Search, Search, Search

Not a novel or undiscovered market at this point, but search stocks are cheap relative to where they have been recently. And web usage only grows each day as people literally embed themselves in their cell phones.

While the value of social media ads is starting to be questioned more broadly (see the recent Facebook advertiser lawsuit) search ads are late funnel & drive high-intent user traffic. Further, many of the leading search engines also have dominant video destinations, whereas Facebook’s video push was based in large part on “fake news” styled metrics. Worse yet, Facebook got many other publishers to follow them into their video-first doom machine.

Facebook is so addicted to free content AND not sharing adequate revenue with publishers that even Instant Articles bombed. Facebook has already took a beating on the margin front by stating they were going to shift toward more friend posts & hire many moderators.

Will the market accept ANOTHER huge market hit by them investing huge into premium video before they have a strong end-user use case? And, if they pushed hard into video, how would they compete against the head start Netflix & Amazon have, the great IP Disney has, or the device ownership Apple has?

The other day Yandex was up 7% and today it is off 17%. Their market cap is around $9.5 billion and they own the Uber equivalent in the Russian market in addition to their strong domestic search share. They also have a Prime-like subscription service with music & other features & are shifting away from an eBay type ecommerce business to more of an Amazon styled ecommerce business.

Baidu was around $240 a share when the trade war narrative started to bite & their 52-week high was $275. It’s now at $192, so it is off about 30%. Their market cap is around $80 billion & they own a big chunk of an online video portal named iQiyi (IQ) which is like a mash up of YouTube & Neflix. Baidu owns almost 70% of it. Backing out that equity stake the rest of Baidu is valued at under $70 billion offset by what’s on their balance sheet.

Google dominates the web. The #2 search engine is…YouTube. I think most people are unaware of how under-monetized Google & YouTube are in emerging markets. If you use a VPN which allows you to shift your location to an emerging market and clear your cookies or use a new different web browser you will see that YouTube has maybe 1/3 to 1/4 the ad load in emerging markets as it has in the United States. The same deal exists with the general web search results. The interface is ad-heavy in the United States because both Bing & Yahoo! are extreme on this front. About the only general web search player in the United States that is fairly lite on their ad load & used by anybody is DuckDuckGo. Yandex also has a global version of their search engine, though it has a lot more spam on it than their localized version does because it has less end user data to refine the results & they don’t spend as much capital policing search results that are rarely used.

The counter view of search being toast is offered by George Gilder in his Life After Google.

I’ll read the book, but I suspect until there is a recession search ad revenues will keep growing ~ 20% a year.

Tim Berners-Lee is also working on a project hoping to upend the business models of Google & Facebook by giving web users more control over their data.

The centralization & decentralization of power has been a recurring fight throughout recorded history.

The first central currency was introduced by the British monarchy as a way to control the decentralizing tide of the merchant economy. The Teddy Roosevelt-led antitrust movement was aimed at reversing the centralizing tide of industrialization. Today, rising antitrust ambition in the E.U. and the U.S. is set on forcing much the same. Even Donald Trump’s trade war is a move to push global trade towards a decentralized system — away from distributed-supply-chain interdependence and towards nation-by-nation manufacturing independence.

Carl Icahn Shorts the US-China Trade War

Tech Stocks on Fire

Today tech stocks are once again on fire with Google & Facebook up a couple percent and other online players like Etsy, Twitter, Zillow are up big as well. Even some of the international beaten down tech stocks like MakeMyTrip, Yandex & JD are doing well today.

A couple things stand out on the massive 7%+ jump in Yandex today.

  • The weakness of the Ruble coupled with the strength of oil prices has the Russian economy humming.
  • Sberbank (which is half owned by the Russian central bank) is up over 3% today and bottomed out a few months back, with its US-listed ADR (SBRCY) up ~ 26.7% since bottoming out at $9.69 about a month ago. The Russian central bank raised rates a quarter point last month.
  • Lyft picked their 2019 IPO underwriters & Uber’s CEO suggested the company might go public at a $120 billion valuation. Buying Yandex (which merged their taxi service with the local version of Uber & plans to IPO it early next year) is a way to front run the car-sharing IPO hype cycle similarly to how people bought Zynga ahead of the Facebook IPO. If Lyft is valued at $15 billion & Uber $120 billion (not saying those valuations are solid but are being sold) then the idea of getting a sort of Lyft with a free mini-Google baked inside for $11.55 billion isn’t a particularly bad deal.
  • Yes it is in Russia, but it has the local regulators working for it rather than against it & isn’t likely to see the sort of major EU fines Google has been earning. Google today announced they would start charging European Android device makers a licensing fee for access to the Play Store & other Google Apps.

Say Cheese

Snap is the exception to the tech stock rally, their stock is trading like a beaten down value stock nobody wants on a FOMO day, down almost 4% in a market where competing plays are up 2, 3, 4, 5%.

Icahn Has Dollar Store Stock (Once Again)

The dollar stores have less robust & redundant supply chains than entities like Wal-Mart do & Carl Icahn recently acquired a sizable stake in Dollar Tree.

Icahn in 2014 built a stake in Family Dollar pressuring it to seek a buyer. His firm made a profit of about $200 million on its investment when Family Dollar was acquired by Dollar Tree for $8.5 billion in cash and stock.

Ironically, Dollar Tree has struggled largely because it took on too much debt to make the deal happen, analysts said. That debt has made it harder for Dollar Tree to invest in its 15,000 stores that only sell items for $1 or less.

