Good morning! Today’s word count is 2,233 words, or a 12-minute read. Let’s get to it:
Market Summary (10:35 A.M. ET): “Investors are also assessing risks tied to rising coronavirus infections, the lack of consensus in Congress on fresh stimulus spending and the pace of development for drugs and vaccines,” WSJ writes.
- S&P 500: $3,509.97 (-0.06%)
- Nasdaq: $11,842.37 (-0.04%)
- Bitcoin: $11,380.24 (+2.92%)
- Gold: 1,911.80 (+0.91%)
- U.S. 10-Year: 0.720%
Justin Oh’s Daily Read
See No. 2 for my Two Cents on the new Apple products and detail on how their products are competing. Apple has hit a ceiling with its growth rates. Sure, the company will continue to introduce ancillary growth avenues, such as AirPods, but these will be incrementally additive, not transformative.
The Apple ecosystem is stable, sticky, and highly defensible, but it’s tough to see a 5-10 year path to doubling revenues. To me, Apple is a Cash Cow, not a capital compounder. Just look at how much cash they store away each year versus the other tech giants that are reinvesting that cash to grow more.
Apple ($AAPL) trades at 24x forward EBITDA and is expected to grow at only a 4.2% rate annually for the next four years based on consensus estimates. It’s not a horrible investment, but a 0.7% dividend yield doesn’t get me out of bed for a product line whose growth is unexciting.
Compare this against:
- Google ($GOOG) trades at 22.2x forward EBITDA and is expected to grow at 15.7% annually.
- Amazon ($AMZN) trades at 25.3x forward EBITDA and is expected to grow at 16.3% annually.
- Facebook ($FB) trades at 14.7x forward EBITDA and is expected to grow at 19.4% annually.
See my point on how Apple is the least tasty of the bunch?
Apple Announces New Products, Including the 5G iPhone
Apple unveiled a lineup of new products at its virtual event yesterday, Tech Crunch reports. Here’s everything you need to know:
HomePod Mini: Apple’s latest venture into the smart home space features a new, smaller version of the HomePod Speaker. The presentation touted Siri and introduced a feature called “intercom,” which lets you broadcast a message across all of your HomePods from another Apple device.
The 5G iPhone: Four new iPhones arrived to mark Apple’s advancement to 5G wireless — the iPhone 12 Mini, iPhone 12, iPhone 12 Pro and iPhone 12 Pro Max. The new models tote improved displays, cameras, 5G support and the A14 Bionic Chip. With Corning’s help, Apple said all of the phones feature a new “Ceramic Shield” technology that reduces damage from falls by 4x. (Apple will no longer include a wall power or adapter or headphones in the box.)
- Mini: $699, 12: $799, Pro: $999, Pro Max: $1099
MagSafe: To further the shift to wireless charging, Apple announced its new MagSafe System (which borrows from the laptop charging system of old), allowing accessories to “automatically snap into the optimal place on a wireless charger, while also allowing for snap-on accessories like magnetic cases or credit cardholders.”
The Big Picture: It’s still unclear whether 5G wireless is going to be transformative. Apple CEO Tim Cook cited the improved experience of the new tech (faster uploads and downloads, higher-quality streaming, improved gaming and less network congestion), saying, “Today is the beginning of a new era for iPhone.”
U.S. networks are still being upgraded, so without a “must-have application or service,” some analysts are skeptical where consumers will see the appeal.
- Samsung already has 5G phones on the market, but Apple continues to follow its strategy of validating existing technology.
Homepod Mini: This one is uninteresting given how competitive this market is.
- Amazon, Google, and Apple are battling for supremacy within the home, and many will unify their Internet of Things (IoT) devices on one platform (i.e., Google Nest Thermostat + Speaker + Security vs. Amazon Fire TV + Echo + Ring). Others will opt to cobble together third-party devices like having Roku + Sonos + SimpliSafe. Apple still lags behind the others. They are not differentiated enough one-on-one and don’t have a comprehensive (or affordable) home portfolio to take market share.
iPhone: I don’t see 5G iPhones being a substantial long-term growth driver — it’s more like “table stakes.”
