Good morning! Today’s word count is 2,076, or a 10-minute read. Let’s get to it:
Market Summary (10:45 A.M. ET): “Despite the steep stock-market selloff Monday, investors appear to be positioning for a speedy outcome to the presidential contest and dwindling volatility through the end of the year,” WSJ writes.
- S&P 500: $3,395.30 (-0.17%)
- Nasdaq: $11,392.82 (+0.30%)
- Bitcoin: $13,367.61 (+1.36%)
- Gold: $1,908.10 (+0.13%)
- U.S. 10-Year: 0.783%
Justin Oh’s Daily Read
There were many requests for me to take a look at Nvidia ($NVDA), so let’s dive into it.
Nvidia’s core business is designing and selling graphics processing unit chips (GPUs) and has traditionally been the space leader ahead of AMD ($AMD). GPUs have seen increased long-term demand in the past few years. They are critical for visual computing, such as video games, rendering, and augmented reality (AR).
In 2017, GPUs were also realized to be the optimal chip to mine cryptocurrencies. Finally and more importantly, GPUs were found to be the optimal chip to run artificial intelligence, machine learning, and neural net programs, given their ability to run lots of calculations simultaneously. Tesla ($TSLA) used Nvidia chips for their self-driving computers until they developed a proprietary one instead.
But how much do we have to pay for this quality asset? (…)
Bitcoin Approaches Highest Level Since Post-Bubble Crash in 2018
“Bitcoin is approaching levels not seen since just after the burst of the cryptocurrency market bubble almost three years ago,” Bloomberg writes.
The leading digital currency by market capitalization, Bitcoin’s value rose as high as 3.7% to $13,497 on Tuesday.
- That brings it just below its $13,851 peak from June 26, 2019, which is the highest since Bitcoin traded at $16.932 in January 2018.
- Bitcoin reached its all-time high in December 2017, nearing $20,000.
A slew of recent developments has Crypto fans excited, including PayPal allowing customers to use digital coins, Fidelity launching a Bitcoin fund and Square making a sizable investment in the digital currency.
- “The world seems poised for a digital currency,” said Edward Moya, a senior market analyst at Oanda Corp.
Even Central Banks around the world have conveyed greater interest in the prospect of using a digital currency such as Bitcoin.
- The European Central Bank plans to experiment with a digital version of the Euro while keeping channels open for public feedback.
- The U.S. Federal Reserve is weighing the costs and benefits of a digital currency but is “in no hurry” to deploy one.
- China has experimented with the concept after launching a four-city pilot program with a “homegrown digital currency” in April.
The Bottom Line: Bitcoin is up 25% this month and more than 80% this year. How much Bitcoin keeps growing depends on what Fed Chairman Jerome Powell described as a network effect; the more people who use digital currencies, the more useful they become.
As someone who bought my first bitcoin at $300 and who allocated a sizable amount to the asset class around $9,000 in 2017, I’ve lived through the emotional ups and downs of holding this asset class. I have it on the Target Allocations and Big Board for a reason – I believe it will become a legitimate asset class that approximates an internet gold-equivalent and third party currency.
It should be uncorrelated diversification against equities and potentially an inflation hedge as well. Yes, it will be much more volatile than gold, but it also offers an immense upside if the Bitcoin network becomes a global alternative asset class.
This is one that, if you believe in it long-term, you should hold and not pay attention to. Emotions will get in the way of the long-term thesis. If you don’t, no shame in opting for gold or gold miners instead.
AMD Agrees to Buy Rival Chip Maker Xilinx for $35 Billion
And so continues the seismic consolidation across the U.S. semiconductor industry. AMD’s acquisition, which will require regulatory approval, is only the latest in a string of mega-deals.
- Analog Devices agreed to buy Maxim Integrated Products for $20 billion in July.
- Nvidia followed in September with a $40 billion deal to pry Arm Holdings from SoftBank Group.
