Good morning! Today’s word count is 2,219 words, or a 12-minute read. Let’s get to it:
Market Summary (10:24 am ET): “U.S. stocks climbed Monday, continuing last week’s gains as investors look ahead to a week that could bring the start of a turnaround for corporate earnings,” WSJ writes.
- S&P 500: $3,509.10 (+0.92%)
- Nasdaq: $11,750.84 (+1.48%)
- Bitcoin: $11,486.40 (+1.09%)
- Gold: $1,929.80 (+0.19%)
- U.S. 10-Year: 0.777%
Justin Oh’s Quick Read
ROIC member Michael C. suggested I look into the stock $KCAC, a SPAC that is acquiring a company called QuantumScape. QuantumScape is developing next-generation battery technology for electric vehicles based on Lithium-Metal technology. Lithium-Ion batteries are fast approaching their theoretical capacity limits, and QuantumScape is boasting “disruptive” batteries that increase capacity (to 450 miles), allow for 15-minute fast charges, and increase power by 50 percent.
It was founded in 2010 by an impressive roster of Stanford Ph.D.’s and counts Bill Gates, Volkswagen, and Lightspeed as early investors. Volkswagen has already begun testing QuantumScape batteries, has become the company’s largest shareholder, and plans to launch 70 electric vehicle models by 2029 across its many brands (Volkswagen, Porsche, Audi, Bently, etc).
QuantumScape is still developing and validating the technology and doesn’t expect to have their first 1-gigawatt hour factory built until 2023 and second 20-gigawatt hour factory built until 2025. As such, it doesn’t expect to truly make their revenues and profits until 2028. They estimate healthy 30 percent gross margins, and at $14.75 today, ticker $KCAC is valuing QuantumScape at $5.5 billion or 2.9x 2028 Gross Profit.
This is a very early stage investment where the valuation doesn’t really matter that much, and is a very binary bet. A successful investment in $KCAC will hinge on whether QuantumScape batteries are truly game-changing and will be used in millions of cars per year. Either they do, and you’ll make a ton of money on the stock in the next 10 years, or they fail to gain traction, and the stock dwindles.
As far as pre-revenue companies go, it certainly looks like it has the credentials and institutional backing to be legitimate (unlike Nikola from even the very beginning). My biggest question is how long this technology can stay differentiated from Tesla or other battery manufacturers. For reference, Tesla’s Battery Day announcements estimate a 16 percent range increase with a 14 percent cost reduction.
The market is clearly huge – if all 90 million vehicles produced around the globe every year used batteries, there would be over $450 billion in battery sales per year. If you believe that QuantumScape can sell 910,000 battery packs (1 percent market share) a year by 2028, $KCAC could 10x your money. If it doesn’t gain traction, then prepare to lose most of the investment.
Red Sox Owner in Talks to Take Sports Holdings Public
Redball Acquisition Corp., a SPAC formed by Billy Beane and Gerry Cardinale, is discussing a potential merger with Fenway Sports Group, owner of the Boston Red Sox, in an $8 billion deal, WSJ reports.
Fenway Sports Group has quite a portfolio. The John Henry-led company, which purchased the Red Sox in 2002, also owns Liverpool FC, the Boston Globe newspaper, a controlling stake of New England Sports Network and Fenway Park.
- Henry founded investment management firm John W. Henry & Co. and has a net worth of $2.8 billion, according to Forbes.
RedBall has its own firepower. Cardinale, a Goldman Sachs alum, has more than 25 years of experience. Beane, an executive with the Oakland A’s, revolutionized baseball by popularizing an analytics-driven approach. (See: Moneyball)
- In August, Redball raised $575 million to focus on sports and data-related businesses. It plans to raise another $1 billion to purchase a less than 25 percent stake in FSG.
- SPACs in 2020: 138 IPOs and $53.7 billion in gross proceeds, according to SPACInsider.com.
Publicly-owned sports teams are uncommon in the U.S., but not unheard of.
- Liberty Media (Atlanta Braves) and MSG Sports (New York Knicks and Rangers) are traded publicly.
- The NFL’s Green Bay Packers are owned by a publicly-held nonprofit, which counts fans as most of its shareholders.
Fenway could expand its roster as a public company, as financial woes have put several European clubs up for sale.
