WHEN: Today, Monday, March 14, 2022
WHERE: CNBC’s “Closing Bell: Overtime”
Following is the unofficial transcript of a CNBC exclusive interview with Altimeter Capital Founder & CEO Brad Gerstner on CNBC’s “Closing Bell: Overtime” (M-F, 4PM-5PM ET) today, Monday, March 14th for the premiere. Following is a link to video on CNBC.com:
All references must be sourced to CNBC.
PART I
SCOTT WAPNER: Now let’s move to an exclusive interview with a marquee investor who saw the destruction in tech coming, Altimeter Capital’s founder and CEO Brad Gerstner. He joins me live. It’s good to see you again. Welcome to “Overtime.”
BRAD GERSTNER: Hey, Scott, thanks for having me. Congrats on the new show. You know how to time markets. I mean, two years ago we were we were having this conversation. I think we spent about an hour together. At the start of COVID on March 26th when I felt about like I do today, growth stocks were under assault. They were cratering ironically, now we’re normalizing and growth stocks are down even more than they were at the start of COVID. But it’s good to be here and and you know, while I think we we did see the normalization and multiples as a likely outcome toward the end of last year. We certainly our base case, as you know, was a soft landing four to five rate hikes into this year. We didn’t see the concerns emerging about hyperinflation about 10 to 12 rate hikes, and we certainly didn’t see this tragic more unfolding on the doorstep of Europe. And as a result, you know, last year we held up better than most because we own high-quality stocks, and we were short lower quality stocks. But as you know, in the first three months of this year, all the high-quality stocks are being destroyed as well. And so we’re getting hurt like everybody else. This is a hard game. We’re down on the year. But I think if you have a time horizon over the course of the one to three years, we see a lot of stocks in our universe that we not only think are going to end the year higher, but we think are going to be multiples higher as we look out over the next two to three years.
WAPNER: Man, I love how honest you are and I know our viewers do as well. And frankly, I was going to play some sound from you from our Delivering Alpha event last September where you called a lot of this but I don’t even have to do that anymore because you just went through it. The bottom line is where I wanted to start this whole interview with is you called it. You got a lot of this right but multiples have come down a heck of a lot to this point. Is it done? Is it close to being done? What do you think?
GERSTNER: So let’s talk for a second about what I called. I expected that as the world of normalized post Omicron that we would get back to the five-year average multiple. We were about 30% to 40% depending upon which basket you looked at software internet above the five-year average. We didn’t think that was durable. We had given most of that up by middle of December. And now we’ve shot right through the five-year average. In fact, our internet stock index is at a 10-year low and software is back nearly where we were in 2016 before the rerating of software occurred. So we’re in the neighborhood of a tradable bottom. If you have a two-to-three-year time horizon, there is no doubt there are a lot of stocks that are going to be up well over 100% off this bottom. But listen, there’s massive uncertainty in the world. What is the Fed going to do? What is the rate of increase? How many increases? What’s going to be the inflation print in April? And what is going to be the resolution to the situation in the Ukraine? So, it doesn’t surprise me at all that buyers are on the sidelines and that sellers and short sellers are having a field day with stocks. I don’t think stocks today reflect a great price discovery about where these stocks are going to be in six months, let alone two years, but I’m also eyes wide open to the fact that we could go lower before we go higher.
WAPNER: Speaking of going higher up, you see what interest rates are doing today after sitting in a tight spot, they’ve started to move to 11. Is it all about rates at this point, especially when you’re talking about the kinds of vulnerable stocks that we’ve really had front and center, those being tech?
GERSTNER: Without a doubt the single biggest lever on growth multiples is rates. And we’ve had government intervention of the magnitude. We’ve never seen on the order of magnitude of the Marshall Plan at the beginning of COVID. It massively distorted multiples on the way in and it’s massively distorting multiples on the way out. As I look at it, the market is now pricing in at least seven rate hikes. As you know we entered the year with a big bond short, we’ve now covered that bond short because we don’t think that it’s possible for the Fed to raise rates 7,10, 12 times as some people think this year. Think about this, Scott. We’ve destroyed over $15 trillion of stock market wealth. We have $130 oil and $6 gas at the pump. We have no stimulus checks. We’re withdrawing trillions off the Fed’s balance sheet. Rates are going up and we have a war. Consumer confidence is plummeting. It’s down 32% in the last 11 months ,that ranks it in the top three of the last 20 years in terms of drawdowns. You know, I said on Twitter a few weeks ago, I don’t think the Fed’s behind the curve on rates. I think, or inflation, I think they’re behind the curve on recession. Every company I talked to is tightening its belts. Consumer confidence is plummeting. I don’t think there’s any chance that the Fed is going to raise rates 10 times this year. I don’t think they can. And frankly, I don’t think we’re gonna have hyperinflation in a world where demand is being destroyed at the rate it’s currently being destroyed.
