Good morning! Today’s word count is 1,747 words, or a 7-minute read. Let’s get to it:
“The Dow and S&P 500 dropped after the Labor Day holiday as investors remained jittery about recent falls in giant tech stocks. Shares in electric-car maker Tesla fell about 15%,” WSJ writes.
- S&P 500: $3,364.91
- Nasdaq: $11,050.52
- Bitcoin: $10,121.87
- U.S. 10-Year: 0.669%
Justin Oh’s Quick Read: Short-Term Options
I read some scary write-ups about how short-term options buying might be causing hyper-buying effects, where someone buying $1,000 of options can cause market makers to buy $100,000 to $200,000 of the stock to hedge. This could be contributing to the amplification of run ups in hot stocks with heavy short-term options buying from retail investors. Regardless of the exact dynamic, we know artificial mechanisms have pushed some growth and tech stocks miles past their intrinsic value. Last week, we discussed how the market hasn’t looked this overvalued at a 26x forward price-to-earnings (P/E) ratio since 2000. It terrifies me to see anecdotal echoes of the Dot Com Bubble, where uneducated speculators are talking feverishly about hot stocks. I will most likely be reducing the ROIC Big Board equity exposure down even more throughout this week.
Shopify is One of the Biggest Pandemic Winners
“The coronavirus pandemic has forced many small businesses to finally open online stores—and turned e-commerce software provider Shopify into one of the biggest winners of the retail shakeout,” WSJ writes.
Why It Matters
E-commerce was expected to grow, but not this quickly.
- Worldwide retail e-commerce sales totaled roughly $3.5 trillion in 2019, according to Statista.
- As millions of small businesses were forced to adapt, U.S. e-commerce sales surged 37 percent to $200 billion in the second quarter, according to the Commerce Department.
- The forecast for global retail e-commerce sales is expected to reach $4.2 trillion this year and $6.5 trillion by 2023.
Shopify’s platform has been an ease-of-use boon for established brands and small sellers.
- The platform provides an easily customizable online storefront, mobile application, payment processing and shipping calculations.
- Brands such as Vera Bradley, Kylie Cosmetics and Allbirds use Shopify’s technology to sell directly to consumers.
Shopify’s value has skyrocketed.
- Shopify’s stock-market value has since tripled from its March low, reaching almost $117 billion, and revenue nearly doubled to $714.3 million in Q2 as the number of new stores on Shopify jumped up 71 percent.
- It’s now worth more than eBay, Etsy, L Brands, Best Buy, Gap, Dick’s Sporting Goods, Kohl’s, Urban Outfitters, Nordstrom, Foot Locker, Macy’s, American Eagle Outfitters and Bed Bath & Beyond combined.
- However, Shopify still earns a fraction of other retailers’ sales or profits, such as eBay or Target.
Other online merchants are reaping the benefits.
- Crafts marketplace Etsy added 4 million new users in April.
- The amount of money stored in payment processor Square’s app reached $1.7 billion in Q2.
Easy to use or not, small businesses may fall victim to retail giants in the end.
- “Analysts say there are concerns about how many small U.S. businesses will survive the economic crisis and whether giants such as Walmart Inc. and Amazon will continue to capture more of Americans’ retail spending.”
Numbers To Consider
- Shopify’s stock opened at $920.91 Monday.
- The platform has roughly 1.3 million merchants on board.
Justin Oh’s Two Cents
$SHOP trading at 33x 2021 estimated sales and 340x 2021 estimated EBITDA is a prime example of a growth company that’s far overextended. These types of stocks will be the most hurt on a market retreat. But there are growth diamonds in the rough, and I’m pretty happy about our performance with $PTON for those of you that followed me into that one.
Read More: (WALL STREET JOURNAL)
Pentagon Sticking With Microsoft For JEDI Cloud Contract
Microsoft scored a significant victory in D.C. on Friday as the Pentagon opted to stick with the tech giant on a massive cloud computing project that has been disputed in court over the last few months. The Joint Enterprise Defense Infrastructure (JEDI) deal has become one of the most hotly contested Department of Defense contracts.
Why It Matters
It’s a big undertaking, with a massive payday.
- The project intends to modernize the Pentagon’s “colossal” IT infrastructure.
- The scope is so vast the deal could be valued as high as $10 billion for services rendered across as many as ten years.
- The contract was initially set to be awarded in September 2018.
It’s a substantial loss for Amazon, which didn’t think the process was fair.
- In November, Amazon Web Services filed a federal lawsuit protesting the JEDI decision.
- “The company argued that President Donald Trump’s bias against Amazon and its CEO, Jeff Bezos, influenced the Pentagon to give the contract to Microsoft.”
- As the legal battle raged on, the Pentagon invited Amazon and Microsoft to “revise and resubmit” their proposals.
The Trump-Bezos conflict is well-documented.
- In a book from former Defense Secretary James Mattis, the president allegedly told Mattis to “screw Amazon” out of the contract.
- Trump has also criticized the Bezos-owned Washington Post for the coverage of his administration, as well as claiming Amazon doesn’t pay its “fair share of taxes” and has negatively impacted the U.S. Post Office.
