As Seen on YouTube!!!

Sector rotation continued yesterday with some emerging market plays like Ctrip up big, bring up other smaller parallel plays like MakeMyTrip. Despegar might be a higher leverage way to play OTAs in emerging markets, though the sort of “national champion” model promoted by China & which India aims to emulate will likely provide a greater level of protection from foreign firms aiming to leverage their current profits from the western world into price dumping to grow to a dominant share in emerging markets.

Funko gave back the pop they had after reporting earnings. They are now trading around where they were before the November stock market sell off.

Since reporting earnings CVS has traded like a penny stock – giving away its quarterly dividend worth of market cap daily for a couple weeks straight. They are off about 22% from February 19th & have fallen by over half since July of 2015.

On way to create a 4% dividend is to start with about a 2% dividend and watch the stock get cut in half. 😀

If the economy goes into a recession there is a fear that Democrats could take both branches of Congress & the presidency, and perhaps initiate some changes which crammed down spending in healthcare. It is worth noting Nancy Pelosi’s top health policy aide told health insurers not to worry about “Medicare for All” impacting their businesses.

Pelosi adviser Wendell Primus detailed five objections to Medicare for All and said that Democrats would be allies to the insurance industry in the fight against single-payer health care. Primus pitched the insurers on supporting Democrats on efforts to shrink drug prices, specifically by backing a number of measures that the pharmaceutical lobby is opposing.

The above approach would seem to lessen the risk of the steep price CVS paid for acquiring Aetna.

Walgreens Boots Alliance has also been careening downward. There was a big multiple percent reversal on CVS yesterday with heavy volume, but then it headed lower once more to close the day & both were down significantly early again today.

There’s a good chance the bottom is in today or tomorrow on both the 2 big drugstore chain stocks unless the entire market tanks – though if that happened it would likely drive investors into defensive sectors like healthcare. Walgreens Boots has debt leverage & more of a global footprint, whereas CVS also has loads of debt due to their Aetna piece which they paid almost their current market cap for. Writing down one acquisition while beginning to integrate a larger acquisition is a great way to crater share prices.

Rite Aid is a proper penny stock with a share price of 66 cents & a market cap around $700 million. That’s quite a fall from their 1999 price of over $50 a share. Their current price isn’t too far from touching their December 2008 prices. They don’t have enough scale to remain relevant.

Target was up big yesterday after reporting earnings & offering strong guidance. After gapping up about $4 a share at open yesterday they are up another $1 today.

Kroger also further recovered from last week’s “oh no Amazon” narrative. Kroger’s almost where they were before the Amazon semi-announcement. That is the second time fading the scary Amazon headline has been a winner for Kroger shareholders.

Target, Kroger & Walmart are quietly fighting back against Amazon.com by becoming online ad plays in their own right.

“Walmart likely has $2 billion to $3 billion in annual digital ad sales already, but could grow that to $5 billion within a couple of years, Stich says. He estimates Amazon ad sales now at $15 billion. And he says that Kroger Co., which only in recent years has developed substantial digital ad revenue from its online grocery business, now has nearly $1 billion in digital ad sales, similar to Target.”


Given the high margins associated with online ads & mass market retailers creating more private label goods to improve margins, differentiate their stock & force ad buys, low margin retailers could see significant margin expansion which offsets delivery costs they ate by trying to adjust their narratives to better compete against Amazon.com. Target has already adopted differential pricing based on user location & is building out a third party network of complimentary suppliers to display on their website.

The Amazon grocery store story also hinted at beauty product sales in their soon to launch grocery stores.

“Beauty items offer high margins for grocers, and Amazon has expanded its array of such products under various labels. Health and personal-care items are Amazon’s largest source of consumer-product sales online, with roughly $5 billion in sales last year, according to e-commerce data analysts Edge by Ascential. … Though more shopping is expected to migrate online, less than 5% of the roughly $1 trillion in annual U.S. food and consumer product shopping is done over the internet now, market research shows.”

My wife loves the Boots beauty products section in the Walgreens between Westfield mall & Chinatown in SF, so any success by Amazon there is another whack to the pharmaceutical retailers.

Carl Icahn is taking his second blood letting from Dollar Tree. He established a stake in the company last October. On earnings they announced they would close 390 of the Family Dollar Stores they purchased from him & other shareholders for $8.5 billion in 2014.

Barron’s quoted a Needham analyst today who suggested Alphabet should spin out YouTube.

“We believe Netflix (NFLX) is the best public comparable for YouTube…A current Netflix multiple of our estimated YouTube net revenue of $14 billion implies that the value of YouTube is about $140 billion.”

