Good morning! Today’s word count is 1,920 words, or a 9-minute read. Let’s get to it:
“The S&P 500 and Nasdaq ticked higher as technology shares led the market higher after recent weakness,” WSJ writes.
- S&P 500: $3,399.24
- Nasdaq: $11,206.44
- Bitcoin: $10,384.93
- U.S. 10-Year: 0.718%
Justin Oh’s Quick Read
I’ll be starting to build a position in the recently IPO’d Albertsons ($ACI) and will list it as a Value Stock on the ROIC Big Board. I’m not too fond of grocery stores as long-term business models, but Albertsons shows market share gains, substantial EBITDA growth, and cash generation. I also believe that we will be in an elevated eating-from-home environment for the foreseeable future, even if vaccines are distributed. This position will be very defensible even if we enter a consumer recession, as people will need to keep buying at-home groceries. At $14.12, $ACI is trading at a bargain 4.75x 2021 estimated EBITDA and a juicy 6-7% free cash flow yield. This is 25% cheaper than Kroger ($KR) (6.3x 2021 EBITDA) and almost one-third the valuation of Dollar General ($DG) (13.5x 2021 EBITDA). If $ACI can close the gap with $KG’s valuation, I see the stock having a 50 percent-plus upside to a $23.00 price target. But also in a market downside scenario, I see it having a resilient business and already trading at a rock bottom valuation.
TikTok, U.S. Discuss Ways to Avoid Sale
With time for a potential sale running out, TikTok’s parent ByteDance talking with the U.S. government on possible arrangements to avoid entirely offloading the app’s U.S. operations. After President Trump signed an executive order compelling the app to divest its American assets, Bytedance had been negotiating with Microsoft-Walmart and Oracle to sell TikTok’s U.S. business.
Why It Matters
A U.S. sale has become complicated.
- The Chinese government passed new laws limiting the export capabilities of proprietary tech like ByteDance’s deep learning algorithm.
- In the case of TikTok, it appears any sale of the app’s U.S. operations would need a license from local authorities, and ByteDance has said it would “strictly comply” with the new restrictions.
- TikTok could sell its operations without its core algorithm, but it’s similar to “buying a fancy car with a cheap engine.”
President Trump’s deadline is fast approaching, which means its time to call an audible.
- The situation is fluid — even if there isn’t a full sale, TikTok would likely restructure.
- TikTok could take on a U.S. tech firm as a minority partner to secure its data, an initial option before Trump signed the executive order.
- Trump and his administration have stressed its concerns about TikTok’s data ending up in the Chinese government’s hands, repeatedly stating he wants an American company to buy the app’s U.S. operations.
TikTok stakeholders are trying everything at this point.
- Representatives from Sequoia Capital, General Atlantic and Coatue Management, all TikTok investors, met with the CIA in Virginia last week to discuss data security.
- In a case for avoiding a sale, ByteDance has also tried to illustrate the risks to Trump — a sizable percentage of TikTok’s users skew politically conservative.
For any merger, a 45-day window is exceptionally tight.
- Trump’s order called for a Sept. 20 deadline to reach a deal.
- A subsequent executive order gave the parties until Nov. 12, after the U.S. presidential election, to complete the transaction if an agreement was reached.
Numbers To Consider
- A sale of TikTok’s U.S. operations reportedly valued between $20 billion and $30 billion, according to CNBC.
- TikTok has roughly 100 million monthly active users and 50 million daily active users in the U.S.
Read More: (WALL STREET JOURNAL)
Amazon Mulling Stake in Mukesh Ambani’s Retail Business
Mukesh Ambani’s Reliance Industries is offering Amazon an approximately $20 billion stake in its emerging retail subsidiary. The Mumbai-based energy conglomerate is reportedly willing to relinquish 40 percent of Reliance Retail in a potential sale to Amazon.
Why It Matters
The almighty Amazon could grow even more powerful.
- A successful deal would pair Reliance’s emerging retail business with Amazon’s dominant infrastructure in the space, forming a “retail behemoth” in India.
- Amazon CEO Jeff Bezos and Ambani, Asia’s richest man, would go from rivals to allies, each inherently removing a key competitor off the board in time to capitalize on one of the fastest-growing consumer markets in the world.
- Amazon and Reliance already had an indirect partnership stemming from both companies’ unrelated investments in Future Group.
India’s growth potential is massive, but market entry is difficult.
- Amazon tried to “go it alone” when entering the Chinese market but floundered competing against domestic giants Alibaba and JD.com.
- A lot of people still shop in “tiny street-corner stores, in India, and Reliance could be a useful strategic partner giving Amazon a “locally-entrenched partner with a strong on-the-ground presence.”
- Online purchasing is still a minuscule fraction of India’s estimated $1 trillion retail market, and Reliance’s brick and mortar component could be the key to cracking the space.
Ambani is trying to pivot away from the energy business and isn’t afraid to bring on partners.
- The Indian billionaire inherited an energy conglomerate from his father but sees tech and retail as future growth areas, aspiring to build the Indian Alibaba.
- Between his retail business and tech venture, Jio Platforms, Ambani has secured investments from notable high-profile investors such as Silver Lake Partners, Facebook and Google.
Amazon is mulling the move.
- No final decision on the size of any potential investment has been made yet.
- The talks could still fall apart.
