Good morning! Today’s word count is 2,167 words, or a 10-minute read. Let’s get to it:
“U.S. stocks extended their retreat into a fourth consecutive week. The VIX, a closely watched measure of turbulence in stocks, jumped to its highest level in almost two weeks,” WSJ writes.
- S&P 500: $3,236.39
- Nasdaq: $10,580.62
- Bitcoin: $10,393.86
- U.S. 10-Year: 0.661%
Also, be sure to enter the new, weekly giveaway in Morning Cents every day.
Justin Oh’s Quick Read
Is this the stock market correction I’ve been wary of since Aug. 31’s Morning Cents? It very well could be, with the NASDAQ down about 12.5 percent from its September highs. Since I raised my concerns about an overvalued market and artificial market dynamics, I’ve advocated for selling off higher-risk positions and building a large cash position in anticipation of a market dip. Hopefully, for those that follow our ROIC Big Board targets, you have reached at least a 35 percent cash position of your stock portfolio and 25 percent cash position of your overall investments by this point. I’ve also pushed for higher allocations to stable value plays such as $ACI, $ORCL, and $WMT, which you’ll see are outperforming the market today. Looking at the market today, I obviously feel pretty good about our portfolio moves beforehand. I will now start nibbling at buying more of our favorite stocks today but not eating too much into our cash position and will update the ROIC Big Board accordingly. And if you missed the chance to sell your high-risk stocks for cash but still have a good job and earnings, don’t despair! I always suggest saving as much as you can of your paycheck through market downturns and buying on the way down.
Nikola Founder Trevor Milton Resigns as Executive Chairman Amid Fraud Allegations
The Trevor Milton chapter of Nikola Motors has come to an end. The 39-year-old founder of the electric vehicle company is stepping down as executive chairman amid allegations from a short seller that “he and the company made false statements to investors. Milton will be replaced by Stephen Girsky, a former GM executive who already sits on Nikola’s board.
Why It Matters
Nikola rose to public stardom out of relative obscurity.
- The electric truck company was little-known this year before it went public through a SPAC reverse merger.
- Despite recording no meaningful revenue to date, its shares climbed to nearly $80 in June.
- A few weeks ago, General Motors took a $2 billion stake in Nikola, committing to manufacture the startup’s debut electric pickup truck — the Badger.
Then, short-seller Hindenburg Research called Nikola out.
- Hindenburg released a report earlier this month accusing Nikola and Milton of “making exaggerated claims about the readiness of Nikola’s technology and how much of it is proprietary.”
- Nikola called the Hindenburg report false, but doubts around the company’s operations were enough to prompt the SEC and Justice Department to examine whether Nikola misled investors.
- Still, Milton fell on his sword, announcing in a company statement that his resignation was to keep the focus on the business, not him. He holds around a quarter of the company’s shares.
But according to people familiar with the matter, Nikola is backtracking on some of its promises.
- The company is reportedly turning to an outside supplier to provide batteries for its first model, which directly contrasts with earlier statements that it had developed its own battery technology.
- When Nikola’s Tre Semi-truck arrives on the market in 2021, it’s expected to be powered by core battery technology from California-based Romeo Systems Inc.
Electric trucks are seen as the next frontier within the electric vehicle industry.
- Thanks to battery advancements and the potential of hydrogen fuel cells to power commercial vehicles, electric vehicles could replace diesel trucks and vans, especially in cities.
- Last month, Amazon ordered 1,800 electric vans from Daimler’s Mercedes-Benz Vans unit for its European delivery fleet. It also placed an order for 100,000 electric delivery vans from Rivian Automotive (Amazon owns a stake in the startup).
- Still, electric trucks are years away as Daimler Trucks CEO Martin Daum said building infrastructure and figuring out how to produce pollution-free hydrogen remain significant hurdles.
Numbers To Consider
- Nikola’s share price, which opened at $34.08, dipped around 21 percent just a few minutes after the markets began trading Monday.
