Good morning! Today’s word count is 1,891 words, or a 9-minute read. Let’s get to it:
“Investors betting on additional stimulus and a coronavirus vaccine are pushing more money into riskier assets such as stocks, while easing out of gold,” WSJ writes.
- S&P 500: $3,547.44
- Nasdaq: $11,920.12
- Bitcoin: $11,350.11
- U.S. 10-Year: 0.657%
Justin Oh’s Quick Read: $WMT
Although $WMT’s Walmart+ is priced 17 percent below $AMZN’s Amazon Prime service, it doesn’t seem to offer even half of the value Amazon Prime does (music, video, catalog, etc.). It’s even rumored that Walmart+ will have a $35 minimum order size. This shows me that the Arkansas-based company is still thinking in old-school terms, focusing on near-term return-on-assets (ROA) rather than the market-snatching, winner-take-all Silicon Valley mindset. The current power of Amazon is that it is the “Google Search” for shopping. Customers don’t just go to Amazon because they want to buy Prime products; they go to Amazon because they can search for anything they want without thinking about shipping costs or minimums and even discover new items to buy. The only advantage I see Walmart+ having is around grocery delivery and gas. Walmart+ will have a tough time winning new customers away from $AMZN, $CSCO, and $TGT, but the service could retain current customers and increase each customer’s value. At a >4 percent free cash flow yield, $WMT stock looks to be a good defensible hold with some upside in Walmart+. I would wait until $WMT pulls back to below $143 to buy into the stock. That way, I only need to believe that Walmart+ will increase its value by more than roughly 10 percent, which seems reasonable.
Mobile-Gaming Company Skillz to Go Public by Merging With Blank-Check Firm
The “Year of the SPAC” continues. Mobile-gaming company Skillz Inc. is merging with blank check company Flying Eagle Acquisition Corp., which is led by movie studio chief Harry Sloan and film producer Jeff Sagansky, valuing the company at $4.3 billion.
Why It Matters
Skillz has a strong business.
- The company is a mobile-gaming platform where players can compete against each other in games such as “Solitaire Cube” and “21 Blitz.”
- It makes money through a revenue sharing program with the developers using the Skillz platform, which had roughly 2.6 million active users at the end of Q2.
- Skillz is getting $690 from the merger with Flying Eagle. At the same time, other investors, including Wellington Management, Fidelity Investments, Franklin Templeton Investments and Neuberger Berman, have committed more than $159 million to the deal.
The blank-check wave continues.
- This year has seen a record 82 SPAC IPOs, with more than $33 billion in gross proceeds, according to SPACInsider.
- Skillz, which initially planned to IPO as early as Q4 this year, experienced “surprisingly strong growth in the second quarter, in part due to the coronavirus pandemic forcing people to stay home” and was approached by multiple SPACs interested in speeding up its public entrance.
These guys are SPAC veterans.
- Flying Eagle’s executives brought DraftKings to market earlier this year also through a SPAC.
- DraftKings has grown from a value of $780 million when it first went public to more than $13 billion today, according to FactSet.
Numbers to Consider
- The average SPAC IPO has raised more $408.9 million in 2020.
- Last year saw a total of 59 SPAC IPOs, which raised $13.6 billion in gross proceeds.
Justin Oh’s Two Cents:
I think $FEAC is interesting from first glance, as a speculative bet. They’re growing 88 percent per year with high 95 percent gross margins, and the deal is priced at 6.2x 2022 sales. I’ll do a deeper dive and report back.
Read More: (WALL STREET JOURNAL)
TikTok Deal Talks Are Snarled Over Fate of App’s Algorithms
ByteDance’s efforts to offload TikTok’s U.S. business was gaining momentum. The company had reportedly selected a bidder (Microsoft-Walmart and Oracle are the leading candidates) and was on the verge of entering exclusive negotiations. But the Chinese government issued new restrictions about the export of artificial intelligence technology, and now the question of whether TikTok’s core algorithms could be included in a deal have tripped up the process.
Why It Matters
The algorithm is TikTok’s “secret sauce.”
- San Francisco-based startup investor and former tech executive Eugene Wei said TikTok’s success is a “direct result of ByteDance’s mastery of artificial intelligence.”
- ByteDance can deliver its users highly personalized content using a process called “deep learning.”
- “When you gaze into TikTok, TikTok gazes into you,” Wei told WSJ. “To see it as merely a novelty meme video app for kids is to miss what is its much greater disruptive potential.”
Buying TikTok without its algorithm isn’t the same.
- Bidders maintain a large chunk of TikTok’s value is in the “suggestion algorithms that keep users glued to the app.”
- “A person close to the talks likened TikTok without its algorithms to a fancy car with a cheap engine. A different person close to the bidders said that not getting the algorithms would be a surprise, and was skeptical that the deal would proceed without them.”
A lot depends on how the new Chinese restrictions actually work.
- Both sides are trying to figure out whether a potential deal will need Beijing’s approval, and whether the Chinese government would sign off.
- ByteDance only has until Sept. 15 to comply with President Trump’s national security-driven executive order, banning the app if it’s not sold by then.
