Market Talk, September 26th 2021
September 26th, Edition 25
Market Talk is where I round up some of the data from public markets over the past week in a bitesize format.
Each Sunday I will share:
• The best pieces of company-related insights I have consumed over the week
• The greatest articles I have read during the week
• One stellar podcast or interview
Coming up this week, I will be sharing a research piece on Square this Monday.
This will be followed up by Edition 6 of the company spotlight series on Thursday, which focuses on Clearwater Analytics, the Saas business which reports on over $5.6T in assets each day for their clients across the corporate treasury, investment management, and insurance sectors.
Following that, expect research on Sea Limited and Redfin, the discussion from my Q3 performance, and an interview with Ensemble Capital’s Todd Wenning.
📈 Market Action 📉
Here are your quick updates from the past week for various asset classes.
The S&P 500
Sectoral ETFs for the US
🌎 Global Indices 🌎
Europe & UK
Africa & Middle-East
🛢️ Commodities 🛢️
💷 Major Currencies 💷
FX rates are correct as of the time of publishing.
🔇 US Market Sentiment 🔇
Fear & Greed Index
The CNN Greed and Fear Index measures market sentiment based on seven factors; momentum, price strength, price breadth, put/call ratios, junk bond demand, volatility, and safe-haven demand.
The current reading stands at 32 down from 34 last week.
The CBOE VIX stands at 17.75, up from 20.81 the week before.
Major Earnings for the Coming Week
Some of the major earnings for the upcoming week, compiled by Fincredible.
🕵️ Company Insight 🕵️
Here, I will share a handful of interesting, company or industry-specific, pieces that I have read over the last week.
1) PayPal: Super App… Kind Of
Source: (Tech Crunch, Investment Talk)
PayPal finally unveiled the long-awaited super app this week after coding was complete during Q2, which will now give users a refreshed user interface, alongside a batch of new features such as enhanced bill pay, PayPal Savings, P2P, direct deposit, the classic digital wallet, and dedicated tabs for shopping (which includes messaging) and bitcoin.
It is likely that users who were anticipating great things may be slightly let down.
During the follow-up to the Q2 analyst call Rainey (CFO) urged investors not to consider this new iteration as the “Ferrari versus the Model T Ford that we have right now”, but instead suggested this is going to be something they build and expand upon over time. I wrote about this, at length, a few weeks ago in this issue of Investment Talk.
Now that the super app re-model is out there, we can expect additional features, such as stock trading, additional financial services, budgeting tools, subscription management, BNPL integration, and a host of other extensions to roll out over the coming quarters. A few weeks ago, I remarked that:
“The core goal here is really all about giving consumers a great experience and extending the breadth of use-cases for PayPal and Venmo. We have seen PayPal acquire some small tuck-in businesses such as Happy Returns (returns solutions) and Chargehound (dispute management) that are geared towards that effort.
The outcome then ideally translates into higher adoption and increased frequency, something that PayPal have clearly excelled at thus far, with over 4.7B payment transactions (+27%) executed in Q2, alongside an average of 43.5 transactions per active account (+11%).”
2) Robinhood: Crypto Wallets
Whilst we are on the topic of digital wallets and cryptocurrency, Robinhood announced in their blog during the week that crypto wallets are coming to the brokerage.
“We’re excited to share that starting next month, the first customers will begin testing crypto wallets on Robinhood.
We’re excited to make crypto more accessible by making investing simpler, more straightforward, and low cost just as we’ve done for equities.” - Robinhood Blog
Whilst still a waitlist-based sign-up process, the Robinhood wallet will allow users to move their crypto in and out of the app in a few taps, send their crypto to other wallet addresses and receive supported cryptocurrencies into their Robinhood account, all free from commissions.
I wonder what SEC Chairman, Gary Gensler, would have to say about this after his choice words at the Senate Banking Committee not long ago.
“Currently, we just don’t have enough investor protection in crypto finance, issuance, trading, or lending. Frankly, at this time, it’s more like the Wild West or the old world of ‘buyer beware’ that existed before the securities laws were enacted.” - Gary Gensler
3) Clearwater Analytics: Yet Another Saas Business
As investors continue to salivate over the influx of newly minted Saas businesses, this week saw the IPO of Clearwater Analytics, a 100% Saas revenue, cloud-based, reporting solution that pumps ~$5.6T of AUM through their system each trading day.