Justin Oh’s Two Cents
Nikola’s promises have always been fishy, which is why we’ve been vocal about staying away from the stock from the very beginning. And now, with its head fishmonger Trevor Milton resigning, it looks to be a sinking ship. Nikola is a company that trades at different shades of “overvalued” since they make zero revenue and promise to deliver unrevealed technology to hyper-competitive end markets. Not only is the end market of truck manufacturing not huge, but the odds it penetrates a majority of the market with hydrogen cell technology is slim. Other than that, Nikola promises an electric and hydrogen pickup truck that looks like the Chevy Colorado. Regardless of its promises, the most disturbing thing about the company is that these promises are being made without usable prototypes or in-house proprietary technology or manufacturing.
Read More: (WALL STREET JOURNAL)
TikTok Deal Faces Questions Over Security, Ownership
Now that the Oracle-TikTok partnership has President Trump’s blessing — in concept — the entire social-media landscape is about to change. Here’s everything you need to know, lightning-round style:
- Oracle, Walmart and ByteDance will partner up and become a new U.S.-based company called TikTok Global.
- The deal is valued at around $60 billion and is pending final approval from the companies involved. The Commerce Department postponed the proposed ban on TikTok for a week while the terms are finalized.
- Oracle would have a 12.5 percent stake and plans to host TikTok Global’s data so it can’t “fall into the hands” of the Chinese government.
- Walmart will purchase 7.5 percent of TikTok Global and agreed to provide e-commerce, fulfillment, payments and other services to the new company.
- ByteDance would retain roughly 80 percent ownership in TikTok Global. But American investors already own around 40 percent of ByteDance. With Oracle and Walmart taking a combined 20 percent stake, TikTok Global would be about 53 percent American-owned.
- Technically, ByteDance wouldn’t be an owner in TikTok Global. The current owners of ByteDance, which include Chinese and American investors, would receive proportionately distributed shares in the new entity.
- After an expected IPO, the Chinese stake in TikTok could drop to about 31 percent, depending on its details. Though a TikTok spokesperson disputed that, saying ByteDance would directly hold an 80 percent share of the new entity before the IPO.
- Walmart said its CEO, Doug McMillion, would serve as one of the new company’s board members. ByteDance Founder Zhang Yiming and some of the U.S. investors would also likely be on the board.
- According to a joint statement from Oracle and Walmart, TikTok global will create more than 25,000 jobs in the U.S. and lead to more than $5 billion in new tax dollars to the U.S. Treasury.
- The companies also said TikTok Global would foster “an educational initiative to develop and deliver an [artificial-intelligence]-driven online video curriculum to teach children from inner cities to the suburbs,” which President Trump said would be a $5 billion fund (a person familiar with the deal said the education initiative would be funded through the IPO.
- The Chinese government hasn’t commented on this version of the deal or President Trump’s response. However, ByteDance has communicated with China’s internet regulator and the Ministry of Commerce on the potential sale.
- “One of the people familiar with the matter said the main outstanding issues for the U.S. concerned data-security details and didn’t appear substantial. Assuming those issues are resolved, creation of the TikTok Global entity would proceed over the next few weeks.”
Justin Oh’s Two Cents
It will be essential to see if the new TikTok Global will be the US-only app or if it will include international markets since $60 billion is very expensive for just 100 million US-based users. It also remains to be seen if Walmart can successfully turn TikTok into a meaningful e-commerce channel, or if they ruin the app’s popularity by over-monetizing. Aside from potential TikTok-driven growth, Walmart ($WMT) and Oracle ($ORCL) trade at reasonable valuations, 12.3x and 10.4x next year’s EBITDA, respectively, and are pretty defensible positions to hold in an overvalued market undergoing a potentially large correction.
Read More: (WALL STREET JOURNAL)
Number Crunch: Microsoft to Buy Bethesda for $7.5 Billion to Boost Xbox
“Microsoft Corp. said Monday it plans to acquire ZeniMax Media Inc., owner of the storied video-game publisher Bethesda Softworks, for $7.5 billion in cash, marking its biggest video game purchase ever,” Bloomberg writes.