Needham’s Laura Martin

The odds of that happening anytime soon are IMHO approximately between 0 and 0 percent. They could, however, eventually start breaking out reporting of performance much like Amazon did with AWS.

They’ve been hesitant to do that for a couple major reasons

  • the core click volume of search has been growing slowly as much of the search volume growth is in emerging markets with limited ad coverage. most of the ad click growth Google is reporting is YouTube video ads – particularly the unskippable preroll ads.
  • they can keep suggesting they are investing in growth with YouTube & it is unprofitable to keep their high 45% take rate on ads from YouTube partners (as opposed to 32% on AdSense) & potentially shield the “unprofitable” service from lawsuits and negative media coverage each time an antivax, suicide tips, or pedo or hate preacher genre is exposed for allegedly playing some outsized roll on the service

One other thing I find at least a bit ironic & hilarious is many news sites are relying on cutting edge Google technology to help moderate their comments.

“Rather than using machine learning to determine what is or isn’t against a given set of rules, Perspective’s challenge is an intensely subjective one: classifying the emotional impact of language.”

Meanwhile YouTube is known for having the singularly worst comments section on the entire web. Recently Google suggested YouTube partners could get demonetized if they did not police comments on their videos.

“instead of hiring more moderators and building better tools to flag abuse, YouTube has, once again, put the responsibility on YouTubers. Now, on top of the burnout-inducing production schedule required to remain in algorithmic favor, the company expects creators to act as their own community moderators.”

Literally anybody can boost their popularity by promoting a viral story about a seedy subsection of YouTube. From the above article:

As part of the backlash against Watson, an old clip from one of his now-private videos is also currently circulating. It’s a scene from a man-on-the-street prank video which allegedly shows Watson asking an underage girl if she wants to make an adult video.”

Why the hell isn’t Google offering the moderation tech as features to their YouTube partners?

In spite of all the media hate YouTube garners, it is a great service which is having profound impacts on millions of lives, especially in emerging markets like India where local substitution will accelerate massively due to cheap access to information.

“There was a time when people had paper maps,” Sengupta says. “Today you walk around India and see everyone using Google Maps because they work off-line.”

“Several Saathis and their trainees have seized the chance to start cottage industries with their new Internet skills, downloading instructional videos on YouTube on how to make homemade honey or embroider shirts, for example.”

Weekend Cleaning

Funko

Funko reported a strong quarter with sales jumping 38% YoY to $233 million in the 4th quarter. Their stock is back above $21 a share, giving them a market cap above a billion & having the stock roughly double off the December lows. They are opening a Hollywood store to boost brand awareness, are projecting YoY growth rates of 18% to 20% (above expectations) on top of the beat & are growing into the board games category through their recent acquisition of  Forrest-Pruzan Creative.

The fact that Fortnite, which the Washington Post called “the biggest pop culture phenomenon of 2018” accounted for only 12% of our Q4 sales and 5% for the year, showcases how Funko is like an index fund of pop culture. The property is important, but it’s just one of many in our portfolio.
Evergreen properties accounted for about 46% of our sales in Q4 and 47% for the full year. Again, this shows that we’re not reliant on a small number of hits, nor are we reliant on only new content

Funko President Andrew Perlmutter

Grocery Stores

Grocery store stocks once again sold off on news Amazon will attack the category by launching another line of grocery stores.

eBay

eBay added 2 board members from activist investors Elliot Management Corp. & Starboard Value.

China Doom Machine

Kyle Bass was once again interviewed on Real Vision. He mentioned how capital left China in a variety of formats including loans in foreign currencies not paid back, diamond sales, cryptocurrencies, etc. & how those generally happened in waves until they got shot down by regulators.

Software Eating the World

Microsoft launched a feature for automatically creating an Excel spreadsheet based on a photograph of a table.

LendingTree

LendingTree is up to $322.60 from a December 24 low of $200.05, a gain of over 60% since the market bottomed. They are now valued at over $4 billion. A large part of their growth has been based on acquisitions.

  • 2016: CompareCards
  • 2017: DepositAccounts.com, MagnifyMoney, SnapCap
  • 2018: QuoteWizard, ValuePenguin, Student Loan Hero

Their core business has seen growth through aggressive expansion of their Google Ads / AdWords ad campaigns.

Through the next 3 to 6 months that ad spend will still provide additional growth, but it looks like the ad spend has flattened over the past couple months, so in about 9 months that ad spend will be required to maintain share rather than buy growth. Some of their other acquisitions like ValuePenguin rely more on organic exposure, while it appears MagnifyMoney has been fairly flat on Google Ads spend & DepositAccounts.com has ramped up their Google Ads spend over the past half-year.

