Author: admin

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.

Aphria: Latest Numbers (Good!) Describe The Current State Of Cannabis

Aphria (NASDAQ: APHA), the company to be merged into Tilray (NASDAQ: TLRY),  with 62% post-merger ownership, just released its earnings for the quarter ended on Nov 30, 2020.

And the numbers are good – net cannabis revenue doubled yoy; adj. EBITDA margin continues to improve.

The stocks in the cannabis industry are cheering it up. In the past 3 month, those stocks are up more than 100%.

More legalization and Cannabis 2.0 products helped the sales.

More impressively, cannabis companies are growing their revenue while controlling the costs.

In the latest quarter (FY21Q2), Aphria grew net revenue by 33% yoy while G&A+sales+marketing+R&D grew by only 17%. Its LTM net revenue grew by 34% yoy (amid covid-19, at least two quarters’ sales impacted) while LTM costs (G&A+sales+marketing+R&D) grew only by 26%.

Canopy Growth (NASDAQ: CGC) is more aggressive in cutting costs. Its costs (G&A+sales+marketing+R&D) in decreased by 24% in 2020 Q3, while the revenue increased by 77% yoy.

Tilray (NASDAQ: TLRY) also cut 40% in those costs in 2020 Q3.

History Is Not A Straight Line Forward: Cannabis, Bitcoin, 3D Printing

History is not a straight line forward.

Setbacks are usual on the road. Plus, it takes time for new ideas to evolve into a better version of itself. As long as it represents a future that’s needed, it will come back from “disillusion”.

Instead of chasing the very new idea, investors looks back and brings past “bubbles” back to life – when they can show some real progress/changes.

Cannabis, Bitcoin and 3D printing are just three examples. It’s interesting to see the cycles forming, although 2-3 years might not be long enough to be called “big cycles”. That’s how the future arrives.

Future ways of living, of production and of how to organize the society are always the areas to invest – but be careful with bumps on the road.

1/ Cannabis

Cannabis stocks had a great performance in the second half of 2018 before they crashed. In the past few month, they are back to life with some 100-200%+ returns.

What has changed? People are expecting the US market to open up as legalization on the federal & states levels is under way. Price stabilizes, oversupply concerns are going away, more consolidation in the industry, and companies post strong growth and healthier gross margin in Q3.

Jan 1, 2017 – Jan 8, 2021 | ~2 years from the previous peak

 

2/ Bitcoin 

Bitcoin was called a “bubble” and is still called a “bubble” today. Bitcoin price hit $20k 3 years ago. Now it’s doubling the previous high to $40k.

What has changed? More people are seeing it as a hedge against USD depreciation as bitcoin’s supply is limited – it’s younger generation’s gold.

Jan 1, 2017 – Jan 8, 2021 | ~3 years from the previous peak

 

3/ 3D printing

3D printing was in a “hype” mode back in 2014 and quickly lost most of its “market cap” afterwards – just like cannabis and bitcoin.

What has changed? During COVID-19, when global supply chain was disrupted, people realized the value of flexibility of 3D printing, especially in medial equipment solutions. The 3D printing companies are also developing more “recurring” business model. With auto and other manufacturing sectors are expected to recover in 2021 and beyond, people are betting on a more “agile” future of the industrial world, with more customization and more flexible capex.

Jan 1, 2012 – Jan 8, 2021 | ~7 years from the previous peak

Charts are created by author, soured from WSJ

How Tech Companies Flex Their Muscle

Tech companies are wielding their influence. People are seeing things that normally they won’t see – things that tech companies are always technically able to do.

Social Medias

  • Facebook on Thursday (Jan 7): “extending the block we have placed on his Facebook and Instagram accounts indefinitely and for at least the next two weeks.”
  • Twitter on Friday (Jan 8): “permanently suspended the account”

App Store

Server

  • Amazon told Parler on Saturday (Jan 9) it intends to cut ties with the company in the next 24 hours – suspend Parler’s (AWS) account effective Sunday, January 10th, at 11:59PM PST. AWS “will ensure that all of your data is preserved for you to migrate to your own servers, and will work with you as best as we can to help your migration”.

