Good morning! Today’s word count is 2,000 words, or a 10-minute read. Let’s get to it:
Market Summary (11:45 A.M. ET): “Tesla is among companies slated to report quarterly earnings, which will give investors insights into how businesses are weathering the economic downturn,” WSJ writes.
- S&P 500: $3,434.55 (-0.25%)
- Nasdaq: $11,487.21 (-0.25%)
- Bitcoin: $12,700.25 (+14.86%)
- Gold: $1,927.70 (+0.64%)
- U.S. 10-Year: 0.805%
Justin Oh’s Daily Read
Many folks have asked about my experience and career path to learn how I advanced in the Wall Street and corporate industries. And it bears going over for everyone else, so you know the qualifications of who’s doing the investment analysis here.
Justin B. and I are doing this because there’s a shortage of qualified, non-sensationalized, quality business and investing analysis out there. Wall Street corporate finance professionals have high-paying careers with SEC regulations that don’t allow them to publish many opinions publicly. And also, in reality, many of these professionals aren’t actually that great at investing decisions; many are stuck in dogmatic frameworks or don’t synthesize the quantitative with the overall qualitative factors.
Without access to investment banking equity research, many are left with Seeking Alpha, Motley Fool, or other outlets that contract out articles to random writers that aren’t qualified enough to get a Wall Street job. I dream of growing this community large enough to afford a team of high-quality analysts for us, but for now, it’s just a labor of love outside my day job. So please do spread the word so we can keep adding great content for everyone!
I’m going to start from the very beginning since some of our readers are still in college wanting to break into Wall Street.
As Snapchat Nears A User Milestone, Netflix’s Growth Slows
User growth, the return of ad-spending and more people spending time online and on mobile devices due to the coronavirus pandemic propelled Snap Inc. to prosperous results in the latest quarter, WSJ reports.
A Quarter Billion: Snapchat ended the September quarter with a daily active user base of 249 million, an increase of 11 million users.
- User growth surpassed analysts’ projections, and Snap said it “continues to see strong engagement among Gen Z and millennial users in the U.S., the U.K. and France” even with a strong year from Facebook’s networks and TikTok’s rise.
Snap posted a 52% increase in quarterly revenue to $678.7 million, mainly driven by advertisers resuming or increasing their marketing budgets during the quarter.
- Snap’s share price rose around 20% in after-hours trading to $35. As of Tuesday’s close, it has gained about 74% on the year.
CEO Evan Spiegel said “that he was pleased with the company’s growth in the period and that it will continue long-term investments on things including augmented reality for its app.
With competitors ramping up and rolling out their own streaming services and the coronavirus pandemic continuing to disrupt the movie and TV business, Netflix’s subscriber growth slowed in the third quarter, WSJ reports.
The streaming giant fell short of its growth projections from July, adding 2.2 million subscribers (on a net basis) instead of the 2.5 million forecasted.
- The numbers signal the end of a hot streak for Netflix. The company had signed up roughly 26 million subscribers over the previous two quarters, nearly as many as the company added in 2019.
Netflix still increased profits to $790 million from $665 million. But on a per-share basis, the company $1.74 a share instead of what analysts expected to be $2.13 a share, according to FactSet.
Fourth-quarter projections are down, relative to 2019. Netflix expects to add around six million subscribers compared to 8.8 million from the same period last year. It also is anticipating a slow first six months of 2021.
But even though Covid-19 has created production challenges, Netflix isn’t in danger of running out of content, and CEO Reed Hastings said 2021 would feature more original content than 2020 did.
- Netflix also expects to cross 200 million subscribers worldwide this year.
Suppose you assume Snapchat ($SNAP) keeps growing revenues at a 50% clip and expands gross margins as expected, which are aggressive assumptions. In that case, the company is trading for 24.7x 2021 Gross Profit, which is still very expensive.
Given I don’t love Snapchat’s trajectory in terms of product and user popularity, I think there are downside risks from them missing growth expectations over the long-term.
Netflix ($NFLX) has a more robust business but is being competed with aggressively on the content and product offering side. They’re expected to grow 15-20% and are trading at 19x forward Gross Profit, which is still too high for me given how many behemoths are coming for their lunch.
By comparison, Facebook ($FB) is expected to grow 20%+ per year and is trading for 9.2x 2021 Gross Profit. Square ($SQ) and Peloton ($PTON) are expected to grow at 25% to 30% per year or more and are trading at 17x forward Gross Profit. I’d feel more comfortable with these plays; $FB is more dominant and much cheaper, and $SQ and $PTON have secular trends with less competition going for them.
Jack Ma’s Ant Receives China Approval for IPO in Shanghai
Jack Ma’s Ant Group is one step close to its public offering after China’s securities regulator gave the burgeoning FinTech firm the greenlight, Bloomberg reports.
Ant Group is planning a dual listing on Shanghai’s STAR Market and the Hong Kong stock exchange, which Hong Kong regulators reportedly approved earlier this week.
Larger Than Life: Ant Group is seeking to raise $35 billion between both exchanges. If successful, it would be the world’s biggest IPO ever.
- Saudi Aramco raised a record $29 billion last year.
At that price, Ant Group could have an IPO valuation of around $280 billion. For context, that would value Ant larger than PayPal (PYPL), Intel (INTC), Netflix (NFLX) or Nike (NKE).
