The SEC, Nikola Motors, Steve Cohen, The New York Mets, Kraft Heinz and $SNOW

The SEC examines Nikola Motors, hedge fund billionaire Steve Cohen buys the New York Mets and Kraft Heinz announces cost-cutting.
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(By Frank Romeo)
(By Frank Romeo)

Good morning! Today’s word count is 1,876 words, or an 8-minute read. Let’s get to it:

“The Dow industrials and S&P 500 ticked up Tuesday as tech shares continued to climb in the wake of a flurry of M&A activity in the sector,” WSJ writes.

  • S&P 500: $3,413.90
  • Nasdaq: $11,203.19
  • Bitcoin: $10,818.67
  • 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: $SNOW

Let’s revisit Snowflake ($SNOW) now that more information has come out about it. We now know that the IPO is pricing much higher than before, valuing the company at $30 billion, more than double its latest private valuation of $12.4 billion. If you assume it continues its growth, the company is valued at an astronomical 52x next year’s gross profit. But we now also know that Salesforce and Berkshire Hathaway are taking considerable stakes in the company at the IPO price, with Berkshire’s stake worth $674 million. I am starting to see how great its product is; clearly, Berkshire’s portfolio companies are considering using Snowflake for their cloud needs and, heck, even my company is considering buying the product. Even though the valuation makes me queasy, sometimes, we just have to get on the train and hold on for dear life. I’ve added this to the ROIC Big Board as a growth stock, and, if we can get in at anywhere around the IPO price of $110 per share, I’d probably make this a 3-5 percent position for a very long-term hold.

SEC to Investigate Short-Seller’s Claims Against Nikola, Report Says

After a Sept. 10 report from Hindenburg Research captured Wall Street’s attention, the SEC is “examining Nikola Corp. to assess the merits of [Hindenburg’s] allegations that the electric-truck maker deceived investors about its business prospects.”

Why It Matters

Nikola rose to public stardom out of relative obscurity.

  • The electric truck company, founded by Trevor Milton, 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.
  • Last week, General Motors took a $2 billion stake in Nikola, committing to manufacture the startup’s debut electric pickup truck — the Badger.

Hindenburg alleged it has all been a sham. (From Morning Cents 9/11)

  • In the report, Hindenburg said it found “extensive evidence,” including recorded phone calls, text messages and private emails that suggest Milton has made “dozens of false statements” over the years.
  • The research firm alleged Nikola engaged in several deceptive practices such as overhyping the capabilities of its electric semi-truck and filling its multibillion-dollar order book “with fluff,” also pointing to crucial partners and backers “cashing out aggressively.”
  • Hindenburg also said Tesla’s ongoing success “pressured” GM to make a deal with Nikola to increase its exposure in the electric-vehicle industry.

Hindenburg did have a lot to gain from Nikola’s tumble.

  • The research firm has a short position in Nikola shares, which fell 11.7 percent in post-market trading Monday.
  • Nikola has vehemently denied the accusations, “accusing the short seller of making misleading statements that were designed to manipulate its shares.”

It’s too early to say whether any of the claims are substantive.

  • The SEC routinely examines short-seller claims, and there’s no guarantee the agency will launch a full investigation or that there will be any allegations of wrongdoing.
  • On Monday, Nikola released a statement saying it “proactively contacted and briefed” the SEC last week regarding the report.

Numbers To Consider

  • Nikola stock opened at $33 Tuesday with a market cap of $12.61 billion.

Justin Oh’s Two Cents

From Morning Cents on Sept. 11, 2020

  • “If it sounds too good to be true, it usually is.” When I see a hype man that’s a slick talker but inconsistent with the numbers or true business rigor, I get very skeptical. 
  • “Where there’s smoke; there’s fire.” When we see rumors or reports of wrongdoing, inconsistencies, fraud, or exaggeration, it doesn’t always mean the allegations are true. But when there are accusatory claims, especially multiple, it usually means there’s a fire there, and I don’t want to be caught in it. Hopefully, you all saw me personally calling out Nikola’s smelly smoke back in May.

Read More: (BLOOMBERG)

Steve Cohen Reaches Deal to Buy the New York Mets

Steve Cohen’s lifelong dream just came true. Cohen, a Long Island native, Mets fan and hedge fund billionaire, reached an agreement to buy the New York Mets, valuing the team at roughly $2.42 billion.

Why It Matters

It took two tries.

  • Cohen already owns 8 percent of the team but tried to purchase an 80 percent stake in the club last year at a $2.6 billion valuation.
  • But Cohen and the Wilpon/Katz Families couldn’t reach an agreement on who would control the team during a five-year transition period, and the deal fell apart.
  • SNY, the regional sports network owned by the Mets organization, reported isn’t part of the new deal.

Cohen would become the wealthiest owner in baseball.

  • With a net worth of $14.5 billion, Cohen immediately becomes the most deep-pocketed owner in Major League Baseball, according to Axios. He’s second among all sports behind Steve Ballmer ($69 billion).
  • Though, Cohen’s finance career is marred by an SEC investigation into his firm S.A.C. Capital Advisors, which pleaded guilty to insider trading charges in 2013, paid $1.8 billion in penalties and lost its ability to handle investments for outsiders.

Even in the middle of a pandemic, sports franchises continue to be an extremely lucrative long-term investment vehicle.

  • The Mets were losing roughly $50 million annually before Covid-19. But those losses pale in comparison to the 519 percent ROI the Wilpons make with this deal. They purchased the Mets for $391 million in 2002.
  • According to Statista, the average MLB franchise value has grown from $286 million in 2002 to $1.85 billion in 2020.