Other actions

  • Payment (Shopify, Stripe, Paypal)
  • Other social medias (Youtube/Alphabet, Snapchat, TikTok, Pinterest, Discord, Reddit, Twitch/Amazon), per Axios
  • Airbnb on Monday (Jan 11) announced that it banned certain users from its platform and cancelled certain reservations in the Washington, D.C. metropolitan area

Pinduoduo Tragedies & Involution

The first 10 days of 2021 is not usual for Pinduoduo (NASDAQ: PDD): a female employee’s sudden death on her way back to home midnight, widely reported in China + a suicide by jumping from an employee’s home on the 27th floor + firing of a Shanghai-based employee due to posting unwanted messages on Maimai. (see details below)

Pinduoduo is not alone. The three cases, although all about Pinduoduo (NASDAQ: PDD), are the latest extreme illustration of “involution” (内卷), a very popular word in China right now.

To explain it in one sentence, involution = excessive competition with no real growth. It’s mostly used with China’s urban working class and popular in the case of internet companies.

How did involution happen? For internet companies in China:

1/ no more demographic dividend. No easy growth from new handset shipment, MAUs. Growth from lower-tier cities has been explored for the past 2-3 years.

2/ major business models are occupied by established companies. It’s the same across US and China. Rarely a new thing could pop up and sustain (Pinduoduo and ByteDance are years old and becoming “established”). Established companies are disproportionately more powerful. And internet companies are usually more innovative than others.

3/ too big to grow domestically and hard to grow overseas. When those $200bn+ companies want to grow fast, they require more energy and space. China has a big market, but US big techs not only have a large domestic market but can easily participate other markets globally. Southeast Asia is important for China’s tech/internet sector but cannot provide enough TAM.

On a side note, investors globally should start to focus on ESG measures in China.

Leading investors in China should take a lead, be more responsible on values (not just value), and care more about all stakeholders (not just as shareholders).

Three Pinduoduo cases attached:

1. The girl’s death on her way home after working until midnight

The tragedy is well reported in medias (Bloomberg, Reuters, etc.). The girl, born in 1998 (22 years old) and joined Pinduoduo (NASDAQ: PDD) in July 2019, collapsed while walking home with colleagues at 1:30 am. She died in the early hours of Dec 29, 2020 in local time – didn’t make it through the new year.

In China, the death quickly get massive public attention and criticism over the internet, as well as the regulator’s probe according to the news.

2. The suicide on Jan 9 by jumping from the 27th floor

The male developer joined Pinduoduo (NASDAQ: PDD) in July 2020. His suicide on Jan 9 (Jan 8, Friday in local time) in Changsha has been confirmed by Pinduoduo and is well-reported in China. It hasn’t been reported much in english so far but here is one from EqualOcean. The details are still unclear.

3. An employee in Shanghai fired on Jan 9 for posting photo

The story is still developing. The fired employee posted a video detailing his experience on social medias, including Bilibili, Weibo and Zhihu. The video is only in Chinese, but here are the major facts he provided:

  • The fired employee joined Pinduoduo (NASDAQ: PDD) as a front-end developer in July 2019, right after graduating from college.
  • On Jan 7 (local time) morning, when he entered the Pinduoduo office building, he saw a male being put on an ambulance in front of the building. He then posted a photo of the ambulance on Maimai, a career social platform in China known for anonymous forum.
  • Somehow, Pinduoduo found out it was him to post the photo anonymously and asked for a “talk” on Jan 8 (local time) afternoon.
  • He was told that he was making Pinduoduo look bad and was asked to sign an agreement that says he will voluntarily quit, confirm that he made certain comments, and not to talk about it after quitting.
  • He refused to sign the agreement and was fired immediately afterwards.

He also confirms some “rumors” about how Pinduoduo treats its employees and the unpleasant working environment, e.g.

  • Employees in Shanghai are implicitly asked to work 300 hours per month; some departments are asked to work up to 380 hours per month
    • It’s much more than the so-called “996” culture; employees mostly get off work around 11pm/12am
  • For any legal holiday that is longer than 3 days, employees are required to get back to work early
  • Employees are asked to move into newly renovated buildings/offices when there is unpleasant/unusual smell in the air