Market Talk, March 27th 2022
Market Talk is a bi-weekly Sunday issue, where I share a curation of the best things I have consumed during the last two weeks.
Every second Sunday I will share:
• The greatest articles I have read during the last two weeks
• A few stellar podcasts or interviews
Comments from Me
In the last few weeks, I have found an excellent stash of company write-ups. I think you’ll find that this edition’s ‘company insight’ reads are a fantastic basket; with coverage of Chiptole, PayPal, AMC, Wingstop, Wickes Group, and Meta. I am quite enjoying this period of being more of a listener, and a reader, as opposed to a writer. But, I’ve taken enough time to kick back now.
Newsletter: After transitioning from fintech → writing full-time → fintech again, I suddenly found I had less time to write. In the past, my entire day was writing. Today, it’s more of an “if I have time” deal. I have different responsibilities now, but this also manifests itself in my personal life. I would once wake up at 6AM. Now, because I mostly work with a US team, I wake up a little later, at 8:30AM. Those 2 and a half hours could be prime calendar real estate for writing without interruption. Whilst the month break from full-time writing was a nice release (I had gone 2-years without a holiday prior to that), the holiday period is over, and I want to get back into my writing flow. This is my way of saying, I am carving out some time to write once again.
Here is a shortlist of a few interesting pieces that I have read over the course of the last two weeks, to feed your mind.
Note, these articles are not listed in order of perceived value.
To access the suggested article, click the purple link after the source subheading.
1) Opportunities in the Metaverse
Length: Moderate Read
Source: (JP Morgan)
Importantly, JP Morgan set the tone in their opening remark to this paper; “We are not here to suggest the metaverse, as we know it today, will take over all human interactions, but rather, to explore the many exciting opportunities it presents for consumers and brands alike.”
The paper first breaks down what the metaverse is and what it is not. They do a good job of this in my opinion, acknowledging that this is more or less a new way to engage in our already digitally-consumed lives. Enriching the experience, more so than consuming us. The paper then breaks off into the economics, the growth prospects, how different industries may adopt it, working in the metaverse, technology, infrastructure, privacy, and more.
“It is not just business-to-consumer environments that will benefit. The metaverse will provide a massive opportunity for business-to-business enterprises. Take a manufacturer that is buying new parts for its equipment. Presently, the process involves receiving a physical brochure or an emailed PDF with static 2D pictures. In the metaverse, users could test the products in a virtual environment at lower cost. Imagine being able to build a complex digital twin of a factory or industrial space at massive scale, and test how robotics systems will interact with the physical environment.”
2) To Buy or Not to Buy
Length: Dense Read
Source: (Credit Suisse)
The largest benefits of being active on Twitter and Commonstock, for me, are the community. Giving without incentive for getting, oft serendipitously results in getting back from which you give, and making friends along the way. Young Money Capital requested some papers on M&A the other day, and so I sent him this paper from Schroders (shared in an older edition of Market Talk) and in return was given the Credit Suisse paper I am sharing today.
Authored by the usual suspects (Mauboussin and Callahan), this 2017 paper acts as a checklist for assessing mergers and acquisitions and is a useful paper to slide into your repository of ‘things to come back to’, much like all of these Credit Suisse papers.
“Here are the main points the checklist helps you discern. EPS accretion or dilution provides little or no guidance for assessing value creation. The buyer creates value when the synergies it realizes by combining with the seller exceed the premium for control that it pays to the seller. Companies are commonly overly optimistic about the synergies they can capture, and experience shows that cost synergies are more reliable than revenue synergies. Low premiums tend to be good because there is a lower bar to clear to create value. How the buyer pays for the deal can provide a signal to the market. Research shows that cash deals generally lead to positive excess returns for the buyer and that stock deals have negative excess returns. Finally, the motivations to do deals fall into various categories. A high percentage of opportunistic deals create value and a low percentage of transformational ones do.”
3) The Risk of War to the US Stock Market
Length: Moderate Read
Source: (Ensemble Capital)
As a young chipper myself, residing in the UK, I have thankfully never endured the travesties of what Ukraine is facing or the long line of previous occurrences of war across the rest of the world. I have also, thankfully, never endured a significant bout of market tantrums. I was not actively invested during the GFC. As such, I can only read about both instances.
Ensemble put together this great memo (also available in audio) outlining the risk of war in the US stock market, looking back at other geopolitical events.
“Over our 18-year track record, we’ve owned stocks during an unprecedented global housing crash, periods of very rapid energy price increases, all sorts of global debt defaults, an ultra-contentious US political environment, a trade war with China, a global pandemic, etc. We can’t say that we foresaw all of these events in advance and during those events we never made huge changes to our portfolio. But over that time period we successfully navigated the challenges at hand.
The way we have navigated all the uncertainty and unexpected events over the last two decades was not by trying to predict the future and make big changes to our portfolio based on various predications. Instead, we assembled a portfolio of companies that we thought were well positioned to navigate uncertainty. And in retrospect, that’s what these companies were able to do. Not every one of them of course, but in the aggregate, our portfolio holdings managed their way through these events and did so better than the average company.”
