Welcome back, everyone. Today on the Jose Carlson Show,
Google stock is surging. It's up 4 1/2 percent on the
day. And this comes, of course, a day
after their developer conference.
That's right. Yesterday, Google showed off all
the many things they're working on and importantly, how they
plan on addressing the attacks from ChatGPT.
Google laid out a game plan, how they're going to address this
challenge. We're going to be going through
it and looking over some of the things that they announced, some
of the new developments and why investors are getting back on
board this stock. And we have a viral interview to
respond to with Elon Musk here giving another update on the
robotaxi rollout that's happening in June.
He responds to many questions about the safety concerns, why
he's not using Lidar, how he considers Tesla in a competitive
position against Waymo. Now, I'm going to be responding
to this interview and highlighting a few things that I
think Elon Musk is leaving out. We're also going to be looking
at FICO, why The stock is down 14% today and it's down a
staggering 23% in just the past week.
What is going on with this company?
In fact, we have another similar company, Equifax, one of my
positions. It's also trading down a little
bit today and yesterday it's down 5%.
Currently, there's something going on.
This one's a bit of a mystery, but we have the answers.
I'll be going over why FICO and Equifax are dropping and what
investors should think of it. And then finally, we have
another fail of the week. This time it is Klarna, which
has had huge losses due to people not repaying loans.
We're, of course, seeing the obvious results of people paying
back their DoorDash delivered burrito in installment payments.
So as always, we have a lot to get into in this episode.
If you like like this type of content, consider trying out the
Patreon membership. It has a free trial and includes
Qualtrim. It's awesome.
So try that out. If you haven't, let's go ahead
and jump into the main story here.
Google yesterday held their Developer IO conference, which
is basically where they show off all the many things they're
working on. And this one was highly
anticipated, probably more than most, because Google's in a
transitional period. Investors are intently trying to
figure out whether or not this company is a value trap.
There's people like Gene Muster that have referred to Google as
the new eBay, a company that's a has been.
It's no longer at the forefront of technology, it's no longer
leading the way. It's simply going to slowly
decay into a relevancy. And that is, of course, because
of the concern of artificial intelligence, LLMS and ChatGPT.
So investors are looking at this developer conference with the
viewpoint of trying to figure out if Google can remain
relevant. Now, Google did answer that
question, but not by just saying that they'll stick around and
remain relevant amongst many competitors.
No, Google made it quite clear that they want to lead the way
that they are at the forefront of many verticals and many
different efforts. Let's go ahead and just take a
look and walk through some of the things that they're now
doing that is ground breaking, truly incredible things.
The first here is the Gemini app.
This has come a long ways. It used to be way behind Chachi
PT, but now Google announced that they're rolling out free
features like live video, which you can simply look at the
camera, point it at things, and it will give you AI commentary,
answer questions based on what you're looking at live.
Should I be nervous about this? It looks like your SRS.
Airbag light is on. That means there's an.
Issue with your airbag system. It's best to get that.
Checked out by a mechanic as soon as possible to make sure
your airbags will work. Properly if you need them.
Glad I asked. Thanks Gemini.
Now this is particularly impressive for a few reasons.
First of all, there are other applications that can do things
similar, like ChatGPT, but so far those are gated towards paid
accounts. So only the people paying the
$20.00 a month have this advanced functionality.
But here Google is not only adding this functionality of
live video feedback, but also making it free for all of their
users. They're going to be rolling this
out globally to every user in the Gemini app, and they're not
only matching what the competitors are doing, but
they're now lowering the price down to free.
In investing terms, what Google's doing by matching the
functionality of their competitors but making the price
lower is giving their current user base, which is still
massive, less incentives to turn over to different applications,
less reason to move. Initially, Google was way behind
Chachi BT there is significant incentive for people to leave
the Google ecosystem and enter into the competitors.
But now that incentive is becoming less and less to the
point now where it's completely diminishing.
We have another example here of Google pushing the limits, this
time not just matching competitors but creating
entirely new features. For example, live video language
translation. Let me turn on speech
translation. It's nice to finally talk.
To you is bueno ablarte finalmente.
You're going to have a lot. Of fun and I think.
You're going to love visiting the city.
The house is in a very nice neighborhood and overlooks the
mountains. That sounds wonderful.
