Month: January 2021

GameStop Is Like A Soros Play

A week of blogs about GameStop – why not.

Reflecting on the GameStop mania, I feel it’s more like a macro trade, e.g. how Soros broke Bank of England in 1992.

1/ hedge funds are like the role of Bank of England facing Soros (retail investors, etc.). It’s almost certain that they cannot cover the shorts in the near term – just like BoE couldn’t support fixed exchange ratio.

2/ HFs didn’t realize that reflexivity is so important… they are analyzing the company as if they are the outsiders. But as people realize their short/put positions, they can support both GamStop’s real business and its stock. HF’s participation changes the real world itself. Also, people’s decision of holing GME stock also changes their purchasing behaviors.

3/ social medias (reddit, twitter trending, etc.) are now playing a role like Draghi’s “whatever it takes” speech. When expectation is set, people’s decision change as well – it becomes self-fulfilling.

Retail Investors & Those Stocks Unavailable For Them To Buy

Didn’t believe I have the 4th blog on the recent stock price surge in GameStop, etc.

But here are 3 things to say.

1/ Platform restrictions

Yesterday, some restrictions were put on those stocks by TD Ameritrade and Charles Schwab (also owns TD Ameritrade; acquisition announced in Nov 2019). Robinhood also increased margin requirement on those stock to 100%.

Today, nearly all major stock trading platforms put restrictions on those stocks. Robinhood, notably, won’t show search result for those tickers/companies and only allow order to sell those position, including GME, AMC, KOSS, BBBY, BB, NOK, EXPR, etc.

Robinhood is under the spotlight, for its name and its innovation and mission to democratize investing. (See Robinhood CEO interview video at the end)

2/ Options that are still in play

I did a little excel calculation, only for call options that expire tomorrow (Jan 29), Feb 19, March 19 and April 16.

If GameStop closes at $300 tomorrow, and assuming all future calls are settled – the call options’ net value would be about $4.4 billion in total, and ~$1.7 billion for Jan 29 options alone.

What’s more crazy – the underlying stock count for those in-the-money call options expiring tomorrow are close to 10 million shares or 19% of the floating.

If GME closes at $200 tomorrow, those call options are worth $2.2 billion at least.

If GME closes at $400 tomorrow, those call options are worth $6.7 billion at least.

And there are more call options in other dates.

3/ Who is broke (don’t know)

In interviews and articles by brokers, (Robinhood, Webull, Interactive Brokers, etc.), they talked about clearing house requirement, etc.

It could also be the counter-party risk from the other side of those call options – as the Interactive Brokers Chairman said “so if there are $10-15 billion loss in there, somebody has to pay them. will they be able to pay is a big question”.

Don’t think people want to see some market makers or brokers or investment banks broke.

But – guess someone is or might be broke.

Robinhood CEO interview

Some further reading…

Webull CEO

ANTHONY DENIER: Well, it wasn’t our choice. Our clearing firm gave us a call and said we’re going to have to stop allowing new opening positions in the three names, AMC, GME, and KOSS. Highly volatile, and what happens is this is not a political decision. And unfortunately, it got political. I think, you know, I think it was once said that don’t let any good crisis go to waste. And that’s clearly what’s happening here.

And we’re seeing politicians jump on the bandwagon so they can get– so they can start trending on Twitter. But in reality, what’s going on is that there is a two-day settlement between if you buy the stock today, those brokerage firms that you bought that stock on have to fund that trade with the clearing central house called DTC for two whole days. And because of the volatility of stocks, DTC has made the cost of the collateral of the two-day holding period extremely expensive.

And we just can’t afford– well, we’re not a clearing firm, but our clearing firm simply cannot afford the cost to settle those trades. We cannot use customer funds to front that cost due to regulation. So the brokerages or the clearing firms have to go into their own pockets to do it. And they simply can’t afford the cost of that trade clearance. That is the reason why these stocks are coming off. It has nothing to do with the decision or some sort of closed room cigar– smoke-filled cigar room of Wall Street firms getting together to the dismay of the retail trader. This has to do with settlement mechanics of the market.

And:

ANTHONY DENIER: …There is no way that a customer would not be able to sell a position they hold. We are simply stopping opening of new positions. Liquidations can happen at any time. This is general market mechanics. We have customer protections in place. We would never stop a customer from being able to get out of a position. But currently, we are stopping customers from getting into a new position. And that has to do with it possibly.

Robinhood blog

Amid this week’s extraordinary circumstances in the market, we made a tough decision today to temporarily limit buying for certain securities. As a brokerage firm, we have many financial requirements, including SEC net capital obligations and clearinghouse deposits. Some of these requirements fluctuate based on volatility in the markets and can be substantial in the current environment. These requirements exist to protect investors and the markets and we take our responsibilities to comply with them seriously, including through the measures we have taken today.

Starting tomorrow, we plan to allow limited buys of these securities. We’ll continue to monitor the situation and may make adjustments as needed.

To be clear, this was a risk-management decision, and was not made on the direction of the market makers we route to.