If the company s already seeing slowing growth due to high debt leverage he might struggle to force them to eat more debt to fuel buybacks. That might be his ultimate play though because each of the last 2 years the company has paid off over a billion dollars in liabilities, which is a sizable shift for a company valued at $20 billion. If he could get them to divert that $1 billion into stock buybacks they could easily pop their market cap 30% before the rising rates couple with the rising debt load to start dragging the stock price downward.

Either he thinks the 30%+ fall in Dollar Tree’s stock price from $116 to around $80 on trade war concerns created an entry point where he can profit from further debt levering before the trade war bites, or he thinks the trade war gets resolved quickly and the company blows well past old all time highs.

DLTR stock is already up over 5% to $85.10 & it looks like today’s share volume might end up about double typical.

If the trade war is a nothingburger in short order then stocks like Newell Brands (NWL) have huge upside. If the trade war is a real thing & will keep escalating then some of the companies like Newell Brands are so beaten up they’ll ultimately end up eating moving production out of China as their stock’s slide since last June has been every bit as extreme as the fall in price after the 1990s tech bubble imploded or the fall from the 2008 / 2009 global recession.

Dollar Tree has a similar market cap to Kroger, but has about 1/3 the debt. Kroger’s stock had been on fire the first half of the year (in part due to them announcing so many ecommerce initiatives & other various partnerships), but recently slid. Walmart also recently announced they would miss their 2019 GAAP EPS guidance. In spite of that their stock was still up over a percent today.

 

Funko Short Squeeze & Slide (FNKO)

The stock market looked quite ugly at close yesterday.

The Funko position I had was in the hurt locker, off about 10%. Then today a massive short squeeze caused a price ramp of about 15%, so I sold close to the top on that in a couple different lots.

Small-caps have since started heading down & Funko has been no exception, giving up about 40% of today’s gains. It is back under $19 again, so I’ve jumped back in.

In the intermediate term I still think Funko is going to have a great next half-year or more (due in large part to the additional space Walmart & Target are creating for selling their products), but if you can go in and out for quick wins then you are lowering the cost basis of the stock you hold.

If you adjust your basis by about $1 a share on a stock trading around $20 a couple times then you are still up to flat if the stock slides 10% while you are holding it.

The big things with Funko are the trading volumes & market cap.

  • Due to light volume sometimes the bid/ask spread can be about a dime, which is about a half-percent on a sub $20 stock, so you really need to catch at least a couple percent swing in order to make going in-n-out worth it. But that isn’t so hard to do when a stock is up over 15% on the day.
  • The other issue is if you did have serious size on you would move the market. so it would probably be hard to trade much more than say 1,000 to 2,000 shares at a time without really pushing the price against you on an entry or exit.

Then again, putting 3% to 5% in on a security isn’t taking a huge risk & unless you have tons of money a few thousand shares would be a sizable position.

No need to be RAMBO and stay fully exposed.

It’s been over 7 years and his Groupon still hasn’t come back yet!

Meanwhile the social gamified Chinese version of Groupon which was founded 3 years ago is valued at almost $24 billion, compared to under $2 billion for GRPN.

Part of what makes that Groupon performance so impressive is how much the stock market has been up during their 80%+ slide since the 2011 IPO & that Groupon raised more than their current market cap in VC funding plus IPO proceeds.

Pinduoduo (PDD) has so many counterfeit goods on it they were investigated by Chinese regulators (though only after the Nasdaq listing, of course).

There’s no Rambo Pop yet, but the Rocky Balboa is going for about $300 on eBay.

 

Long The Gray Lady (NYT)

I  don’t regularly read the New York Times, but I like the current set up for their stock.

Big trends would be: death of competitors, rejection of tech monopolies that ate the playing field, rise of subscriptions & increased political polarization.

Going at them one at a time…

Death of Competitors

  • Many of their competitors (outside of the Washington Post) have been bought out by private equity chop shops to where they are a masthead logo above eHow styled news content.
  • And then there are the repeat bankruptcy styled players like Tronc that do arbitrary name changes to show just how little they value their name, brand & legacy.
  • As regional news services get shallower & crappier & less differentiated while their best employees who were laid off become their fiercest critics, more people will flock to the national news outlets like the New York Times. Businesses in structural decline with many layoffs of media savvy people end up getting their ugly stories told. A few will land techno-oligarch bailouts, but most will end up getting some of the seedy behavior leaked. Their competitors will, of course, cover that story.
  • Savvy web publishers like IAC which have tried to create evergreen content via About.com have repeatedly been whacked algorithmically by Google as they split a big site into vertical sites & vertical sites into niche sub-brand sites.

Competing publishers will have the obvious brand erosion from PE chop shop rightsizing combined with an internet that forgets nothing and trusts nothing.

“Briefly stated, the Gell-Mann Amnesia effect is as follows. You open the newspaper to an article on some subject you know well. In Murray’s case, physics. In mine, show business. You read the article and see the journalist has absolutely no understanding of either the facts or the issues. Often, the article is so wrong it actually presents the story backward—reversing cause and effect. I call these the “wet streets cause rain” stories. Paper’s full of them. In any case, you read with exasperation or amusement the multiple errors in a story, and then turn the page to national or international affairs, and read as if the rest of the newspaper was somehow more accurate about Palestine than the baloney you just read. You turn the page, and forget what you know.”  – Michael Crichton (1942-2008)

Rejection of Tech Monopolies

  • Now that the big tech companies are starting to be viewed broadly with disdain, more people will seek trusted filters / curators rather than relying on the central algorithmically-driven surveillance networks.
  • European publishers who are trying to push regulators to ensure payments of compulsory copyright payments will ultimately lead to over-representation of US media across European countries. When EU pubs first pushed for these types of regulations Google started including bloggers in the “in the news” section inside their regular search results, they’ll also have no problem over-representing whatever they get for free.