Clearwater would end their first day on the NYSE at $25.37, after having priced the IPO at $18 per share (a 41% return on the opening day). The proceeds from the IPO are expected to be used to dissolve Clearwater’s outstanding debt.
This business is unique, in that Clearwater are truly a best-in-class solution in an industry of archaic legacy reporting solutions. Even more, interestingly, I spent a number of years of my early career at this company.
As such, I decided to start working on a write-up for the company spotlight segment of this newsletter. This will be released next Thursday, on the last day of the month.
4) Farfetch: FTCH Write-Up
Source: (The Global Investor)
Nothing newsworthy here, but I do like to use this segment to share good write-ups on companies I feel readers may be interested in. In this piece, conducted by the chaps at The Global Investor, they take a crack at Farfetch, the luxury e-commerce retailer, taking the reader through the history, the operations, the numbers, and the upside & downside.
An enjoyable read, indeed.
5) Netflix: A Truly Wonkers Deal
It was announced during the week that Netflix, the global streaming giant, would be purchasing the content library from Mr Roald Dahl’s estate for between $500M to $1B. The deal looks “to bring some of the world's most-loved stories to current and future fans in creative new ways”.
After striking up an initial licensing agreement in 2018, Netflix will now acquire the entire library of stories and characters which together have sold more than 300M books worldwide, and captured the world’s attention with a number of great cinematic experiences.
6) Draft Kings: Potential $20B Deal for Entain
Source: (Financial Times, HL, CNBC)
DraftKings, the recently minted de-SPAC fantasy sports betting company placed an offer for Entain (formerly GVC Holdings) for ~$20B during the week. Entain, the international sports betting business currently owns an extensive list of digital and physical betting brands across the UK and Europe (see the full list here) including Ladbrokes, Party Casino, Gala Bingo, Coral, Eurobet, and a 50/50 partnership with MGM Resorts over the BetMGM franchise.
Hargreaves Lansdown shared an insightful view on the deal in this statement, whereby they suggest “the proposal reflects a significant premium and, unlike previous attempts to buy the business, Entain management are considering the offer. But the deal is still far from becoming a reality.”
For those interested, I recommend the HL piece, as well as the linked article from the Financial Times.
📰 Brain Food 📰
Here is a shortlist of a few interesting pieces that I have read over the course of the week, to feed your mind.
Note, these articles are not numerically listed in order of perceived value.
To access the suggested article, click the purple link after the source subheading.
1) Pricing Power: Delighting Customers Vs Mortgaging your Moat
Length: Light Read
Source: (Ensemble Capital)
As I was preparing for a future guest interview segment of Investment Talk, which features Ensemble’s Todd Wenning, I was reading through the archives of their Intrinsic Investing blog (which is something I do regardless).
Here, Todd and co-authors (Sean Stannard-Stockton, Arif Karim, and Paul Perrino) discuss businesses that are able to build a “seamless web of trust” when it concerns pricing power dynamics.
Specifically, the two variants of pricing power that both arise “from delighting customers and the same power that arises from customers having no other choice and actively hating the company even as they pay the new higher price.”
Companies that raise their prices without delighting those customers run the risk of mortgaging their moat, which at some stage will come due to costly repercussions.
“Let’s say you live in a desert and your homestead includes the only freshwater well within a day’s drive. You could run a pretty good business selling that water to your neighbors. Indeed, with no competitors around, you could in all likelihood increase prices without reducing demand. In fact, you might well be able to jack prices up by 50% every year and still your neighbors would come to your well. They’d all hate you, but they’d still buy your water.
The problem with this source of pricing power is that it comes with an off balance sheet liability. A sort of “negative goodwill” that grows every time you increase prices. While the profits might roll in for awhile, one day the customers will revolt. At the very least, the perceived excessive pricing of the well water will create a huge incentive for customers to try any new competitor that comes to town.”
2) Modern Financial History Begins in 1998
Length: Moderate Read
Source: (The Diff)
A fun and insightful read on the history of modern finance by Byrne Hobart at The Diff.
Touching on subject matter like inflation, equity and bond correlation, China, risk tolerance, and the psychology of market participants over the decades, this issue is a technical read, presented in layman’s terms.
