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Today’s News (Apr 22, 2021) : Silicon Valley’s frenzy, Apple and Google’s day on Capitol Hill, Bitcoin weakness and more.
Market Summary (9:45 A.M. ET): “The S&P 500 and Dow slipped as investors gauge blue-chip earnings and data on the U.S. labor market,” WSJ writes.
“Deal flow and valuations are reaching new heights in technology startups, as a flood of cheap cash fuels efforts to find the industry’s next big winners, from software to social media,” WSJ writes.
U.S. startups netted an astonishing $69 billion in funds raised during Q1 of this year, a 41% improvement on the previous record (via Pitchbook data). Average startup valuations reached a record level across all companies, and late-stage outfits more than tripled to an average value of $1.6 billion. What used to be monthslong negotiations are closing in days, and companies are raising new funds in monthly cycles as opposed to years. “I’ve never seen it this frenzied,” said Larry Albukerk, founder of investment fund EB exchange.
There is so much capital sloshing around because yields, and prospective returns, are lower across the board.
When all asset classes are at high valuations and bond yields are unattractive, money tries to go up the risk spectrum to hunt for returns. Venture capital and private equity are two established ways of doing so.
If I were a founder of a good technology startup with product/market fit, I’d consider using the current “seller’s market” (to use a real estate term) to raise capital at favorable terms with good VC funds. But picking the right VCs is the utmost importance.
I’m still not sure if Cents qualifies as a “startup” yet, but I honestly would rather have subscribers and ROIC members as partial owners of this thing than any VC.
If I owned a small-to-medium-sized business and wanted to sell, now is probably a good time to explore the private equity acquiror route. But if I wanted to stay in the business, I would be very wary about letting any fund into the capital structure with any semblance of power.
A general rule of thumb for life: Despite how beautiful, friendly, interesting, or awesome people seem when you meet them, you won’t see their true colors until they hit times of distress or adversity. The importance of truly collaborative partners really shows itself when times are tough.
Apple and Google Pressed in Antitrust Hearing on Whether App Stores Share Data with Product Development Teams
Apple and Google representatives testified before the U.S. Senate on Wednesday on whether they have systems in place to prevent the “leveraging the data from third-party businesses operating on their app stores to inform the development of their own competitive products,” TechCrunch reports.
Apple, specifically, was questioned on the practice of “sherlocking,” which refers to copying other apps. Developers have made several claims over the years that Apple has ripped off their ideas. Both companies, in one form or another, said they did have some form of controls in place to protect third-party data.
Although this is yet another headline about the government looking into Apple and Google abusing their positions of power, I’m not too worried about this one unless they are hit with big fines for specific instances.
Ultimately, $AAPL and $GOOG’s share performance will rely on their ability to maintain their oligopolies and develop new (meaningful) products to grow revenues.
- Apple can keep adding on little accessories, but in order for the stock to really outperform over the next decade, it needs another breakthrough.
- Google is in a slightly better position, as I believe they’re more native to the internet and software world, and have a number of “moonshot” projects that could become viable breakthroughs.
Wall Street Starts to See Weakness Emerge in Bitcoin Charts
Investors are on edge as Bitcoin has yet to recover from its latest drop, Bloomberg reports.
One company’s technical analysis of the digital currency’s trading patterns, looking at its relative strength index, didn’t support its recent highs. It’s a possible indicator, among other things, that Bitcoin’s upward momentum is fading. Either way, Bitcoin has become too big to ignore and everyone from institutional outlets to retail investors are paying attention.
Bitcoin Price (8:15 a.m.): $54,915.39
If this marks the Bitcoin cycle top, then it will have looked very different from the 2017 one.
- Last cycle, Bitcoin skyrocketed and crashed within the span of 10 weeks, spending only about 1-2 weeks at the “top”.
- This time, Bitcoin has been rising for about 19 weeks, and has already been trading sideways at the “top” for 5 weeks now.
