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Relationship-based Economy and Tax

It’s fair to say that relationship-based economy is a bit like barter-based economy, where a “double confidence of wants” is usually needed.

It is less efficient, compared with the modern economy where a mutually agreed intermediary “currency” is used.

And relationship-based transactions can often span a very long time frame – any immediate “payment” is not required. Although this can be see as a “credit”, usually it can not be used to “pay” for other things. Thus, one person is actually “maintaining” many accounts with people around him/her, where bilateral relationships are recorded.

One reason that relationship-based transactions have been popular in Asia cultures might due to the taxes.

In ancient times, when taxes could be high and unpredictable, relationship-based transactions are not obvious to others outside the transaction.

Technically speaking, it’s probably not a “transaction” under modern definition. It’s just “I help someone and he/she might help me some day”.

Current State of Covid

I found this graph a good illustration of what has been happening in the past year – “Zoom” vs. “Vaccine” on Google Trends.

Source: Google Trends

Meanwhile, trend only illustrates new changes – “zoom” has permanently entered people’s life although the number of searches for it lowers overtime.

Purpose of Regulation

We had an interesting discussion today on the purpose of regulation. The case in point was the banking and securities regulation in 1933 & 1934.

Three key purposes:

1/ To ensure fairness, leveling the playing field – e.g. information disclosure, less friction

2/ To manage externalities – e.g. systematic risks or spillover effects

3/ To build public confidence – although it may create some enduring wedges as well

On the third point, the banking or securities act is not the perfect example; but in healthcare/drug, FDA seems to deliver a better outcome.

Also today, China’s State Administration for Market Regulation issued statement on fines over grocery group buying companies.

In the long run, good regulations are helping the industry grow – it encourages balanced growth, instead of growth at all cost.

Rule of 40 & Valuation

For SaaS companies, rule of 40 is a quick back-of-the-envelope calculation, to measure the healthiness of the business.

Score = top-line growth + bottom-line margin

Score of 40 or above is good – e.g. a business grows at 40% with 0% adj. ebitda margin.

The valuation for those businesses, which usually starts at 10x revenue, is assuming a maturity stage of 0% growth and 40% profitability.

10x revenue @40% profit margin = 25x P/E

8x revenue @40% profit margin = 20x P/E

Current State of EV Market(cap)

EV is booming, in market cap and in sales.

1/ Three big markets, EU, China and US, account for more than 90% of global xEV volume; while xEV is just a bit more than 5% of global unit volume.

Global BEV+PHEV unit volume is expected to be 3.24 million in 2020, or a bit more than 5% of the overall ~60 million vehicle market globally.

Nearly 1.4 million BEVs and PHEVs were registered in Europe during 2020, 137 % more than in 2019

China alone contributed more than 1.3 million in unit volume.

US grew slow (~4%), with a bit more than 0.3 million units sold.

2/ Globally, industry valued at 8x 2022 revenue

Currently, EV companies globally have a market cap of ~$958 billion; Tesla accounts for ~2/3 of that.

Expected 2022 revenues of those EV companies sum up to $122 billion (Tesla accounts for half), while TTM revenues are ~$57 billion.

Overall EV/ ’22 Sales = 7.9x

If normalized margin is 20%, then the valuation indicates ~40x P/E.. where E is normalized 2022 level.

Source: this google sheet compiled by FT.

DoorDash Beyond Pandemic

Back in January, I wrote about how DoorDash could be valued at $60bn, with solid earnings (in the future).

While I question the near-term growth beyond $60bn, today’s earnings obviously doesn’t help.

Its stock drops more than 10% after-market.

Two things that the market seems to be too optimistic about:

1/ GOV and revenue growth – won’t be amazing

While it’s amazing that DoorDash GOV grew more than 200% in 2020, its forecast for 2021 is conservative: $30bn to $33bn, or 28% growth at the middle point.

Given Q4 GOV is ~$8.2bn, it’s basically forecasting minimal sequential growth. (lower in Q3/Q3 and higher in Q1/Q4, considering seasonality)

Our outlook anticipates the successful rollout of COVID-19 vaccines, among other things. Though we cannot predict the short or long-term effects this will have on consumer behavior, our guidance assumes it creates headwinds to growth in total orders and average order values. We caution investors that the outlook for 2021 remains highly uncertain, and consumer behavior could deviate from the expectations included in our guidance. Our guidance also assumes that the timing of scaled vaccinations will coincide with our seasonally softer Q2 and Q3 periods. Consequently, our forecast assumes increasing consumer churn, reduced order frequency at the cohort level, and slightly smaller average order values beginning in Q2. Because of this, our full year 2021 guidance assumes Marketplace GOV in Q2 and Q3 will be below the levels we expect in Q1.

2/ Profits – won’t be amazing

While DoorDash posted ~10% adj. EBITDA margin for the past three quarters, it may not be able to do so in 2021.

Considering $86 million adj. EBITDA in 2020 Q3, the forecast of $0-200 million for FY2021 seems lower than what investors were expecting.

That being said, to maintain a healthy ecosystem and to withstand the normalization of life, DoorDash needs to put extra efforts in retaining users and Dashers, and business partners. And it can and will invest more in acquiring talents.

Even 2021 GOV is $30-33bn, it will diversify (more heathy/stable demand), growing outside of the food delivery business. In 2023, this number can still go to $50 billion (say 2 billion orders x $25 per order), growing at over 25%.

