Good morning! Today’s word count is 1,884 words, or an 8-minute read. Let’s get to it:
Market Summary (8:45 am ET): “Resumption of stimulus talks has bolstered confidence in the economic outlook even as coronavirus cases climb, sending S&P 500 futures higher,” WSJ writes.
- S&P 500: $3,446.83 (+0.80%)
- Nasdaq: $11,420.98 (+0.50%)
- Bitcoin: $11,057.65 (+1.18%)
- Gold: $1,920.70 (+1.35%)
- U.S. 10-Year: 0.777%
Justin Oh’s Quick Read
The S&P 500 is on track for its best week since August. I had talked about how we should expect a volatile, but relatively sideways market, which has been playing out as expected. Markets don’t like uncertainty, so it has liked new stimulus package negotiations and Biden’s increased lead in the polls. But for the market to make another meaningful move higher, we will need to see another stimulus package to support consumer spending and a weak job market.
Large-cap stocks are trading at around 22x forward price-to-earnings (P/E), which remains about 20 percent to 25 percent elevated compared to where it usually has traded. But small-to-mid cap stocks are trading closer to historical valuations at around 19x forward P/E.
WarnerMedia Plans Thousands of Job Cuts in Restructuring
AT&T subsidiary WarnerMedia is planning to lay off thousands of workers in the coming weeks as it looks to overhaul its business and cut costs by as much as 20 percent, WSJ reports.
Another Covid-19 Casualty: As white-collar workers pivot to remote work, many service jobs have been lost. As a result, industries such as entertainment and travel are suffering, while grocers and cloud-computing firms thrive.
- WarnerMedia also laid off 500 employees in August. Earlier this year, the subsidiary employed 30,000 people.
- Disney and NBCUniversal had to make similar job cuts in recent months.
Too Much Exposure: AT&T’s transformation from telecom giant to “Hollywood heavyweight” left the company vulnerable to the uncertainties of the entertainment industry. The company gambled unsuccessfully on releasing its latest blockbuster, “Tenet,” just as movie theatres reopened. And to make matters worse:
- AT&T is the most indebted non-financial company.
- DirecTV (which AT&T acquired in 2015) has lost millions of subscribers in the last two years.
- Its cable networks – TNT, TBS, TruTV, CNN, HLN and Cartoon Network — are getting slammed by cord-cutting, which could have been worse if live sports didn’t return this summer.
WarnerMedia is staking its survival on a new, consolidated content strategy centered around HBO Max.
- The standalone streaming service attracted 4.1 million subscribers since its launch in May, and the HBO brand has around 36 million subscribers as a whole.
- Divisions like Warner Bros. TV are “being encouraged to focus solely” on HBO Max content, leading to staff cuts, mainly on the distribution side.
- NBCUniversal has “undergone a similar streamlining process.”
AT&T CEO John Stankey urged patience on the company’s broader strategy, saying its “media bets will take years to pay off but were the right choices long-term.”
- Its stock price has fallen roughly 28 percent this year.
We discussed AT&T ($T) as a value and dividend play while the behemoth is undergoing a turnaround. The layoffs and concentration on HBO Max, while unfortunate, are encouraging signs that management is very focused on modernizing their TV content. Unfortunately, Warner Brothers, along with all of Hollywood, will continue to see pain until production and movies are back in swing. Still, the asset is a valuable one long-term, and people will always watch blockbuster movies. The real question is if AT&T can stymie the bleed out of its DirecTV and cable network business. They clearly have the content assets to be a real player in streaming, but they’ll need to execute and market very well.
AMD Is in Advanced Talks to Buy Xilinx
Advanced Micro Devices Inc. is in talks to acquire chipmaking-rival Xilinx Inc. in a deal that could be worth more than $30 billion, WSJ reports.
AMD: Based in Santa Clara, it makes components used in computers, Playstation and Xbox. AMD also built a burgeoning data-center-processor business, which has long been dominated by Intel.
- It offers CPUs, or the computers’ digital brains, and had an approximately 20 percent market share in personal computer CPUs during Q2, according to Mercury Research. AMD also offers GPUs, which are graphics chips, and integrated chipsets.
- Market Value: $100 billion
Xilinx: The San Jose-based Xilinx makes chips for wireless communications, data centers and the automotive and aerospace industries. Its business has been hurt by the U.S. ban against China’s Huawei Technologies, which accounted for around 6 to 8 percent of Xilinx’s revenue.
- Xilinx also produces special microchips that can be reprogrammed after production, which differs from how standard chips operate. It’s a valuable tool for “fast-emerging technologies,” such as 5G.
- Market Value: $26 billion
Closing The Gap: The semiconductor industry has rapidly consolidated of late as chipmakers “seek scale and expand their product portfolios to support the increasing number of everyday items that are connected to the internet.” If AMD and Xilinx agree to a deal, three of this year’s largest mergers would be in the semiconductor space.
- Analog Devices bought Maxim Integrated Products for $20 billion.
- Nvidia spent $40 billion to acquire Arm Holdings.
Buying Xilinx brings AMD closer to leveling the playing field with Intel, while positioning itself to dominate the telecom and defense markets.
An agreement could come as soon as next week, but there’s no guarantee it goes through.