“The easiest way to retrospectively understand market regimes is to look at a long-term chart of stock prices. It's pretty easy to see that something was happening in the 90s, that it stopped in 2000, that something else happened up through 2007 and then something pretty disastrous happened in 2008. And this is useful. Stocks are a large, widely-followed asset class, and they reflect expectations about economic growth, corporate profits as a share of it, interest rates, inflation, and risk tolerance. But sometimes the big inflections show up as smaller stock price deviations, because those inflections change why a trend is happening, without changing the trend itself.”
3) The ESG Movement: The "Goodness" Gravy Train Rolls On!
Length: Moderate Read
Source: (Musings on Markets)
Aswath Damodaran posted a somewhat scathing article about ESG last year where he dissected the theme of ESG under a sceptical lens. One year later, and after many discussions with those who disagree with his view, he remains committed to his belief that ESG is more so a matter of sounding good, rather than doing good.
He states “more than ever, I believe that ESG is not just a mistake that will cost companies and investors money, while making the world worse off, but that it creates more harm than good for society.”
The crux of his argument is that ‘goodness’ is hard to measure, the relative lack of value-add for adopters which stands to hurt other companies, an inconsistent sales pitch to investors, and the fact that outsourcing one’s conscience is a salve and not a solution.
I am admittedly still in the learnings process of ESG, so reading opposing arguments is something I value. Aswath’s presentation of the facts makes for an interesting ten minute read on the topic.
“If the argument that ESG translates into higher value is weak, the argument that incorporating ESG into your investing is going to increase your returns fails a very simple investment test. For any variable, no matter how intuitive and obvious its connection to value might be, to generate "excess" returns, you have to consider whether it has been priced in already. That is why investing in a well managed company or one that has high growth does not translate into excess returns, if the market already is pricing in the management and growth. Applying this principle to ESG investing, the question of whether ESG-based investing pays off or not depends on not only whether you think ESG increases or decreases firm value, but also on whether the market has already priced in the impact.”
4) Aggreggedon: The Key Terrain Of The Streaming Wars Is Bundling
Length: Moderate Read
Source: (Entertainment Strategy Guy)
In this piece, written in 2019, the author claims that the real winners of the streaming wars will be the bundlers such as Amazon, Apple, or Roku and not the outright streamers that most believe will win such as Netflix, Disney, Comcast, or AT&T.
Regardless of whether or not you believe that this issue is an interesting perspective from an author who solely focuses on this space in the investment market. Whilst a tad dated, there is still a lot to learn.
“In war, what really matters on a map is the “key terrain”. The place on the map that if you control it, you have a much better chance at winning the upcoming battle or war. In Army lingo, terrain that control “affords a marked advantage”. Usually this is the high ground, but can be anything from a bridge to a national capitol, or airfield or even castle, in olden times.”
Other Items I Read This Week:
• The Financial Times: Starbucks’ Kevin Johnson: taking on a founder’s brand
• MBI Deep Dives: Square: The quest for an inclusive financial ecosystem
• The Science of Hitting: Is The Party Over?
• Asian Century Stocks: Inside the mind of a bear
🍬 Ear Candy 🍬
There is a huge range of Podcasts to listen to, and the choice can feel quite saturated at times. Here, I will share one podcast I listened to during the week, that I feel is worth your time.
Canva: Melanie Perkins
How I Built This
Sometimes, I like to take a break from listening to the investing world and listen to something that is truly inspiring. Whilst still partially within the purview of my investing world, the How I Built This podcast is something I listen to with the goal of relaxing and passively learning. I have always been enthusiastic about entrepreneurship after discovering Richard Branson as a teenager.
I am not sure if it’s the soothing background music, Guy Raz’s smooth radio voice, or the down to earth nature of the discussions, but most often these episodes refresh me.
Canva, the graphic design platform, has long been a speculative IPO prospect after raising ~$200M in funding last week, with a FY21 revenue guide for ~$1B.
Whilst it’s unlikely we get an IPO this year, the news resulted in me re-listening to this interview with the founder, Melanie Perkins, conducted back in 2019 when Canva was valued at ~$1B. After last week’s capital raise, they are valued at ~$40B today.
This 45-minute interview is fun, inspiring, and should offer a welcome break from the high-velocity noise of the markets. I like listening to How I Built This whilst running, commuting, or going for a long walk.
Host: Guy Raz
Guest: Melanie Perkins
Thank you for reading Market Talk and have a great week,
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