Good morning! Today’s word count is 1,938 words, or a 9-minute read. Let’s get to it:
Market Summary (11:20 A.M. ET): “The Dow and S&P 500 ticked up ahead of House Speaker Nancy Pelosi’s deadline for Congress to reach an agreement on a spending package to support American households and businesses through the pandemic,” WSJ writes.
- S&P 500: $3,444.29 (+0.51%)
- Nasdaq: $11,513.47 (+0.30%)
- Bitcoin: $11,945.21 (+8.03%)
- Gold: $1,910.70 (-0.05%)
- U.S. 10-Year: 0.782%
Justin Oh’s Daily Read
ROI Connect member Calvin D. suggested I go over EBITDA and EBITDA multiples, which I use extensively when quickly evaluating where a stock is valued.
When you look at most investments, you’re trying to estimate what kind of annual return you might receive if you bought it. For example, purchasing a five-year bond for $100 with a 5% interest rate would earn you $5 per year (5% annual “return”). You could also say you bought the bond at a 5% interest rate “yield.” Additionally, if you inverted the metric, you could say you purchased the bond at 20x interest.
Equities (stocks) are much more complicated than bonds because they don’t guarantee cash distributions to the investor. A company makes profits that vary year-to-year, and the board of directors and management can choose to do what they want with the cash: horde it, reinvest it into the business, use it to buy other companies, distribute it to shareholders via dividends, repurchase shares, etc.
Company valuations are complicated, so the “truest” way to value them is through a discounted cash flow (DCF) model, which tallies up all the cash flows the company is expected to earn in the future and then takes into account how long we have to wait for those cash flows. Short of doing this, we try to get a feel for how cheap or expensive a stock is through metrics, just like we did with the bond example. (…)
Justice Department to File Long-Awaited Antitrust Suit Against Google
“The Justice Department will file an antitrust lawsuit Tuesday alleging that Google engaged in anticompetitive conduct to preserve monopolies in search and search-advertising that form the cornerstones of its vast conglomerate,” WSJ writes.
Oh, How Things Have Changed: Google was once a public darling. Now, it’s sitting on the wrong end of arguably the “most aggressive U.S. legal challenge to a company’s dominance in the tech sector in more than two decades.”
- The fallout could have a massive impact on Silicon Valley, Big Tech and beyond.
The Government Says:
- Google is a gatekeeper to the internet, using an “unlawful web of exclusionary and interlocking business agreements that shut out competitors.”
- Google spends billions on paying smartphone manufacturers to use Google as its preset, default search engine.
- Google’s search app is not only preloaded on devices, but its revenue-sharing arrangements unlawfully prevent competitors’ search applications from doing so.
Google Says: “Its competitive edge comes from offering a product that billions of people choose to use each day.”
- Google does own or control roughly 80% of U.S. search queries, leaving little room for any competition.
Google has $120 billion in cash to spend, so the tech giant is unlikely to back down from a costly legal battle.
If The Government Wins: It could mean court-ordered changes for how Google operates different business segments, which could open up room for new rivals. The DOJ would address the fallout in a later case, but “nothing is off the table.”
If Google Wins: It’ll be a lot harder for the federal government to take another shot at Google’s business model or go after Big Tech in any other way.
- “Such an outcome, however, might spur Congress to take legislative action against the company.”
Don’t Wait Up: The case, which followed a year-long investigation, will likely take years to resolve. Managing the suit will fall on whoever wins the Nov. 3 election.
We’ll continue to monitor this antitrust litigation and its effects on Google’s future prospects. There’s a good chance that the restrictions might limit Google’s domination but will still leave ample room for it to be a leader in a rapidly growing digital advertising world. And don’t forget about their commitment to innovation via their “other bets” such as Waymo, Verily, etc.
Fed Takes Cautious Approach to Possibly Issuing Digital Currency
The Federal Reserve is weighing the costs and benefits of central-bank digital currencies but is “in no hurry” to issue one because of theft and fraud potential, WSJ reports.
Going digital could make international transactions faster and less costly.
- Overseas workers who send money back to their families in low- and middle-income countries pay a 7% premium on the transfers, “more than twice the target set by the United Nations’ sustainable development goal.
- An estimated $500 billion is sent home each year, which is expected to decline 20% this year due to the Covid-19 pandemic.
The Other Side: There’s a risk of cyberattacks, counterfeiting and fraud, not to mention the impact on monetary policy and financial stability.
Caution, not haste, is the best way to describe Fed Chairman Jerome Powell’s view on a potential digital currency.
- It’s a balancing act between maintaining the dollar’s central role in the global economy and remaining on the “frontier of research and policy development.”
- Powell: “We do think it’s more important to get it right than to be the first.”
Big Tech could be a valuable tool in the digital currency discussion. Powell highlighted the early-stage success of Facebook’s global money, Libra.
The Future: Powell said digital currencies could create a large network effect. They only become more useful as more people adopt them, which leads to increasing returns to scale and a small crop of competitors dominating the market.
- China is currently experimenting with the concept after launching a four-city pilot program with a “homegrown digital currency” in April.
- The Fed is co-developing a hypothetical central-bank digital currency with researchers from the Massachusetts Institute of Technology.
