Good morning! Today’s word count is 2,040 words, or a 10-minute read. Let’s get to it:
“Investors’ confidence has been crimped by elevated levels of new coronavirus infections in the U.S. and Europe, as well as signs that the global economic recovery is slow and uneven,” WSJ writes.
- S&P 500: $3,256.06
- Nasdaq: $10,762.96
- Bitcoin: $10,615.52
- U.S. 10-Year: 0.656%
Also, be sure to enter the new, weekly giveaway in Morning Cents every day.
Justin Oh’s Quick Read
Here’s a three to twelve-month “value” play that looks potentially attractive. It seems as if the pandemic-led economic hardship isn’t being felt by much of the middle-to-upper class. We see evidence of this in home purchases, e-commerce, and recreational spending. Consumers have increasingly gravitated towards outdoor activities (even seen with the “Van Life” trend!). One *cyclical* theme that looks interesting right now is boating. The pandemic and cheap credit has attracted many more people towards boating and increased demand for boats. These tailwinds could be long-lasting, too, if the first-time boaters are converted into loyal, lifelong boaters. The boating stocks have also traded down recently as the summer season ends and momentum traders exit positions. If you believe we’ll see continued strength in middle-to-upper class consumption and that the pandemic’s effects will last into 2021, then now might be a good time to build a position in the thesis and could potentially outperform a tech-heavy selloff. But the risk is that these are high-ticket discretionary products that will see a hit if middle-to-upper class consumer spending weakens. For a riskier, cyclical, and vulnerable sector, I would want meaningful potential upside. My preferred play from first glance would be OneWater Marine ($ONEW), one of the largest recreational boat retailers, with a $28-30 stock price target representing 40 percent+ upside, based on a 5.5x to 6.0x 2021 EBITDA target where peer MarineMax ($HZO) trades. With dealer inventories are at historic lows and a robust upcoming replenishment cycle, manufacturers like Malibu Boats ($MBUU), Brunswick ($BC), and MasterCraft ($MCFT) could be exciting stocks. Still, I think they’re trading around through-cycle average multiples and probably don’t offer enough upside to get me interested.
Spotify, Chernin Entertainment Sign First-Look Film and TV Deal
Spotify has found its next frontier, announcing it has agreed to a first-look deal with Chernin Entertainment. The agreement gives Chernin the right to “mine” Spotify’s library of original content for potential film and TV projects.
Why It Matters
Spotify has invested heavily in its podcast business, and this could be a new way to derive value out of its content.
- The company has spent hundreds of million dollars acquiring podcast studios such as The Ringer and Gimlet Media to draw new users and advertisers.
- Spotify built a large portion of its business on the music side but is looking to diversify revenues as songs carry high royalty costs.
Chernin has quite the resume.
- The production company has been behind critically-acclaimed films such as “Ford v Ferrari,” “The Greatest Showman” and “Hidden Figures.”
- It also produced “New Girl,” which ran 146 episodes over seven seasons on Fox.
- Earlier this year, the company signed a deal to produce movies for Netflix.
Now, it’s a constant grind to find commercially successful intellectual property.
- “With the Chernin deal, the company is looking to turn its library into valuable new stories for Hollywood, much like comic books have for Walt Disney Co. and Warner Bros.”
- It’s a natural transition for podcasts to become source material for video projects in the same way books and other written work has, creating a new, potentially lucrative revenue stream.
- Gimlet had already seen a few of its podcasts become TV shows before Spotify acquired the company, including “Homecoming” on Amazon, starring Julia Roberts.
Numbers To Consider
- Spotify has a diverse content library with over 250 original series.
- The company has amassed around 299 million monthly active users, according to The Hollywood Reporter.
- Spotify’s stock opened at $233.98 Friday, with a market cap of $43.56 billion.