- A sale to Amazon will likely need to clear antitrust hurdles.
Numbers To Consider
- Reliance Retail reported 1.63 trillion rupees ($22 billion) in revenue in the year through March 2020 through the 12,000 stores it operates in nearly 7,000 towns.
- Reliance Industries has a market capitalization north of $200 billion.
- A $20 billion sale would be the biggest deal for both Indian and Amazon.
Justin Oh’s Two Cents
This is precisely the reason why we own Amazon ($AMZN). Amazon is attempting to eat the world, and we want to be part of it. It’s also why the Capital Compounder strategy is optimal (if you can find true capital compounders), especially compared with some dividend or “DRIP” strategy I see pushed around. Truly dominant capital compounders like Amazon can take pre-tax profits and reinvest them at insanely high rates of returns. Bezos wouldn’t be buying Reliance if he didn’t think it had a significant return on his money. Bezos is reinvesting our capital for us at possibly 30-40%+ returns, whereas dividend “DRIP” investors attempt to reinvest at *hopefully* 6-8% returns. And quite honestly, I’d be dubious about many dividend investors’ ability to pick the right stocks themselves in the first place.
Read More: (BLOOMBERG)
Number Crunch: U.S. Unemployment Claims Held Steady Last Week
Jobless claims are close to four times what they were before the Covid-19 pandemic upended the economy in March, which shows companies are continuing to cut workers. The slowing trend could indicate the labor market’s recovery “could be losing steam.”
- U.S. unemployment claims held steady at 884,000 last week, which is a sharp decline from a peak of roughly seven million in March but still well above the pre-pandemic record of 695,000.
- The total number of people receiving assistance from state and federal programs remained high at 29.6 million in August. Continuing claims increased to nearly 13.4 million in the same month.
- The unemployment rate peaked as high as 15 percent in April when the pandemic triggered temporary business closure. It has since dropped to 10.2 percent in July and 8.4 percent in August.
- “The increase in the number of job postings, a real-time measure of labor-market activity, has markedly slowed since late July, and last week stood about 20 percent below 2019 levels.”
- With the $600-a-week enhanced unemployment benefits now expired, President Trump signed an executive order last month to allow states to tap disaster-relief funds for an additional $300-a-week on top of regular state benefits. The GOP also proposed a new bill with $300 in weekly federal unemployment insurance through December.
Justin Oh’s Two Cents
It is clear we’re still in a very weak job market. If the government cannot come to an agreement on another stimulus bill and we go through an extended period without enhanced unemployment benefits, we will absolutely see a retraction in consumer spending, which might be a catalyst for pushing the stock market down.
Read More: (WALL STREET JOURNAL)
Worth Your Time
Some Good News: The Covid-19 pandemic and sports shutdown “should have been the end for us,” according to The Athletic co-founder Adam Hansmann. But instead, the company weathered the storm, rebounded and announced it had crossed the 1 million subscriber milestone Wednesday. The Athletic’s future is bright, though it’s still a quixotic bet. With the future of sports journalism partly riding on its success, can The Athletic reach long-term, sustained profitability and growth despite its heavy dependence on venture capital so far? (CNBC)
A Bump In The Road: An unexplained illness in a U.K. patient prompted AstraZeneca to pause clinical trials on its experimental Covid-19 vaccine. But CEO Pascal Soriot said the shot could still be ready by the end of the year. The length of the safety review into the trial subject will be a crucial determinant in the timetable for vaccine progress. However, Soriot still expects to have enough data from the trials to present to regulators by year’s end. (WALL STREET JOURNAL)
Get With The Times: “The nation’s biggest grocer, Kroger has poured money into projects ranging from a self-driving grocery delivery robot to a partnership to sell goods in China through Alibaba. It also bet that a delivery model using remote fulfillment centers, popular in Europe, would resonate stateside. Yet, when the pandemic sent a tsunami of customers ordering groceries online for the first time, it was unable to meet higher demand. The wide-ranging investments slowed adoption of technology for grocery delivery, leaving Kroger behind some of its competitors.” (WALL STREET JOURNAL)
Huawei plans to begin selling smartphones that run its self-designed operating system instead of Google Android.
Audio journalism platform Curio has closed a $9 million Series A round of funding, raising $11 million in total to date.
“A European Union privacy regulator has sent Facebook a preliminary order to suspend data transfers to the U.S. about its EU users, an operational and legal challenge for the company that could set a precedent for other tech giants.”
Recursion, a buzzy startup using machine learning to speed up drug discovery trials, announced it had raised $239 million in a round led by Bayer, giving the company a near $1 billion valuation.
Palantir was valued at $20.4 billion in a 2015 funding round, but according to the company’s updated prospectus, the company’s current valuation has sharply declined and now falls around $10.5 billion.
JFrog, Sumo Logic, Palantir, Asana and Snowflake (most likely) expect to enter the public markets and start trading this month.
The Long Term Stock Exchange (LTSE), a new alternative to trade all U.S.-exchange listed securities along with the NYSE and Nasdaq, went live Wednesday.
Jane Fraser, Citi’s president and chief executive of global consumer banking, will replace Michael Corbat when the incumbent Citigroup CEO retires in February.
Oil giant BP is spending $1.1 billion to buy into two undeveloped wind farms in the waters off the coasts of New York and Massachusetts, its first foray into the “booming offshore wind sector.”