This is obviously groundbreaking stuff.
Being able to communicate with someone else in an entirely
different language, have it translate everything you're
saying on the fly in your voice, is incredible.
This is something that Google and Google alone is doing.
They're at the leading edge of this.
Of course, the integrations don't stop there.
Google's integrating Gemini and their AI features into every
single one of their properties. In fact, the integrations go a
lot further than you would initially expect.
For example, in this demo here, you can aim the camera the the
live video camera at a specific thing like a postcard or an
event, maybe a wedding invitation and literally just
say add this to my Google Calendar and it will create a
calendar event with that physical thing.
Now it shows another example here of a shopping lifts that
that you jotted down and then you say add it to my Google Keep
and it will do that as well. So we have the live video camera
being integrated into the rest of their product suite.
This is the type of integration that other companies simply
don't have. They don't have the billions of
touch points with different users, but Google's able to
leverage this and they are now getting to another aspect of
this demo. Quite possibly the most
impressive thing that we saw yesterday was Google's ability
to create AI videos. We know that they've been good
at this for a long period of time.
In fact, Gemini has probably been the best by far in image
generation and video generation. You can think they're huge
library of YouTube content to train that data on, but
regardless, they've introduced Flow, a new AI film studio that
ties together all their various products to work in concert to
create films. It uses VO, Imogen, and Gemini
all together and strings different pieces of content
together. One of the issues with AI video
is there's a lot of discrepancies, inconsistencies.
There's no continuity between clip after clip.
And this hopes to solve that. So we have some insane examples
of this tool being used. Like all of these AI tools, it
starts off with with a prompt. So you simply have a text based
prompt. More specific you are the
better. But then you can actually start
to edit it. You can revise things, you can
import it into different tools, you can clip things, you can
actually work on the content. It's not just a stand alone
clip. You can actually start to create
longer and longer pieces of content.
And we see this natural gravitation of just these silly
AI clips now starting to make more meaningful content.
Google showed off the quality of this new video generation with
VO3. It looks completely stunning.
This ocean, it's a force, a wild, untamed might, and she
commands your awe with every breaking light.
There's some different clips that Google made that are
incredibly impressive, but then there's ones that users are
quickly making after this new demo after this product was
released. Here's another test of Google's
new video generation. This is entirely AI generated.
Do a non existent car show. Let's see some opinions.
I mean man, the acceleration is crazy.
You look far, step on the pedal and you are there.
I feel safe with him in an SUV and it seems to be like the
right type. Of car for him I think the range
is only. Be honest, would you be able to
tell if you were just watching this?
Would you know I'm not? I'm not sure.
I don't think I would be able to.
It's getting to that point where it's crossing the line of I
can't obviously see that it's AI.
If I'm being honest. It just looks so real.
Only going to get better, sorry. We don't want to drive gas cars
anymore. Yeah, no more gas cars.
You can see I'm kind of a. Kind of a misfit here, but.
Don't tell anyone. I've just bought an electric
car. There's a few things that give
it away, like Hell's Angels being spelled HELS, misspellings
on things, different lanyards, and signs that seem a little bit
off, but overall it's very confusing.
Even people in the comments are still confused of whether or not
this is real or actually it's a real video disguised as AI.
Here's another one. This is entirely created by
Google's Flow, their AI generation.
All of this is AI video. It's different segments and
clips cropped together to form a narrative, and this is possibly
one of the most impressive examples of this new technology.
When we get in there I want no I just stay on my 6 at all.
Times stay sharp.
They're nasty and dangerous. Stay alert.
What the hell happened here? Where are the bodies?
It doesn't look perfect. Some of the barrel flash is a
little bit misaligned with the guns, but overall this looks
pretty good. Now, all of this technology and
initiatives from Google are incredibly impressive.
It shows that the company's still at the leading forefront
of AI development. But it doesn't answer that
central question that Google investors are still concerned
about, which is search. But Google did address this and
they do have a plan to maintain their search dominance.
This was the main focus from Sundar Pichai and he addressed
this subject specifically of how they're improving search.
For those who want an end to end AI search experience, we are
introducing an all new AI mode and I'm excited.
To share that. AI mode is coming to everyone in
the US. Starting today.
Today you'll see how you can ask anything.