Justin Oh’s Two Cents
My thesis in Spotify ($SPOT) is still intact, but competition from Apple and Amazon is definitely intensifying. I am encouraged that Spotify isn’t resting on its app-experience laurels and is trying to keep its lead in audio by bringing big brands in-house and be creative with content partnerships. They’re making great strategic moves so far, which will be needed to fend off the blunt bundling of $AAPL and $AMZN. Hopefully, like me, you own more $AMZN than $SPOT anyways, so even if $AMZN eats $SPOT’s lunch, we should be fine in the long run.
Read More: (BLOOMBERG)
Catching Up on Amazon’s Fall Hardware Event
Amazon unveiled a slew of new technology products at its fall hardware event Thursday. Here are the highlights:
A Redesigned Echo Dot
- The popular smart speaker now features a spherical design and a few internal upgrades.
- (Cost: $99, Release: Oct. 22)
A Smarter Echo Show 10
- The smart display has a new motor in its base that automatically faces you as you move around.
- Amazon Prime Video and Hulu are already available on the device, but it’s also adding Netflix.
- (Cost: $249.99, Release: TBA)
The Luna Cloud Gaming Service
- Amazon unveiled its AWS-powered cloud gaming platform to position against Google’s Stadia and Microsoft’s xCloud.
- It’ll be available on Fire TV, PC, Mac and iPhone (via web app) at launch. Android support will follow soon after.
- Amazon revealed the Luna Controller to go with it, which will have “lower latency” when used with its “Cloud Direct” technology.
- (Cost: $49.99 — Luna Controller, Release: Early Access)
Ring’s “Always Home Cam”
- Ring is launching an autonomous security drone that can patrol your home independently and charge itself by returning to a special dock.
- (Cost: $249.99, Release: 2021)
A New Fire Stick
- Amazon’s latest fire stick has HD Streaming, Dolby Atmos and an Alexa Voice Remote, as well as a “lite” version with a simpler Alexa remote.
- There’s also a new user interface for Fire TV, launching later this year.
- (Cost: $39.99/$29.99 – Lite, Release: Sept. 30)
Ring Car Cams
- Ring is releasing a set of security cameras for cars — “The Car Alarm and Car Cam.”
- The company is also working on an API to integrate cars directly into Ring’s platform called Ring Car Connect.
- (Cost: TBA, Release: 2021)
- “Ring will offer end-to-end encryption for video footage for free to all users by the end of this year.”
- Amazon’s new AZ1 Neural Edge chip, co-developed with MediaTek, will allow Alexa to answer voice queries faster by processing them on the device.
- “Amazon showed off a number of machine learning-powered technologies to help Alexa better understand multiple people at once and ask clarifying questions if needed.” One demo helped two people order a pizza, and another showcased it understanding the difference between talking directly to Alexa and each other.
- To increase sustainability, all new wall-powered Echo and Fire TV devices will have a “low-power mode.”
- Amazon announced a more robust version of its free Alexa Guard security monitoring system called Alexa Guard Plus. It costs $4.99 per month.
Justin Oh’s Two Cents
I am very impressed with the Echo and Ring lineups and will probably make the switch myself from a Google Nest household to an Amazon Echo Alexa one. Amazon is increasing its user-experience lead with its product and machine-learning updates. It’s too early to tell if Amazon can crack the gaming market, so I don’t put any weight into Luna yet. But that drone security camera is creepy AF, though, eh?
Read More: (THE VERGE)
Number Crunch: Costco’s Sales Climb, Palantir Expected to IPO North of $20 Billion
“After stockpiling early in the coronavirus pandemic, Americans continue to turn to Costco Wholesale Corp. to buy bulk quantities of groceries and cleaning supplies. They have also been loading carts with home furnishing,” WSJ writes.
- Costco recorded a 14.1 percent increase in comparable sales for the quarter ending Aug. 30, excluding gas and currency effects. It’s close to double the growth Costco experienced during the spring quarter, where it struggled to keep up with out-of-stock items and placed limits on consumers.