You may not be too familiar with AMD, but it specializes in CPUs and graphic chips in modern computers and other devices such as Sony’s PlayStation and Microsoft’s Xbox.
- Its new, high-performance chips in recent years have grown a lucrative new sector for the company, selling processors to data centers.
AMD has been on the up and up while rival Intel struggles. Both have benefited from the increased laptop demand amid the cloud computing boom. Still, manufacturing issues have plagued Intel, and AMD decided to “shed its chip-making facilities more than a decade ago.”
- Taiwan Semiconductor Manufacturing Co., which operates leading chip plants worldwide, produces AMD’s products.
An Ideal Match: Xilinx, which somewhat overlaps with AMD’s customer base, creates a new layer for its soon-to-be parent.
- Xilinx specializes in reprogrammable chips, which are useful in fast prototyping.
- It also gives AMD a “foothold in areas where it’s a small player or entirely absent, including telecommunications infrastructure and defense.”
Overall, AMD “promises $300 million in cost savings from the combination within 18 months.” The company also said the all-stock deal would improve profit margins, earnings and cash generation upon closing.
AMD is the little brother of $NVDA. AMD is second place in GPUs, although it is a reliable number two, and has less than half the EBITDA margins of Nvidia. Think of it as a more-down market version of Nvidia. That said, it is also expected to grow at a 20% clip in the future, given the strong video gaming trends.
Ignoring the gross profit multiple, I believe AMD is trading in-line with NVDA at 38.6x forward EBITDA, which is too expensive. I would want to see a much more significant discount to NVDA to start being interested.
All in all, if you’re looking for consumer-influenced growth companies, look at $SPOT and $SQ trading at 17x forward gross profit. If you’re willing to stomach 25x forward gross profit, look at high-growth, business-to-business software companies trading in that range, like $ASAN, $TEAM, and $DOCU that aren’t at the mercy of consumer risk or unknowable, long-dated trends.
Number Crunch: A Slew of Tuesday Earnings
Thanks to massive cost cuts, BuzzFeed CEO Jonah Peretti said the company is on target to break even this year for the first time since 2014.
- A mix of furloughs, pay reductions, layoffs and other changes that saved the company roughly $30 million offset steep revenue losses this year. With these cuts in tow, BuzzFeed has slashed $80 million in costs over the last two years.
Heavy machinery manufacturer Caterpillar faced slower sales and lagging demand as the Covid-19 pandemic continues to weigh on the industry.
- With machinery sales down 23%, the firm’s revenue fell 23% to $9.88 billion after posting $12.76 billion in the same period a year earlier. Profit dropped 55% to $668 million.
3M Co. said its sales increased in the latest quarter, as “it gained from personal-safety and home-improvement products.” But profits did fall as expenses increased and demand for products servicing Covid-19-affected industries dropped.
- 3M said its sales improved by 4.5% to $8.35 billion in Q3, and it reported a profit of $1.41 billion.
BP reported its fifth-straight quarterly loss on Tuesday, which paints a pretty bleak picture of how the oil industry is faring through the Covid-19 pandemic.
- The company reported a replacement cost loss of $644 million for the quarter ending Sept. 30, almost an 83.5% increase from its loss of $351 million during the same period a year before. BP’s net debt dropped marginally to $40.4 billion from $40.9 billion at the end of June.
Sales of some of Pfizer’s drugs decreased in the latest quarter as the company awaits the results of a large-scale trial involving its experimental Covid-19 vaccine.
- Pfizer posted sales of $12.13 billion, decreasing from $12.68 billion in the same period a year ago. The company said the pandemic dragged down its Q3 revenue by roughly 4% or $500 million.
Restaurant Brands International reported an 8% decline in quarterly revenue, with Burger King and Tim Hortons sales struggling to rebound from the Covid-19 pandemic.
- Restaurant Brands posted sales and revenue equal to $1.34 billion, which matched Wall Street’s expectations. Net income was $145 million, falling from $201 million a year ago.