WAPNER: So let me talk about your overall exposure if I if I could because by last December, you had said you had taken most of your your shorts off and your long exposure was back up to 70%. It’s interesting that now today you say we’re in the neighborhood of a tradable bottom. Where’s your exposure today?
GERSTNER: Right Scott so that you know I started off by saying you know we’ve been beaten up this year like everybody else because I was covering shorts as we approach the five-year average. That was our baseline that we were going to have a relatively soft landing, three to four rate hikes. And so we add on a fair amount of exposures we entered this year. We were wrong. We did not see this talk of 10 rate hikes and we certainly didn’t see a war developing in Europe. We think both of those are solvable. We don’t think we’re going to have 10 rate hikes and we do think there’ll be an off ramp to the situation in Ukraine. So we’ve taken up our exposure, we’ve consolidated behind our five or six best ideas, we don’t run leverage and so the bet for our LPs, I’m the largest LP in the fund. I’m not a seller. I’m going to own these companies, there are a handful of select companies that are free cashflow positive that are going to be worth more in the future. And so, for our LPs, the bet is simple. Do they want to stand with me and ride that out? I can’t tell you what’s going to happen the next three days or the next three weeks or even three months. But I am confident these companies like Snowflake, like Uber, like Facebook are going to be worth more than they are today at significantly more if you look out two years.
WAPNER: I wanna, I want to take a break and get into some of those names of all four but before I do that lastly, you mentioned very interestingly that you’ve taken your bond short off. I’ve got some people including a guy coming up in a little while Mike Wilson who suggested at this point bonds may be a better deal than stocks.
GERSTNER: Right, it comes down fundamentally to a question Scott of whether you think we’re gonna have more than eight rate increases or less. My bet is we’re gonna have less this year. We’re not in the business of being long or short bonds generally I’d put them on as a hedge against our growth exposure. And frankly, they weren’t a very good hedge because bonds haven’t moved all that much but gross stocks are down 60, 70, as you mentioned, down over 80%. And so for us, it’s about simplification, reduction of gross and making sure that you consolidate that what you own into your highest conviction ideas whether you’re playing at home in your 401k or whether you’re doing this professionally. These times are what try people if you dig a hole and get into the hole here at the bottom after having lost, you know, my sense is you’re locking in losses that you’re going to come to regret. Two years from now, people are going to be looking back and say, why the hell didn’t you buy Snowflake at 160 bucks a share? Why didn’t you buy, you know, Uber at 28 bucks a share? The answer to that is because people are very fearful. They’re fearful about the war. They’re fearful about what’s going to happen with rates. And for us, we consolidate behind the things we have deep conviction in with confidence they’re going to be worth more in the future. But admittedly, you know, nights like tonight we’ll we’ll get we’ll catch a little less sleep.
PART II
WAPNER: We’re back now with Altimeter Capital’s Brad Gerstner hanging out with us at “Overtime” today, You know, we talked about the magnitude Brad by which some of these stocks have come down and I’m looking at the, listen, it’s not just Meta, obviously. Look at another one that I know is in your book or at least it was Roblox is down 74% from its 52-week high. When you were with me in December, you said that you had picked some more of that up along with Snowflake. Can you tell me where that stands now and how you view stocks like that that have gotten absolutely obliterated?
GERSTNER: So, Scott that you know the top six names in our book are all companies that we believe are, you know, both accelerating, expanding margins, expanding free cash flow margins, right, and that are critically important and will be worth more in the future. So take Snowflake as an example. It’s our largest position in the book. Everybody knows we’ve been in this company for a long time. In fact, we distributed over $6 billion worth of Snowflake to our venture investors last year. Nobody debates whether or not this company is going to be more valuable in the future. In fact, in the most recent quarter, they added 1.4 billion of contracted value. This is a company that only did 1.2 billion in revenue last year. In a single quarter, they added 1.4 billion. Remember last year they gave a guide at the beginning of the year they’re going to grow at 80%. Instead, they grew at 106%. Now they’ve told us that they’re going to achieve 15% free cash flow margins this year, five years early, right, while still growing 100%. That’s because enterprises love their product. We think this is a 3X in three years even if software multiples remain at these levels near the five-year average. Right? It’s our largest position we’re not selling but we acknowledge that it’s been rough for our investors, rough for us. It’s been a big drawdown this year. If you look at, if you look at, you know, what we expect to occur over the rest of the year, this stock will compound as it continues to beat earnings, as it continues to expand its use cases, even without multiples expanding, right, as investors begin to look at those higher numbers in ’23 and ’24. The same is true for Microsoft, right? This is a business it’s grown, it’s trading at 28 times free cash flow with 20% growth, that will continue to compound. We can just go through the list, Uber, Facebook, Roblox. I’ll acknowledge that Roblox and other names like that are in a much smaller, are in a much more perilous position in this market because they’re not generating as much free cash as some of these other companies that I already mentioned. To put it in perspective, Roblox was a couple percent position for us, right, and Snowflake was a 30% position for us. So these are different order of magnitude bets.