4) Redpoint: The State of the Current Market
Length: Light Read
Source: (Redpoint Ventures)
This google doc presentation by Redpoint Ventures will take all of 5 minutes to flick through, and is mostly a visual experience. Nonetheless, it captures an interesting high-level view of the public and private landscape for tech companies, M&A activity, valuations, and where things might be heading from here.
“Private markets have not yet meaningfully corrected. Currently many companies in private markets (particularly at late stage) are in “price discovery” mode in fundraises with everyone trying to figure out market price → rounds are taking longer to get done and “willingness to pay” spreads are wide”.
Other Items I Read
Note: ($) indicates there is a paywall on this content.
• Value Stock Geek: Portfolio Management Guidelines
• OakTree Capital: The Pendulum in International Affairs
• S&P Down Jones Indices: SPIVA U.S. Year-End 2021
• 01Core: How to beat the QQQs
• The Generalist: 10 Lessons from Great Businesses
• Visual Capitalist: The Big Mac Index, A Measure of PPP & Burger Inflation
• Politicio: EU Set new rules to rein in tech giants
🕵️ Company Insight 🕵️
• Valuabl, Edmund Simms (CMG): Chipotle Mexican Grill Write-up
• TSOH Research (CMG): Chipotle Mexican Grill Write-Up ($)
• Value Stock Geek (PYPL): PayPal Write-up
• Value Situations (WIX): Wickes Group Write-Up (Spin-Off)
• AGB (WING): Wingstop Write-Up
• Doomberg (AMC): A Fool and His Gold
• MBI Deep Dives (FB): What’s embedded in Meta’s stock price?
• FastCompany (SBUX): Starbucks Trialing EV Stations at Stores
There is a huge range of Podcasts to listen to, and the choice can feel quite saturated at times. Here, I will share three podcasts I listened to during the last two weeks, that I feel are worth your time.
(1) Jimmy Soni, his book the Founders, and the many lessons of PayPal
A really fun and informative conversation between Frederik G (author of Insecurity Analysis) and Jimmy Soni (author of the Founders, shown below).
An exceptionally researched book on the group of outsiders that came together to build PayPal. Granted, when someone publishes a book, they go on a media circuit to promote said book. But this doesn’t feel like one of those conversations. The incredible energy from Jimmy, and he dives into some interesting aspects of the book, and silicon valley generally.
Guest: Jimmy Soni
(2) Fundsmith Annual Shareholder’s Meeting 2022
I don’t know how many Terry Smith fans out there read this newsletter, but I am one of them. Combining smarts with classic British humour, Smith oft conveys his points concisely and gluten-free (no waffle). The annual Fundsmith shareholders meeting typically sees Smith walk through performance of the fund, discuss the wider market, and hone in on certain fixtures in the holdings.
In this edition, he talks about Facebook, Unilever, Amazon, and Netflix in some detail as well as touching on inflation, pricing power, and macro. If you just want the takeaways, Thomas Chua made a cool post flagging 16 takeaways.
Guest: Terry Smith and Julian Robins
Back in the 1990s, most people appeared to ‘know’ or have some vague idea about what the internet would be. More astute observers had a richer understanding, related to how this ‘thing’ would ultimately shape the world’s communication, commerce, and connectivity. I am not here to discuss the overzealous sentiment for internet stocks and the ensuing 2000 bubble, however.
Back in this period, the term ‘information superhighway’ was coined to refer to the opportunity that would come from digital communication and internet telecommunications. This superhighway, constructed of telephones, computers, satellites, and other communication devices, would allow users to transport themselves and goods through a global network. It was oft-cited in media, as you can see from the below Time Magazine cover, dated 1993.
Or this 1994 front cover of Popular Mechanics Magazine, outlining how “you’ll shop, bank, learn, be entertained, and more via interactive TV”.
What actually happened, however, was quite different. The internet was originally assumed to be a business model for this highway, but after the explosive growth of the web, the internet essentially became the information highway. The narrative was enough to help people digest it, and I implore you to go check out some of the nonsensical stuff that politicians and leaders said about this narrative back then.
With the popularisation of ‘Web3’ and ‘the Metaverse’, had me considering the similarities between 1990 and today. Some suggest that Web3 is simply a rebrand of ‘crypto’, to help VCs, others seem to mistakenly believe that the ‘metaverse’ is some digital oasis (like Ready Player One) and that humans will suddenly become a zombified race of VR headset-donning plebs.
The reality will probably, as it has in the past, be something quite different. I guess my point is, although what was promised of this highway in 1990 (shopping, banking, communicating) all came to fruition, it didn’t come to fruition in the way that was catching headlines. These terms; metaverse, web3, really have no meaning and are more so reflective of where the world might be heading, not necessarily how it gets there.
Author of Investment Talk