Rise of Subscriptions

  • Much of their revenue base has shifted away from advertising to direct subscriptions from end users.
  • Spotify, Netflix & other online vertical media services are re-normalizing content-based subscription fees that the ad-driven Internet temporarily did away with.
  • People are starting to view paying for subscriptions as a virtue signaling move. If you never visited rural towns in the south that have been utterly decimated by “free trade” then you can smugly view yourself on the right side of history paying to inform the public with your monthly New York Times subscription payments.

Increasing Political Polarization

“The world of media, trust, and tribalism is going to get a lot more complicated in the coming years.” – John Borthwick

  • The bailouts & financial asset price reflation have fueled increasing political polarization and resentment.
  • Now that liquidity is disappearing from markets & money is once again having a price the debt binge that masked the true economic damage will start causing further hate / polarization / resentment.

 “After generations of doing the opposite, when unity and conformity were more profitable, the primary product the news media now sells is division. …  we encourage full-fledged division on that strip. We’ve discovered we can sell hate, and the more vituperative the rhetoric, the better. This also serves larger political purposes. So long as the public is busy hating each other and not aiming its ire at the more complex financial and political processes going on off-camera, there’s very little danger of anything like a popular uprising.” – Matt Taibbi

Until the U.S. economy is re-oriented toward the rust belt & away from metropolitan coastal elites the level of division will only increase.

At the bottom of the New York Times pages there is an ad with the headline “Subscribe to debate, not division.”

And yet they publish this sort of polarizing hate, which their base loves.

Millions of people with left leaning political views are likely to subscribe to the New York Times in record numbers in lieu of allowing low-income subsidized housing for teachers which risk lowering their property values by slightly re-balancing supply and demand.

As the saying goes: “I believe the children are our future, let their teachers be poor & burned out & commute at least 3 hours every day…”

Central Aggregators? Indy Publishers? Blockchain? Blah?

Automation will decimate us before we are rebuilt by (eventual) lower barriers to entry which enable our tribal affinities to be focused around more productive & niche interests rather than the primal issues which dominate the current political landscape.

“automation will likely disrupt your current job (and your next one, and the one after that), and you’ll be the target of attention-grabbing, behavior-modifying algorithms so exponentially effective you won’t even realize you’re being targeted. The best defense against that? An emotional flexibility that allows for constant reinvention, and knowing yourself well enough that you don’t get drawn into the deep Internet traps set for you. … I don’t have a smartphone. My attention is one of the most important resources I have, and the smartphone is constantly trying to grab my attention. There’s always something coming in. … The way to grab people’s attention is by exciting their emotions, either through things like fear and hatred and anger, or through things like greed and craving” – Yuval Noah Harari

Longterm I think the web will have many Stratechery-styled businesses where beat reporters who know a particular field exquisitely well build niche communities consisting of many direct subscribers, but that future could be 10 or 15 years off.

Between now and then the Gray Lady will sing.

Normally I write posts shortly after establishing a position. I have an itchy trigger finger for buying some NYT, but I want to give it a couple more days to a week to slide back from the recent strong run it has had. Maybe it keeps going up, but I think somewhere around $23 might be a good entry point.

Long Funko (FNKO)

Funko‘s stock closed Friday trading at $19,47, down from a recent high of $31.12 but up large from a 52-week low of $5.81.

Their November 2, 2017 IPO was widely panned and even qualified for being in the all time disasters category in terms of IPO performance.

Renaissance Capital, which tracks IPOs, reported late Thursday that Funko’s 41 percent fall was “the worst first-day return for an IPO in 17 years.”

Funko shares closed at $7.07, down 41.1 percent from its IPO price of $12, according to Nasdaq. The offering price itself was dialed down from the anticipated range of $14 to $16.

A lot of the best performing companies had institutional hate leading into the IPO or right after the IPO. Facebook cratered on the fear of the move to mobile. Google was viewed as smug and out of touch with the Playboy interview & the Dutch auction listing model that didn’t give banks a big greenshoe.  GoDaddy was seen as carrying too much debt.

It took Funko almost 8 months to reach their IPO price, but after they hit it they blew right through it. Now that Funko shares are up almost 300% off the bottom they may not be cheap, but if you consider the initial IPO goal price was originally ~ $15 they are up less than 1/3 from that price and they have done an amazing job executing by signing a wide range of licensing deals & even launching a cereal line.

CEO Brian Mariotti collects Pez & understands the mindset of collectors. In this interview he highlights the importance of balancing supply with scarcity to reward collectors. He hints they are certainly willing to forego short term profits to keep growing the brand.

Funko fans can even make 1:1 figures at company headquarters.

Ultimately Funko may end up to by like Ty Beanie Babies or even the baseball card bubble of the late 1980s into the early 1990s, but it still has a way to go before reaching saturation.