You'll find it as a new tab directly in search, or right
from your search bar. First, with AI mode, you can ask
whatever's on your mind. And as you can see here, search
gets to work. It generates your response,
putting everything together for you, including links to content
and creators you might not have otherwise discovered, and
merchants and businesses with useful information like ratings.
Search uses AI to dynamically adapt the entire UI, the
combination of text, images, links, even this map.
Just for your question. AI mode combines all the best
parts of Google search with artificial intelligence.
And the way that this works as they describe is it basically
creates search into an Omni search where you can still have
the very simple searches of I just want to find this address
and navigate to it, or is this restaurant still open?
Those type of simple searches will have very simple outputs
designed around those searches that just give you that
information. But if you have a more deep
search, one that requires more context and understanding, then
you're sent through the AI flow dynamically.
It'll give you an in depth AI response with all of this
information around it. Google search is now an Omni
search that dynamically adapts to whatever the user is asking.
So no longer is it a dumb search with just blue links.
No longer is it just a little AI overview snippet.
Now it is an Omni intelligent search and they're pushing this
out to everyone. Another thing that Google's
going to leverage is your personal contacts.
This is another thing that they have that no other company has.
Google has so much information about you because of your
YouTube viewing habits, your Gmail, your Google Docs, all
your calendars, everything that's integrated with Google.
They have all of that information, and with your
permission, they can use that to supply better context to your
searches. Soon, AI mode will be able to
make your responses even more helpful with personalized
suggestions based on your past searches.
So now, based on your recent restaurant bookings and
searches, it gets that you prefer outdoor seating.
And since you subscribe to those gallery newsletters, it suggests
some cool art exhibits to check out while you're in town.
This means that Google can do things like look at the type of
restaurants that you frequent and then suggest different
restaurants based on the ones that you've been going to and
navigating to in your Google Maps.
Again, this is data that Google exclusively has.
Now, they mentioned that this feature is not one that you have
to have on. Of course, you can turn it off,
but this has the potential to create a much more intuitive
experience than competitors. Google's leveraging yet another
advantage they have now with AI mode.
It looks very similar to like the ChatGPT homepage or the Grok
homepage. It's right in Google's search
and it says Meet AI mode with a big text box.
You now have the ability to do deep research on it.
So now all the billions of users that haven't tried out ChatGPT
or aren't aware of deep research are going to have this baked
into Google. And this is using their latest
greatest models. Deep Search uses the same query
find out technique you just heard about, but multiplied.
It can issue dozens or even hundreds of searches on your
behalf. It reasons across all those
disparate pieces of information, create an expert level, fully
cited report in just minutes. Google's not just sitting around
idly waiting for things to happen, they're creating the
most powerful Omni contextual search in existence.
Google also demoed different tools that weren't even on
people's radar, just new things that people weren't expecting.
For example, this tool allows you to try on clothing
digitally. I have many pictures here.
I'm going to pick one that is full length and a clearview of
me and off it goes. You can see it here how it
really gives me a feel for how this dress might look on me.
And I am going to click this thing to track price.
I pick my size then I have to set a target price.
I am going to set it to about $50.00 and tracking is
happening. There's two new pieces of
functionality there. The first one, of course, is
this new tool that allows you to superimpose new items of
clothing on you so you can virtually try them on.
You can purchase them online with greater confidence.
But then the next thing she does here, I think is even more
important. She looks at the item and then
sets the price that she wants to pay for the item and then sets
it to automatically buy the the clothing item as soon as it
reaches underneath that price. This is a limit buy.
This is like if you're setting a limit buy on a stock, but now
Google's implementing this type of purchasing directly into the
Google app, directly into Google itself.
You can now set limit purchases on random websites to trigger
the purchase when the item falls below that price.
Now, these weren't the only features that Google shared in
that demo. There's many other things
they're working on, but these are some of the most significant
highlights and it shows that this company is not waiting
around to be disrupted. They are leaning into new
technology. Sundar Pichai was being honest
when he said that the innovator's dilemma is only a
dilemma if you choose it to be. If you make it 1, he's always
going to lean into the new developments, the new
technology. He's going to disrupt itself to
create new experiences. But in this case, the damage
that investors are concerned about.
The reason that the stock trades at such a significant discount,
a 19 Ford PE ratio. This is cheaper than the S&P
500. The S&P 500 trades currently at
a 23 Ford PE ratio and Google's at a 19.
