Episode 52: Canva Bets Big on AI, Rex Crash Lands, Atlassian Slumps, the Business Behind the Olympics and Adir's Hot New Rig
Adam & Adir chat about Canva's huge bet on Leonardp AI, the unsurprising collapse of Rex, Atlassian's share price slump and how it can recover, and the anticipated latest edition of Adir's Book Club.
The Contrarians catchup
Did you know Adir’s grandfather was an amateur wrestler in Poland? This explains why most subscribers of The Contrarians opt to watch each episode on YouTube: to see Adir’s biceps.
Adir: “There’s a lot of pressure now that this podcast is on video”. Adam: “You’re telling me, I’m sitting next to Hulk Hogan!”
Adir’s take on insurance: “I know you're not saying insurance is not worthwhile, but I think even at a financial level, the risk profile of individuals is such that they probably can't absorb a terrible disaster. And so paying something you can afford to avoid something you can't afford, even if the probabilities don't work out in your favour, I think it’s a smart move.”
Adam had a problem with organising Apple Care after he dropped his phone (again) and said “Steve Jobs must be turning in his grave hearing this - he wanted everything to be synchronised, easy, connected. It's just not now. You've got to re-login to every single thing. I don't know why I need to wipe my phone and re-login to 50 different apps to run my life.”
Adir was wearing a ‘Red Dead Redemption 2’ (a historical video game) t-shirt after a listener pointed out that the t-shirt he wore last week was made by Lacoste, a company who has continued to sell in Russia. After some introspection, Adir realised he doesn’t believe in boycotting companies.
Adam is impressed with the 9Now on-demand viewing experience during the Paris Olympics, versus previous Olympics where you had to watch what Channel 9 decided to show.
Adam references Malcolm Gladwell’s podcast, Revisionist History. You can listen to his multi-episode series on ‘Hitler’s Olympics’ here.
Adir's Book Club
This week, Adir read Golda Meir’s ‘My Life’. Golda Meir was an Israeli politician who served as the fourth prime minister of Israel from 1969 to 1974. She was Israel's first and only female head of government and the first in the Middle East.
Adir: “Her life story is incredible. I highly recommend that book for people that want to understand, who just want to interesting read, people that want to understand why and how Israel was created, because she was there at the beginning of all of that. People who are interested about the origins of the, Arab-Israeli conflict. People who want to understand early female political leaders and what it took. It was a really a remarkable book.”
The other book mentioned is ‘The World In A Grain: The Story of Sand and How It Transformed Civilization’.
Adir: “Sand just means a very, very fine grain of something. Like silicates, the most common sand. It turns out everything is made from sand. By the way, the difference between sand and gravel? Size. So this whole building is made of sand. So the biggest innovation I would say in the last 200 years or maybe 1000 years, even bigger than the silicon chip in my view, is concrete.”
Canva Bets Big on AI
Canva has doubled down on its AI investment with a $320M acquisition of design startup Leonardo AI, which raised $47M at the start of the year at a $120M valuation. The sale was a boon for Leonardo's VC backers, which include Blackbird, who owns 28% and was also a large investor in Canva.
The acquisition raised some eyebrows because it appeared Leonardo was quickly running out of cash and was up against very well-funded US competitors.
Adir: “So this is how these models work.You should think that it has three parts. So one part is, the data pool of information it's going to use for its knowledge. And so that's when you go to ChatGPT you use the online version, tt says it's using a 2022 version of everything that was on the internet. So, that's the data pool. And so a lot of companies, what they really want to do is interrogate their own data. So how do you match the data with the internet stuff. Just think about everything as a flow. So at the other end of that flow are the prompts. One of the maybe the fastest rising job in terms of volume and pay in the world is prompt engineering. Yeah. And so that is just people who work out how do you write the best prompts to get the best outcomes.”
[The world-class back and forth between Adam and Adir sharing their thoughts on Canva’s acquisition is why this is called The Contrarians, and to include all the great lines would risk making this newsletter longer than that book about sand Adir recommended.]
Rex Crash Lands
Australia’s third domestic carrier has gone from an upstart airline to voluntary administration in the space of about two weeks. Rex was created in 2002 when former Ansett employees bought regional carriers Hazelton Airlines and Kendell Airlines and launched as Australiawide Airlines and then renamed Regional Express Holdings.
Adir: “This is a sad story. I posted about it on LinkedIn.”
Adam: “You posted about it on LinkedIn? I’m shocked.”
Rex was never a particularly valuable airline, with its market cap hovering around the few hundred million dollar range, and it was funded by the government as a niche carrier until 2020.
Adir: “It seems to be a universal view that they basically just don't do marketing. Every time I say to someone they should take Rex Melbourne to Sydney, or Sydney to Melbourne, they would be like ‘do they fly that route?’ Terrible positioning, no marketing. But they were the friendliest airline and they were the most on time airline.”
Adam: “I think that the writing was always on the wall with Rex because airlines have these golden windows every sort of 15-20 years. And this has been the most golden of golden windows for airlines. The cost of airline travel was just out of control. It has come down in some routes internationally, but certainly domestically it's as as high as it’s ever been. And Rex still couldn't make money. So if you can't make money in this most golden of golden windows, you're never going to make money.”
Atlassian Slumps
Since January, Atlassian’s market cap has dropped from $99B AUD to about $69B. This, of course, won’t be news to any listeners of The Contrarians, who have all made millions on their short positions since gaining unofficial investment advice from the world’s best podcast back in late January.
Adam: “So to summarise, Atlassian saw its margins crash, customers pretty much stopped growing… forecast its growth would drop and potentially would run out of cash, but for the kindness of its employees.”
Adir: “Make profit, generate cash, pay dividends. That would be my mantra for Atlassian, which is almost a universal mantra for me for most things that I'm involved in. I think if they're growing at 20% or more, there’s an argument to keep investing in growth. Not to invest all the profitability into growth. But I get it, because if you do the economics on such high-gross margins and their retention is extremely strong, so I think you could argue that they should keep investing, but if they're slowing growth down to 15% or less, I think there's no option but to generate free cash. And the challenge with the $37B market cap, even after it's fallen, is what level of earnings would you need if you became an owner to justify 37?”
Five other stories worth following:
Nintendo reported a 55% plunge in quarterly profit as it sold just 2.1M of its seven-year-old Switch consoles. That’s a 46% drop, as consumers hold out for a Switch successor.
Intel shares sank 26% on Friday after the chipmaker posted a huge Q2 earnings miss and said it would cut 15K jobs. Intel’s lagged rivals like Nvidia and AMD, who’ve made billions off the AI chip boom.
Google yanked an ad for Gemini, in which a child uses the chatbot to write to US Olympian Sydney McLaughlin-Levrone, following backlash that it encouraged relying on AI over authenticity.
Airbnb chief business officer Dave Stephenson suggested the company may start offering luxury amenities — e.g., personal chefs, massages, etc. — to lure customers back from hotels (maybe drop the cleaning fee first).
Warren Buffett’s Berkshire Hathaway sold 49%+ of its $84.2B Apple stake last quarter, which helped up the conglomerate’s cash pile to $277B. Apple remains Berkshire Hathaway’s largest stake.