To a large degree fantasy sports and online stats sort of displaced the roll of the baseball card. And Ty was creating their full on hype cycle versus creating licensed goods.

Here are a few reasons I think Funko still has at least another doubling in it…

  • At around $9 to $12  per piece retail the price of units is quite low, making the barrier to entry / risk / cost quite low & making impulse purchases rather easy.
  • They have a cult following.
  • Once units are retired/vaulted/no longer produced they often quickly double in price or more, then increase further over time on secondary markets like eBay.
  • Some of the ones I paid maybe $20 for a few years ago we limited to a print run of 480 pieces and now sell for $600 or $700 on eBay. Collectors don’t actually gain monetarily on the way up during a bubble until & unless they sell, but they feel as though they have, which encourages further investment / buying new supply. Online price guides & a regular stream of eBay auctions reinforce the growing perceived value. Earlier this year those same units were going for maybe $200 or $300. Even some of the ones that were bought retail for about $10 a few years back are now selling for $400 or $500. eBay shows regular sales at these prices and over time as the prices rise collectors feel the gains.
  • The diversity of product range allows them to appeal to other collectors in other categories. For example they gave out 20,000 Ken Griffey, Jr. Pops at a recent Seattle Mariners game & they are typically selling for $50 and up on eBay. But they cross every sort of entertainment & pop culture category: sports, WWF, Disney collectors, comics, cartoons, movies, music, rap, etc.
  • Rather than creating IP from scratch & investing into building brands from scratch they tap into existing brand equity of other brands in a synergistic way. They can make a set of units for whatever the latest hit movie or video game is, units for cult classic sitcoms or cartoons, and they can make a unit for a local fast food chain in a foreign country. Some of their most popular and most expensive units were mascots for cereals and other ad icons.
  • They can create units quickly at low cost & can use different limited runs to offer collectors options at different price points & create a more diverse range of options to choose from. There is a series called flocked with a different feel to them, some have chrome paint, some have glow in the dark designs, some have other aspects which differentiate them like a stain on an outfit, a different pose, or such.
  • While a trade war may slow down the economy and drive up inflation, I’ve noticed some of the Funko boxes on eBay are showing stickers for “Made in Vietnam” so Funko has already added some redundancy to their supply chains ahead of the widespread tariffs on Chinese manufactured goods.
  • Stores like GameStop that are seen as relics in terminal decline are doing a strong business in pop culture goods turning around their fortunes. They made $208 million in gross profits on $636 million of collectibles revenues in the prior year ending in January. Funko can appeal to many different stores by offering different stores a wide variety of exclusives.
  • The store exclusives both increases the appeal of carrying their product by helping each retailer differentiate their offering against other retailers & it lubricates the secondary market by requiring some people to buy on eBay, Amazon.com or other collectible sites to get ones not available in nearby chains.
  • Walmart recently announced  they are aggressively expanding their pop culture merchandise by partnering with Loot Crate and Funko to try to grab a big slice of the $12 billion collectibles market, which will also likely grow the market.

Funko has a variety of other product lines including Wacky Wobblers bobbleheads, Dorbz chibi styled figures, Blox, Vinyl, Hikari Sofubi hand painted figures, cereals, Pez dispensers, plush toys, T-shirts, mystery minis, etc. … but so far nothing has really caught on the way Funko Pop has. The aesthetic behind Pop product design & packaging is fantastic.

Most likely if other companies tried to clone the Pop product efforts to clone it would bomb. Each additional Pop that sells makes the figurine stronger as the category default. There are other players like Kidrobot, but none have struck lighting in a bottle the way Funko Pop has.

Further, the fact that Funko has relationships with so many IP holders makes it easy for them to go back to those same sources for additional IP licenses while also increasing the licensing fees for any new player who enters the field with a competing product.

As the web fragments culture, Funko Pop is almost a physical manifestation of a horizontal layer to re-homogenize culture by striking deals with many different IP creators from gaming to movies to comedies to cartoons to even in-store or product mascots.

I bought Funko stock at around 13 right as it first broke out but went in and out of it a few times on the way up and only got a small portion of the total move. With the current retracement I figure it might be a decent entry point. If it goes much lower it will be right around the IPO price when revenues have been growing over 30% a year.

Health Industry Stocks

Real Vision was recently profiled in the New York Times. One of their most recent interviews was Kiril Sokoloff interviewing Stanley F. Druckenmiller. In the interview Mr. Druckenmiller mentioned how health stocks drastically underperformed earlier this year perhaps in part due to political rhetoric about lowering drug prices.

He stated how it didn’t make sense they really went down then because if the economy was soft those should be some of the more stable stocks as people take their prescriptions in any economic environment. And now that it seems the economy is going better, the pharmaceutical stocks are on fire.

Pfizer, Abbvie, Merck, Johnson & Johnson, etc. .. you could pick just about anything and make money.

He noted how them being a hot sector right now does not perhaps make a lot of sense because the same political rhetoric is still in place.

One thing to consider is the passage of time is itself a signal. So the pharma stocks recovering from the early year swoon is the market stating they think the anti-pharma company statements from President Trump are hollow bullcrap.

One way to know of the perceived lack of importance of a particular political issue is to see how much action there is relative to jawboning. If a lot of time passes and there is still nothing but jawboning then it is a nothingburger.