While the deal is still in its early stages and could fall apart, it’s a significant endorsement of the pandemic-ravaged MLB, which lost nearly two-thirds of its schedule and all gate revenue without fans in attendance.
RedBall ($RBAC) and Fenway Sports Group have not agreed to a deal yet, and we are still in the rumor stage of the transaction. In general, the assets owned by Fenway are sticky, but mature companies.
Baseball viewership has been on a decline for the past 40 years, but I see it normalizing around hockey-levels of popularity. Baseball ticket sales will always be healthy even if baseball never recovers its former television glory.
Justin Birnbaum, who covers sports, says, “It’s hard to imagine baseball going anywhere from a popularity standpoint, especially with a young, marketable star like Fernando Tatis Jr. emerging in San Diego. Also, sports franchise valuations have been skyrocketing, and that’s reason to get involved by itself. Billionaire hedge fund manager Steve Cohen just bought the Mets (pending MLB approval) for $2.5 billion.”
Liverpool FC is a great asset, but most likely mature and will track the growth of global soccer (“football”). Media has also been under siege with the internet opening up hyper-competition and commoditization of content.
I think sports are safe, cash-flowing oligopolies, which is why billionaires buy teams to protect their wealth. For this one to be interesting, the valuation would need to be very attractive, and I would look at it as a value or dividend stock instead of a growth one.
Richard Branson’s Virgin Orbit Seeks $1 Billion Valuation in Fundraising
Virgin Orbit, Richard Branson’s satellite-launching business, wants to raise $200 million in a funding round to bring the company’s valuation to roughly $1 billion, WSJ reports.
Space Odyssey: Branson, like Elon Musk and Jeff Bezos, has been at the center of efforts to “kick-start an era of commercially led space exploration.” Virgin Orbit, which employs around 500 people, started building rockets in Long Beach, California in 2017.
- Large vehicles usually launch large satellites. But Virgin Orbit wants to send smaller ones into lower orbits, targeting underserved civil, military and commercial customers.
- Virgin Orbit’s moving vehicle launches are cheaper and more flexible but still face technical hurdles as it had expected to reach a dozen yearly launches by now.
“In a crowded market, Virgin Orbit is a front-runner,” said Bryce Space and Technology CEO Carissa Christensen.
- Virgin Orbit’s business relies heavily on a bunch of smaller space startups to “provide new commercial opportunities and a steady flow of scientific payloads from governments and universities.”
- But the already tricky task of finding funding and building momentum dried up after Covid-19 hit.
- Industry insiders say the sector could see a gradual resurgence powered by U.S. military support.
Virgin Orbit has suffered directly from Covid-19, too. Without tourism and travel, the primary revenue sources of Virgin Group, Branson is turning to investors for the third time to bail out his businesses.
- Virgin Atlantic Airways secured a $1.5 billion package in July to “stave off bankruptcy,” including a 10 percent sale of Virgin Galactic Holdings.
“Over the last decade, Mr. Branson has mainly taken a back seat on management of his companies but remains focused on his two U.S.-based space ventures, Virgin Galactic and Virgin Orbit, according to people familiar with him.”
I like the Virgin Orbit concept better than I do the Virgin Galactic one. I don’t think Mars colonization is happening in the next 30 years, and that space tourism is a small industry. So, Virgin Galactic ($SPCE) isn’t interesting to me. I like the idea of owning the companies that will be sending payloads, like internet satellites, into orbit, but none of these companies are publicly traded yet.
In all honesty, vision needs to be coupled with disciplined management, and I don’t believe in Richard Branson’s unfocused track record. His companies have relied on name brand and not technological differentiation, struggling many times in the past. If I wanted to and had the chance to invest in the sector, SpaceX is probably the only one I would feel comfortable with.
Apple’s 5G iPhone Carries High Expectations
Apple is expected to unveil the 5G iPhone Tuesday, WSJ reports. But how useful will the next-generation wireless technology actually be?
High Anticipation: Wedbush Securities analyst Dan Ives called the 5G release a “once-in-a-decade-type upgraded opportunity” for the tech giant.
- The hype harkens back to Apple’s record device sales after unveiling the iPhone 6 Plus in 2014 and its record revenue after introducing higher-priced models with facial recognition in 2017.