Market Should Work

Although I believe there is a turnaround story for GameStop (NYSE: GME) and short squeeze is smart, it seems that the impact is more negative today. GME closed at $347.51 per share at 4pm, more than 4x the closing price I mentioned in Monday’s post. The negatives come from a few things:

1/ the story is not relevant to fundamentals now – however the healthiness of a functioning market depends on its ability to return to fundamental (in the long run).

2/ too much volatility + ripple effect of funds scaling back will cause additional chaos in the entire market. Some unnecessary negative feedback loop might form.

3/ people who entered the “casino” late probably won’t do well…

This mania may alert future participants/regulator, but may also set a bad example for markets globally.

What I See From GameStop

The GamStop story is developing daily. I feel it’s not just about a reddit community. What I see is –

1/ Anti-establishment or anti-institution mood. People are getting excited about seeing those who are right most of time get things wrong (or they believe they see it)

2/ People really have the time and energy to unite and do “great project” or fight for a “mission”

3/ Tech vs. Wall Street – People love to see this story.

4/ I believe retail investors are just the cover-up. Some “smart money” is fighting other “smart money”.

More on 3/

The Case Of The Day – South Sea Company And GameStop

First last day of school for me!

In one of the courses today, we discussed the South Sea Company in 1720 in UK, when Sir Isaac Newton, representing “the smartest in the world”, didn’t do well in the stock market.

South Sea Company
Source: sovereignman.com

Also today, we saw news that Melvin Capital Management received $2.75 billion cash injection, as it has lost 30% in the first 3 weeks of 2021, due to its short bets including shorting GameStop (NYSE: GME). Melvin “had been one of the best performing hedge funds on Wall Street in recent years”, representing “the smartest of the smartest” in today’s world.

GameStop’s stock soared 245% in 2021 through Jan 22.

It closed at $6.68 on August 31, 2020, when Ryan Cohen revealed his 5.8 million shares purchase, or 9% stake. It closed at $76.79 today (Jan 25) – some 11.5x return if you buy at $6.68.

GameStop stock price in from Jan 19 – Jan 25 | Source: Yahoo Finance, author

The $2.75 billion cash includes $2 billion from Citadel and its partners, and $750 million from Point72. Melvin founder Gabe Plotkin was from Point72’s predecessor firm.

Takeaways:

1/ Predicting human behavior is much harder than physics or quarterly earnings.

2/ Leverage is the multiplier of actions.

3/ The “smartest” people might get it right – but lots of things can go wrong before that happens.

Seemingly Confusing Terms For China’s Preschools (Kindergartens)

I was reading several articles regarding kindergartens in China. The industry has changed a lot in the past few years, mostly related to regulations/policies and  RYB Education (NYSE: RYB). RYB has renamed itself as GEH Education.

One set of definition is around “for-profit” and “not-for-profit”, which is used in private education in general, not just for kindergartens.

Another definition is “affordable”. In an opinion document issued in November 2018, the target is that 80% of kindergartens should be “affordable”.

Nuances:

1/ Technically, “affordable” doesn’t equal to “not-for-profit”. Though it’s not surprising that some confusion may come. (seems to be a good and necessary public education)

The law around “for-profit” and “not-for-profit” is issued by Minister of Justice, and it defined based on legal definitions. “Not-for-profit” basically means the entity cannot distribute residual “profits”. The law itself, by defining “for-profit” private education, actually gives a boost in drawing investment.

“Affordable” is a term developed for policies. For kindergarten owners, it means to accept local government’s guidance on pricing while receiving grants or other help from local government.

In reality, local governments often require that “affordable” kindergartens are registered as “not-for-profit”.

2/ “Affordable” sounds like what parents might want – it indicates that the kindergarten is not expensive (?)

It should be. However, in certain circumstances, “affordable” also mean cost control, which leads to cutting the existing offerings/amenities, which parents might don’t want. And kindergartens might charge extra fees on top of the “basic” package.

3/ “for-profit” implies profits, IPO…?

Nonono.

Many kindergartens won’t be profitable if not with some form of government support.

And it’s not allowed for any public companies to invest or acquire kindergartens, whether it’s for profit or not.

4/ “not-for-profit” means no profits?

No.

I think this is actually the path that many policies would want – “not-for-profit” kindergartens that offers high quality services and can sustain itself. (like non-profit private institutions/universities)

PBOC’s Draft On Payment Regualtion

The most important clause is the definition of “dominant position” in the national e-payment market – over 50%, or over 2/3 for two companies, or over 3/4 for three companies.

The new regulation is only for nonbank payment service providers, like AliPay, WeChat Pay, etc.

The the most obvious outcome?

1/ In offline markets, it’s time for Meituan payment to grow.

2/ Meanwhile other internet companies will first grow their payment services within their ecosystem online. To name a few: JD payment, Pinduoduo payment, ByteDance’s payment, Kuaishou’s payment, Baidu’s Duxiaoman, Bilibili’s payment, etc.

3/ Traditional banks will be benefited. They can partner with internet companies and grow users. Related services can be provided via those internet companies, such as credit card, small loans, etc.