- It will drive a strong multi-year refresh sales cycle for $AAPL when the carriers actually have widely available 5G plans. At this point, smartphone hardware is a commoditized arms race. Flagship phones last for multiple years without noticeable performance issues for most people. Apple is relying on an admittedly powerful “moat” in their closed ecosystem. Customers do not switch off of Apple because their friends are on iMessage, they’ve spent money on Apple’s App Store, and their photos are stored on iCloud. It’s an amazingly lucrative business, but not one that has compounding growth potential.
Accessories: Apple’s accessory strategy shows me that they’re hitting a ceiling on iPhone, iPad, and Mac growth rates and are clearly trying to look for additional growth avenues.
- Cutting wall adapters and headphones is Apple’s way of cutting costs (and improving margins) without having to sacrifice product quality. Adding accessories like AirPods and chargers is their way of trying to increase revenue growth (by increasing spend per customer). $AAPL can only go so far with hardware, unfortunately, and they’ll need another transformational product to truly be a compounder for the next decade.
AMC Running Out of Cash, Delta Says Travel Recovery Far Off
AMC, the world’s largest movie theater chain, has reopened 83% of its U.S. theatres, but attendance is down 85% from a year ago. At that rate, the company’s cash reserves would be depleted by early next year at the latest, WSJ reports.
The movie theater business has been ravaged by Covid-19 between government bans on large gatherings and consumers avoiding indoor crowds. Hollywood is pivoting as a result. The decreased attendance has caused studios to delay major movie releases and focus more on streaming content.
Nothing Lasts Forever: According to recent regulatory filings, AMC burned through more than $230.4 million between July and August. Unless movie studios start rereleasing films, AMC’s cash burn will continue at a similar rate.
- AMC’s cash balance was just over $500 million at the end of August.
With a reported quarterly loss of $5.4 billion through September, compared to a profit of $1.5 billion last year, Delta Air Lines’ said, “its losses were mounting, as the coronavirus pandemic looks likely to continue weighing on travel for years,” WSJ reports.
Count airline travel as another industry irrevocably hurt by the pandemic. The Transportation Security Administration in August said airline travel was down 75%, according to CNBC.com. That number is now closer to 70% based on current TSA numbers.
- “Persistently high infection rates and the resulting restrictions on travel and business cut short the beginnings of a summer resurgence.”
Delta has been hurt by its focus on business travel, which has all but evaporated during the pandemic. The airline has a close to $22 billion war chest to fall back on, but that hasn’t stopped it from being forced to cut 18,000 workers, giving another 40,000 some form of unpaid leave and slashing the remaining employees’ hours.
The Takeaway: Whether its advancements in rapid testing, therapeutics, a vaccine, or even a new government stimulus package, something needs to happen if airlines are going to weather this downturn.
If you’re interested in either movie theaters or airlines, you’re probably looking to bottom-pick a deep value play. But unfortunately, with the pandemic looking like it will last for more than a year, most of the stocks in these industries look more like falling knives than undervalued investments.
As a reminder, I wouldn’t touch $AMC with a 10-foot pole. I’m willing to bet they will go through Chapter 11 bankruptcy and wipe out shareholders. If you’re dead set on investing in a movie theater comeback, $CNK is the one.
I am more constructive on airlines, as I believe that airlines have much more government support, recreational travel is flowing more freely into airlines, and they can scale back costs more than the movie theaters do. I personally do not own any because there is so much uncertainty about the return of business travel, representing half of airline profits. But if you want to invest in an airline comeback, $LUV is the one.
Business Insider Parent Nears Deal to Buy Controlling Stake in Morning Brew
Insider Inc., the parent company of Business Insider, is closing in on a deal to buy a controlling stake in Morning Brew, the popular business and finance email newsletter company geared toward young professionals, WSJ reports.