Another signal that there is no drive for action is how when Trump won the election his campaign website quickly disappeared health-related promises, as noted by Karl Denninger. Mr. Denninger also wrote another blog post where he mentioned how some doctors he knew who were involved with the political process were quickly deprioritized:

If you recall I expressed grave concern during the election season that he really didn’t mean it on health reform — despite not one but three planks in his platform on the campaign web page related to same.  A large part of my skepticism came from the fact that repeated inside attempts to obtain some sort of solid indication in public on the details or some sort of interaction or meeting were rebuffed.

Then, on election night, those planks disappeared.  Literally gone while the votes were still being counted, as soon as the results were evident.  They’ve never been seen again, although there was, during the transition, a brief flirtation through not one but two people I know (and who have impeccable credentials in terms of actual inside knowledge as a physician) with an alleged meeting on the issue.  One such overture was postponed twice and then canceled with no reschedule, the second was just flat-out canceled.

So that’s at least 3 separate signals that restraining the pharmaceutical companies is political rhetoric versus political action. That would mean the market view earlier this year was wrong & the current market view is correct.

However, it is possible the market is just as incorrect today as it was during the pharmaceutical stock sell off earlier this year.

Next year the Obamacare penalty disappears. That will REALLY make the cost of healthcare hit people hard as the risk pools deteriorate. And the House of Representatives is likely to flip to being Democrat controlled after next month’s midterm elections.

When a party is sort of unopposed they can jawbone eventual changes that never come and appease their base, but when the direct consumer harm felt increases dramatically and populist party outsiders drive political discourse outside of the overture window they’ll likely end up calling each other’s bluffs & end up pushing through some sort of reform.

I recently sold out of my AbbVie & Johnson & Johnson shares on the thesis that actual change will be (almost accidentally?) forced when two different brands of fake populism are forced to square off over an issue where an increasing share of the pain is being felt directly by the populous.

With trillion dollar deficits during a non-recession, there isn’t an easy way to keep sinking an increasing share of GDP into the health industry.

As the Federal Reserve lifted short term rates over the past couple years it didn’t carry through into longer duration bonds & there was a fear of yield curve inversion. Financials have been beaten down recently as spreads dropped.

Today longer dated bonds started selling off with the yield on the 10-year Treasury bond touching the highest level in 7 years, settling at 3.159%. The 30-year Treasury bond jumped to a 4 year high of 3.315%.

As yields rise, debt service costs rise for both the government & heavily debt-levered companies. That in turn lowers the relative value of value stocks while also increasing their interest expenses.

Once I saw bond yields jumping like that yesterday I sold off a bunch of value stocks on the thesis there will be a rotation away from them in the coming week.

Renewed confidence in the economy has helped drive bond yields to fresh highs in the second half of the year after months of relatively driftless trading.

Commerce Department data showed the economy rose at a 4.2% seasonally and inflation-adjusted annual rate in the second quarter, thanks to gains in consumer spending and business investment. Measures of consumer confidence are at 18-year highs, and corporate profits are expected to grow at a rapid clip again in the third quarter.

Accelerating growth & rising rates is typically not the sort of environment where value stocks will outperform growth. The extreme underperformance of value is likely to continue for some time unless the whole market tanks.

Gratis

Cloudflare announced they are offering domain registration services for zero markup over the wholesale registry fee & ICANN fee.

Two phrases kept coming up: “bait and switch” and “endless upsell.” If you’ve ever registered a domain, you know the drill. You get a discounted price when you first register, but with each renewal the price soars. In the best cases we’ve found, it’s around two times the original offer. In the worst, it’s more than twenty times. It’s gross. That’s in addition to the constant upsells for other products that either should be included for free (for example, DNSSEC) or that you just don’t want (for example, worthless trusted site seals).

Domain privacy services offered registrars a huge mark up on a low margin sale. $10 domain with $8 in core fees = $2, less the 30 cent credit card fee = $1.70. Add in an all-margin $10 per year domain privacy service and the profit on the domain goes up from $1.70 to $11.40.

The passage of GDPR has meant some people who previously paid for domain privacy services will likely stop as more registrars redact the data by default.

  • 2014 revs: $1.39 billion
  • 2015 revs: $1.61 billion
  • 2016 revs: $1.85 billion
  • 2017 revs: $2.23 billion

Since their 2015 IPO their stock has quadrupled from $20 to $83.2.

GoDaddy is trading at about a 100 year P/E. They’ve done a great job growing revenues by using their dominant share in the domain name market to expand into other higher growth markets while other domain-related companies (outside of Tucows) have languished.

Verisign sees the domain registration market growing about 2% per year, with the .com & .net TLDs representing over 100% of the aggregate growth.

The second quarter of 2018 closed with approximately 339.8 million domain name registrations across all top-level domains (TLDs), an increase of approximately 6.0 million domain name registrations, or 1.8 percent, compared to the first quarter of 2018. Domain name registrations have grown by approximately 7.9 million, or 2.4 percent, year over year.

Total country-code TLD (ccTLD) domain name registrations were approximately 149.7 million at the end of the second quarter of 2018, an increase of approximately 3.5 million domain name registrations, or 2.4 percent, compared to the first quarter of 2018. ccTLDs increased by approximately 5.5 million domain name registrations, or 3.8 percent, year over year.