And on the subscription front,

While DashPass orders carry a below-average Take Rate, the average DashPass subscriber orders more frequently and stays on the platform longer than the average non-subscriber.

DoorDash is playing the long game and the business is here to stay.

Be patient.

Increasing Yield & Multiples

US stock market is in a tough week as 10-year yield rises.

It’s interesting to review the CAPM formula and its relation with multiple.

Assumptions:

    • Market risk premium (MRP) = 6%
    • Before covid, risk-free rate = 10-year yield = ~2%
    • 10-year yield basically goes to 0.5% in 2020 and approaches now to 1.5%
    • Discount = Risk-free rate + MRP, assuming beta is 1
    • Earnings terminal growth rate = 3%
    • Earnings multiple = 1/(Discount – Terminal growth rate)
Risk-free rate Discount Multiple
2% 8% 20.0x
0.5% 6.5% 28.6x
1% 7% 25.0x
1.5% 7.5% 22.2x

When market was performing like it’s 1% but realized that it’s actually 1.5%, the correction is ~9%.

When market was performing like it’s 0.5% but realized that it’s actually 1.5%, the correction is ~22.5%.

Proposed Law in Japan For FinTech

Found this proposed law in Japan very interesting – for Financial Services Intermediary Business operator (FSIBO).

It’s basically a single registration system that allows 4 types of major fintech services​: Banking / Lending / Securities / Insurance​, as long as it’s an intermediary business.

It’s like a law for Ant Group…

Or for PayPay (backed by SoftBank).

To list a few details here:

FSIBO is not required to be sponsored by a principal institution​

A FSIBO is required to make a security deposit at a public deposit office before commencing its services to secure the payment of potential damages to its clients.

FSIBO can offer only those conventional products or services that do not need a sophisticated explanation to the clients​

The FSIBO must disclose fees or remuneration to be received from financial institutions or other matters upon clients’ request. The FSIBO is generally prohibited from receiving deposit from clients in relation to its intermediation service with financial institutions.​

FSIBO is subject to further requirements depending on the financial sector where the FSIBO provides its services

Bitcoin’s Downside (?)

So Bitcoin price traded at over $50k today, surpassing $1 trillion market cap.

People are seeing the future where Bitcoin are welcomed or adopted in certain ways by major institutions.

– Tesla bought $1.5 billion Bitcoin recently.

– Twitter considers “how we might pay employees should they ask to be paid in bitcoin, how we might pay a vendor if they asked to be paid in bitcoin and whether we need to have bitcoin on our balance sheet”

– Banks like BNY Mellon are going to offer Bitcoin-based service.

While I share a similar view that it is becoming more mainstream, I think it also faces risks – people should remember that it’s not rare that governments “hated” gold occasionally in the past.

“One of his first moves as President was to declare a four-day bank holiday and suspend gold exports. Within days, the Emergency Banking Act was enforced that prohibited banks to pay out gold coins or bullion or gold certificates except under a government-issued license.

Just two weeks prior to abandoning the gold standard, he issued an executive order prohibiting hoarding of gold coins, bullion or gold certificates.” – Investopidia “When FDR Abandoned the Gold Standard”

As people talk about how Bitcoin can replace gold, the risk transfers to Bitcoin as well.

Fed’ or others’ ability to effectively print money will be reduced if goods and services are priced in Bitcoin and wages are paid in Bitcoin.

Facebook – Not An Easy Business

Facebook blocked all news content in a Australia on Thursday – users cannot share news links and Facebook Pages of media account are taken down.

This is in response to Australian government’s proposed law, which requires payment deals between media outlets and tech companies over content.

This is also one day after Google stroke a deal with News Corp, the media giant. Under the proposed law, Google will need to pay for news content if they appear in search results.

1/ Why Google and Facebook chose different routes (at least for now)?

I think their ad business are fundamentally different.

Facebook ads is seen on Facebook platforms, but Google ads is seen on both Google products and third-party websites.

Google is enabling third-party advertisers (think about the ads on newspaper’ website) to make money, e.g. AdSense. They are partners, and this network of advertisers is valuable to Google.

Facebook’s ads is sold by getting to know users better and letting users stay on its platforms longer. Traffic is important to Facebook, so news is important as a form of content that users want to see. However, Facebook also thinks it is giving media outlets traffic in return. More important, ads sold by Facebook is not relying on those media outlet.

2/ What content should be on social media?

Instagram is in a purer form of social media, so does Twitter. They are usually gravitating towards certain types of contents. On the other hand, products such as Facebook’ main app are aggregating all kinds of “feeds” as long as they can drive traffic.

I think the two types are both here to stay.

Another related issue is how to regulate contents, which has been an increasingly important issue in the US and globally.

“Regulate more” or “regulate less”?

I think either way more regulatory interventions (government) is most likely inevitable.

If platforms regulate less, regulators may think Section 230 is providing to much protection and platforms are not doing enough for their social responsibility.

If platforms regulate more, regulators might think they have too much power, which is also risky. And as they moderate more, it costs more and they may be challenged more often on their decisions.

“Public square” is not easy. “Digital living room” is where Facebook may find more flexibility in contents.

Paying for news might be one of the solutions to navigate some content risk, e.g. fake news, misinformation. However, fake news or misinformation might be the traffic driver that Facebook values.