- The Maryland-based ZeniMax owns multiple other studios around the globe. It’s one of the largest privately-held game companies with 2,300 employees worldwide.
- Acquiring Bethesda — which publishes games like The Elder Scrolls, Doom and Fallout — gives Microsoft a much-needed infusion into its Xbox lineup. Microsoft is launching a new generation of Xbox consoles later this year, and anticipated titles have so far disappointed players. Halo Infinite, the company’s most-hyped release, was delayed until next year. To compete in the past, Microsoft acquired seven studios between 2018 and 2019. Back in 2014, it paid $2.5 billion to purchase the maker of Minecraft.
- But the expanded lineup plays an even more prominent role in Microsoft’s long-term gaming plans. The company is leaning heavily on its game subscription service, Game Pass, to draw in users and boost revenue. Game Pass now has 15 million subscribers, up from 10 million it announced in April.
- Bethesda has worked closely with Sony of late, with two of its upcoming games debuting on PlayStation. Both were “timed console exclusives,” meaning they would come to Xbox after some time. It is unclear how the acquisition will affect that deal.
- Microsoft expects the deal to close in the second half of its 2021 fiscal year, which ends June 30. It’s share price opened at $197.19 Monday.
Justin Oh’s Two Cents
This is a huge play by Microsoft for their Xbox business since Bethesda is a considerable developer that produces some of the most popular games out there. As a video game consumer, I would absolutely make a console decision based on Elder Scrolls and Fallout exclusivity. Gaming revenue represents less than 10 percent of Microsoft’s overall business, so the effects of this acquisition might not be singularly transformational for the stock, but it is an excellent example of high-return uses of shareholder capital for smart acquisitions. $MSFT is trading at around 18x next year’s EBITDA and 3.5 percent free cash flow yield, which is pretty reasonable for the dominant business. For this and many other reasons, $MSFT deserves its spot as a Capital Compounder and is a justified long-term position to hold in this market. And when $MSFT trades down in tandem with a market correction, it should be looked at as a chance to buy even more at a discount along with the other Capital Compounders on the ROIC Big Board.
Read More: (BLOOMBERG)
Worth Your Time
The Next Unicorn: What happens when you start a new mobile gaming company with the founders of Game Closure and Zynga? Well, you wind up with a billion-dollar unicorn. Playco, a new venture from Michael Carter and Justin Waldron, only announced its existence today but has already raised $100 million in Series A funding. The raise values the company “just north of $1 billion” and sets the stage for a highly anticipated reveal of the company’s first games later this year. (TECH CRUNCH)
App Spat: For eight hours Friday, Google pulled Paytm, the app from India’s most valuable startup, off of the Play Store in response to repeated violations of its guidelines. Paytm, a key competitor in the Indian payments markets, has been frustrated with Google’s policies, which it argues gives them an unfair advantage. The whole saga is reminiscent of Epic Games’ spat with Apple over App Store policies and brings the “monopolistic” hold the tech giants have over mobile-app marketplaces to center stage. (TECH CRUNCH)
Following a lawsuit of WeChat users arguing that President Trump’s ban undermined American free speech rights, a California judge has temporarily stayed the Chinese app’s nationwide ban.
Illumina, a leading maker of the machines that sequence genes, announced it was buying Grail Inc. for $7.1 billion, the developer of a long-sought blood test that could detect cancer early.
Popular language learning service Babbel says it has now sold more than 10 million subscriptions.
“Donald M. Kendall, who built PepsiCo Inc. into a snack-and-beverage juggernaut and introduced the Soviet Union to American cola at the height of the Cold War, died Saturday. He was 99 years old.”
U.S. officials are mulling concepts for a 5G network that would allow civilians cellphones to access airwaves alongside the military, setting up a “potential clash over how to deploy the next-generation technology.”
“Global trade is rebounding much more quickly this year than it did after the 2008 financial crisis, lifting parts of the world economy and defying predictions the pandemic could send globalization into permanent retreat.”
The Federal Reserve is rewriting the rules in lending hundreds of billions of dollars to lower-income neighborhoods.