I expect they are looking at a dollar-backed blockchain “stablecoin,” which uses the immutability of blockchain but tracks the price of the U.S. dollar. I believe that government-backed stablecoins are a net positive for Bitcoin because people can hold USD-coins without going through the banking system. Once that happens, it’s that much easier for funds to flow into Bitcoin when there are fears of money manipulation and printing by governments. In case you’ve missed it, Bitcoin (BTC) has been rallying lately, and I am still a fan of it long-term.
Microsoft Teams With Elon Musk’s SpaceX to Push Cloud Battle With Amazon Into Orbit
Cloud computing is going to space, and Microsoft is partnering up with Elon Musk’s SpaceX to get there, WSJ reports.
Space Odyssey: As part of a new initiative targeting commercial and government space businesses, Microsoft plans to “help connect and deploy new services using swarms of low-orbit spacecraft being proposed by SpaceX, and more traditional fleets of satellites circling the earth at higher altitudes.”
- SpaceX is currently in the middle of deploying thousands of its high-speed Starlink internet satellites.
Follow The Leader: Microsoft’s announcement comes around three months after Amazon Web Services revealed its space-focused plan. The Microsoft-SpaceX union is a natural fit since Amazon CEO Jeff Bezos also owns Blue Origin, a SpaceX competitor.
- It doesn’t hurt that space-related cloud computing could be a $15 billion industry by the end of the decade.
A Bitter Rivalry: The pandemic-driven shift to the cloud has only intensified the competition between Amazon, the market leader, and Microsoft, the No. 2 in the industry. Microsoft did beat out Amazon last year on a potentially $10 billion cloud-computing contract for the Pentagon. (Amazon challenged the decision and lost again.)
- Microsoft hasn’t been shy about teaming with Amazon’s competitors either. It has since launched partnerships with Walmart and FedEx.
Meanwhile, the U.S. Department of Defense is upping its investment in space.
- “Pentagon brass have said smaller, lighter and more maneuverable satellites are essential to protect U.S. assets from potential hostile actions in space.”
- SpaceX recently won a contract for missile warning satellites, opening the door for Microsoft to get involved.
I’m not sure what I think about Starlink. On the one hand, they boast download speeds of 100Mbps, which would be fantastic for covering many of the earth with top-level 4G speeds. But how does that compete with 5G speeds of up to 5Gbps?
In reality, I think the market ends up looking like what cable TV looked like, with higher-priced, higher-speed offerings being sold to urban and suburban middle-to-upper class customers and lower-priced, lower speed offerings being sold to rural and lower-income customers. Even if this is the case, it’s a pretty big potential business line for Tesla (#TSLA) and Microsoft (#MSFT) because even DirecTV sold for $65 billion.
What’s Going On
Vax Trax: “Moderna Inc. Chief Executive Stéphane Bancel said the federal government could authorize emergency use of the company’s experimental Covid-19 vaccine in December, if the company gets positive interim results in November from a large clinical trial. Mr. Bancel, speaking during The Wall Street Journal’s annual Tech Live conference Monday, said if sufficient interim results from the study takes longer to get, government authorization of the vaccine may not occur until early next year.”
Bank Here: “The proportion of U.S. households without access to a bank account fell in recent years but could be driven up again by the coronavirus pandemic, according to a survey released Monday by the Federal Deposit Insurance Corp. The so-called unbanked rate declined to 5.4% in 2019 from 6.5% in 2017, as some 1.5 million households saw at least one member open a checking or savings account, the FDIC said in the biennial report. That rate represents the lowest level since at least 2009, when the survey began.”
Oil Runup: “Pioneer Natural Resources Co. is in talks to buy Parsley Energy Inc., according to people familiar with the matter, as a wave of consolidation takes hold in the beleaguered oil patch. The two oil-and-gas companies, shale producers that operate in the Permian Basin of Texas and New Mexico, are discussing an all-stock deal that could be completed by the end of the month assuming the talks don’t fall apart, the people said. Austin, Texas-based Parsley has a market value of about $4 billion. It also has more than $3 billion of debt.”
Raise Watch: SAIF Partners rebranded as Elevation Capital and secured $400 million for its new India fund, direct-to-consumer brand operator Perch raised $123.5 million, Dublin’s LearnUpon pulled in $56 million for its online learning management system, ShopUp collected $22.5 million to digitize small shops in Bangladesh, proprietary math learning platform Knowledgehook grabbed £13.5 million, Tiliter bagged $7.5 million for its cashierless checkout technology and 3D and AR design platform Vectary netted $7.3 million.
Fresh And Clean: “Procter & Gamble Co. reported its biggest global sales increase in 15 years as the world’s consumers spent more to keep their homes and themselves clean during the coronavirus pandemic.”
Chip Change: “Intel Corp. has reached a deal to sell its flash-memory manufacturing business to South Korea’s SK Hynix Inc. for about $9 billion, in a move that would reorient the semiconductor giant away from an area of historical importance that has become increasingly challenged.”
Streaming Wars: “[AT&T Chief Executive John Stankey] said tech giants like Amazon.com Inc. and Apple Inc. should be scrutinized for their power to restrict the kinds of apps and services allowed on their platforms.”
Lock Up: “Sweden will ban Huawei and ZTE from supplying equipment for new 5G services, becoming the latest nation to take a stand against China’s telecommunications manufacturing giants over national security concerns.”
Ride On: “China’s top ride-hailing firm Didi Chuxing is considering Hong Kong for a multibillion-dollar initial public offering next year, dropping previous aims to list in New York amid rising Sino-U.S. tension.”
A Couple Cents Featured