The more concerning thing for me is the increasing frequency of “altcoins” skyrocketing. This is behavior that I remember marked the top of 2017.
But on the other hand, legitimate projects like Ethereum have not risen nearly as much as they did last cycle, so we still may have room to grow.
But who knows, perhaps Bitcoin will crash and enter another crypto winter, but I believe it is a $500,000 asset some day, which gives me the confidence to hold on a 10-20 year time horizon.
Furthermore, I still think the risk/reward profile here is better as a hold because a bear market would be the first deviation from the Bitcoin stock-to-flow model to date.
Private-Equity Firms Regain Taste for Giant Buyouts
Leveraged buyout bids, which have significantly slowed since the 2008 financial crisis, are rising in popularity once again as companies look to deploy $1.6 trillion in unspent cash, WSJ reports.
“Between 2005 and 2007, private-equity firms inked 18 deals worth $10 billion or more, according to Dealogic. Since then, they have struck only 10, mindful that many of the pre-crisis deals didn’t work out as planned.” Toshiba, Royal KPN and Medline Industries are all exploring potential sales to private equity outlets.
See commentary on the first story. There is too much money chasing too few companies and deals, leading to riskier and riskier behavior in the search for returns.
AT&T’s Revenue Rises as Wireless Unit, HBO Add Customers
AT&T saw a revenue increase during the first quarter as the company added customers in its wireless, internet and streaming segments, WSJ reports.
HBO & HBO Max subscribers improved by 6.51% to 44.2 million. The postpaid phone business, which is a key profit driver for AT&T, added 595,000 new subscribers. Overall, total revenue rose 2.7% to $43.9 billion and its net income nearly doubled from $4.61 billion to $7.55 billion. Net debt remains around $169 billion.
AT&T ($T) is up about 4% in a down market. We’ve been a big fan of AT&T ($T) and have held it on the Big Board since December. It’s a compelling value stock with a high dividend yield that keeps us fed while we wait on the turnaround.
SEC to Examine Fund Disclosure Rules After Archegos Blowup
The Securities and Exchange Commission is weighing stricter disclosure requirements for investment outfits in the wake of Archegos Capital Management’s meltdown and the GameStop trading saga, Bloomberg reports.
In the case of Archegos, the regulator wants to increase transparency on the derivative bets that drove the chaos. For GameStop, the SEC is getting pressured by Capitol Hill to “shed more light on who’s shorting public companies after the GameStop frenzy.”
Automation Software Maker UiPath’s Shares Rise 23% in Market Debut
UiPath, a company that helps businesses automate repetitive tasks, saw its share price increase by 23% in its trading debut, WSJ reports.
At Wednesday’s close, shares were at $69 and the company reached a valuation of $36 billion. It opened at $56. “UiPath, founded in Romania in 2005 and now based in New York City, is one of several companies that bets on RPA, short for robotic process automation, and other automation solutions as a ticket to efficiency.”
What’s Going On:
Netflix failed to meet expectations on subscriber growth for the first quarter, WSJ reports.
The company forecasted adding six million subscriptions on a net basis worldwide from January to March. Instead, they pulled only four million. It’s a steep drop from last year — Netflix added 15.8 million subscriptions when lockdowns started forcing people to stay home — and it could be “a potential warning sign for the company as consumers in many countries start to emerge from pandemic-related lockdowns and as streaming competition increases.”
Netflix ($NFLX) is one that has looked too expensive for my tastes throughout the past year. Even after the steep drop in price to $550 per share, it’s trading at 20x forward Gross Profit and expected to grow only 15-20% going forward.
There are a plethora of other growth stocks, including some on the Big Board, that offer higher growth at a lower valuation. In this market, if I’m buying any growth stock for more than 20x forward Gross Profit, I had better be confident in some 30%+ growth numbers.
Apple Unveils Subscription Podcasts, Latest iPad Pro
Apple announced the impending release of a new iPad Pro, as well as other products at its press event on Tuesday, TechCrunch reports.