- However, the Pentagon’s inspector general released a report earlier this year saying the White House did not appear to sway the decision, though limited cooperation prevented a complete assessment.
Amazon is not done fighting.
- On Friday, the company ran a blog post saying it will continue to ”seek a review of the situation and that the Pentagon’s re-evaluation of the companies’ proposals simply validated the original decision to go with Microsoft.”
- The contract remains on hold, pending the outcome of Amazon’s legal challenge.
Numbers To Consider
- Amazon Web Services generated $35 billion in revenue in 2019, while Microsoft’s cloud computing business earned $12.5 billion.
- Amazon stock opened at $3,137.68 Monday morning.
- Microsoft shares kicked off the week at $206.63.
Justin Oh’s Two Cents
This is obviously good for $MSFT, who, along with $GOOG, is trying to dethrone the almighty $AMZN’s Amazon Web Services in the commercial arena. But since they’re among my top Capital Compounders, we should be holding all three stocks, so if one wins from the other, hopefully, it should be net neutral to the portfolio.
Read More: (CNBC)
Number Crunch: GM Takes Stake in Nikola and Partners on Pickup Model
Fresh off its collaboration with Honda, General Motors has taken a significant equity stake in Nikola and agreed to work with the electric vehicle manufacturer to engineer and manufacture its Badger pickup model.
- GM bought $2 billion worth of shares in Nikola, roughly 11 percent of the company. The position gives GM the right to nominate one director to Nikola’s board.
- The news caused both companies’ shares to soar in premarket trading. Nikola’s stock surged as much as 50 percent and came back down to nearly 30 percent, while GM jumped up as high as 9 percent.
- Nikola has yet to generate any meaningful revenue but gains credibility by partnering up with GM. In total, GM expects to receive more than $4 billion in “perks” from the deal. The Detroit-based automaker will be paid to manufacture the Badger and supply batteries and fuel cells to Nikola in addition to the equity value of the shares.
- Nikola unveiled the Badger in February of this year, started taking pre-orders from buyers in June, and expects to begin production by the end of 2022.
- Before Tuesday, Nikola had a $13.5 billion market value, while GM was at $42.9 billion, Ford at $27 billion and Tesla at $390 billion.
Justin Oh’s Two Cents
This seems like a good idea for GM. They’re receiving $4 billion in value and notably 11 percent ownership of a potential moonshot like Nikola, all in exchange for some production and low margin services, which they have plenty of capacity for. Ford already has an investment with Rivian. If you’re still itching to gain exposure to electric vehicle sales, Ford ($F) and GM ($GM) could be more-reasonable ways to do so since they’re trading at under 12x EBITDA. Just remember there will be significant pain in all autos if we enter a real consumer-felt recession without stimulus checks.
Read More: (BLOOMBERG)
Worth Your Time
Mo’ Money Mo’ Problems: Boeing has a problem, which is not the 737 MAX. The planemaker told regulators that certain parts produced at its 787 Dreamliner factory in South Carolina failed to meet its own design and manufacturing standards, with quality-control lapses spanning back almost a decade. As a result, the FAA is considering mandating enhanced or accelerated inspections that could cover hundreds of jets. (WALL STREET JOURNAL) (Shortly after this ran, news of another production problem at Boeing emerged.)
Bike Faster: Peloton surged through the pandemic, seeing its fiscal Q3 sales rise 66 percent and earn $524 million in revenue, according to CNBC. It’s connected subscriber base now exceeds 1 million. With all of that in tow, Peloton aims at grabbing a more significant share of the fitness market. The eight-year-old company plans to expand its product lineup and institute a near 25 percent price drop on its core exercise bike. (WALL STREET JOURNAL)
Level Playing Field: “China is launching its own initiative to set global standards on data security, countering U.S. efforts to persuade like-minded countries to ringfence their networks from Chinese technology…Chinese Foreign Minister Wang Yi cited growing risks to data security and what he characterized as efforts to politicize security issues and smear rival countries on technology matters—in an apparent swipe at Washington…Beijing’s initiative comes amid heightened tensions with Washington over issues including trade and technological competition, which has raised the specter of an increasingly bifurcated internet.” (WALL STREET JOURNAL)
Thanks to massive discounts and new-model debuts, China’s car sales grew at their fastest rate in more than two years.
The CEOs of nine drug-making companies announced Tuesday they signed a pledge promising not to file for regulatory approval on Covid-19 vaccines until they’ve been shown to work safely in late-stage testing.
Boston-based developer tool company Progress announced it was acquiring software automation platform Chef for $220 million.
Mollie, a Dutch payment processor, has raised $106 million in its latest funding round, giving the company a valuation north of $1 billion.
Private equity firm Silver Lake led the way in Indian online learning platform Byju’s most recent $500 million round of financing.
Singapore-based startup Thunes, which is developing a cross-border payment network for emerging markets, announced it raised $60 million in Series B funding.
“TikTok-owner ByteDance is paying a half-month bonus to employees as its 60,000-strong workforce faces uncertainty about the fate of its global hit video-sharing app.”