- China isn’t happy about the “forced fire sale” of one of its tech jewels. It could be seeking to delay the deal to give itself a say and reciprocate the same scrutiny it received from the Committee on Foreign Investment in the U.S. on other matters.
A sale of TikTok’s U.S. operations isn’t necessarily dead without the algorithm.
- Software engineers could build an alternate version using TikTok’s current user data as a guide.
- That could take a long time, though, and the app could lose users to rivals such as Instagram Reels along the way.
Numbers to Consider
- ByteDance is seeking $30 billion for TikTok’s U.S. operations.
- The app has more than 100 million users in the U.S., a steep rise from 11 million in early 2018.
Read More: (WALL STREET JOURNAL)
Number Crunch: Macy’s Posts A Big Loss, Cash App and Square Thrive
Even though sales have somewhat recovered from the temporary store closures brought on by the Covid-19 pandemic, Macy’s posted a near-half-billion dollar loss in the quarter ending Aug. 1.
- The retailer improved sales from $3 billion to $3.6 billion this quarter, but its still almost $2 billion less than what it recorded in Q2 2019. Macy’s posted a $431 million loss in the quarter.
- Macy’s also cut around 3,900 jobs in June to generate approximately $365 million in savings during the current fiscal year and $630 million annually in the future. The company also laid off 2,000 corporate employees in February, while anticipating $1.5 billion in cost reductions.
- “For the three months ended Aug, 1, Macy’s posted a loss of 81 cents on an adjusted basis, compared with a $1.77 loss forecast by analysts polled by FactSet. Sales were slightly above analysts’ forecasts of $3.5 billion. Shares rose more than 5 percent in premarket trading.”
Cash App isn’t a bank, but the app’s money storing and transferring capabilities have made it a popular choice for accepting stimulus checks, unemployment benefits and other transactions. Investors “don’t seem to mind” as the growth in activity and engagement has pushed Square to outperform bank stocks.
- Square’s share price has risen 28 percent in the past month and is up 166 percent this year. Its stock closed at $166.66 on Tuesday, which is more than double its $61.84 at this time last year.
- Cash App’s revenue has more than doubled to $325 million from the second quarter a year ago.
- Because of the ease of accepting stimulus money and unemployment benefits, the funds stored in Cash App has risen to $1.7 billion. The app hit 30 million monthly active users in June.
- Analysts at Bernstein Research estimate investors are valuing Cash App’s value as high as $40 billion. That would make the app worth more than Capital One, First Republic Bank and all but roughly a dozen U.S. banks.
Justin Oh’s Two Cents:
Do you think Covid-19 will be resolved soon, and Macy’s can recover their sales and stabilize the business in 1-2 years? If so, $M could be a good deep-value play. But if the effects of Covid-19 and e-commerce pain stretches past that period, Macy’s has a very real chance of wiping out its shareholders. Without much conviction behind a short-term recovery in retail shopping, I am calling $M a hard pass.
Worth Your Time
Video Variety: Zoom has ascended to video conferencing supremacy during the pandemic, but nine-year-old cloud-based VoIP and contact center software company Dialpad is making a play to grab a share of the market. Dialpad has acquired video conferencing startup Highfive, which was valued around $500 million after its last funding round in 2018. Adding Highfive’s video capabilities joins Dialpad’s established VoIP business to support larger meetings and compatibility with other collaboration platforms. Once integrated, Dialpad will represent a direct threat to Zoom’s business. (THE INFORMATION)
Modern Meddling: Facebook announced it recently took down accounts and pages tied to a Russian group U.S. authorities accused of meddling in the 2016 election. Though Russia has denied interfering in American elections, the spur of activity highlights Facebook’s broad vulnerability and the U.S. intelligence community’s warning of a Russian effort to damage Democratic presidential nominee Joe Biden’s bid for the presidency. (WALL STREET JOURNAL)
Data Due Diligence: As early as next week, the White House is planning to publicize hospitals’ names with missing or inconsistent data from the federal pandemic reporting system. Incomplete data will put some hospitals on high alert — under a new rule soon to take effect, hospitals with holes in their data could risk losing payment from Medicare and Medicaid. But hospitals have struggled with delays and confusion after the Trump administration changed the way data is reported and submitted. (WALL STREET JOURNAL)
DraftKings stock shot up 13 percent in premarket trading after the company announced Michael Jordan is joining the company as a special advisor to the board of directors, with an equity interest included in the deal.
Mitsubishi Powers America Inc. is spending $3 billion to build three power plants in New York, Virginia and Ohio “designed to replace natural gas with cleaner-burning hydrogen produced from renewable sources.”
The Internet Association blasted President Trump’s attempts to roll back Section 230, saying, “it is unconstitutional and would undermine efforts to moderate hate speech and harassment online.”
AT&T is selling its Xandr advertising business as it looks to shrink its heavy debt load.
Though, AT&T has pulled back on its decision to unload WarnerMedia’s gaming unit, which could have fetched around $4 billion.
Popular dating app Bumble is going public in 2021 and could value its business between $6 billion and $8 billion.
The Detroit Pistons are running a promotion where fans deposit the full amount for season tickets, and the team will transfer the funds to an account offering up to 5% annual percentage yield as a way to add additional value to season ticket holders.