The iPad is said to improve performance by 50% over its predecessor and retails at $799 for the 11-inch model. Apple’s other announcements included a “redesigned Podcast app with support for paid subscriptions, a new purple iPhone 12, its long-awaited AirTag devices for finding lost objects, a new Apple TV 4K with a new remote (you also can buy the remote separately) and colorful new iMacs with M1 chips.”
Apple released a bunch of new products at its event, which you can watch in 11 minutes here. My biggest takeaway is that this was more of a refresh cycle, without any game-changing products released.
The only actually-new product was the AirTag product, which may kill the startup Tile, but all-in-all, adding a hundred million of value to the business is only about 5% of $AAPL’s value. It’s generally a good thing they’re finding new things to add to their product lineup, but it still seems like they’re squeezing the last juices out of current customers instead of innovating.
The biggest question is if they can compete with their software products like Apple Fitness or Music/Podcasts. I personally believe that Apple isn’t ready for prime time against $SPOT or $PTON in this regard, but it’s definitely a huge risk for those companies.
Procter & Gamble Will Raise Prices in September
Procter & Gamble, the producer of many household staples like diapers and tampons, will raise prices this fall, WSJ reports.
The company, which also makes Tide detergent and Gillette razors, attributed the decision to “rising costs for raw materials, such as resin and pulp, and higher expenses to transport goods.” It’s not an unusual change — big consumer products companies last raised prices in 2018 during a pulp surge. But global supply chains have not only had Covid-19 disrupting them but other issues like the February winter storms as well. Shutdowns have led to shortages and its filtering back to consumers in the form of prices.
Inflation is showing up in the real world. My base case assumption is that this is natural, post-recession, transitory inflation, but the risk is if inflation starts to run away so much that the Fed will be forced to raise rates in a reactive manner.
Discord Ends Deal Talks With Microsoft
Discord and Microsoft have ended talks on a possible acquisition, WSJ reports.
Microsoft, which almost bought TikTok’s U.S. business earlier this year, had been negotiating a deal to buy Discord for at least $10 billion, according to earlier reports. Discord, which operates a free online platform for communication by text, audio or video, and is loved by gamers, has exploded in popularity during the pandemic. Rekindling talks is not out of the question, but for now, Discord could turn its focus to a potential IPO.
Good for Discord, probably bad for Microsoft. I believe Discord has the ability to be a huge player if they play their cards right.
If you want to join our ROIC-only Discord, consider signing up here!
IBM Breaks Latest Revenue Losing Streak As Cloud Revenue Shows Modest Growth
IBM posted a slight revenue increase just a few years removed from 22 consecutive quarters of revenue declines, TechCrunch reports.
The company’s growth was bolstered by its Cloud and Cognitive services division, which IBM is very much betting its future on. That segment posted revenues of $5.4 billion in the most recent quarter, a 3.8% year-over-year improvement. The driving force within that is Red Hat, the enterprise cloud software company IBM acquired in 2018 for $34 billion.
$IBM is what I would call a dividend stock on a very slow decline or stagnation.
They basically haven’t grown revenues for 6 years, but pay a 7-9% dividend yield. That’s a great yield except for the fact that you’ll also probably lose a little money in the stock price.
Even as a dividend investor, I would rather take less dividend yield for a stable and growing company than have to be in a declining business.
Executives Wonder if Their Stock Selloffs Were Linked to Archegos
“Executives at online lender LendingClub Corp. and digital streaming service fuboTV Inc. still aren’t sure if sudden swings in their stock were from banks unloading billions in Archegos investments—or if the drop was from something else entirely,” WSJ writes.
Archegos had said to LendingClub executives that it was a big shareholder. But those executives didn’t have a way to verify without the usual disclosure that big investment firms typically make when buying up a large block of a company. It’s surprising to some that a company can’t figure out why its stock is falling. But the Archegos situation “shows how difficult it can be for executives to determine who owns their company’s stock and for what reason.”
