Oracle, TikTok, Nvidia, Arm, Verizon and Morning Cents’ New Weekly Giveaway

Oracle beats out Microsoft for TikTok, Nvidia agrees to buy Arm Holdings from SoftBank Group and Verizon acquires wireless reseller TracFone.
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(By Sundry Photography)
(By Sundry Photography)

Good morning! Today’s word count is 2,036 words, or a 10-minute read. Let’s get to it:

“Shares of Oracle soared as investors cheered its deal with video-sharing app TikTok. The Dow, S&P 500 and Nasdaq Composite all rose in early trading,” WSJ writes.

  • S&P 500: $3,396.72
  • Nasdaq: $11,089.76
  • Bitcoin: $10,722.15
  • U.S. 10-Year: 0.662%

Also, be sure to enter the new, weekly giveaway in Morning Cents every day.

Justin Oh’s Quick Read

Since we’re trying to find defensible stocks in this volatile and possibly overvalued stock market, Oracle ($ORCL) is starting to look like an attractive one. Relative to the rest of the market, it trades at a reasonable 10.5x forward EBITDA. It also produces very strong cash flows amounting to 7 percent of its value annually (7 percent free cash flow yield). Furthermore, it boasts an extremely defensible tech business serving corporate customers. It traditionally has been a sleepy company with slow growth. Still, if a TikTok partnership can provide Oracle with meaningful growth in its cloud business, $ORCL stock seems like it could offer a good mix of defensible cash flow at a good value with potential growth upside.

Oracle Beats Microsoft, Wins Bid for TikTok in the U.S.

TikTok’s future became clearer Monday after parent company ByteDance announced Oracle had won the bidding for the short-form video app’s U.S. operations. Oracle had been competing with a Microsoft-Walmart partnership in the race to acquire the app after President Trump signed an executive order in August, giving TikTok 45 days to divest its U.S. assets.

Why It Matters

The structure of any potential deal has changed.

  • China recently passed new technology export restrictions limiting TikTok’s ability to transfer its proprietary algorithm without state-sanctioned approval.
  • Oracle is set to become TikTok’s “trusted tech partner” in the U.S., and the deal is not expected to be an outright sale.
  • Those familiar with the agreement said it was “more appropriate to call it a partnership, rather than an acquisition, suggesting there wasn’t an exchange of significant assets.” It includes a commitment to establish TikTok as a global company in the U.S., creating 20,000 new jobs.
  • Some of ByteDance’s existing U.S. investors, including Sequoia Capital and General Atlantic, will get stakes in the venture under the deal. Still, it is unclear if it includes the transfer of ByteDance’s highly-coveted algorithm.

Oracle had the inside track at Microsoft’s expense.

  • Larry Ellison, Oracle’s co-founder, is a supporter of President Trump, having thrown him a fundraiser earlier this year. Oracle CEO Safra Catz worked on the executive committee for the Trump transition team in 2016.
  • With its consumer-facing businesses (Xbox and LinkedIn) and $136 billion in cash on hand, Microsoft seemed like the favorite to land TikTok. Walmart later joined Microsoft’s efforts, bolstering the bid.
  • A deal with TikTok could be a chance for Oracle to bolster its lagging cloud computing business and reinvent itself. Even while both companies have sizable cloud operations, Oracle has “virtually no experience running a social media platform or other major consumer-facing business.” With Microsoft out, Walmart also suggested it could join Oracle’s group.

Agreement or not, there are still hurdles to cross.

  • Given President Trump’s executive order started this whole debacle; the proposed deal still needs a thumbs up from the White House and Committee on Foreign Investment in the U.S.
  • Treasury Secretary Steven Mnuchin said CFIUS would review it this week, and clarified the deadline for the sale of TikTok’s U.S. operations is Sept. 20.
  • However, it’s unclear whether China will sit back and let this unfold as Reuters reported the Chinese government would rather see the app shut down in the U.S. than allow a forced sale.

Numbers To Consider

  • TikTok’s U.S. audience exploded to roughly 100 million monthly users in the U.S. from around 11 million in early 2018.
  • U.S. users are considered the most lucrative among TikTok’s global user base of 689 million, but the app still loses money.