There’s one hurdle left to cross.

  • At least 23 of MLB’s 30 owners must approve the deal, which will likely occur in November.
  • Some of the group could “be alarmed by Cohen’s vast resources and his ability to single-handedly outspend them and raise player salaries in general.”
  • But $2.42 billion sale price of the Mets, which tops the $2.15 billion paid for the Dodgers and surrounding real estate in 2012, will inherently increase other clubs’ value.

Numbers To Consider

  • Cohen will wind up with nearly a $200 million discount between the two efforts to buy the club.
  • The Katz and Wilpon Families plan to retain 5 percent of the Mets.
  • The currently fourth-place Mets could lose $200 million this year as MLB recovers from a Covid-19-shortened season.

Justin Oh’s Two Cents

Steve Cohen is notorious on Wall Street and made a fortune through his hedge fund S.A.C. Capital. S.A.C. went through several criminal investigations for insider trading, and Cohen had to stop taking outside investments and turn S.A.C. into a private office, now called Point 72. Having worked in the industry and at a direct competitor, I’d say his reputation is mixed. He is clearly a super successful investor and billionaire, but his legacy is tarnished by his company’s cutthroat culture and obvious insider trading crimes.

Read More: (SPORTICO)

Number Crunch: Kraft Heinz Plans Cost Cuts

Kraft Heinz Co. is planning to cut $2 billion in costs over the next five years as it tries to balance increased Covid-19 driven sales with a loss in market share.

  1. Kraft Heinz chief executive Miguel Patricio says he plans to use some of the savings to “re-energize sales of certain brands,” increasing marketing spending by 30 percent overall.
  2. The company posted a loss in the second quarter after recording $2.9 billion in impairment charges in July. It all comes after Kraft Heinz had reduced the value of its assets by almost $17 billion last year.
  3. The strategy dates back to when Kraft and Heinz first merged in 2015. Executives spent several years removing around $1.7 billion in annual costs through job reductions, lower administrative costs, procurement savings and other means.
  4. Kraft Heinz shares opened at $31.87 Tuesday with a market capitalization of close to $40 billion, according to Yahoo Finance.

Breaking: Kraft Heinz is nearing a deal to sell a big chunk of its cheese business to France’s Groupe Lactalis for around $3.2 billion.

Justin Oh’s Two Cents

Kraft Heinz ($KHC) is a stock I definitely do not want to own. It produces strong cash flows, but it’s a stagnating and declining company that will undoubtedly be pressured by the continuous trend towards craft, local, organic, and healthier foods. I categorize this as a “slowly sinking giant.” Owning the stock will probably get an investor a good enough yield, but I’d rather own Verizon ($VZ) or Oracle ($ORCL) with similar free cash flow yields but with better future business prospects.

Read More: (WALL STREET JOURNAL)

Worth Your Time

Streaming Wars Escalate: Netflix. Amazon. Disney. AT&T. Comcast. And now, ViacomCBS? The company, created by Viacom and CBS’s merger, is preparing to shift to the streaming big leagues as it announced plans to rebrand and expand its CBS All Access service as Paramount+. The new platform will leverage the substantial catalog created by last year’s ViacomCBS merger and aims to launch early next year. (WALL STREET JOURNAL)

Inside The Oracle Saga: “Oracle is one of the most lucrative but unflashy companies in Silicon Valley, a provider of business software and consulting services. Now, it is poised to become the U.S. partner for TikTok, the smash Chinese social-media app that has become a staple on the smartphones of millions of American teenagers. The emergence of this oddball alliance is the latest twist in six weeks of negotiations that bear little resemblance to regular deal talks, driven by U.S.-China tensions, commercial rivalries and President Trump’s personal interventions.” (WALL STREET JOURNAL)

Tidbits

NBCU’s Peacock streaming service crossed the 15 million user milestone, up from 10 million at the end of the second quarter.

With Oracle named the winner of the TikTok race, the short-form video app’s U.S. future now rests in the hands of the Treasury Department, which said it would review the agreement this week.

“Sony has cut its estimated PlayStation 5 production for this fiscal year by 4 million units, down to around 11 million, following production issues with its custom-designed system-on-chip for the new console.”

Citigroup will resume cutting jobs starting this week, putting an end to a pledge it made with rivals, such as Wells Fargo, to pause staff reductions during the Covid-19 pandemic.

“Productivity software company Airtable has raised $185 million in Series D funding from existing investors at a valuation of about $2.6 billion.”

Swedish fintech startup Klarna raised another $650 million from investors, putting its valuation at $10.65 billion.

“A planned $765 million U.S. loan for Eastman Kodak Co. to produce drug ingredients is under review by the inspector general of the agency that helped put together the deal.”

“Chamath Palihapitiya’s SPAC Social Capital Hedosophia II will acquire Opendoor, an online marketplace for buying and selling houses,” valuing the company at $4.8 billion.

“China’s economic recovery accelerated in August, with retail sales, the last holdout among the economy’s major components, returning to pre-coronavirus levels by showing their first month of growth this year.”

“Walmart’s Flipkart says it will hire 70,000 workers ahead of an Indian online shopping festival during the country’s fall holiday season.”

A Couple Cents Featured

Justin Oh breaks down Oracle’s winning bid in the race for TikTok’s U.S. operations and why it isn’t a real purchase of the business and more like a technology contract and partnership.

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