I didn’t particularly like $FUBO at $30, and it was a good call to avoid this one. If you want to watch the video I did on it on January 14th, you can watch it here.
What’s Going On:
“U.S. stocks slipped Monday, dragged down by losses across everything from technology shares to retail stocks,” WSJ writes.
It doesn’t look like investors are pushing the panic button, instead taking a cautious approach to the week. A series of blue-chip companies are reporting earnings this week and those results will “offer a view on businesses’ expectations for the pace of economic revival.” After the S&P 500 and Dow closed at record highs last week, all eyes are on whether these skyrocketing valuations are justified.
I still don’t think we’re in a bubble and am moderately bullish on the market over the next 6 months. At most, I see a 10% correction as the biggest downside for the major indices, barring another headline such as a bad Covid-19 variant or runaway inflation.
If it makes you feel any better, Facebook ($FB) is still trading at only 14.2x forward EBITDA despite having over 20% growth rates. There are definitely safe places to hide if an investor wants to avoid the massive volatility seen in high growth or SPAC stocks.
Facebook and Reddit Announce New Audio Products
The move comes on the heels of Clubhouse’s latest fundraise, which reportedly put the company at a $4 billion-plus valuation. Facebook’s new audio offerings include the Clubhouse clone, a long-form audio platform for podcasters, some Spotify integration and a short-form feature called Soundbites. Reddit’s version, known as Reddit Talk, will live on the platform’s subreddits or subcommunities. Both are still being tested.
Despite Andreessen Horowitz continuing to fund Clubhouse and signaling their bullishness, I am not very optimistic about the long-term success of Clubhouse.
Twitter, Facebook, and Reddit are using the infamous Zuckerberg “copy-and-contain” strategy. I also actually believe that the Clubhouse “feature” lives more naturally on Twitter than anywhere else. Or even as a call-in feature on YouTube or Twitch.
As a consumer, I don’t find the platform natively compelling absent big names like Elon Musk or Chamath Palihapitiya. As a creator, being on Clubhouse has by far the lowest ROI on time and energy.
But of course Andreessen Horowitz may know something we don’t. Perhaps Clubhouse has some killer features on the roadmap or the data show a different story…
Stock Shorts Collapse as No Hedge Fund Wants ‘Head Ripped Off’
Nobody wants to be the next GameStop bear, and Wall Street shorts are crumbling as a result, Bloomberg reports.
Short interest in members of the S&P 500 hit a 17-year low at 1.6% of market value, according to Goldman Sachs data. Across the Atlantic, “a short-covering frenzy has sent bearish bets collapsing like never before in Morgan Stanley data.” JPMorgan data shows hedge fund long bets are at their highest relative levels in years, pointing to “the bullish mania propelling global equities to fresh records this month.” As money flows in from re-openings and stimulus, smart money isn’t picking against expensive or risky companies.
Retail investors have been a big force in the markets during the pandemic. The data is showing that retail volumes are continuing to wane, and my baseline assumption is that retail investors will fade into the background as we fully reopen.
But I do hope that many will stick around with me as I continue to create content, pick stocks, and invest, as true wealth is not created over two years, it’s created in two decades.
Venmo Adds Support For Buying, Holding and Selling Cryptocurrencies
Starting today, Venmo is adding support for cryptocurrencies, TechCrunch reports.
Just as parent company PayPal did last year, 70 million Venmo users now have access to digital currencies. Venmo will support four at first — Bitcoin, Ethereum, Litecoin and Bitcoin Cash, which is the same offering as PayPal.
Yet another huge competitor enters the cryptocurrency ring. This is the reason why I believe retail-facing fees and “take rates” by cryptocurrency exchanges will be driven to zero.
Coinbase ($COIN) at $333 per share trades at a $100 billion valuation, representing around 20x revenues. This is too expensive for me to favor this trade over underlying Bitcoin.