WAPNER: I hear you. I hear you but look, there are, there are some people who think and it’s not maybe it’s not a Snowflake, but it’s a you know, a basket of these kinds of names that may never get back. They may never get back to the levels at which they traded before. I just happen to look at a Snowflake it’s in front of me and because it’s your largest position, I say can Snowflake really get back to its 52-week high of $405 a share. It can do great this, the business can be incredible. It can compound its earnings and this that and the other but I need to know can it get back to that level—
GERSTNER: Scott, I love that you asked the question. That’s what makes markets. That’s the asymmetry. Right? I remember people asking that question about Amazon. Can it possibly be worth 100 billion? Can it possibly be worth 200 billion? Can it possibly be worth a trillion? It’s 3 trillion, right? Or it’s well over a trillion, Microsoft 3 trillion. When you look at these questions, it comes down to this. How many dogs want to eat the dog food? How big is that market? How big are the margins, ultimately Snowflake will be worth a lot more because there is almost endless demand for the product and this is a business that is highly profitable. It will get there three years from now because it’s free cash flow margin will continue to expand and if you just get it, give it the multiples that are currently in the market, right, that have already drawn down on free cash flow, you get to that 3X that I quoted. If multiples expand then you have even more upside. So the way companies have to get there is by growing their top line and growing their bottom line, the answer as to all companies many most certainly will not. There are a lot of companies with speculative business models, right, that are should have never been valued where they were valued and if you don’t have absolute conviction, right, they can grow their product, grow their top line and grow their earnings to match where those earlier prices were, then you need to rotate those dollars out of those companies and into companies where you have that level of conviction. With Snowflake, the question as to whether or not that business is going to compound, I think is not one that many people will debate. I think the only debate is what is the multiple going to be in three months, in six months, in nine months.
WAPNER: I want to take a look at the stock in “Overtime” here because I think you’re moving in I’m looking at what looks to be a higher move as we’re having this conversation and that brings me frankly, now to Facebook. Before we we move, what do I do with Facebook? I mean you have defended it at every turn from the issues that the company has had you you defended Mark Zuckerberg, you’ve defended Sheryl Sandberg and you you did it quite loudly on this program. The stock is 51% off of its high. Are you as optimistic today as you were in months past?
GERSTNER: Well, first let’s talk about what took Facebook down, right? Facebook’s revenues in Q1 were lower than people expected. So were Shopify’s and so were PayPal. What is the connection between those three companies. In Q1 of 2021, everybody was sitting on their couch. They were buying goods, soccer balls on DICK’s Sporting Goods and candles on Williams Sonoma. That stuff was being advertised on Instagram. It was being purchased on the Shopify platform and people were using PayPal to check out. Those three companies are all down that amount because it turns out that this year people got off their couch, they went out and they went to restaurants and they went in and did things instead of buy things. On top of that we had supply chain challenges. So first, you need to understand why did we see a deceleration of revenue because that informs why we’re going to see a reacceleration in the back half of this year. In the back half, you don’t have those same comp issues that you have caused by COVID. In the back half, you’ve already lapped IDFA, in the back half of this year, the supply chain issues begin to ameliorate. That’s why even the sell side consensus numbers have their growth rate accelerating, almost doubling between Q2 and Q4 of this year and we think it will accelerate even faster. Now that’s what’s going on in the business so all those people writing rest in peace epitaphs for Facebook are going to have to deal with that acceleration. This is a business it’s trading at 12 times free cash flow, X the meta investment and 18 times including. It has 24 billion in free cash they’re going to generate this year. If they just take the incremental cash they’re going to generate this year and buy back shares that’s 6% of the company Scott, let alone the 50 billion in cash they have sitting on the balance sheet. So we believe not only you’re going to get dramatically accelerated earnings, right, we think they’re going to be a little bit more cautious about how they’re spending those meta investment dollars, how they’re spending dollars across the business. I imagine they’re going to be super aggressive about how they’re buying back shares. Reels, which is a massive product is going to increase its monetization between now and the end of the year. It just launched in 150 countries, has over a billion views. So you know, when I look at what’s going on in the business and I try to distill it from the noise, which is what has made us good for 20 years, not following the crowd, not panicking, but really looking at the business. Right. I think that this is a business that is investing in the right things. I don’t think Mark did a particularly good job of explaining the meta investments. And I’ve let the company know that, right? If you really think about what the metaverse is in the first instance, it’s a better version of what you and I are doing right here. It’s a better version of Zoom. It’s a better version of Messenger. This company is perfectly positioned to capitalize on that they have the, the ad network to monetize it. So I think they got to match the investment to the revenue growth of the business. I think they have to take a look at their capital allocation plan. And I think they have to execute against the underlying operations in the business. If they do it, I think the stock can be up over 50% between now and the end of the year.