This company is trading at a significant discount to the S&P
500 while growing twice as fast. When we look at the revenue
growth of Google, the continued strength of this company growing
13%. I continue to believe that it's
highly likely the concerns that investors have about this
company are being overstated, that the disruption risk is
being overpriced into the stock, and that investors today
continue to have an asymmetric risk with high upside and
limited downside. Google's trading up a little bit
today. It's currently up 3% in a down
market that's down 1%. So it has a lot of alpha on the
day, and I think we're going to see a lot more of this in the
future. Now, Google still remains a
highly divisive stock amongst investors, with analysts like
Gene Munster continuing to insist that Google's the new
eBay. But we also have analysts like
Mark Mahaney saying that the death of Google has been
overstated. What it tells you is yeah, that
it's a, it's a more powerful search product.
It's more, it's it just, it's more, I think they use the term
it's more personalized, it's more intelligent and it's more
agentic. Whatever.
It just makes it a better search product.
You create you to improve the search product, people are going
to use it more. And I think that's one of the
reasons why I think the the death of search at Google is
been greatly exaggerated, overstated.
I think they're improving the product.
People are going to continue to search with Google.
I don't think you're going to see a dramatic share shift away
from Google if they continue to innovate the way that they have
the last year and what they're showing today.
Search was up 13% in the first quarter.
Operating margins were to 34%, which was their highest, as you
pointed out, in 12 years. I mean, this is just
extraordinary. So if they add more AI
functionality to the main page, is that going to push the ads
down? It could, it'll also make the
ads more relevant. Look, the name of the game isn't
to show the most ads. The name of the game is to show
the most effective ads from a user's perspective.
Like I get the information that I want, but also from an
advertiser's perspective, which is I want the, I want that lead
that I'm paying to click for. I want that to convert really
well. And what Google is using AI to
do, it's not too dissimilar from what Meta is doing, is using AI
to better capture intent. So the better qualify the lead
and it's an auction market. If the lead is more qualified,
if it's converts, better marketers will bid up for it.
So my guess is we've had, I think it's 11 to 15% revenue
growth out of search for Google for the last seven quarters.
I think there's a decent shot they do it again for the next 7
quarters. I think the, the growth in
search revenue is much more sustainable than market thinks.
If I'm right about that and they keep showing us for the next
three or four quarters, I think the stock re rates.
And by the way, then there's the rest of Google, which is YouTube
Cloud and Waymo. And I think these, if you put
all those together, are just dramatically worth more than
where the stock is now. That's why it's our number one
pick. He points out that this product
that's under so much question is still growing by 15% per quarter
done so for the past seven quarters in a row.
He believes it's going to happen for the next seven in a row.
If that happens, Google will re rate to a 25 PE, a 29 PE.
It'll go back up to that sub premium category away from being
discounted below the market. If that happens, it'll show that
Google is dramatically undervalued at this point.
He also points out that the other properties making up half
of Google, which is YouTube, Android, Cloud and Waymo are all
great properties that have strong growth.
These are very valuable properties.
This company generates $70 billion per year and is trading
below $2 trillion. So I believe, like Mark Mahaney,
that Google is undervalued right now.
We'll see what happens with the search query growth with Google
search. We'll see if the revenue
continues to grow. If it does, we're going to see
the stock higher. Now moving on, we get to the
other big news, which was Elon Musk sat down for an interview
and he answered a lot of tough questions directly.
And one of the first things he talks about in this interview is
the subject of timelines. We know that this is a difficult
subject for Tesla because in so many cases, Elon Musk has thrown
out timelines that have been pushed back again and again and
again, specifically with a robot taxi.
This one feels like Elon Musk is no longer going to push it back
or delay. He is set on releasing Robotaxi
in June. Are you going to have full
autonomous on the roads of Austin at the end by the end of
June? Yes, you are.
What gives you that confidence? We we have cars driving 24/7
with drivers in the cars and we see essentially no
interventions. So he's saying quite
definitively that they're sticking to this timeline.
They will have cars on the road without drivers in Austin by the
end of next month. And then he gives a timeline of
how it's going to ramp up. At what scale will Tesla start?
And then how many vehicles will they add over time?
