Good morning! Today’s word count is 1,837 words, or a 10-minute read. Let’s get to it:
“The S&P 500 continued its rise as investors cheered trade talks among senior U.S. and Chinese officials following weeks of escalating tensions between the world’s two largest economies,” WSJ writes.
- S&P 500: $3,432.06
- Nasdaq: $11,400.20
- Bitcoin: $11,435.79
- U.S. 10-Year: 0.706%
Justin Oh’s Quick Read
Ant Group (Alipay) is an insanely dominant business with incredible growth at scale. We’d have to merge Paypal, Square, E*TRADE, Lemonade, and Yelp to get anything even close in the US. If we’re comfortable with continued growth and penetration of the Chinese economy, I’d actively try to own this stock upon IPO and the other dominant Chinese stocks as Chinese capital compounders. The targeted $200 billion valuation implies an approximate 18x LTM Gross Profit multiple, a better multiple than $BABA and Tencent (700:HK) trading at around 18x forward Gross Profit multiple. I’ll be buying a good amount of Ant Group if I can catch it around this valuation.
Inside Ant Group’s Giant Valuation: One Billion Alipay Users and Big Profit Margins
“Ant Group Co., the Chinese financial-technology giant controlled by billionaire Jack Ma, filed listing documents on Tuesday for initial public offerings in Hong Kong and Shanghai, kicking off a process that could see the company go public in the coming months,” WSJ writes.
Why It Matters
Ant operates Alipay.
- Alipay, the popular payments and lifestyle app, has grown immensely popular in China as citizens use it for a range of financial transactions.
- The app had 711 million monthly users as of June and more than one billion annual active users, according to the filings.
- The company also derives a significant amount of revenue from technology-service fees charged to banks, asset managers and insurance companies that use Alipay to “make loans, and sell mutual funds and other products to customers.”
The business’s size and scale have been shrouded in secret for years, but the public filings show Ant is highly profitable.
- Ant said it made $3 billion in net profit for the first six months of 2020, already surpassing its $2.5 billion profit in 2019.
- It’s roughly 30 percent profit margin is impressive for a “relatively young company that is growing rapidly.”
Ant’s valuation could be one of the biggest ever for a first-time IPO.
- The company is looking to sell 10 percent of its shares to raise $20 billion, implying a $200 billion valuation.
- If achieved, it would “propel Ant into the ranks of China’s most valuable listed companies and the world’s top financial-technology companies, in the vicinity of PayPal and Mastercard.”
- Two years ago, Ant was valued at $150 billion after raising $14 billion from domestic and global investors.
- The company intends to use 30 percent of its IPO proceeds to expand its user base and digital services while diverting another 40 percent on innovation.
It’s a huge opportunity for China’s STAR Market.
- The new exchange was established a year ago to draw listing from homegrown tech companies.
- Ant’s first-half revenue is a big testament to the company’s ability to withstand economic shocks, emphasizing its value to domestic financial institutions such as China’s national pension fund.
Numbers to Consider
- 40 Percent — Ant’s revenue growth through the first half of 2020 and full year of 2019.
- $590 Billion — The total value of assets under management on Ant’s investment platforms.
- 16,660 — Ant’s total employee count at the end of June.
Justin Oh’s Two Cents:
I looked into Ant’s filings, and it’s a uniquely dominant company without an analog in the West. Alipay is the dominant financial app in China and not only allows digital payments but also provides a single marketplace for loans, investment and insurance products, as well as services like food delivery and transportation. That means it can be thought of as Paypal ($PYPL), Square ($SQ), Lemonade ($LMND), E*TRADE ($ETFC), possibly Yelp ($YELP) and more combined… except more dominant. For reference, $PYPL and $SQ only have a combined 376 million active users, half Ant’s numbers.
Read More: (WALL STREET JOURNAL)
General Atlantic, Sequoia Capital Are Key Drivers in Oracle Bid for TikTok
If TikTok does get sold to a U.S. company, investment firms General Atlantic and Sequoia Capital want in on the action. Fearing the possibility of being excluded from a Microsoft purchase, both firms, which own large stakes in TikTok parent ByteDance, have become key drivers in Oracle’s bid to acquire the short-form video platform.
Why It Matters
Somebody has to buy TikTok.
- Citing economic and national security concerns, President Trump signed an executive earlier this month giving ByteDance 45 days to sell its U.S. operations to an American buyer or be banned in the country.
- Microsoft has been looked at as the favorite, already engaging in advanced discussions before the order was signed.
- Twitter also had preliminary talks but hasn’t made significant progress.
- Oracle has ties to Trump, though. Larry Ellison, the company’s co-founder, chairman and largest shareholder, threw a fundraiser for the president at his home earlier this year. Oracle CEO Safra Catz work on Trump’s transition team in 2016 and donated to his re-election bid.
Oracle isn’t an obvious fit.
- The software giant has a sizable cloud-computing operation and technical capabilities, but virtually no experience running a consumer-facing business.
- Microsoft is a significant player in the business computing space and owns LinkedIn and the Xbox video game business.
- Oracle only has about a third of the $136 billion of cash Microsoft has on hand.
- Asked about a possible Oracle bid last week, Trump said: “I think that Oracle would be certainly somebody that could handle it.”
It’s a conflict of interest, though.
- Both Sequoia and General Atlantic both hold seats on ByteDance’s board.
