Category: lenS & thoughtS

Second-hand e-commerce boom (hype)?

Poshmark (POSH) had a great run at the beginning of 2021 – closed at $101.5 per share on its first day (Jan 14), or 142% higher than its IPO price of $42.

On March 29, ThredUp (TDUP) went IPO with $14 listing price, closing its first day at $31.4 per share, or 124% higher.

Capital reacts fast in China as Zhuanzhuan raised $390 million on Apr 1. Zhuanzhuan was from Wuba and raise $300 in Sep 2019. In May 2020, Zhuanzhuan merged with Zhaoliangji, with post-merger valution of $1.8 billion.

However, valuations seem to be rich.

A long RealReal (REAL) short Poshmark (POSH) trade would return more than 13% in four week (March 4 – April 1).

Poshmark was trading at 10x forward rev while RealReals is below 5x.

If short was implemented right before Poshmark’s earnings on Mar 11, which disappoints, return would be 29%.

2020 revenue

Poshmark: $262.1mn

RealReal: $299.9mn

ThredUp: $186.0mn

Btw, these companies are not growing crazy at 50% or above – CAGR for the next 3 years is like 30%.

Moat is not enough. Social responsibility is better.

Internet & tech companies are facing increasing pressure from regulators across the globe.

Moat is not even a good word now – as it may imply reduced competition. Lawful practices don’t mean they won’t attract criticism.

What’s a better strategy?

1/ Being socially responsible for the future by investing in R&D seems to be a good choice. Ali Cloud is even more important to Alibaba now than its e-commerce business.

2/ Being socially responsible for the current by providing services for free and improving them overtime, e.g. Tencent’s chat apps. Although sometimes”free” is part of the business model, it does create value for users.

3/ Being socially responsible for the unmet demands. It seems to me that ByteDance’s education business is falling into this category.

 

 

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”.

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.

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.

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.

Two Steps For Video Platforms To Stand Out

There are two strategic offerings that drive the organic growth of Kuaishou, Douyin and Bilibili, which also differentiate them from the others:

1/ an easy-to-use video editing tool that is actually empowering users

2/ a marketplace (e.g. ads, e-commerce) for users/MCNs to monetize. One key difference is that: it is not for platforms to sell ads. Platforms are just operating the marketplace.

Video editing tools

– Kuaishou introduced Kuaiying (Kmovie) in 2017

– ByteDance/Douyin introduced Jianying (CapCut) in Jun 2019

– Bilibili introduced Bijian (bcut) in July 2020

Marketplaces

– Kuaishou upgraded the exchange as 磁力聚星 Magnetic Star, part of the 磁力引擎 Magnetic Engine

– ByteDance upgraded the website to 巨量星图2.0 in 2020

– Bilibili launched 花火 Huahuo in July 2020

Those are all similar – marketplaces for brands/agencies + influencers/MCNs

JOYY After Sale of YY

JOYY (NASDAQ: YY) just announced on Feb 8 that “The sale by JOYY Inc. (“JOYY” or the “Company”) of its YY Live business to Baidu, Inc. is substantially completed”.

Without the China business, YY = BIGO, which has BIGO Live and Likee.

More importantly, investors are only valuing the BIGO Live business, while Likee is like a “bonus”.

To be more specific,

1/ BIGO is undervalued

JOYY has ~81 million ADS -> $9.7 billion market cap at $120 per ADS.
It also has some $3.5 billion cash/short investment and $1 billion convertible bond (conversion price 95.5 and capped at 127.87).

The sale price of YY China business is $3.6 billion.

JOYY still has 68.4 million Huya shares, which is worth ~$1.6 billion at $24 per share.

Therefore the enterprise value for BIGO is around $2.4 billion.

BIGO Live is a live streaming business with RMB 3.4 billion revenue in Q3 2020, so around $2.1 billion annually.

That is 1.1x sales multiple! Usually live streaming virtual gifts could be valued at 2-3x revenue.

Room to double!

2/ Market is not even valuing Likee, which is a legit business with 104 million MAUs in Q3.

Likee is popular. Some may even compare it with TikTok. The recent decrease is due to the ban in India but the rest of the growth will be fine.

3/ JOYY will become an true international company, and is poised to operate in a more flexible global manner, which should benefit its ex-China strategy.

Kuaishou Valuation

So the competitor of Douyin (TikTok) in China, Kuaishou (HKEX: 1024) just went IPO this week, now valued at ~$160 billion.

It’s a well-known app in China – with the current market sentiment, hypes around video-based social platforms, I should say I am not surprised about the valuation.

Here I provide one way to look at Kuaishou’s valuation:

Q3 revenue is ~$2.4 billion:

1/ ~50% comes from live-streaming (virtual gifts).

2/ The rest is from ads and e-commerce. I categorize them as “good” revenues that are fast growing (+200% yoy for ads) and stable.

For the first part, virtual gifts, we can use Huya (most revenue is from live-streaming) as a comp – about 3x annualized revenue.

For the second part, we can compare it with Snap, which trades at 25x annualized revenue. Kuaishou’s ads business (~$900 million in Q3) is at the same scale as Snap and grows faster – so some can argue to use 30x.

Therefore,

Kuaishou = virtual gifts business x 3 + ads & other business x 30

As virtual gifts is 50% now, we are talk about 16.5x revenue as a whole.

Annualize it: $2.4 billion x 4 x 16.5 = $158.4 billion

Virtual gifts business is debatable – while it’s 50% of revenue, it accounts for less than 20% of Kuaishou’s value if we use the above framework. So change it from 3x to 2x or 1x won’t affect much actually.