GM, Honda, Apple’s App Store, The Nasdaq and $LMND

GM and Honda partner up, Apple holds off on App Store privacy changes and the Nasdaq takes a significant tumble.
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(By Jonathan Weiss)
(By Jonathan Weiss)

Good morning! Today’s word count is 1,895 words, or a 9-minute read. Let’s get to it:

“U.S. stocks wobbled following August’s stronger-than-expected jobs report. Nasdaq fell after declines in technology shares drove Thursday’s selloff,” WSJ writes.

  • S&P 500: $3,364.71
  • Nasdaq: $10,935.17
  • Bitcoin: $10,239.40
  • U.S. 10-Year: 0.669%

Justin Oh’s Quick Read: More On $TSLA

Lemonade ($LMND) is a high-growth, mobile app-based insurance provider. It’s the first user-friendly mobile app that has a good chance of disrupting the stodgy insurance industry. I’ve personally used Lemonade for years (NYC condo insurance, current home insurance) and think it’s fantastic – in fact, I can’t believe I found it so early. Explained simply, Insurance companies collect monthly payments (“premiums”) from customers. When insured things are damaged or lost, they have to pay out claims (“losses”). So the “value” of an insurance company is the difference between the premiums and the losses. The most important thing (famously from Buffett and Geico) is getting the premium pricing right, a process called underwriting. Otherwise, the losses might be more than your premiums, and the company would lose money. So should you drink the Lemonade? $LMND is growing customers by 84 percent and is still tiny compared to incumbents (1/30 the size of Progressive $PGR). Their use of AI across the platform is impressive, and it’s a good sign that their Loss Ratios are improving.

I’m struggling to make my mind up on valuation, though. It’s too early-stage to apply traditional Price-to-Book-Value (P/BV) multiples to $LMND. $PGR is a growing insurance company and is trading at 1.5x Enterprise Value to Forward Sales. $LMND is trading at around 20x Forward Sales by my estimates. I’d ideally like to buy the business at 10-15x, which is around the IPO price of $29. It’s super expensive, but knowing the product, I genuinely think they have 10x growth potential in the near future. So, I will be adding this one as a growth stock to the ROIC Big Board.

GM, Honda Deepen Ties, Plan Joint Vehicle Development

Longtime rivals General Motors and Honda have worked together in the past. But the two automakers have come together on a new strategic alliance to develop vehicles for North America that entail “cooperation on everything from engineering the underlying components of a vehicle to purchasing parts.”

Why It Matters

Car companies worldwide are facing increasing pressure to cut costs and innovate.

  • Automakers have to find a balance between developing electric and driverless cars while continuing to fund their core businesses, even though the latter is years away from profitability.
  • Stricter auto-emissions rules, such as those in Europe and China, are only heightening the importance of finding more financially efficient ways of doing business.
  • The industry is also trying to navigate one of its worst slumps in years stemming from Covid-19.

The cost and innovation burdens have sparked new partnerships in the last decade.

  • Many center around bets on electric vehicles or car-sharing, but sharing engineering costs on traditional cars is becoming more popular.
  • Honda has searched for partnerships to save money on development, while GM is pulling back from regions where it doesn’t anticipate profitability.
  • In January, GM and Honda revealed a co-developed, podlike driverless shuttle, while Honda is also working on two electric vehicles using GM’s technology.

Collaboration goes back even further.

  • Fiat Chrysler almost merged with Daimler AG, and still uses some of the same underlying components as Mercedes Benz cars.
  • Toyota and Subaru introduced twin sports cars a few years back, while GM and Toyota shared parts on two separate models in the early 2000s.
  • GM and Honda had earlier collaborated on small and midsize sport-utility vehicles and passenger cars, despite being longtime competitors.

How the alliance will work is unclear.

  • The two firms signed a nonbinding memorandum of understanding to form the alliance but didn’t disclose many details.
  • Part of the plan is to work together on purchasing parts, which could help lower costs from suppliers.
  • It also could eventually lead to GM building Honda vehicles at its factories, which could help the former “absorb some of its excess U.S. production capacity.”
  • The two automakers have said their pact could lead to shared research and development, including advanced safety and connected-car technologies.

Numbers to Consider

  • GM stock opened at $29.93 and Honda at $25.88 Friday.
  • Honda reported $143.1 billion in total revenues in the 2019 fiscal year, while GM pulled in $137.2 billion.

Justin Oh’s Two Cents

Traditional auto sales volumes are taking a beating due to Covid-19, down 20 percent this year. Furthermore, traditional auto manufacturers feel the pressure of being so behind the electric vehicle and autonomous driving tech race. They’ve got such great resources, but in reality, they are hamstrung when it comes to innovation or product cohesiveness. You can just tell by sitting in my Honda Pilot that everything is cobbled together by different vendors. I don’t see how these players can stop Tesla ($TSLA) from being the No. 1 EV company in the mid-term. And new players like Rivian are also coming. Once the tech and infrastructure are established, though, it’s possible they can leverage their mass production to take the “economy” segment of the EV market, which will lower Tesla’s market share. The old guard needs to solve the at-home and on-road charging infrastructure and then make cooler electric cars with reliable range (Ford Bronco, please?). 

Read More: (WALL STREET JOURNAL)

Apple Holds Off On Privacy Change Amid App Publishers’ Concerns

With iOS 14, Apple’s new operating system, set to roll out later this month, Apple had planned privacy changes limiting app makers’ abilities to track user behavior. The tech giant announced those changes would go on hold until early next year to give developers the necessary time to adjust.