Justin Oh’s Two Cents

Sometimes the market reacts to good news even if the fundamentals aren’t clear, such as today with Oracle ($ORCL) jumping 6.5 percent on news it “won” the TikTok bid. But from what I’m reading, ByteDance will likely retain control over TikTok and its algorithms, while exclusively housing and computing user data on Oracle’s cloud. This is more of a “partnership” and a cloud computing customer for Oracle, but probably not worth 7 percent of $ORCL ($15 billion value) in the short-term, at least. Still, it could mean a growth driver for the historically stagnant corporate technology behemoth.

Read More: (WALL STREET JOURNAL)

Highflying Nvidia’s Deal for Arm Signals Loftier Chip Ambition

After reaching new heights in 2020, Nvidia is buying Arm Holdings from SoftBank Group in a cash and stock deal worth up to $40 billion. For Nvidia, and the rest of the global semiconductor industry, the acquisition of Arm’s widely utilized smartphone-chip business could have wide-ranging implications.

Why It Matters

It’s a massive win for SoftBank and its chief executive, Masayoshi Son.

  • SoftBank bought Arm four years ago for $32 billion but has struggled to grow the business.
  • The Japanese conglomerate has been offloading a wide range of assets, including its stake in T-Mobile and part of its stake in Alibaba, resulting from the market downturn.

Nvidia is in the middle of a meteoritic rise.

  • A fast-growing industry player, Nvidia is best known for its chips that power video games like the Nintendo Switch, and, most recently, data centers that are increasingly in demand because of remote work.
  • The chip giant generated record sales in its most recent quarter and reached a market cap of around $300 billion, making it the most valuable U.S. semiconductor company.
  • The deal presumably adds Arm’s nearly $2 billion in annual sales to Nvidia’s $11 billion and carries existing relationships with the top smartphone companies such as Apple and Huawei.

However, it’s a risky play for Nvidia.

  • “Following a sale to Nvidia, customers like Samsung Electronics Co., Apple and Qualcomm Inc. would face the prospect of one of their chip-making competitors owning Arm, potentially undermining its attractiveness as a neutral supplier.”
  • The potential sale is also likely to face regulatory scrutiny. The increased tensions between the U.S. and China have led to a close review of semiconductor deals such as Broadcom’s blocked takeover of Qualcomm and Qualcomm’s failed purchase of NXP Semiconductors.
  • It’s unclear how China would react to the idea of Arm, a company used by many Chinese smartphone manufacturers, shifting under the umbrella of an American firm.

Numbers To Consider

  • Nvidia will pay $21.5 billion in stock and $12 billion in cash for the deal, while SoftBank could receive up to $5 billion in cash or stock subject to Arm hitting performance targets.
  • SoftBank has promised around $40 billion in asset disposals under pressure to “shore up its flagging stock price.”
  • Nvidia’s stock opened at $523.24 Monday.

Justin Oh’s Two Cents

This is massive news for Nvidia ($NVDA). If the deal goes through, it will combine the most-dominant designer of graphics cards (GPUs), which are good for video, video games, VR, and AI, with a large designer of central processors (CPUs), which are good for running operating systems. Intel still reigns supreme on computer and server CPUs, but ARM is dominant in the mobile space. Merging Nvidia and ARM technology could create massive synergies that could increase market share and dominance for the combined company.

Read More: (WALL STREET JOURNAL)

Number Crunch: Verizon to Buy Wireless Reseller TracFone

Verizon, the biggest wireless operator in the U.S., has agreed to acquire TracFone, the country’s largest reseller of cellphone services, in a deal valued at up to $7 billion.

  1. The deal will include $3.125 billion of cash and $3.125 billion in Verizon shares. TracFone is eligible to receive an additional $650 million in cash based on performance measures and commercial arrangements.
  2. TracFone doesn’t run its own physical network in the U.S., riding on other wireless carriers’ systems in exchange for a fee. Roughly 13 million of TracFone’s 21 million subscribers already use Verizon’s network through an existing agreement.
  3. Verizon is the U.S.’s biggest wireless provider with around 120 million connections, but it competes in a mature market dominated by three providers. TracFone watched its subscriber numbers grow from the Covid-19 pandemic, but the company’s growth has waned in recent years due to competition from AT&T and T-Mobile prepaid plans.
  4. The deal is subject to approval from antitrust and telecom regulators, though the agreement is unlikely to attract as much scrutiny as T-Mobile’s Spring takeover in 2018. The Verizon-TracFone deal is expected to close in the second half of 2021.

