confidence that it's arrived where you need it to arrive as opposed to just, here's a bank, it sent it, and let me call whoever's supposed to receive it to see if they got it. And then
57:59 the second part of it is that if you look at M2 growth in general, central banks are going to continue to print more and more money. It's a train that's never going to stop. Whether or not we're in recession, whether we're in good times, M2 growth is going to continue to grow.
58:16 Traditionally, it's grown at around five or six% a year. And if you could find a company that has a scrape on that growth and is able to defend their take rates, the economics are very very powerful, especially if you consider how that scales and how that drops down to the bottom line.
58:32 So payment companies are very very special if you can find the right payment company. Think about if you got into a Visa or Mastercard early, or a Stripe if you're an early investor on Stripe or something like that. Extraordinarily >> or Adian, another one >> extraordinarily powerful businesses. The competition is fierce and you got to pick the right one.
58:48 >> You see so much hinged on the phrase if they can defend their take rate, which is how much they are paid as a percentage of the transaction value. Why do you think that these companies can defend their take rate and they won't go down the way of, oh my god, I mean there's Worldpay, Fiserv. Why are these companies defensible? What is their moat? >> I'll take Remittly and Wise. Those are very different businesses but functionally they do a lot of the same thing which is helping move money across
59:21 borders. Remittly is purely a migrant remittance provider, so air hole. It's really a Western Union killer is how you can think about Remilli, like a digitally native player, much more enhanced experience, cheaper fees, and has really eroded Western Union's business model and they really have built mind share with migrants.
59:53 So migrants, they're not like your typical customer. They really understand that market well. They're not just going to try to find a lowcost solution. Trust is a huge deal for them. Branding is a huge deal for them. So having that mind share in the migrant community is going to help defend their take rate.
1:00:10 Their take rate is going to naturally come down. It's going to come down very very slowly, like a bip here, a bip there. But their send volume is growing 30, 40% annually. So send volume is growing 30, 40% annually and revenue is growing 25%.
1:00:27 So that's really the structure and if you look at the durability of that growth you could see that out the next five or 10 years, the more and more money that goes through these fintechs as opposed to correspondent banking. Not to mention there's still a lot of money that just moves from cash.
1:00:44 There's still significant room for digitization as people go from moving, people walk into your Western Union with a bunch of money to send to their grandma in Mexico or something, that electronification of cash is still happening.
1:01:03 So you have several trends that are working in the same direction. What Wise is, another one where they're going to continue to defend their take rate because they have the best infrastructure around and nobody's done the work that Wise has done to build out their infrastructure to plug into different nation central banks and be able to move money as fast as they can.
1:01:23 And they're more aggressive about taking down, their whole thing is like, I'm going to be the loss leader. I'm going to take down my rate very, very fast. It's not due to competition. It's more aggressiveness. It's not defense. So they're contin >> they're the one causing the storm.
1:01:41 They're not being disrupted. >> Exactly. So yeah, I think those two players, the durability of those two players' growth profiles is very very very strong. There's so many tailwinds that they're benefiting from that we feel very comfortable owning those companies for a long period of time.
1:01:59 >> Who are their competitors in the crossborder movement? Visa reported today. I always see Visa and Mastercard say crossborder volume, crossborder volume. So it sounds like they are a competitor and then you have the traditional banks competing. Who competes with Wise and Riley? >> So you could say that Riley and Wise are competitors.
1:02:22 They are competitors for a certain segment, but Wise's market is so much bigger and they're really going after businesses. They're going after banks. They're trying to help banks with their infrastructure to move money. So Wise is really trying to take down, it's really about debanking and trying to take down correspondent banking and even Visa and Mastercard.
1:02:46 Wise is bad for Visa and Mastercard. Wise isn't bad for Remitty because 90% plus of transactions of Remitty move through the Visa or Mastercard platform, they move across visa rails, as opposed to Wise where Wise has built out their own infrastructure to move, where it's more like a global system. So banks are a competitor. You have a lot of regional players that focus on certain corridors, focus on moving money let's
1:03:20 say from US to Europe. There's tons of different players out there but none of them at the same scale as a Wise or >> It's interesting. Yeah. So so many times investors have been bearish on Visa and Mastercard. The bear case is these fintechs are going to compete with Visa and Mastercard, where almost inevitably the fintechs have used the Visa and Mastercard rails. Tell me about Payafe.
1:03:43 >> Payafe is an interesting company. It's more your typical kind of processor. You talk about PayPal, it's more a competitor to PayPal. So now we're talking about more traditional payments as opposed to crossborder money movement, where they're doing the processing for a different company's payment needs and really they have an orientation in gaming.