The deal reportedly values Morning Brew at $75 million, which could also include performance incentives.
It’s a bright spot in an otherwise dark sector. Media companies dependent on advertising revenue struggled enough before Covid-19 further tanked the online ad-market. The success of Morning Brew, theSkimm and other newsletter offerings from traditional outlets has given new life to a long-established medium.
- Newsletters “command higher advertising rates than traditional display ads in new articles.”
- They help companies expand their reach, find new subscribers and engage users much more effectively through their own inboxes.
Morning Brew has exploded to nearly 3 million total subscribers across its platform since Alex Lieberman and Austin Rief founded the company at the University of Michigan in 2015.
- Lieberman and Rief raised less than $1 million to start the company.
- Brew expects to earn $20 million in revenue this year and is profitable.
- It counts Fidelity, Oracle and Allbirds among its stable of advertisers.
Insider doesn’t plan on integrating Morning Brew within its other businesses. Instead, the company, which is owned by German media conglomerate Axel Springer SE, is looking to “increase its investment in email newsletters to attract more readers to its news and entertainment platforms.”
Wait and See: The deal is not final and still could fall apart.
Congrats to Morning Brew! They made a great news aggregation email newsletter that helps younger generations efficiently keep up with business news without reading through dense Wall Street Journal articles (saving folks time!).
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What’s Going On
Debt Dilemma: “Spending by the world’s governments to fight the coronavirus and the global economic downturn will propel public debt to a record level, the International Monetary Fund said, adding that more will be needed to assure a full recovery. Governments have committed $11.7 trillion, or 12% of global output, as of Sept. 11, the IMF said in its semiannual Fiscal Monitor report. That will drive up budget deficits by 9% of gross domestic product on average this year, with cumulative public debt approaching 100% of global GDP.”
SPAC Shift: “Online used car marketplace Shift announced Tuesday it has completed its merger with a special purpose acquisition company, or SPAC, called Insurance Acquisition Corp. The merger will provide Shift with $300 million to invest in its business. Shares of Shift will begin trading Wednesday, October 14 on the Nasdaq under the ticker symbol ‘SFT’ and warrants under ‘SFTTW.’”
Raising Reel: Silicon Valley car rental startup Getaround netted $140 million, Augury tapped $55 million for machine diagnostics tech, Mexico City’s Casai mustered $23 million to merge the Airbnb and traditional hotel models, Vivun pulled in $18 million to keep growing its pre-sales platform, Engageli raised $14.5 million to build a new approach to remote learning, Tel Aviv-based AI data management platform Dataloop collected $11 million, Playbook, which aims to be the “Patreon of fitness content, grabbed $9.3 million, Atlanta-based Cove.tool acquired $5.7 million to optimize building design for sustainability and cost and Tel Aviv-based startup Frontegg secured $5 million to help SaaS companies build products faster.
Another Bump: “A federally funded clinical trial testing an experimental Eli Lilly & Co. Covid-19 treatment has been paused due to a potential safety concern, the company said.”
To Proceed or Not: “Johnson & Johnson hopes to know within days whether it can resume testing its Covid-19 vaccine, as the health-products company battles the virus on several fronts.”
Chicken Change: “Chicken processor Pilgrim’s Pride Corp. said it has agreed to a plea deal with the U.S. Justice Department to resolve price-fixing charges, and will pay a fine of $110.5 million.”
Unload and Evolve: “Huawei is in talks to sell parts of its Honor budget smartphone unit as the Chinese electronics giant struggles to cope with the impact from the U.S. government’s sanctions, Reuters reported.”
Big Tech on Broadway: “Amazon, Google, Facebook and Apple together have leased or purchased 1.6 million square feet of office space in [New York City], adding to big developments such as the 1.7 million square feet Google acquired last year.”
Exit Strategy: “Last quarter saw a 7.6% increase in exits for venture capital-backed startups as hot, highly-valued software companies like Snowflake and Unity went public, according to new data from PitchBook.”