Justin Oh’s Two Cents

Verizon ($VZ) is worth $350 billion, so a $7 billion deal is a 2 percent drop in the bucket. But it could provide some growth since TracFone has been growing quite well in the lower-income markets selling prepaid phones. Verizon, being a mature, slow-growth company, isn’t my style of investment. Still, for those of you looking for stable income streams rather than maximum capital growth, $VZ is probably one of the best “dividend stocks” with its over 7 percent free cash flow yield and around 4 percent dividend yield.

Read More: (WALL STREET JOURNAL)

Worth Your Time

New Perspective: In the heated battle over the cloud computing market, Microsoft has a new tactic: partner up with fast-growing startups and promise to help sell their services. Microsoft announced a deal Monday to move San Francisco-based email security startup Abnormal Security Corp.’s software onto the Azure cloud in exchange for pushing its services to the tech giant’s large enterprise clients. For both Microsoft and Amazon, partnership deals could “help sustain growth in a business segment that has become crucial to their financial fortunes—and increasingly competitive.” (WALL STREET JOURNAL)

Cash Rules Everything Around Me: Delta Air Lines needs cash, and it’s resorting to a creative, but not uncommon, method of doing so. The airliner plans to use its SkyMiles program to raise $6.5 billion, becoming the latest carrier to use its frequent-flier program to secure cash to weather the Covid-19 pandemic. Delta announced Monday it would issue a private-notes offering and enter a term loan facility backed by the program. Delta has raised $16.5 billion since the pandemic upended the economy and the airline industry, but is losing around $27 million in cash per day. (WALL STREET JOURNAL)

Apple Picking: While Apple generally used its big September event to showcase new iPhones, this year’s Covid-19 era virtual version isn’t expected to feature one. Instead, the company is “holding its biggest publicity blast for next month when it unveils a highly anticipated smartphone with 5G connectivity that is expected to usher in big sales and fat profits, investors and analysts say. The next-generation iPhone is among the most anticipated since 2014, when Apple introduced a larger-screened option of the device, which now makes up about 50% of its annual sales.” (WALL STREET JOURNAL)

Tidbits

Amazon is planning to hire 100,000 additional works in the U.S. and Canada to keep up with the massive online shopping demand caused by the Covid-19 pandemic.

SoftBank Group executives are discussing taking the Tokyo-listed company private based on frustrations stemming by the wide gap between its internal and public valuation, according to The Financial Times.

Displeased with the disparaging research report released by short-seller Hindenburg Research, Nikola Motors issued a more detailed denial Monday saying the research firm “made false and misleading statements that were designed to manipulate the market.”

YouTube is facing a “class action style lawsuit” seeking more than $3 billion in the U.K. alleging the platform violated data protection laws by unlawfully targeting 13-year-olds with addictive programming to harvest their data for advertisers.

Publishing group Red Ventures announced it is buying CNET Media Group from ViacomCBS for $500 million.

“Town Sports International Holdings Inc., the parent company of New York Sports Clubs and Lucille Roberts gyms, has filed for bankruptcy after facing debt coming due this fall as well as reduced cash flow and liquidity due to coronavirus-related closures.”

Around a dozen states are joining in on the Justice Department’s expected antitrust suit against Alphabet’s Google.

Alibaba is weighing a $3 billion investment into Southeast Asian ride-hailing app Grab.

“Merck & Co. said it is investing $1 billion in Seattle Genetics Inc., as the companies collaborate on developing and selling Seattle Genetics’ breast-cancer treatments.”

A Couple Cents Featured

Justin Oh dishes on the sudden popularity of short-term options and how trading by small investors may be causing or exacerbating huge pumps in the market.

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