Generally, we’re seeing pressure in industries where people buy things in-person or where companies buy big-ticket equipment.
In-person restaurants and niche consumer goods are hurting, while superstores like Walmart, Target, Dollar General are doing well. This is probably because, while people are still going out to shop, they limit their visits to their mainstay, all-inclusive stores rather than extend their shopping to ancillary locations.
Additionally, corporations are holding off on purchasing large ticket items like heavy machinery and planes and opting to continue to use older equipment, which is a telltale sign of managerial uncertainty around the pandemic and the economy.
I’m inclined to stay away from many of these stocks until we, too, have more certainty around the return-to-normalcy.
What’s Going On
No Time To Decide: “Metro-Goldwyn-Mayer Inc. held discussions with Apple Inc. and Netflix Inc. about taking its new James Bond film directly to streaming, but the studio says it’s committed to a theatrical release. The film, “No Time to Die,” could fetch hundreds of millions of dollars in a potential streaming sale, said [people familiar with the matter], who asked not to be identified because the discussions were private. MGM declined to comment on any talks, but said the film ‘is not for sale.’ ‘The film’s release has been postponed until April 2021 in order to preserve the theatrical experience for moviegoers,’ an MGM representative said.”
Let’s Stay Together: “Europe’s top antitrust enforcer Margrethe Vestager has warned against pushing for the structural break up of tech companies during a debate around the future of internet regulation in the European Union. Vestager, who has aggressively pursued antitrust investigations against the likes of Google, Amazon and Apple in recent years, said it would be ‘doable’ to force the break-up of the tech giants under current EU law. But she warned of unintended consequences and potentially lengthy court battles between European regulators and the tech giants.”
|Companies Raising Capital|
|FreshToHome||$121 Million||Meat and Vegetable E-Commerce Platform (India)|
|Ordermark||$120 Million||Building a Decentralized Ghost Kitchen|
|Impact America Fund||$55 Million||Invest in Startups Targeting the World’s Overlooked|
|Theta Lake||$12.7 Million||Video Conferencing Security Technology|
|Deci||$9.1 Million||AI That Optimizes AI Models (Tel Aviv)|
|Leading Edge Equipment||$7.6 Million||Technology to Improve Solar Manufacturing|
|Tül||$4 Million||Improving Supply Chain Construction (Latin America)|
Hot Stock: “Ant Group will close its Hong Kong institutional book building process a day earlier than expected due to strong demand for its record initial public offering (IPO).”
Maximum Effort: “Pfizer’s late-stage coronavirus vaccine trial has enrolled more than 42,000 volunteers, the company announced Tuesday when it released a mixed third-quarter earnings report.”
Up In The Clouds: “Cloud business-to-business messaging software company Twilio is continuing to grow during the pandemic, with sales rising 52% to $448 million in its September quarter compared to last year.”
Expansion Pack: “Google and Temasek Holdings Pte have agreed to invest about $350 million in PT Tokopedia, a major cash infusion that will bankroll the Indonesian online mall’s post-Covid-19 expansion.”
Tencent Soars: “A U.S. appeals court has denied the Trump administration’s request to immediately ban Chinese-owned app WeChat from smartphone app stores over national security concerns, backing a decision made by a California federal court judge who had previously blocked the ban.”
A Deal’s A Deal: “China accelerated purchases of U.S. farm products last month, new data shows, but overall it remains far behind on a commitment to buy about $140 billion in specific U.S. agricultural, energy and manufactured goods this year under a trade accord signed in January.”
No Dice: “Federal health researchers have halted testing a combination of Eli Lilly & Co.’s Covid-19 antibody-drug and remdesivir in hospitalized Covid-19 patients after an independent committee found a lack of a benefit.”
Born To Be Wild: “Harley-Davidson Inc. reported a stronger third-quarter profit and beat expectations for revenue tied its motorcycles as it looks to refocus on a narrower set of markets under a new chief executive.”