TIP751: Mastermind Q3, 2025: Uber, Merck, and Bath & Body Works

Episode Summary

Executive Summary: The episode is a stock-pitch mastermind covering Uber, Merck, and Bath & Body Works. The discussion weighs bull and bear cases, focusing on network effects, AI/autonomous vehicle disruption, patent cliffs, valuation, and cash flow. The participants largely favor all three as contrarian or misunderstood opportunities, while emphasizing significant risks around regulation, competition, leverage, and capital allocation.

Main Topics: Uber’s network effects and multi-segment growth story (Priority: 5/5): Stig argues Uber is more than ride-hailing: mobility, delivery, and advertising create a scalable ecosystem with strong two-sided network effects and operating leverage. Autonomous vehicles as both threat and possible tailwind for Uber (Priority: 5/5): The group debates whether Waymo, Tesla, and AV adoption will disrupt Uber or actually strengthen it by validating the platform and increasing demand for an aggregator with flexible supply. Merck’s patent cliff, oncology dominance, and pipeline defense (Priority: 5/5): Hari pitches Merck as a cheap big pharma name with a dominant oncology franchise, but acknowledges Ketruda’s patent expiry and pricing pressure as major headwinds. Bath & Body Works as a cheap, cash-generative retail compounder (Priority: 4/5): Toby presents BBWI as a highly cash-generative specialty retailer with brand loyalty, strong free cash flow, aggressive buybacks, and potential upside from re-rating. Valuation discipline and quality of capital allocation (Priority: 4/5): Across all three pitches, the speakers focus on whether current valuations compensate for risks, while debating buybacks, dilution, debt, and the credibility of management metrics. Macro and structural shifts in consumer and labor behavior (Priority: 3/5): The conversation touches on gig economy growth, reduced car ownership, mall traffic changes, consumer stress, and healthcare spending as broader trends shaping these businesses.

Key Arguments: Uber’s scale and city-by-city network effects make it hard to disrupt once a market reaches critical mass. Uber’s advertising business is small today but could become a high-margin monetization layer thanks to rich user and location data. AVs may reduce Uber’s moat, but Uber’s flexible human-driver supply and marketplace matching could remain cost-advantaged versus owning fleets. Merck is cheap because investors are pricing in Ketruda’s 2028 patent expiry and pricing reform risk, but that cliff may be more of a slope than a collapse. Merck’s oncology expertise and pipeline/acquisition strategy could offset Ketruda losses over time. BBWI appears deeply undervalued with strong free cash flow, low earnings multiples, and a loyal customer base despite a weak retail backdrop. BBWI’s store experience, product specialization, and member loyalty give it a differentiated niche that is not easily replicated. In all three cases, management quality, capital allocation, and true economic earnings matter more than headline multiples or adjusted EBITDA. Buybacks can support returns, but only if the underlying business is genuinely improving and the company is not overpaying for repurchases.

Data Points: Uber market cap: $190 billion - Stig references Uber’s size while pitching it as a long-duration compounder. Uber stock price: $91 - Stig says he would consider starting a 1% position at this price. Uber implied IRR: 15% over five years - Stig estimates this as his base case return assumption. Uber revenue mix - mobility: 58% of revenue; 69% of adjusted EBITDA - Stig breaks down Uber’s business segments. Uber revenue mix - delivery: 32% of revenue; 31% of adjusted EBITDA - Stig highlights delivery as the other major segment. Uber revenue mix - freight: 10% of revenue - Stig says freight is the smallest segment and not especially profitable. Uber advertising share of revenue: About 3% - Stig cites advertising as a small but promising line item. Uber ad click-through rate: 3% - Stig gives ad performance metrics to support the monetization opportunity. Uber ad CPM: $45 - Stig argues these are strong advertising economics. Uber gross bookings growth: 15% to 20% - Stig expects this range in the foreseeable future. Uber mobility take rate: Around 30% globally - Stig says take rates rise with market maturity. Uber delivery take rate: 5 to 7 percentage points - Stig gives a lower take rate range for delivery. Uber SBC dilution: 3% to 4% - Stig says dilution has persisted in recent years. Uber buyback authorization: $20 billion plus $3 billion previously authorized - Stig criticizes the scale of repurchases relative to growth investment. Merck revenue: $60+ billion - Hari describes Merck as one of the top five pharma companies. Ketruda revenue: $29.5 billion - Hari calls it Merck’s dominant oncology platform drug. Oncology TAM: $500 billion+ by 2032 - Hari frames the growth backdrop for Merck’s core category. Oncology TAM CAGR: 11.3% - Hari cites projected industry growth. Merck P/E: 12x current; 11x forward - Hari argues the stock is cheap relative to peers. Merck operating margin: 31% to 31.5% - Hari and Toby cite this as the highest in pharma. Ketruda patent expiry: 2028 - Main long-term headwind in Hari’s thesis. Ketruda dose cost: $10,000 to $12,000 - Hari discusses pricing pressure and middleman economics. Annual Ketruda treatment cost: $150,000 to $180,000 - Hari notes the burden on patients and payers. Merck stock decline from high: Down 40% - Hari says the stock is well below its all-time high. Merck dividend yield: 4%+ - Hari emphasizes income while waiting for pipeline execution. BBWI market cap: $5.9 billion - Toby frames Bath & Body Works as a small-cap/mid-cap value idea. BBWI enterprise value: $10.4 billion - Shows debt impact on valuation. BBWI debt: About $4.5 billion to $5 billion - Toby and Stig discuss leverage as a key concern. BBWI free cash flow: $750 million - Used to support the thesis that the company is cheap and cash-generative. BBWI free cash flow yield: About 12% - Toby calls this a very large yield. BBWI P/E: 7.5x - Toby highlights the low earnings multiple. BBWI EV/EBITDA: 7.7x - Another measure showing cheapness. BBWI price to cash flow: 6.3x - Toby uses this to argue for undervaluation. BBWI share count reduction: From nearly 280 million to 212 million shares - Toby cites aggressive buybacks since the IPO. BBWI IPO price: $20 - Toby notes its spinout/public listing valuation. BBWI peak price: $80 - Toby says it ran up during meme-stock enthusiasm. BBWI analyst target range: $41 to $45 - Toby says current price is well below sell-side expectations. BBWI current price: About $28 - Toby’s pitch is based on this market level. BBWI member sales: 80% - Stig cites loyalty and repeat purchase behavior. BBWI debt maturity example: $284 million in 2027; $444 million in 2028 - Stig reviews the debt schedule and refinancing risk.

Pivotal Quotes: "It’s a business that many of us use frequently, but when you dig into the numbers, you see there’s a fascinating story about scale, networking effects, and how the company is building an expanding ecosystem well beyond just rights." — Stig Brodersen: Opening rationale for pitching Uber "I would argue that for a company like Uber, it’s actually supply that’s driving." — Stig Brodersen: Explaining the economics of Uber’s two-sided marketplace "It’s never about just liking the company we like. It’s really about testing our ideas, asking the hard questions and seeing where we might be wrong." — Intro/host: Framing the mastermind episode format

Implications: Listeners should expect long-duration value to come from businesses with durable economics, not just popular brands. Uber’s future hinges on AVs and ad monetization, Merck on pipeline execution after Ketruda, and BBWI on cash flow discipline and brand loyalty.