Oatly Reveals Growing Losses, Revenue in U.S. IPO Filing
Vegan food and drink company Oatly has filed for a public offering, Bloomberg reports.
This all comes amid rising sales and growing losses. The filing listed the offering at around $100 million, a placeholder that will be amended later on. Oatly posted a $60 million net loss on $421 million of revenue last year. In 2019, it lost $36 million on $204 million of revenue.
Nvidia’s $40 Billion Deal for Arm Faces U.K. National-Security Probe
Nvidia Corp.’s $40 billion agreement to buy chipmaker Arm from SoftBank is being put under a national-security review by the U.K. government, WSJ reports.
The massive acquisition was poised to reshape the chip industry, but it has a new obstacle to overcome with regulatory scrutiny creeping in. The probe “plans to investigate the deal on antitrust grounds” and it is “the latest example of how governments around the world are increasingly tightening control over semiconductor technology.” Access to advanced microprocessors has proven to “make or break” the futures of some of the U.K.’s biggest companies.
Johnson & Johnson’s Covid-19 Vaccine Adds $100 Million to Quarterly Sales
“Johnson & Johnson’s Covid-19 vaccine contributed $100 million to the company’s sales growth in the latest quarter, as U.S. health authorities re-evaluate the vaccine during a pause amid safety concerns,” WSJ writes.
It’s a sign that maybe things are heading back to normality as vaccines roll out and a lift to the company after a “tumultuous first months of 2020.” The company’s Q1 revenue was $22.32 billion, up from $20.69 billion in the year-ago period. Net earnings also improved to $6.2 billion from $5.8 billion compared to the last Q1.
What’s Going On:
Covid-19 infections have reached their highest levels during the past seven days even as vaccines continue to roll out, Bloomberg reports.
More than 5.2 million people were diagnosed with Covid-19 during that period, which “casts doubt on the hope that the end of the pandemic is in sight.” The weekly increase overtook a previous high set during December and amounted to a 12% increase from the week before, according to Johns Hopkins University data. More than three million people have died worldwide from Covid-19.
At this point, the pandemic continues to disproportionately affect countries in the developing world, with India and Brazil “shouldering surging caseloads.”
U.S. and U.K. cases seem to have stabilized at a lower level, but India and Brazil are bearing the brunt of the recent case increases. At least it still looks like vaccinations are a huge factor in preventing cases, and hopefully the rest of the world will improve as vaccinations are distributed globally.
America Is Short of Home Builders as Well as Homes
An increase in home construction and home buying “reflects a remarkable resurgence in the housing market that the Covid-19 crisis set off, as low-interest rates and city dwellers flocking to the suburbs substantially boosted demand,” WSJ reports.
According to data from the Commerce Department, construction started on a seasonally adjusted 1.74 million homes (at an annual rate). It’s a steep increase from February’s 1.46 million mark and the highest level since July 2006, “when the housing bubble was coming undone.” And the need for new homes will only keep rising — “Freddie Mac estimates that as of the end of last year the country was 3.8 million single-family homes short of what is needed to meet long-term demand.”
Now that it’s rallied substantially, how real estate will perform going forward is a puzzle.
Many factors lead me to believe that home prices will be flat or a little weak going forward.
- Rising yields will increase required cap rates and add to the cost of ownership, which will be a headwind for home prices.
- There is also the possibility of demand flocking back to cities and multifamily rentals after the pandemic.
- Anecdotally, it seems like houses are currently going for prices that aren’t commensurate with how nice they actually are.
But there is still a case to own real estate.
- There is still a housing shortage, which might keep prices going up.
- Perhaps prices stabilize and don’t offer the same upside as before, but at least rents will increase and investors will get an increasing yield.
- Real estate is still a hard asset to own in the whirlwind of unprecedented monetary policy.
All in all, I would rather be in multifamily or commercial real estate right now than single-family rentals.
