Good morning! Today’s word count is 1,760, or a 7-minute read. Let’s get to it:
Market Summary (11:20 A.M. ET): “U.S. share benchmarks and oil prices fell as coronavirus cases surged in America and Europe, adding to worries about the economic outlook after Congress and the White House failed to agree on a much-anticipated fiscal stimulus deal,” WSJ writes.
- S&P 500: $3,391.35 (-2.14%)
- Nasdaq: $11,346.78 (-1.74%)
- Bitcoin: $13,115.51 (+0.87%)
- Gold: $1,903.00 (-0.12%)
- U.S. 10-Year: 0.795%
Justin Oh’s Daily Read
To kick off this week for you, I pulled a comparison of the top ten largest U.S. stocks’ financials and valuations. Here are some observations to point out:
Tesla, Facebook, Alphabet and Amazon are expected to grow the fastest, with Tesla expected to grow 75% faster than the runner up, Facebook.
Visa, Facebook, Microsoft and Alphabet have the highest profit margins, befitting their software (or software-like) business models.
Among the growth stocks, Amazon, Alphabet and Facebook look like the most attractive on a forward gross profit basis, which is the basic reasoning why we are overweight those stocks compared to the others.
Johnson & Johnson looks like the most attractive “value” stock in the top ten, with 8.6% growth, high profit margins and trading at the cheapest valuation of 12.3x forward EBITDA. But Alphabet and Facebook are also trading within spitting distance of these valuations, which is odd given how fast they are expected to grow. Are they trading at such a discount because of antitrust risk?
Facebook Moves Into Cloud Gaming
Facebook is transitioning into cloud gaming after announcing the addition of “Netflix-like” streaming of games to its Facebook Gaming platform, WSJ reports.
Facebook said six games, led by auto-racing title “Asphalt 9: Legends,” would be available to play in certain parts of the U.S. on the tech giant’s desktop website and android app, with more games and geographic access coming over time.
- Facebook Gaming is free-to-play, while cloud-gaming rivals Google and Microsoft use subscription models.
Tech giants are racing to pick up cloud gaming market share, which has become highly competitive as consumers worldwide continue to spend more time and money online.
- Google, Microsoft and Amazon have all launched subscription-based cloud-gaming services.
- PlayStation Now (Sony) had 2.2 million paid subscribers as of April, while Nvidia’s GeForce Now boasted 4 million registered users as of August (both free and paid subscribers).
- Last year, Facebook acquired PlayGiga, a Madrid-based cloud gaming technology firm.
Cloud gaming has the appeal of ease of use — users avoid clogging up device memory from downloading games to their devices and don’t have to buy any hardware.
- But analysts say widespread adoption has lagged because “their libraries are light on big hits; people might not have friends who are also subscribers to play with; and it requires reliable, fast internet for an optimal experience.”
The Big Picture: Facebook isn’t in a rush to chase down its rivals — it already has around 380 million people gaming monthly on its platform in one form or another.
- But Apple remains a critical barrier to the service’s long-term success. Apple rejected Facebook’s submission for a standalone gaming app over the Summer, later approving it only after Facebook reluctantly agreed to remove the games.
I’m interested in seeing how the already crowded cloud gaming race shapes up between Google Stadia, Microsoft xCloud, Playstation Now, Amazon Luna, Nvidia GeForce Now, Apple Arcade and now, Facebook Gaming. As mentioned, widespread adoption will rely on carrying titles that gamers want to play.
If I were to make some initial, way-too-early predictions:
I imagine Microsoft and Playstation will lead cloud services for “heavy” gamers that tote controllers around to play games on smart TVs and phones. Long-term, this may cannibalize console hardware sales but will hopefully transition gaming into a software-as-a-service (SaaS) model.
On the other hand, I think Facebook, Apple, and Google are well-positioned to leverage their existing apps and users to dominate the market for casual gamers, although they currently lack compelling titles. Amazon can probably buy and bully their way into being a big player like they do with other verticals. I fail to see how Nvidia will succeed here.
Jack Ma’s Ant Seeks to Raise $35 Billion in Biggest-Ever IPO
Ant Group is about to make history with “a blockbuster listing that will rank as the world’s biggest share sale ever.” Jack Ma’s venture plans to raise around $35 billion through dual initial public offerings in Shanghai and Hong Kong, Bloomberg reports.
The Backstory: Ant Group was co-founded by Ma in 2014 and is known for its revolutionary payments and investing app Alipay.
- Shanghai Price: 68.8 yuan ($10.27)
- Hong Kong Price: HK$80 ($10.32)
- Total Intended Raise: $34.5 billion (before exercising its greenshoe option)
- Total Valuation: $280 billion (pre-IPO)
Ant Group is already poised to eclipse the largest IPO ever — Saudi Aramco’s $29.4 billion sale last year and yet, it could be even bigger.
- Ant could raise an additional $5.17 billion if it exercises its Hong Kong and Shanghai greenshoe options.