AMD ($AMD) and Nvidia ($NVDA) are clearly using their elevated stock prices as an opportunity to buy assets, using their stock as currency. AMD has been taking market share from Intel in the past few years and now looks to compete in the 5G telecommunications game.
Nvidia buying ARM can be transformational, but I wonder how Nvidia will stay neutral in the marketplace. Even though they are expected to grow 15-25 percent into the future, $AMD and $NVDA are entirely too expensive for my taste, trading at 42.2x and 37.4x forward EBITDA, respectively. The last time $NVDA traded at these valuations was in 2018, after which the stock crashed over 50 percent.
$AMD’s been on an upward trajectory for a few years, but to own the stock from here, you need to believe that they keep taking market share, something I don’t have enough insight into. One thing I’ll note is that, at 7.1x EBITDA and almost 7 percent free cash flow yield, Intel ($INTC) looks like a value play if they can find their groove again. Still, they’ve been losing ground lately, and I’d feel uncomfortable owning $INTC in a hyper-competitive and dynamic technology industry.
Shaq, MLK’s Son, Former Disney Executives Team Up to Create SPAC
With a star-studded lineup rivaling any All-Star team he ever played on, Shaquille O’Neal is teaming up With Martin Luther King III and a group of former Disney Executives to form a SPAC, WSJ Reports.
Year of the SPAC: SPACs have exploded in popularity during 2020 as a more-certain, time-efficient way of going public. They’re essentially “big pools of cash the sole purpose of which is to do deals.”
- This year: 138 SPAC IPOs, $53.6 billion in gross proceeds raised, according to SPACInsider.com.
- SPACs do carry more risks for investors as they don’t get as much regulatory attention.
Shaq’s Spac, Forest Road Acquisition Corp., intends to raise $250 million to target acquisitions in the media and technology space. That could include things like “intellectual property and ‘audience aggregation platforms’ such as streaming platforms.”
The Starting Lineup:
- COO: Zachary Tarica, CEO of Forest Road Co. (the financing firm)
- CEO: Keith Horn, former COO of Elliott Management Corp. and founder of Loring Capital Advisors
- CFO: Salil Mehta, former Disney Strategy Executive
- Chairperson, Strategic Advisory: Tom Staggs, former Disney COO
- Strategic Advisers:
- Shaquille O’Neal
- Kevin Mayer, former TikTok CEO and Disney Executive
- Director: Martin Luther King III, co-founder of Bounce TV
Believe in Shaq: The Basketball Hall of Famer and four-time NBA Champ has done quite well for himself as an investor. He owns a bunch of Papa John’s Pizza and Auntie Anne’s pretzel franchises, as well as Las Vegas Nightclubs, and “is active in esports.”
- Forest Road’s SEC filing also cited him investing in Google before it went public and Ring before Amazon picked it up.
This one will trade under ticker FRX.U and seems more like a SPAC piggybacking off famous names than anything else. I’m not really sure how focused this amalgamation of famous people is at creating shareholder value. It might be interesting for those of you that store your money in $10.00 SPACs waiting for upside when they announce deals, but I’ll be waiting for a deal announcement before getting too excited.
What’s Going On
Back and Forth: “The Trump administration is appealing a federal court injunction blocking it from imposing a download ban on TikTok, the Chinese-owned video-sharing app that the government contends poses a national-security threat. In court papers filed Thursday, the federal government asked the U.S. Court of Appeals in Washington to review a Sept. 27 ruling from a U.S. District Court judge who halted the download ban hours before it was scheduled to take effect.”
4G With A New Name: “Apple is set to embrace 5G as one of its most significant additions to this year’s iPhones, but the technology is still not ready for the masses in the U.S. That’s because the country’s three largest wireless carriers, Verizon, AT&T and T-Mobile, have yet to roll out 5G in a way that provides consistently higher data speeds or widespread coverage. If these companies do not dramatically upgrade their networks soon, many consumers buying the latest iPhones could find this year’s premier feature underwhelming.”
Raising Wrap: Instacart increased its valuation to $17.7 billion post-money after raising another $200 million.
Sicko Mode: “McDonald’s Corp. said its U.S. sales have bounced back from the initial shock of the coronavirus pandemic, thanks to sped-up drive-throughs and a meal promotion with musician Travis Scott.”
Crossover Special: “Microsoft and the video game retailer GameStop unveiled a strategic partnership spanning multiple years, a deal that could have implications for cloud market leader Amazon Web Services.”
Fair Play: “Microsoft [also] said it is committed to allowing more competition on its own app store for personal computers than other big technology companies have for their platforms.”
Wheels Keep Turning: “Affirm, a financial technology firm that lends money to shoppers buying goods online, said it confidentially filed with the Securities and Exchange Commission to go public in an initial public offering.”
Relief Restored: “The White House shifted tack on Thursday, signaling that the administration is again leaning toward a large-scale stimulus bill after House Speaker Nancy Pelosi pushed back on the idea of individual measures for parts of the economy hit by the Covid-19 crisis.”
Coming Soon: “President Trump’s endorsement of an experimental Covid-19 drug from Regeneron Pharmaceuticals Inc. has raised expectations for a type of medicine that could be authorized for public use within weeks or even days.”
Slow Drain: “WSJ Survey: 43% of economists don’t see the U.S. gaining back lost jobs until 2023.”