The .com and .net TLDs had a combined total of approximately 149.7 million domain name registrations in the domain name base at the end of the second quarter of 2018, an increase of approximately 1.4 million domain name registrations, or 0.9 percent, compared to the first quarter of 2018. The .com and .net TLDs had a combined increase of approximately 5.3 million domain name registrations, or 3.7 percent, year over year

In the face of lethargic domain name registration growth across the industry, GoDaddy grew their customer base by 6.5% to 18 million customers & grew domain revenues 16% YoY. Their revenue mix is as follows:

  • Domain names $304.8 million, up 15.8% YoY / 47% of total revenues
  • Web hosting $244.6 million, up 13.8% YoY / 37.3% of total revenues
  • SaaS business applications $102.2 million, up 28.4% YoY / 15.6% of total revenues

And then the quarterly breakdown between international & domestic

Revenues 2017 YoY change 2018
total $557.9 m 16.8% $651.6 m
international $187.7 m 24.3% $233.3 m
domestic $370.2 m 12.9% $418.3 m

So long as GoDaddy can keep doing tuck-in acquisitions of b2b SaaS plays they should be able to follow the Salesforce model of growth by cross-marketing all the new acquisitions to their existing customer base.

But how long can they keep growing their core customer base ~ 3 times as fast as the market they are in when they are already closing in on being half the market?

Every day more pages are added to the web, so the increasing use of the web would suggest the market for domains will keep increasing. However, there are a few core headwinds:

  • GoDaddy already has a significant share of the domain registration & web hosting markets to where it might be hard to keep gaining share at the rate they have. They already have over 62 million domain registrations between their core company and Wild West Domains.
  • In many ways the web is becoming more like TV by the day, with greater attention being spent on fewer core channels. The core services keep expanding their breadth. YoY Google keeps owning a higher share of the search market, Amazon keeps owning a higher share of the ecommerce market, etc. Google keeps adding more informational features, ad unit types & interactive content units like appointment booking directly to the search results.
  • The longtail risks are not just the risk of perpetual obscurity, but also as the core central attention merchant networks like Google & Facebook have increased their ad load that has drove down reach for other publishers who previously relied on those channels for high-margin revenues.
  • Those expanded ad features lower the margins of smaller niche businesses which were formerly getting free exposure. If it costs more to rank, it costs more to maintain rank, and the value of ranking slides due to ads displacing the regular results then costs rising while value drops leads to less investment. That leads to some domain investors pruning their domain holdings.
  • The value of generically descriptive domains has in many cases dropped precipitously in many markets as the barrier to entry has increased & signals of brand awareness have become relevancy signals.
  • Verticals with high commercial value (like travel) have seen more aggressive ad placement in the result set, which has led to Expedia acquiring a fallen Orbitz & Travelocity. This sort of consolidation has occurred in many other markets as well. In market after market after market the leading vertical publisher brand names have been gobbled up by private equity. TheKnot, BankRate, Blue Nile, WebMD, etc.
  • Programmatic ad spending has drove CPMs into the ground for years while ad blockers also gained popularity. The technical cost of gaining & maintaining exposure has increased (even upstart web-first publishers like Vox & BuzzFeed are missing revenue targets).
  • In some emerging markets where the web is less developed & growing far quicker some businesses simply share their Facebook names rather than listing their domain name on their shopping bags or such. In addition, in emerging markets YouTube, Facebook & other such properties often have a far lower ad load than they do in the U.S. That ultimately acts as a subsidy which prevents the emergence of local competitors (outside a few key markets like China).

My account manager at GoDaddy has been great to me & GoDaddy has done a great job building a premium portfolio of names for sale at reasonable prices, but GoDaddy will likely need to push their ecommerce software sales & other services to quick growth as shopping cart companies like Shopify, Squarespace, Volusion, Big Commerce, & Square (which acquired Weebly) take share in the domain market & companies like Cloudflare push to commoditize the core domain registration market.

Verisign, which administers the .com TLD, currently charges $7.85 per year to register a .com domain. ICANN imposes a $0.18 per year fee on top of that for every domain registered. Today, if you transfer your .com domain to Cloudflare, that’s what we’ll charge you per year: $8.03/year. No markup. All we’re doing is pinging an API, there’s no incremental cost to us, so why should you have to pay more than wholesale?

About 6 weeks ago longtime GoDaddy shareholders KKR, Silver Lake & Bob Parson’s YAM Special Holdings announced the sale of  10,390,942 shares of Class A common stock. At the company’s current market cap that is nearly $1 billion in shares out of a market cap of $14.31 billion.

Some news publishers are trying to push through mandatory taxes on the central networks to force revenue sharing. In the past such efforts have fallen flat on their face. Google’s regular organic search results have an “in the news” section which only contained approved news publishers until the compulsory copyright tax stuff was first pushed & then shifted to listing personal blogs and other sources in that. That was years ago & Google hasn’t undone the blog inclusion.

Two big positives on the shift away from an ad-funded web to a more balkanized set of closed silos are:

  •  It should allow somewhat neutral players with strong usability to shine & gain share against sites with heavy paywalls.
  • As people become more acclimated to paying for content, that should help a lot of small indy players develop niche publications & services. In China – long known for piracy – people are spending over $7 billion per year on podcast subscriptions.

I wouldn’t dare short GoDaddy, but it wouldn’t hurt to buy a few put options. Put options with a $75 strike price on January 18, 2019 are going for $2.10 & have over 1,000 open interests. If GoDaddy rallies and those options fall much further they could be a good risk/reward. Another option to consider would be the political chaos risk off idea. The November 16, 2018 options would be a way to play the run up to the midterms, the election itself & whatever batshit crazy violent response may happen as a result of the media constantly fomenting hyper partisan hate. Put options with a $70 strike price are going for 40 cents. Of course a 15% drop would be a big move, but if you are long the market broadly or heavily long tech plays a few of those options might be ok insurance on other positions.