WAPNER: Okay, that’s a that’s a big a bold call. Now you didn’t address any of the iOS changes and the revenue hit that Facebook is is assuming from that and those are legitimate changes. I mean, we’re talking about billions of dollars in revenue but you left that out.
GERSTNER: No, I didn’t leave it out. I said IDFA which is the Apple changes right? The comp against IDFA was very difficult in Q1 and will again be difficult in q2. But remember, Facebook’s not just sitting there with his hands in the air saying oh my goodness, what can we do in a world where Apple wants to flex its monopolistic muscle and steal all of our advertisers. They’re building their own ad platform, right, that can deal with this. And so that will be rolled out in Q2 and Q3. I think you’re gonna see monetization gains against IDFA and either way we lap that issue in Q3 and Q4. That could in fact become a tailwind as we get to the back half of the year. So no, these issues are rea,l what’s going on in Russia is real, what’s going on in Europe is real. Let me tell you the bear case on Facebook, okay, the bear case on Facebook and other ad models like Google is that we’re running headlong into a massive recession. Right if the Fed raises rates 10 or 12 times given the demand destruction and the slowdown already underway in this country, we will be in a big recession come fall. Right. I don’t think the Fed is going to throw away two years’ worth of work to try to avoid a recession in a election year and run us straight into the teeth of a recession while we’re trying to fight a war in Europe. It makes no sense to me, but that is the risk that you run. I think if you said why might these numbers have to come down if we’re heading into a recession, the numbers are likely to come down.
WAPNER: Let me lastly ask you about Grab, the SPAC deal you did, biggest SPAC deal ever of $40 billion. The stock today hit a new low under $3. What am I supposed to think about that?
GERSTNER: Well, the first thing I would say is this, set aside SPAC. No matter how a company came public in 2021, let alone December of 2021, right, they’ve been obliterated. The average tech IPOs down almost 50% from last year, SPACs much worse, direct list bad, all stocks that were taken public last year now it’s clear were overvalued relative to where the world is trading them today. And then take that part of the world. This is a leading internet company in Southeast Asia. Right? Its competitor or not its competitor, its closest comp in Southeast Asia Sea Limited is also down over 70%. All of China internet down over 80%. So I am very unhappy because I’ve lost money on the deal. We worked hard on the deal and the timing was horrific. But the fact of the matter is the entire market has evaporated around these types of stocks. If you look at the company, it’s now trading at $5 billion enterprise value. Frankly, if I was Sea Limited, if I was Uber, I might be looking at consolidating the business. It’s going to do 20 billion in GMV. They just announced that they’re going to be profit, full company profitable by 2023. We know they have high EBITDA margins on the rideshare business which is dominant across the region. This is a region of 700 million plus people. So if you want to bet on the future of growth, Southeast Asia is one of the places you want to bet this is one of the dominant brands, dominant internet platforms, and it’s got 7 billion of cash on the balance sheet. So listen, I’m not happy about it. You know, I told people at the time that, you know, there’s risk in making these investments, right, we’re shareholders of this, we’ve lost capital. But I do believe that this company like the others that we talked about is going to be worth more in the future supported by real free cash flow.
WAPNER: I know I know you’re not happy about it. It’s my job to ask you about it knowing you’re not happy about it and you answered the question. And I appreciate you being with me on the very first “Overtime” show. Brad, thank you. We’ll see you soon.
GERSTNER: Scott, thanks for having me. You do, you do great work, excited for the new show and let’s stay after it.