Ticking Clock: Based on the timing of the approvals, Ant could hit the market next week, which is important for two key reasons:
- Ballot-counting delays in the upcoming U.S. election could “spark prolonged market volatility.”
- While both President Donald Trump and Democratic Nominee Joe Biden have taken hard stances against China, Trump’s administration is already considering restricting Ant Group and other Chinese technology companies over “perceived national security risks.”
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.
Google’s Exclusive Search Deals With Apple at Heart of U.S. Lawsuit
“Google’s partnership with Apple is at the heart of the U.S. Department of Justice antitrust lawsuit claiming that the Alphabet Inc. unit misused its power in an anti-competitive manner, potentially threatening a major revenue stream for both tech giants,” WSJ writes.
Google spends roughly $11 billion annually to be the default search engine on iPhones. As a result, users are fed Google search results and related advertising when using Apple’s Safari browser.
- That equates to about a third of Alphabet’s profits and as much as 20% of Apple’s revenue.
- Apple-originated search traffic comprises almost half of Google’s search volume.
The Government Says: “Securing the prime piece of real estate in the Apple ecosystem has had the effect of denying competitors the ability to compete.”
- Citing public data sources, the lawsuit says Bing holds roughly 7% of the search market compared to Google’s 88%.
- A recent House subcommittee report targeted Big Tech as a whole, claiming Apple too was misusing its power over the iPhone ecosystem.
Mounting Evidence: The Government says “that Apple CEO Tim Cook and Google’s CEO Sundar Pichai—neither of whom are named in the lawsuit—met in 2018 to discuss how the companies could work together to drive search-revenue growth.”
- According to the lawsuit, a senior Apple executive followed up saying: “Our vision is that we work as if we are one company.”
- The companies didn’t comment on the meeting. Apple and Google previously had a tense relationship after Apple’s late co-founder Steve Jobs and former Google CEO Eric Schmidt had an evident fallout.
Google plans to fight the lawsuit, which is expected to “drag on” for years.
A ban on making Google the default search engine on iPhones would definitely be a drag, but could a workaround make iPhone users pick their preference as they do on a PC? PCs come loaded with Microsoft Edge browsers, but so many people still choose to download Google Chrome.
I don’t believe this to be fundamentally damaging to an investment in Google ($GOOG) as a long-term capital compounder. Still, it could be a mid-term challenge to overcome. Being the default is additive, but not 100% of their competitive advantage. People choose to search with Google at the end of the day because they are the best at search.
What’s Going On
Hey everyone! Cents’ own Justin Birnbaum wrote a piece for Forbes today on the Covid-19 safe changes at UBS Arena, the $1 billion arena soon to be home to the New York Islanders. Check it out!
Playing The Payment Game: “JPMorgan Chase is making a play to sell more services to millions of American small business owners, pushing into an area pioneered by fintech firms including Square, PayPal and First Data, CNBC has learned. The bank is rolling out a checking account that is paired with a new fintech-inspired service called QuickAccept, according to JPMorgan executives. QuickAccept lets merchants take card payments within minutes, either through a mobile app or a contactless card reader, and users will see sales hit their Chase business accounts on the same day.”
Qui-Bye: “Jeffrey Katzenberg may be nearing the end of the road with his mobile video streaming service Quibi. He recently tried to sell its catalog of programming to companies such as NBCUniversal and Facebook. Both passed, according to several people familiar with the matter. Meanwhile, Katzenberg has told people in the industry that he may have to shut down the company, according to one person who spoke to him.”
Raising The Roof: RVShare raised more than $100 million to expand its RV rental business, Anyscale added $40 million to “bring its Ray-based distributed computing tech to the enterprise masses,” Synthetaic collected $3.5 million to create data that can be used to train artificial intelligence and Mindlabs pulled in £1.4 million to build a platform nicknamed a “Peloton for mental health.”
Settled Story: “The Justice Department reached an $8.34 billion settlement with OxyContin-maker Purdue Pharma LP, the agency said Wednesday, helping clear the way for the bankrupt drugmaker to turn over future profits to cities and states that accuse it of fueling the opioid crisis.”
Stimu-Hopes: “White House and Democratic negotiators said they would press ahead with efforts to reach a sweeping coronavirus relief deal after making progress Tuesday, even as the prospect of a roughly $2 trillion package sparked opposition from Senate Republicans.”
Chip Shakeup: “Chinese technology companies including Huawei Technologies Co. have expressed strong concerns to local regulators about Nvidia Corp.’s proposed acquisition of Arm Ltd., people familiar with the matter said, potentially jeopardizing the $40 billion semiconductor deal.”
Rideshare Revamp: “Uber is considering an overhaul of its business in California if voters reject a ballot measure that would prevent the ride-hailing company’s drivers from being classified as employees.”
Lofty Goals: “IBM hopes to double sales at its Red Hat open-source software unit in the next three years as Chief Executive Arvind Krishna aims to restore growth at the tech titan.”
Vax Prep: “Like other drugmakers testing potential vaccines, Pfizer is urgently laying the groundwork with its logistics partners so it can move quickly if its vaccine gets the go-ahead from the Food and Drug Administration and other regulators around the world.”
Health Spending: “Nestlé said the pandemic has increased consumers’ health consciousness, boosting its small but fast-growing health-sciences unit and contributing to better-than-expected overall sales at the world’s largest packaged-food maker.”
Bringing Down The House: “Homebuyer demand is incredibly strong compared with last year, but there appears to be a slight pullback this month.”