Well, we'll have to see how, how well it it does.
But you know, I think it's prudent for us to start with a
small number, confirm that things going well, and then
scale it up proportionate to how well we see it's doing.
Right. And what's going to be a judge
of how well it's doing? Wait, are there any incidents?
Are there any, any interventions?
And but we, we want to be, we wanted to deliberately take it
slow and we could start with 1000 or 10,000 on day one, but
we, I don't think that would be prudent.
So we'll start with probably 10 for a for a week, then increase
it to 203040 and I think by say yeah would probably be at 1000
within a few months. So he says that they might have
1000 in just a few months as operating robo taxis.
Now, that doesn't sound like a lot, just 1000, because when you
look at Ubers, 1000 isn't a lot. But as a robo taxi, that is a
ton. Robo taxis work 16 hours a day.
They can go out all the time. Even Waymo that's operating in
multiple cities that just completed 10 million paid rides
only has a bit over 1000 operational robo taxis.
The fact that they're working around the clock is why they're
so effective. In fact, in Los Angeles, robo
taxis from Waymo are doing more business than all of Lyft.
So they are highly efficient when you have them operational.
But Elon Musk is suggesting that in only a couple months Tesla
could pass Waymo in the amount of operational robo taxis.
No. Next he's asked an important
question. He's asked to compare what
Tesla's doing with their technology perspective against
Waymo. As we know, Tesla is vision only
camera only. They're not using any type of
sensors that you have on the fenders of the vehicle and
they're not using the Lidar, which are the lasers that create
awareness of the distance of different objects relative to
the vehicle. Now Waymo's doing the strategy
of all three of these. They have LIDAR, they have many
cameras and they they have sensors.
They combine all of these inputs together to make it a very safe
vehicle. And that's what's been tested
with Waymo's. Waymo credits this combination
of different safety factors to the reason that they have almost
no incidents and they've had no deaths with their vehicles.
When you compare that again to Tesla, they're going down the
route and they're sticking with it with vision only. 28 cameras
that got Lidar and radar. You've had a different approach,
6, I think 8 to 9 cameras and the neural network.
Why do you feel that that is going to be the equivalent in
terms of safety profile? Oh, I think it'll be better.
Why? Because the the way that the
road system is designed is for AI.
It's basically, I should say it's for intelligence,
biological neural net and eyes. That's how the whole Rd. system
is designed. So that what will actually work
best for the road system is artificial intelligence, digital
neural Nets and cameras. And that we we'll also have the
microphones, the car can hear emergency vehicles, that kind of
thing, right? Yeah, you need to 'cause that
was a question, right? You need to hear a fire engine
or a police car. Yes, exactly.
Right. So, but that's, that's how the
whole Rd. system's designed. It's not designed for shooting
lasers out of your eyes. Elon Musk has stated over and
over again he's made this point many times.
In fact, he said it ad nauseam that roads are designed for
humans and that's the reason that Tesla is pursuing the path
of vision only. They're just like humans.
You see what's outside. That's how roads were designed.
So it makes sense to create the car exactly like it was designed
for humans. Now he says that point and it
kind of makes sense at first. You hear that and you go, oh,
that, that makes sense. Roads are designed for vision
only. That's what humans have.
Maybe hearing as well. They have a mic as well, but
those are the two inputs. You just have the vision.
After all, as he mentions, humans aren't shooting lasers
out of their eyes. In fact, that seems silly.
Why would they do that when human drivers aren't doing that?
But then Elon Musk always makes It's a different point that
seems to conflict with this point.
Here's another point that he brings up in the same interview
just seconds earlier. In order for that to be the
case, we we want the autonomous car to be much safer than a car
driven by a person. Right.
We want the robo taxi car to be much safer than a car driven by
a person. In Tesla's most recent earnings
call, Elon Musk said that the robo taxi has to be orders of
magnitude safer than the average human driver.
So in one point, Elon Musk is saying that the reason we're
designing our vehicles to only have vision is because that's
how humans drive. It just makes sense to drive
just like humans drive. But then in the next he says
that the the bar, the standard for robo taxis is to be orders
of magnitude safer than humans. Well, I would argue that these
two points conflict with each other.