Why It Matters

Targeted advertising in mobile apps could be radically different.

  • iPhone users will be asked on an “app-by-app basis if they consent to having their behavior tracked” under the change, which inherently makes it harder to sell personalized ads.
  • Facebook, along with other online publishers, spoke out against Apple’s proposed policy last week and did say it would stop using unique identifiers that helps advertisers track the effectiveness of ads across platforms.
  • Mobile advertising revenue accounted for 94 percent of Facebook’s total ad sales when the company announced earnings after Q3 2019, according to Business of Apps.

Other parties tried to take action to prevent the change.

  • The Partnership for Responsible Addressable Media, a coalition of advertisers and ad-tech firms, formed in July to prevent Apple’s new policy.
  • DMG Media, the operator of the Daily Mail and Mail Online, reached out to the Justice Department last month, fearing the ad-tracking prompt would be anticompetitive.

It’s a bold step for Apple.

  • “Apple isn’t necessarily going to war with the digital and mobile ad industries, but the privacy feature is among the iPhone maker’s most aggressive developer policy changes it has introduced in recent memory,” The Verge writes.
  • Facebook has said this change could “severely impact” its ad network, according to Bloomberg.

Numbers to Consider 

  • Apple’s App Store grossed roughly $50 billion in total sales in 2019, which ranked No. 64 on the Fortune 500, according to CNBC.
  • In June, Apple “touted the findings” of a study from economic consulting firm Analysis Group that said the App Store generated $519 billion in commerce last year, according to The Verge.

Justin Oh’s Two Cents

We should keep an eye on this. $FB, and to a lesser extent $GOOG, rely on tracking app behavior to serve personalized ads. And their ability to sell targeted, high ROI advertising space is their cash cow.

Read More: (WALL STREET JOURNAL)

Number Crunch: Tech Stocks Take Hit In Nasdaq Tumble

“U.S. equities tumbled by the most in almost three months as the rotation away from high-flying tech stocks gained steam, with investors questioning the sustainability of lofty valuations,” Bloomberg writes.

  1. The S&P 500 dropped more than 3.5 percent, its most significant drop since early June as it comes off of record highs.
  2. The Nasdaq sank 5 percent, its largest fall since March. When the markets closed Thursday, Apple fell 8 percent, Amazon 4.6 percent, Facebook 3.8 percent, Microsoft 6.2 percent and Salesforce 4.2 percent.
  3. Major tech companies had pushed the market high all year as a rush for electronics, cloud computing and online shopping helped mitigate Covid-19 losses. Before Thursday, Apple had gained 75 percent on the year, Amazon 86 percent and the Nasdaq as a whole 33 percent.

Justin Oh’s Two Cents

Take another look at my Quick Read on the market from Monday, Aug. 31. The market looks really high in valuation, and I’m not comfortable holding overpriced tech or hyped growth stocks right now.

Read More: (BLOOMBERG)

Worth Your Time

Short-Form Steal: With TikTok banned in India, SoftBank Group Corp. is exploring a play to acquire the app’s Indian assets and is “actively looking for local partners.” The Japanese conglomerate, which owns a stake in ByteDance, has approached India’s Reliance Jio Infocomm and Bharti Airtel, though details are private. Discussions have fizzled since SoftBank first started pushing the idea last month, but TikTok is considering offloading its operations in several countries after local governments shut out the app. (BLOOMBERG)

Antitrust Showdown: Google’s reckoning is coming. Well, as much of a reckoning as a multi-trillion dollar tech giant can face. The Justice Department is weeks away from filing its antitrust case against Google. It’s widely expected to bring charges to Google related to its dominance in the digital advertising market, which would be the most significant antitrust case involving big tech since 1998. U.S. Attorney General William Barr has been eager to file a case, partly to ensure the Trump administration receives credit for taking on big tech. But he’s also been frustrated by the probe’s pace, despite concerns from Justice Department lawyers that moving too quickly would sink the case. (NEW YORK TIMES)

Zero Control: Founders of startups in recent memory usually hold special shares with extra voting privileges, but those votes dissipate if underlying shares are sold. Palantir hasn’t gotten that memo, as Peter Thiel, Stephen Cohen and Alex Karp will hold special “Class F” shares that ensure they maintain a commanding vote in the company even if they sell. The takeaway from the soon-to-be public startup’s amended S-1 filing: Palantir will be a “controlled company” with likely zero public input into governance. (TECH CRUNCH)

Tidbits

Episerver has acquired Optimizely, a 10-year-old company founded by former Google executives that makes technology to help websites A/B test content, for somewhere under its $600 million valuation from 2019.

Nreal, a mixed-reality startup in China powered by Qualcomm chips, raised $40 million from a group of high-profile investors in Series B funding.

Peloton is reportedly preparing to add a cheaper, entry-level smart treadmill and higher-end stationary smart bike to its product offering.

The U.S. labor-market improved in August, adding roughly 1.4 million jobs, but it’s still down 11.5 million jobs since Covid-19 hit.

“If the reality is somewhere in between a resurgence of [Covid-19] or victory over it, then testing is the industry to watch.”

Increased trading due to Apple and Tesla stock splits caused outages at Robinhood and Charles Schwab, as well as disruptions on other services.

The World Health Organization said it doesn’t expect widespread Covid-19 vaccinations until the middle of next year.

Campbell Soup Co. announced demand for its soups and other foods is slowing down after a pandemic fuel surge.

A Couple Cents Featured

Tesla’s stock keeps soaring. But is it time to sell? Justin Oh breaks down why Tesla is ripping and whether he’s holding or selling the stock.
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