1:04:06 The company, we really like the company although it is significantly overleveraged. They're paying down debt, that continues to grow, there's really been a turnaround, a new CEO, trying to get things operationally tight while continuing to grow, but the biggest thesis behind Payafe is that they have a digital wallet subsidiary that, if you look at the value of that, it makes up 60, 70% of the enterprise value of the whole company if they were to just
1:04:38 sell that off at 9, 10 times earnings, which is, it's a very portable business as well. So they own an asset which makes up a huge portion of the value of the company. Not a lot has to go right for there to be a rerating, but there is some hair on it with the leverage. >> Yeah, they do owe $2.
1:05:00 5 billion relative to their book value of $600 million. Their revenues have not grown nearly as much as the other companies you said. So are they more of a stable player? >> Yes, single digits. They've also sold off some assets. So organically, it's better than it screens. And it's really around high single digit growth.
1:05:23 >> So you sound like you really like this business because it's exceptionally cheap. What else do you like about it other than it's cheap? >> I like the play on gaming, prediction markets. There's a lot of business growth there and there's a lot of payment processing that needs to be done there.
1:05:40 It's not Stripe, the Stripes of the world, the Adians of the world typically stay away from that kind of business. And you have a specialized processor that can focus on that segment of the economy and there's just a lot of growth to participate in there. >> How do you assess the threats to the payment world, specifically cross border, of crypto and stable coins? So stable coins, oh I'm going to go to Europe.
1:06:09 I'm just going to transfer it on stable coins. You hear that all the time and stable coins transaction volumes are growing at ridiculously high rates, admittedly from super small levels and a large percent of that is just cryptocurrency speculation. But theoretically a company could move millions of dollars from the US to Europe on a very cheap mechanism, not using wise, not using remittly.
1:06:32 What's your reaction to that? >> You have seen a lot of announcements around companies using stable coins in a treasury function. And again this gets around correspondent banking which I think is really going to be the loser of all that. That being said, that isn't really where wise, or at least their use case anyway, is not really helping companies with their treasury function.
1:06:55 It's at the end of the day about consumers and small businesses and what they're doing to move money and to make payments and so on. Again like you had mentioned, stable coins is being used primarily in a crypto function. Overwhelmingly it's being used in a crypto function. Until we actually start to see people use stable coins in their local economies to make payments for goods and services,
1:07:20 I'm not worried about it at all. The data does not, I mean there's some examples where in Africa or something where the banking system is completely broken down, people are using stable coins to pay for things, but other than that, there's absolutely zero cases of people actually using stable coins like they're using fiat.
1:07:40 It just isn't happening at all. There was a lot of fear of it. I know circles come down significantly as a result of this narrative fading, but yeah, it's just not a thing. >> One thing. >> Yeah. >> Yeah. That's funny. Any other views on other payment stocks? Interesting.
1:08:04 I pulled up a fintech ETF. The biggest holding is actually Robin Hood, which is now. So yeah, Robin Hood, Block, Visa, Global Payments, Affirm, Toast. Any thoughts? >> The big trend there is a lot of it is moving towards, a lot of these companies that are providing this verticalized software solution that includes payments, they'll do your inventory management, they'll do everything that's like the nervous system of your entire enterprise and it also has payments built in. So
1:08:41 the processing part is becoming commoditized and the value seems to be accruing to the application layer, to the Toasts of the world. So that's why if you're investing in one of these companies they have to do more than just processing. There has to be something special about what they're doing.
1:08:56 They've got to be able to defend their moat. Yeah that would be my only take there. We did stay away from PayPal. We actually like Brainree. We like their processing segment. What we didn't like was their branded payments. >> Really? Okay. So you didn't like the part of PayPal that was making the most money.
1:09:16 You liked the part that wasn't making that much money, which actually does kind of make sense to me because what was growing was the unprofitable part, Brainree. What was not growing was the branded checkout because people aren't using that anymore, right? >> It's a high margin business. And there's just a lot of vulnerability there because it's hard to see the future growth.
1:09:36 So there's just a lot of vulnerability in the branded payment side. The Brainree side, volumes are growing like crazy. I don't remember exactly the profitability profile of that business, but there were scale economics to be had. And yeah, put it all together, we couldn't like it just given how profitable the branded side of things were.
1:09:54 >> That makes sense. Fun fact for people is that Brainree, which was sold to PayPal, the founder is Brian Johnson, the guy who's trying to live forever, who posts on Twitter all the time. >> Yeah. He used to go door to door and sell processing solutions to small convenience stores and stuff like that. Yeah.
1:10:13 So started off as really a salesman. >> That is interesting stuff. Well, I know we've covered a lot of ground. There's a lot of health stocks you follow. Obviously we want to leave some stuff for the subscribers behind your paywall. People got to subscribe.
1:10:31 But yeah, I really like the work that you guys do. >> Thanks, Jake. Yeah, it helps that it's fun. >> Well, guys, we will leave it there. I really appreciate the work that you do. Congrats on the great track record and people can find out more about the work you do at Pernos Research by clicking the link in the description.
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