Why does it make sense to design a vehicle exactly like humans
drive if the goal is to make them drive much safer than
humans? In fact, a way that you could
possibly make human drivers safer orders of magnitude safer
is if they had some special ability to shoot lasers out of
their eyes and immediately measure the distance of
different objects relative to themselves.
Especially in very difficult conditions like cloud or rain or
dark conditions where cameras or our eyes can be deceptive.
Our eyes can struggle with low light conditions or sun glare,
or fog or extreme rain. There's lots of scenarios where
the human eye is inferior to LIDAR.
So while Elon Musk makes these two points that seem
contradictory, we're designing Teslas to fit the road of
humans, but we need Teslas to be orders of magnitude safer than
humans. You have Waymo that is making
them orders of magnitude safer than humans by having better
technology than humans. Now, Tesla investors continually
mock Waymo for their LIDAR because it looks a little goofy.
And in some cases, Waymos can even do silly things.
They can block traffic, they can get stuck, they can go in
circles or do funny things. But so far there's been no
serious video of a Waymo being in a near death collision.
There's been no truly frightening video of a Waymo.
When we look at examples like this, like there's a video here
that this was going viral amongst Tesla investor circles.
And this is of a Waymo driving through this, this deep puddle.
Obviously the the LIDAR and the the cameras themselves can't
look at how deep this puddle is, so it goes through it.
It bounces a bit. It's a rocky ride.
I think this is probably more of a fault of the roads in LA than
the Waymo itself. But either way, these are the
type of mistakes that Waymo's are making.
They're driving through deep puddles.
Sometimes they get stuck in traffic.
That's what we see when we compare that with some of the
footage we've seen from full self driving, especially in edge
cases, again, like cloudy conditions like we're seeing in
this one, they can be truly frightening.
Here's one example of a terrifying edge case of full
self driving. The person that posted this
video said they've owned their Tesla for less than a year and
within the last six months alone it's tried twice to drive
straight into a train. Now I'm not bringing this up to
bash Tesla, that's not my goal, But it's to illustrate that
these Lidar sensors come in with those edge cases.
The difficult part with full self driving, a robo taxi is not
to do a normal drive in great conditions with no edge cases.
There's most full self driving systems or any similar system
that can accomplish that. It's the unique cases, the edge
cases that define whether this technology works.
So far, Waymo has proven that out.
Tesla hasn't, and there's still a question of whether or not
Tesla can truly rule out these type of edge cases without the
use of Lidar. Now moving on, we get to another
news story that's being ignored by the media, which is the
dramatic fall in stock price of FICO.
The company is down 14% today, so huge fall and share price
today. And then on the week it's been
down even more. In fact, if we go out just to
the past week, it's down 23%. Now, Fico's not the only one.
We also have the credit bureaus. Equifax in particular is down 7%
today. So it's giving up some of its
gains. If we look over the past week,
it's not down quite as much as FICO, only 4%, but it has given
up a lot of its gains, going down from 280 now to 260.
What is going on with these companies?
Why is FICO down so much today? Well, this has everything to do
with the new Federal Housing Finance Agency director, Bill
Poulton. He is addressing the obese
Fannie Mae and Freddie Mac, and he's putting them on a
treadmill. Bill Poulte was at a conference
and he made remarks that were aggressively directed at
expenses in mortgage assessment costs, specifically with FICO.
In particular, Bill Poulte was asked about the Trimerge credit
scoring and converting that to buy Merge credit scoring.
Now, right now, you currently get your credit score from all
three credit bureaus. That's how you get mortgages.
And he wants to change that to where you only get it from 2.
And Pulte said that they're actively looking at getting it
done. Quote.
I think FICO should make sure that they're being as economic
as possible. We're actively looking at
getting it done. I don't like some of the things
I've heard in terms of cost. It's only a couple sentences,
but it was enough to drop Fico's stock by 20%.
Now, why are FICO investors so concerned about this?
After all, it can't be that concerning to switch from three
credit bureaus to two, right? Well, there's more to it.
If you understand the way that FICO makes money.
Everybody knows that this company has the FICO score, the
score that you get when you're applying for a mortgage or any
big purchase. It's to assess your credibility
and allow the lender a better look at what type of interest
rate you get. That way they can price their
loans in the interest rate more appropriately.
So that's the basis of Fico's business.
But more specifically, the way that they sell these loans is
they have licenses with all three credit bureaus.