- That would amount to a valuation of around $320 billion, making Ant bigger than Disney, Bank of America and Coca-Cola.
Side Note: What is a greenshoe option?
- “It is a provision in an underwriting agreement that grants the underwriter the right to sell investors more shares than initially planned by the issuer if the demand for a security issue proves higher than expected.”
Ant Group’s Hong Kong stock will begin trading on Nov. 5, according to WSJ.
At $280 billion, Ant Group is more expensive than its peers Alibaba ($BABA) and Tencent ($TCEHY). But on the other hand, it might be expected to grow faster than the two, which is why I’d want to hold all three as a basket for my Chinese and international exposure.
Apple’s Booming Services Business Could Be Hit in Google Antitrust Battle
The Justice Department has its eye set on Google. But the fallout could significantly affect Apple’s business, WSJ reports.
How So? Google pays billions of dollars to be the default search engine on Apple’s iPhones (and other devices), which is “at the heart of the case the U.S. government filed last week against Google.”
- The 15-year-old deal, which gives Google access to the more than 1 billion users of its devices, could be worth as much as a fifth of Apple’s overall profit (an estimated $8 billion to $12 billion).
- Apple devices originated nearly 50% of Google’s search traffic last year, according to the government filing.
- Google now gives Android users the option to choose in Europe after losing a battle with regulators.
The deal dates back to the late Steve Jobs’ tenure as Apple CEO. He struck a deal to make Google the preset in Apple’s Safari desktop web browser, and then the iPhone followed two years later.
It’s essentially pure profit for Apple and has “bolstered CEO Tim Cook’s effort to redirect the company as it has faced stagnating sales of iPhones, which make up about half of the company’s revenue.”
- Powered by its relationship with Google, Apple’s “so-called services business” has grown to an analyst estimated $53 billion in the past fiscal year.
- Apple is about to report its 2020 fiscal results. Last year, through September 2019, Apple notched $55.26 billion in profit.
- Apple may even get into the search business itself depending on how things shake out after acquiring privacy search engine DuckDuckGo.
Looking Ahead: This case could take years to play out, and the results are far from clear.
This antitrust lawsuit can hurt Apple and Google equally. But if you see my Daily Read today, Google is trading at a 37% cheaper valuation than Apple, which gives $GOOG a more considerable margin of safety, should the worst antitrust outcome come to pass. This is yet another reason to pick $GOOG over $AAPL.
What’s Going On
Promises, Promises: “A Covid-19 vaccine being developed by the University of Oxford and AstraZeneca showed a promising immune response and low levels of adverse reactions in the elderly and older adults, according to an interim analysis that the drugmaker said was encouraging. The vaccine, now in late-stage human trials aimed at showing its efficacy and safety, is a front-runner in the global sprint for a shot to protect lives and jump-start economies hobbled by the pandemic. Trials in the U.K. could produce results before year-end, fueling hopes among scientists and government leaders that a vaccine might be available for high-risk groups here by early 2021.”
Big Pharma Union: “Bayer AG said Monday it would pay as much as $4 billion for U.S. biotech firm Asklepios BioPharmaceutical Inc. to strengthen the German company’s drug-making arm, as Bayer continues to reel from its acquisition of crops giant Monsanto. The latest deal—for which Bayer will pay $2 billion now and as much as a further $2 billion based on future success milestones—is a bet on cutting-edge gene therapy, in which a functional gene is inserted to counter the effects of a disease caused by a missing or faulty gene.”
It’s All About The Raise: China-based eSports provider VSPN raised $100 million led by Tencent, the U.K.’s PrimaryBid collected $50 million to continue building out its retail investing platform, water quality and distribution monitoring software firm Ketos nabbed $18 million and Linktree pulled in $10.7 million for its “lightweight, link-centric” user profiles.
Onward and Upward: “Reliance Retail, India’s largest retail chain, said on Sunday evening that its proposed deal to acquire Future Group’s assets for a whopping $3.4 billion — against which Amazon has filed a legal proceeding — is fully enforceable under the Indian law and it intends to complete the deal ‘without any delay.’”
Evolve and Survive: “Coca-Cola Co. agreed in principle to sell its stake in its Australian bottler to one of its European affiliates, its latest move to reduce exposure to costly bottling operations and focus on the more lucrative concentrate-making business.”
Pandemic Hits Still Coming: “SAP SE, the business-software maker, on Sunday said profit and sales declined in the three months through Sept. 30, as the economic fallout of the global response to the coronavirus pandemic hit core business units.”
Tensions Rise: “China said it will sanction three American defense contractors over proposed arms sales to Taiwan, retaliating against U.S. efforts to deepen security ties with the island democracy that Beijing claims as its territory.”
Infections Spreading: “The average number of new daily cases of coronavirus in the United States is at a record — stressing local hospital systems and forcing new curfews and other restrictions in some parts of the country.”
Doing Its Part: “Facebook Inc. teams have planned for the possibility of trying to calm election-related conflict in the U.S. by deploying internal tools designed for what it calls “at-risk” countries.”