Consumer Agency Warns Against Peloton Tread+ Use, As Company Pushes Back
The U.S. Consumer Product Safety Commission has issued a warning telling users not to use Peloton’s Tread+ after 39 incidents, one of which included a death, TechCrunch reports.
The warning is based on “multiple injuries involving small children and a pet.” Peloton has pushed back saying the warning is “inaccurate and misleading.” The Peloton Tread+ costs $4,295.
This is an event that, although tragic, doesn’t deter me from investing in the stock.
- Having heavy machinery in the home is dangerous for children in general. There were 22,500 injuries in 2019 and 17 fatalities between 2018-2020 related to treadmill usage in the U.S.
- Most of Peloton’s revenues come from its Bike product.
- A lot of Peloton’s future involves replacing existing treadmills in non-home settings with connected ones (gyms, hotels, apartments, etc).
Squarespace Files To Go Public
Website development and hosting platform Squarespace has filed to go public, TechCrunch reports.
Squarespace boasts impressive growth, with a 28% year-over-year revenue gain from $484.8 million in 2019 to $621.1 million in 2020. It also had a $30.6 million net income last year. It will trade on the New York Stock Exchange under the ticker “SQSP.”
Squarespace ($SQSP) carries 82% Gross Margins and 19% EBITDA margins. It’s an amazing business with great product design/fit and high retention rates of over 83%.
Depending on the valuation, it would be a great long-term investment in the growth of the internet and democratization of ecommerce.
Two things that I would want to look into are:
- How inflated was 2020 growth because of the stay-at-home boom to website creation?
- Squarespace states that 48% of small-to-medium-sized (SMB) businesses aren’t online today, but how much more online adoption do we expect to happen here? Surely not every neighborhood taco stand needs a website.
- How is Squarespace’s market share trending versus competitors like Wix.com and WordPress?
Coinbase Hangover Rattles Crypto Assets With Bitcoin Falling
The fallout of Coinbase’s IPO frenzy has presumably resulted in Bitcoin’s biggest drop since February, Bloomberg reports.
Bitcoin fell as much as 15% on Sunday and was roughly $57,000 in the afternoon of Tokyo trading on Monday. It had previously hit a high of $64,870. Ether also saw a drop, slipping below $2,000 over the weekend. Meanwhile, Dogecoin, which was started as a joke, saw 25% gains in the last 24 hours, according to CoinGecko.
Historic Oil Glut Amassed During the Pandemic Has Almost Gone
“The unprecedented oil inventory glut that amassed during the coronavirus pandemic is almost gone, underpinning a price recovery that’s rescuing producers but vexing consumers,” Bloomberg writes.
Roughly a fifth of the surplus that flooded the markets last year remains as of February. The aftermath has resulted in international crude prices landing at $67 per barrel, a solid price point for consumers, but has left consumers, motorists and governments, concerned about inflation.
What’s Going On:
Surging Covid-19 cases, heightened building demand, Bitcoin’s slide and more.
Is this auto insurance giant a sneaky reopening play?
China’s economy saw massive growth in Q1, improving by 18.3% compared to the year-ago period, WSJ reports. The world’s second-largest economy nearly tripled the “6.5%
Cryptocurrency price highs, everybody wants a piece of Coinbase, autonomous driving and more.
Coinbase’s moonshot IPO, regulating SPACs, the recovery of oil, Chinese EVs and more.
Uber posts a record month, the FDA pauses the J&J vaccine for further study, Grab’s SPAC deal and more.
An economic inflection point, raw materials surging, China’s antitrust regulator drops the hammer on Alibaba and more.
Justin’s notes on the current state of the stock market and Bitcoin.
Let’s understand the mortgage industry a little bit better…
Is there value hiding in the mortgage lending industry?
While the pace of economic recovery is promising, Fed Chairman Jerome Powell said the slow rollout of Covid-19 vaccines outside of the U.S. is a
Twitter’s Clubhouse aspirations, the dangers of market leverage and the ongoing chip shortage.