You have Experian, you have TransUnion, and you have
Equifax. FICO licenses their score and
their algorithm to all three of these companies.
When a customer wants to buy a home and they have to get a
mortgage, they get their credit pulled, which is a trimerge,
meaning that they pull their credit from all three credit
bureaus. Every credit Bureau has their
own unique FICO score, so there is a FICO Equifax score, FICO
TransUnion score, and so on. When you look at these scores,
sometimes they differ because they have different data sets
and different algorithms behind them.
And so you can have a situation, for example, like the TransUnion
score being a 5, the Equifax being a four, and the Experian
being a six. In that case, what happens is
the lender will use a combination of all three scores,
usually the mean of them, and that's what you get with your
credit rating. You take all three data inputs,
you combine it together and that's what dictates your credit
score and your interest rate. Now, if Bill Polt a successful
here in turning this from a Trimerge into a by merge poll,
that means that you're not pulling from all three credits,
you're just pulling from two of the three.
You'd presumably pick two different ones every time that
they pull credit, and either way you would only have two of those
data points. So the credit score in and of
itself may not be quite as accurate because you're missing
out on one credit Bureau, but it would be cheaper because again,
FICO licenses with all three. Every time you have a Trimerge
score, all three credit bureaus are paying FICO.
So if you change that to two, that essentially wipes away
around 33% of Fico's score revenue every single poll.
So in very simple terms, this is as if Fico's losing 33% of their
customer base with their high margin credit business.
Now of course, that's a big simplification, but you can see
the concern here. If this goes through, it could
impact materially Fico's free cash flow and their earnings.
Now when we look at Equifax, this company is also trading
down a bit with the rest of the credit bureaus, but albeit not
as much as FICO. The reason that Equifax is a bit
less exposed to this is first of all, out of the three credit
bureaus, if we move to a by merge credit pulling system
where we could only pick 2, Equifax and TransUnion are the
most likely to be picked on the most common basis.
They have the most data, they're at the cheapest prices.
Experian would be the one that would likely suffer the most.
So even though simple math would dictate Equifax's picked only
66% of the time, the odds are that they would be picked more
like 80% of the time. But I'll also mention that
Equifax is simply more diversified when we look at what
they're doing. The reason that I'm investing in
this company primarily is because of their workforce
solution, the work number, their verification of previous
employment, that is the product that's growing the most, that
has the highest margins. The credit scoring is nice.
It's a a nice business. It gives them a lot of data to
work with, but it's not the most important part of the investment
thesis. So Equifax will certainly be
impacted by this if it goes through, but it's not going to
be to the same detriment as FICO.
Now moving on, we get to the fail of the week, which this
time we're going to highlight the company Klarna.
This company is reportedly seeing widening losses, lots of
losses, as people are not repaying their loans.
Now, if we look at the business model of Klarna, the way that
this company makes money is by exploiting one of the worst
parts of American consumerism, which is overspending, getting
into debt, not being able to pay back your loans, destroying your
credit. Now, credit card companies do
this to some degree, but Klarna here took it to a whole new
level, extending enormous amounts of credit to people that
have no business having this credit.
And Klarna is now seeing the obvious outcomes of that.
Klarna SOTS losses jump in the first quarter as a popular buy
now, pay later firm applies the brakes on a hotly anticipated US
initial public offering. Swedish payment startup said
it's net losses for the first three months of 2025 totaled 99
million, significantly worse than the 47 million loss it
reported a year ago. Klarna said that it was due to
several one off costs related to depreciation, share based
payment and restructuring. Now, even though Klarna wants to
blame a lot of one time items like depreciation and so on,
they do have to mention that credit losses with their product
are up 17% year over year. So as they continue to loan more
and more people, they're finding that these people don't want to
pay it back. And that brings up an
interesting point here. If we really simplify what
Klarna is doing here, they're taking investor capital,
diluting investors, taking their money and providing it to
customers, customers that want to pay for their Crunchwrap
Supreme in four easy installment payments.
That's the demo that they're targeting.
And now we're starting to see the first early cracks in this
investment plan. So we'll see how this one works
out over time. But as of now, because of the
rise in the credit losses, they're delaying their IPO and
they are the fail of the week. That's all for this episode.
See you in the next one.