- The investment firms have an obligation as board members to maximize the value of ByteDance’s prized assets.
- But they’re also trying to buy into TikTok’s U.S. operations at a good price to capitalize on its potential.
The next step could be resolved soon.
- Bidders have to submit offers by the end of the week, opening the door for one of the parties to enter exclusive negotiations shortly.
- A sale still isn’t guaranteed, and TikTok filed a lawsuit Monday arguing Trump’s initial executive order failed to follow due process.
Numbers to Consider
- 100 Million — TikTok’s estimated userbase in the U.S.
- $50 Billion — The estimated valuation of TikTok’s collective operations in the U.S., Canada, New Zealand and Australia.
Justin Oh’s Two Cents:
An Oracle ($ORCL) acquisition seems even less natural than a Microsoft one. Even worse, TikTok is already worth almost 30 percent of the valuation of Oracle. This looks like a financial engineering exercise by General Atlantic, Sequoia and Oracle, but maybe it can provide the stagnant company some artificial growth. If this happens, I’ll value Oracle stock for us as two separate companies and hope the stodgy B2B technology doesn’t screw up TikTok.
Read More: (WALL STREET JOURNAL)
Number Crunch: Asana Leads A Slew of IPOs Hitting The Market
Workplace software firm Asana has filed to go public through a direct listing.
- It last raised money at a valuation of $1.5 billion in 2018. It’s paid to free users ratio has grown steadily from 3.6 percent in January 2018 to 4.8 percent in January of this year.
- For the 2020 fiscal year ended Jan. 31, Asana reported an 86 percent increase in revenue to $142.6 million from the previous year.
- This month, the Information reported that Asana was projecting a 66 percent increase in revenue to $236 million for its fiscal 2021.
Cloud data analytics startup Snowflake filed confidentially for a public offering earlier this year and has made its filing public.
- Snowflake is backed by Sequoia Capital, valued at $12.4 billion and looks to raise $100 million through its IPO.
- It reported a 174 percent sales increase to $264.7 million in its fiscal 2020. Though, its net loss nearly doubled from the previous year reaching $348.5 million.
- Snowflake said the pandemic-related lockdowns had both positive and negative effects on its business, according to the filings. Its sales have continued to grow, notching $242 million in the first six months of fiscal 2021.
Sumo Logic has filed IPO paperwork, becoming the latest software company to join the public markets this fall.
- Last May, the company was valued at $1.2 billion and has raised $346 million to date.
- It had a $155 million revenue last year, a 50 percent hike from the previous year.
- But the company has yet to be profitable. According to the filings, Sumo Logic lost $92 million last year.
Unity Software — which makes game engines that serve as the “building-blocks for popular developers” — filed paperwork for an initial public offering Monday.
- The company is backed by Sequoia Capital and Silver Lake Partners, collectively holding 42.3 percent in equity. In its filing, Unity disclosed it relies primarily on cloud services from Google, which it’s spending a total of $189 million on between December 2018 and December 2024.
- Unity’s revenue rose 39 percent to $351 million during the first half of this year compared to $253 million from a year earlier.
For the six months ending June 30, Unity had a $54.1 million net loss, a decrease from $67.1 million the year before.
Worth Your Time
Slow The Spin: Arm Ltd., the U.K. based chip designer that powers the majority of the world’s smartphones, has called off a planned spinoff of two businesses to parent company SoftBank Group. While Arm had planned to transfer two Internet of Things businesses, it determined it could realize the same benefits of a spinoff by keeping the operations in-house. The announcement comes as SoftBank promised to dispose of roughly $42.5 billion in assets to appease activist investor Elliott Management. (WALL STREET JOURNAL)
Different Purviews: Unemployment has risen far more in the U.S. than in Europe this year. But it’s not the result of a deeper recession in the U.S. or less-aggressive fiscal response. It’s a reflection of different approaches to the labor market. European governments have paid companies tens of billions of dollars to keep workers on the payroll, while most U.S. support goes directly to the unemployed. Europe props up jobs, while the U.S. props up workers. (WALL STREET JOURNAL)
An Expected Shift: “As the COVID-19 pandemic reshapes our world, more consumers have begun shopping online in greater numbers and frequency. According to new data from IBM’s U.S. Retail Index, the pandemic has accelerated the shift away from physical stores to digital shopping by roughly five years. Department stores, as a result, are seeing significant declines.” (TECH CRUNCH)
American Airlines announced it will shed 19,000 jobs in the coming months to cope with weak travel demand that isn’t expected to recover for years.
Salesforce, Amgen and Honeywell are joining the Dow Jones Industrial Average, replacing Exxon, Pfizer and Raytheon.
Chinese ride-hailing giant Didi Chuzing has started offering its services in Russia as the world grapples with weak transportation demand due to the Covid-19 pandemic.
“Google’s cloud division is set to invest $100 million in the teleheath technology firm, Amwell, which has seen a spike in revenues amid the pandemic.”
“Best Buy said its online sales surged in the latest quarter as consumers bought laptops, appliances and other items that help them work and cook from home.”
A federal judge denied Epic Games’ request for a temporary restraining order that would have forced Apple to put Fornite back into the App Store.
Apple has agreed to a deal with Automattic, the WordPress operator, resolving a dispute about the content management platform adding in-app purchases.
Chinese commercial launch startup iSpace has raised $172 million in Series B funding as the private launch industry continues to heat up.