Early and Wrong

So that BBBY call was smooooth.

I had so many trades go well in row that confidence got a bit high & I traded into BBBY after hours yesterday.  I made sure the position size was small to where I could lean into it more if it slid further & wouldn’t have a massive loss even if it kept sliding.

And keep sliding it did!

Over 40% of the stock’s shares have traded hands today. There has been a bit of a bounce & I bought a few more shares and sold them off to recover part of the miss from last night.

My guess with tomorrow closing out the quarter is that almost nobody will want to be showing they are holding BBBY, so whatever dead cat bounce there is tomorrow will likely fade into close.

Quarter end window dressing likely had some people crowding into FANG & some momentum stocks which were hot earlier this year like FUNKO. With the Fed unanimously voting to raise rates & committing to doing another raise this year some of the money that went into value plays has rotated back into tech.

Tesla will make the quarter end interesting as the SEC just sued Elon Musk over his “funding secured” Tweet.

The Ugliest Headline is a Buy

For trades I try to mostly buy stocks in areas I know a bit about. If something is tied deeply to the web I have a better than random chance of maybe knowing something about it that the market doesn’t & the confidence to hold (or is that hodl?) if the trade goes against me.

If I can get a few percent in a day on a trade then I will happily exit it, but I try to buy stuff I wouldn’t mind either quickly exiting if it just didn’t work, or stuff I wouldn’t mind holding for years if I thought the trade was going to go astray temporarily but the longterm trends were good.

I am not sure if it was on Stocktwits or his blog, but Howard Lindzon mentioned a great interview of Salem Abraham which I listened to while I was doing some tedious HTML editing a couple days ago & in the interview he mentioned that inevitably his best trades were often those that were the hardest to put on & had the most visceral emotional reaction. He stated (badly paraphrasing here!) with trades you are largely trading against the psychology  and emotional behaviors of others. When everyone is on one side of the boat whoever goes to the other side stands a better than even chance of having a good trade set up. If something looks so ugly that nobody would want it, maybe it’s a buy.

Shortly after listening to the interview I was catching up with tech related news & kept coming across the story about the CEO of JD & the stock was off another 7.47%, and is down about 40% since Google invested $550 million into it about a quarter year ago. JD is still growing over 30% YoY & are valued at a song on a price to sales basis (about 0.5) when compared against other leading internet retail stocks.

After the recent swoon (terrible rape story) on top of swoon (decline in Chinese tech stocks tied with a slowing domestic economy from trade war ratcheting up this year after China tried to pop their stock market bubble a few years ago & housing bubble last year) it would seem there is no reason to buy JD, which is why it went up about 4% today.

I sold it shortly after the market opened along with my eBay.

MakeMyTrip has been sliding & dropped again on news that hotel chain OYO was raising a billion dollars from Softbank & other investors. I messaged a friend about how that story didn’t make a lot of sense to me:

Indian hotel booking app valued at $5 billion. Expedia is under $20 billion & leading India publicly traded online travel agency MakeMyTrip near 52-week lows, off 3% today on the competitor funding, and valued at $2.7 billion, in spite of owning almost half the OTA market including doing bus ticketing or train ticketing for core travel infrastructure. I sometimes wonder if Vision Fund is dropping a billion or more at a time, why not buy out the leading public competitor as well? like if you do $1B for a minority investment in a fast growth startup, why not spend $3b more & own a controlling stake in the combined entity?

The above exchange sounds like I talked myself into a position, but unfortunately I did not!

Someone else apparently viewed some similar string of logic as sound, as MakeMyTrip ramped up as high as 17% today before pulling back to closing the day out up 9%.

I love the look of MMYT in the search results.

Clever use of sales copy in the page title & who doesn’t love some  ✅ action in the description? 🙂

+1 to their SEO team.

After hours Bed Bath & Beyond fell into a deep slumber as  BBBY tanked about 15% on top of falling about a half-percent on the trade day due to declining same-store sales.

“These poor numbers…need to be set against the context of a robust consumer economy where spending on homewares and home-related products has been strong. Framed in this way, the numbers are little short of terrible and underscore the myriad of missteps Bed Bath & Beyond is making,” said Neil Saunders, Managing Director of GlobalData Retail.

I bought a few shares hoping for at least a dead cat bounce in the morning.

Now that the divorce rate is falling if only we can get more people married & birthing children before open tomorrow, this will be a great trade!!!

Sheinhardt Wig Company is not all that far from testing 2009 lows. Will they soon be soaring? The headlines certainly are ugly enough.

 

 

Long eBay

eBay should keep growing along with the broader ecommerce market provided the economy remains hot & we do not have a recession. They won’t grow as fast as Amazon.com or Walmart.com, but they are still growing at about 8% YoY.

And as the big platforms source more goods from China & increase the ad loads in their search results, they are adding back friction to offset some of the friction they removed with things like 1-click ordering.

The first three results, which take up the whole screen above the fold — everything visible before you scroll — are sponsored placements that appear as search results … The competition for brands to bid on their own or others’ keywords is fierce

There are guides on how to launch products for sale on Amazon where they directly suggest bidding on other trademarks, paying Amazon $5,000 and up for access to reviews from the Vine program, etc.