- The company’s e-commerce sales almost doubled, jumping up 93 percent from a year ago. Costco has been slow to embrace online sales, but the pandemic-driven demand fueled its e-commerce business.
- Costco, which operates 795 stores in the U.S., Canada and a few other countries, posted total revenue of $53.38 billion for the most recent quarter. Its profit was $1.39 billion, an increase from $1.1 billion in the comparable quarter from last year.
Read More: (WALL STREET JOURNAL)
“Palantir Technologies Inc. is expected to fetch a lofty valuation in its transition to a public company despite an unusually aggressive governance structure, in the latest sign of investors’ voracious appetite for new shares,” WSJ writes.
- The data-mining-software company, which is going public through a direct listing, is expected to start trading near $10-per-share. At that price, Palantir would be valued at roughly $22 billion on a “fully diluted basis.”
- For its 2020 fiscal year, Palantir announced it anticipates revenue growth of 42 percent to around $1.1 billion. The company recorded a net loss of $579.6 million in 2019, and a similar number the year before.
- Palantir’s numbers improved in the first half of 2020. It lost $164 million compared to $274 million in the same period in the prior year. Since being founded in 2003, Palantir has raised more than $3 billion and was one of the highest-valued startups when a 2015 funding round raised its valuation north of $20 billion.
Read More: (WALL STREET JOURNAL)
Justin Oh’s Two Cents
A $22 billion valuation would imply a roughly 25x forward gross profit multiple. Given that this company has high-security risks and relies on a small number of government and corporate customers for growth, I don’t find it particularly attractive. For a similar B2B software play, I would rather buy Salesforce ($CRM) at $240, which has grown at 25 percent+ for the past 5+ years and continues to perform with amazing cash flows, at half the valuation of 11x forward gross profit.
Worth Your Time
Stalled Talks: House Democrats are preparing to propose a new, $2.4 trillion pandemic aid package that would include “assistance to airlines, restaurants and small businesses.” However, the White House said it could only support spending as much as $1.5 trillion, and a number Senate Republicans have said that number already high. While both parties recently reached an agreement to keep the government funded through December, Republicans doubt a deal for new stimulus is likely before the November presidential election. (WALL STREET JOURNAL)
Breakthrough Medicine: “Increasing evidence suggests that a significant minority of Covid-19 patients get very ill because of an impaired interferon response. Twin landmark studies published Thursday in the journal Science showed that insufficient interferon may lurk at a dangerous turning point in SARS-CoV-2 infections…The possibility that interferon may help some people is enticing because it appears most efficacious in the early stages of infection, when life-threatening respiratory failure could still be averted.” (BLOOMBERG)
Republicans on the Senate Commerce Committee scheduled a vote next week to decide whether to subpoena testimony from the CEOs of Facebook, Twitter and Google in the “latest GOP action against social-media giants.”
“Apple’s legal battle in Europe over a $15.2 billion tax bill will continue, potentially for years, after the European Union appealed a court ruling that sided with the tech giant.”
Climate change tech startups worldwide raised $16 billion last year, bringing the sector’s total funding to $60 billion since 2013.
ChargePoint, the world’s largest EV charging network operator, is going public in a $2.4 billion SPAC merger deal.
“Denmark’s latest proposal to reduce carbon emissions could see the price of a premium Tesla Model S rise by nearly a third.”
“The Tokyo Olympic organizing committee and the International Olympic Committee agreed to cut costs by simplifying next year’s games in 52 areas, including staffing and events.”
Tesla’s growth is generating more overseas interest in the electric vehicle space, and Chinese EV makers Xpeng and Li Auto are reaping the benefits in the form of additional investment capital.
Blue Cross Blue Shield tentatively agreed to pay out $2.7 billion as a settlement in an antitrust lawsuit alleging the group limited competition among its three dozen member companies.
The Pac-12 announced its fall sports return to action, with a shortened, seven-game football season starting in November.