- Apple’s shares have already risen more than 50 percent this year, and its market value has surpassed $2 trillion.
5G comes with the promise of nearly 10 times faster speeds (some say it could even be 100), which could tie in nicely with the growing shift to cloud computing technology.
But Samsung, for example, has been selling 5G phones for more than than a year and has yet to “showcase a killer software application to demonstrate why it is worth the money.”
- “5G utility is far from clear,” BayStreet Research founder Cliff Maldonado said.
Wall Street Analysts: Apple’s iPhone revenue will increase 15 percent to $160 billion this year (which began on Oct. 1).
Analysts Surveyed By FactSet: iPhone revenue probably won’t beat the record set with the iPhone X in the fiscal year that ended in Sept. 2018.
In other news: Apple is also fighting battles on two fronts.
- The tech giant is in a bitter dispute with Epic Games over the 30 percent cut it takes from its App Store sales.
- Last week, The House Antitrust Subcommittee released a “scathing report” accusing Apple of “exerting monopoly power” through its control over the mobile device market.
Call me an Apple ($AAPL) cynic at this point, but I fail to see why I need to buy a 5G iPhone when I don’t have a 5G cellular plan available to me yet. Furthermore, I fail to see how a 5G iPhone is anything but “table stakes” to be shoulder-to-shoulder with flagship Android phones. A 5G-driven refresh cycle may boost iPhone sales in the short-term, but I’d need to see new, genuinely innovative product lines for me to reinstate Apple to Capital Compounder status.
What’s Going On
Status Quo: “A California federal judge said Apple doesn’t have to return the popular video game “‘Fortnite’ to its App Store but maintained that the tech giant can’t block the game’s creator from accessing its critical software development tools. The ruling Friday on Epic Games’ motion for a preliminary injunction yielded a split decision similar to Judge Yvonne Gonzalez Rogers’s order in August. ‘Given the novelty and the magnitude of the issues, as well as the debate in both the academic community and society at large, the Court is unwilling to tilt the playing field in favor of one party or the other with an early ruling of likelihood of success on the merits,’ Judge Gonzalez Rogers wrote in her ruling.”
The Price of Moving: “Tech workers fleeing the San Francisco Bay Area to work remotely amid the pandemic are facing a new reality: pay cuts. Over the past several months, Covid-19 has shaken traditional notions of where employees can work. In Silicon Valley, which has a relatively high cost of living and an employee base with access to state-of-the-art remote-work tools, companies are devising plans for a future with decentralized staffs. In some cases, changes can include cutting salaries by 15% or more depending on where someone moves.”
Airbn-Back: “Airbnb’s summertime resurgence continued in the U.S. in September, according to e-commerce firm Edison Trends. The company’s sales in the U.S. grew 41% in September, compared to the same period last year. The increase followed a 48% year-over-year increase in August, according to a sample of 80,000 transactions on Airbnb that the firm analyzed. The company has seen consistent year-over-year increases in U.S. sales since mid-June.”
Raising Riff: Thai logistics startup Flash Express raised $200 million, Indonesian venture fund AC Ventures pulled in $80 million to invest in the country’s burgeoning startup economy and Indian fintech startup Razorpay collected $100 million in Series D financing.
Judgement Day: “Voters are getting their first close look at Judge Amy Coney Barrett in hearings that began Monday and are all but certain to lead to President Donald Trump’s Supreme Court nominee being placed on the high court just days before the election.”
On Your Left: “Triller Inc, a budding competitor to popular short-video app TikTok, is in discussions with blank-check acquisition companies about a merger which would take the U.S. social media company public.”
Another One: “Pakistan’s government has banned TikTok, citing complaints about the popular video app’s immoral and indecent content.”
Communication Future: “Twilio Inc. is buying customer data infrastructure company Segment Inc. for about $3.2 billion in stock, after a boom in demand for online communications tools.”
Shaking It Up: “British Airways’ parent replaced the carrier’s chief executive, moving to shake up the senior ranks at several of its most important airlines as the industry faces a crisis because of the pandemic.”
Optimism in the Air: “Investors are entering third-quarter earnings season with brighter expectations for corporate profits, a bet they hope will propel the next leg of the stock market’s rally.”