People who invest  heavily to build a position in organic search get to enjoy outsized margins so long as they rank (though the result displacement by ads trend is there too). But with Amazon you’ll need to jump through all these hoops to get sales volume & then you will still have many forces working against you to cram down your margins over time.

Further, the largest central platforms are seen as competitive to merchants with all sorts of hazards

  •  private label products that clone top sellers
  • direct deals that cut out some resellers
  • a layer of ads in the interface that displace the search results & further move margin share in the direction of the central platform
  • scammers doing fake reviews & fake copyright or trademark violation reports to get competitor products delisted, & all sorts of other seedy stuff like bribery of Amazon employees in China

Here is just a taste of the fake reviews & rank manipulation stuff.

only the first four reviews were related to the mask—the hundreds of others mostly evaluated a battery charger. The merchant, labeled by Amazon as “just launched,” likely co-opted an old listing with positive reviews and changed the product’s image and description to fool Amazon’s algorithms … Some China-based Amazon employees have been paid off by sellers to pull confidential seller-account stats, search-optimization tricks and other internal information, according to people with knowledge of the practice. … To trick Amazon and boost a product’s ranking, sellers will ship an empty box with a real tracking number to accomplices in the U.S., who then leave a positive review for the product. … His listing for the product was split into three listings, one for each size he offers. Not only did that cause the product to drop in the rankings, it also meant that consumers who found the listings were frequently ordering the wrong size. … As Amazon has cracked down on fake reviews, some sellers are leaving five-star, fake-looking reviews on rival listings so they trigger Amazon’s scam-detecting algorithm and get the rival seller suspended, according to the people familiar with the practices. Another tactic is to vote rivals’ bad reviews the most helpful. Others buy the product and leave safety complaints, which typically trigger an immediate listing suspension as Amazon investigates.

And then here is the kickbacks to Amazon employees in China:

In exchange for payments ranging from about $80 to more than $2,000, brokers for Amazon employees in Shenzhen are offering internal sales metrics and reviewers’ email addresses, as well as a service to delete negative reviews and restore banned Amazon accounts, the people said.” … “The going rate for having an Amazon employee delete negative reviews is about $300 per review, according to people familiar with the practice. Brokers usually demand a five-review minimum, meaning that sellers typically must pay at least $1,500 for the service, the people said. … One Chinese Amazon seller said competition on the website had become so heated that he is tempted to use illicit tactics to gain an edge. “If I don’t do bad things, I will die,” he said of his business.

Those private label brands from Amazon are an even bigger risk than the sort of scams some nefarious competitors pull, because the private label brands can source from the same factories & even be sold at a loss, as they can be cross-subsidized from cloud computing profits AND Amazon can factor in the value of displacing their organic results with more ads to force the ad buy to claw margins away from other merchants.

 The company now has roughly 100 private label brands for sale on its huge online marketplace, of which more than five dozen have been introduced in the past year alone. … Analysts predict that nearly half of all online shopping in the United States will be conducted on Amazon’s platform in the next couple of years. That creates a massive opportunity for Amazon to more than double revenue from its in-house brands to $25 billion in the next four years, according to analysts at SunTrust Robinson Humphrey. That’s the equivalent of all of Macy’s revenue last year. … Type the word “batteries” into Amazon’s search bar and the first thing that will catch your eye is a large sponsor ad running across the top of the screen for Energizer, featuring its ubiquitous drum-playing pink bunny. But after that, the screen is filled with offerings for AmazonBasics batteries … Some of this data is also available to big brands or vendors selling on Amazon’s platform through a program called Amazon Retail Analytics Premium. But it is expensive, with vendors paying 1 percent of their wholesale cost of goods sold to Amazon or a minimum of $100,000 to get access to a database that lets them see to some, but not all, of the data Amazon has compiled. … Amazon has utilized a reviewing program called Amazon Vine for many of its private-label goods. … Of those 835 products, more than half of the first 30 reviews were from the Vine program … many analysts say it is fairly expensive to participate, saying it can cost manufacturers as much as $5,000 to obtain reviews for one product, along with the cost of giving the product away.

As bad as the above sounds, Amazon is also offering billions in loans to merchants on their platform, so you are competing against all sorts of subsidies & leverage from a competitor who doesn’t need to profit from transactions plus gets a cut of your transactions any time you actually manage to win the sale.

eBay not be as competitive as Amazon, but they are also not known to be as cut throat. Maybe they were terrible when they dominated the market, but the Avis rule (we try harder) creates a more stable ecosystem for partners than the sort of move fast & break things mindset. They’ll still have some issues intermediating transactions, but they can connect IP addresses, user accounts, etc. to flag patterns of abuse like any other large platform can.

eBay is down to new 52-week lows (and may go lower still now that I’ve bought a bit :D) but they announced they have started their transition away from Paypal today, which will eventually increase eBay’s margins as Ayden charges far lower fees.

Nowak said eBay’s move away from PayPal should improve the company’s ability to grow buyers and gross merchandise value, as well as increase earnings before interest and taxes (EBIT) by 20 percent over the next three years. It will also lead to a 52 percent increase in gross payment margin, he said.

The vast majority of eBay’s business (about 90%) is fixed price listings with large retailers selling on the platform, but every day thousands of auctions have rare, unique & vintage things not widely found elsewhere. And if the economic expansion continues collectibles will follow other financial assets up in price.