DoorDash Can Grow – But By How Much More Above $60 Billion

I did buy some DoorDash (NASDAQ: DASH) from the $140-150 level, but feel that potentials are priced in now.

To put some rough numbers –

DoorDash in 2020 Q3:

  • Active customers: 18 million
  • Total number of orders: 236 million
  • That’s around 1 order per week for each customer.
  • GOV: 7,252 billion
  • So $ per order = $30.7
  • Revenue: 879 billion
  • Take rate = 12.1%
  • Contribution Margin = 24.5%
  • Adj. EBITDA Margin = 9.8%

That’s a nice profit thanks to growing orders during covid (no marketing needed).

The question is how much of the growth will continue post-pandemic.

My guess is that GOV will continue to grow, due to

  1. Food delivery offers greater convenience & more selections – benefits that are not only tied to the pandemic (DashPass can become a food explorer’s subscription)
  2. DoorDash is inner-city-delivery-as-a-service and can expand to groceries & pickups from brick-and-mortar stores. It’s a way to revive every kind of physical retail.

Plus, it’s legit to argue that as delivery network density grows, the efficiency grows, and unit cost will drop.

That being said, let’s assume (post-pandemic, by 2022) total order number goes to 450 million/qtr so 1,800 million/yr (e.g. 30 million customer x 60 orders/yr)

$ per order goes up to $35.

GOV = $63 billion

With unchanged 12% take-rate, revenue = $7,560 billion

Adj. EBITDA = $1,512 billion (margin improved to 20%)

Then 40x adj. ebitda will give us a valuation of ~$60 billion. (which is DoorDash’s current valuation)

Clearly, multiples will depend on the market sentiment.

Some of the assumptions are not conservative I have to say, so I won’t expect some solid 50% return ($90bn valuation) from the current level in near term.

Fundings Versus $800 Billion Tesla & Top 5 US Tech All Have An EV Play

Following up on my post almost 2 years ago – fresh fundings are going to EV makers and autonomous driving.

The check sizes are big – you need billions of dollars to compete with the $800 billion Tesla.

1/ Microsoft + Cruise, $2+ billion

A new investor in the EV space – Microsoft (NASDAQ: MSFT) led the $2+ billion round for GM’s (NYSE: GM) Cruise, with valuation up to $30 billion. Microsoft’s Azure is getting the new customers: GM and Cruise.

Cruise, as a self-driving unit, spent $0.8 billion in operating cash flow in 2019.

At December 31, 2019, external investors held 17.3% of the fully diluted equity in Cruise Holdings. After this funding, GM should still have 77%+ of Cruise.

2/ Rivian, $2.65 billion

The financing is led by T. Rowe Price and the firm is valued at $27.6 billion. This is in addition to the $2.5 billion raised in July 2020.

3/ Lucid Motor, $2 billion (?)

It was reported (rumored) that Lucid Motor will go public via a SPAC deal with Churchill Capital Corp IV (NASDAQ: CCIV), which raised $2.07 billion last year.

The transaction could be valued at up to $15 billion.

CCIV share closed at $17.9 today, or 79% above its blank check ipo price of $10.

If pre-money Lucid is worth $13 billion, then buying CCIV at $17.9 is buying Lucid at over $23 billion.

There were a lot more others, with SPACs. To name a few others – Lordstown Motors (NASDAQ: RIDE) raised $1.175 billion; Luminar (NASDAQ: LAZR) raised $570 million; Fisker (NYSE: FSR) raised $1 billion, etc.

Plus, Apple will make EVs, Alphabet has Waymo, Amazon has Zoox and invested in Rivian. With Microsoft’s deal today and Tesla surpassing Facebook in market cap: now top 5 big tech in the US all have an EV play.

Takeaways:

1/ Cash might be abundant today – cash will be a competitive edge tomorrow.

2/ Covid-19 delayed most EV companies’ production for 1 year – that’s a gift for those who can produce – namely Tesla. The valuation jump includes the unexpected another year ahead.

3/ Top 5 big tech in the US all have an EV play.

Tech Companies Want A Podcast

Spotify (NYSE: SPOT) launched podcast service in 2015. It appears to be the leading podcast provider in 2020.

Podcast listeners are projected to surpass 100 million in 2020 in the US alone, and podcast ads revenue to surpass $1 billion in 2021, according to emarketer.

US Podcast Ad Spending, 2018-2022 (millions and % change)

Spotify launched Spotify Podcast Ads in January 2020.

In November last year, Spotify announced to acquire Megaphone for $235 million. Megaphone offers technology for podcast publishers and advertisers seeking targeted slots on podcasts.

Amazon Music came a bit late – it adds podcasts in September last year.

Apple, an already big player in podcast, seems to plan another route to monetize – a paid subscription service, according The Information today.

On the same day, Tencent Music (NYSE: TME) announced its acquisition of Lazy Audio, which provides audiobooks, and other forms of “podcast-like” audio services.

ByteDance, Kwai and LiZhi (NASDAQ: LIZI) have their own apps for podcast as well.

It’s another round of competition in long-form audio – PGC & UPGC contents will be hot.

Yep, tech companies always want to connect with users longer.