Outside of CompareCards.com (which has a similar Google Ads chart to the above LendingTree chart) most of their secondary sites are generally far more reliant on organic search than their main site.

When you look at the acquisitions we’ve made, they’ve all been people who are in kind of the same business we’re in, albeit, in some cases, more SEO-oriented. Our SEO strategic initiative was because we knew that we were under-indexed there from a marketing perspective. And the combination of Magnify, Deposit and now ValuePenguin, we feel like we’ve built and will continue to build organically an SEO business. But I would not anticipate more SEO-oriented acquisitions, okay? We feel like we’ve achieved that strategic objective.

J. D. Moriarty

They also mentioned growth rates of specific properties:

We’re also beginning to see real traction in SEO with meaningful growth across multiple brands and product categories. DepositAccounts and MagnifyMoney have both doubled their revenue since we acquired the brands in 2017. And through our centralized SEO function, we’re becoming a scale player in the content transaction model space.

Our investment in off-line advertising is also resulting in lift across a number of channels, including direct traffic, branded SEM and SEO. We’re seeing a 40% year-over-year increase in direct-to-site loan requests, a 43% lift in branded SEM loan requests and a 17% increase in loan requests from SEO channels.

LendingTree Chairman & CEO Douglas R. Lebda

Last year when LendingTree was close to their peak I bought some put options that turned out ok. If I were broadly long the market now I would be tempted to consider buying a few LendingTree put options or maybe some put options on Wayfair. On the conference call LendingTree mentioned their My LendingTree platform could see strong growth due to cross-marketing of higher payout credit card offers.

I think UBS Investment Bank’s Eric Edmund Wasserstrom gets at the core issue with the market size opportunity & growth drivers at their elevated P/E ratio.

I guess what I’m ultimately trying to discern is, on the one hand, the recent drivers of guidance upside have come largely from acquisition integration. And at the same time, it looks like within the core business, there’s an increase in marketing and acquisition costs. And so I guess what I’m trying to understand is, has there been some change here wherein organic growth is just becoming more challenging and, therefore, more expensive to accomplish? And is that some indication of kind of the go-forward economics of LendingTree’s business?

LendingTree has held up quite well when compared against the likes of QuinStreet, which has slid from $20.02 to $13.60 a share after a weak Q4. No doubt LendingTree is a stronger business, but then there is also a huge gap between trading at around a 10x multiple or trading at about a 50x multiple.

Faux Marketing Innovation by Non-marketing Companies

The lens through which you have experienced the world is also the lens through which you ultimately view the world. Thus a person who spent decades in marketing could argue that almost everything is a subset of marketing. But sometimes it becomes a bit of a reach.

Last year I read Ken Auletta’s Frenemies book which detailed how technology was changing the media landscape & impacting ad agencies. One of the companies repeatedly featured in the book for taking innovative new approaches to marketing & promoting their brand as being cutting-edge was GE. They currently trade at about $10 a share, down from about $30 a share a couple years ago when the book was being researched.

Intel had built an in-house ad agency, was building dancing robots, etc. … and in the process let TSMC get ahead of them in being able to produce chips with transistors at a 7 nanometer density while Intel is still at 10.

Kraft Heinz recently slid 27.5% after missing their estimates & slashing their dividend. They wrote down the value of their Kraft & Oscar Mayer trademarks by $15.4 billion. After years of 3G’s zero-based budgeting they failed to keep up with changing consumer tastes. It is hard to sustainably cut your way to success.

Other than accounting, it seems they have no idea what they are doing.

“I’m a terrified dinosaur. I’ve been living in this cozy world of old brands [and] big volumes. You could just focus on being very efficient and you’d be OK. All of a sudden we are being disrupted in all ways. We bought brands and we thought they would last forever. Now, we have to totally adjust to new demands from clients.”

3G co-founder Jorge Paulo Lemann

Last May Warren Buffett mentioned the ongoing battle between brands & private label brands offered by retailers.

Barrons published an article mentioning the direct-to-consumer trend could drive ad growth for Google & Facebook.

“As direct-to-consume brands become more confident in their ability to drive repeat business organically,” he wrote, “we believe the willingness to pay for the initial customer acquisition naturally grows, which could serve to continue to grow ad revenue derived from these verticals over time.”

Evercore ISI’s Anthony DiClemente

After under-funding growth for long enough, cutting the business to the bone, the only solution is … divestures. Maxwell House is one of many brands which is up for sale.

Mood at the company, which saw its shares plummet nearly 30 percent on Friday, is dour, say people familiar. It is taking a no stone unturned approach to which brands it should or could unload, they say.

CNBC

There was a huge hint they were going to bomb the quarter about a month ago, when they ran a custom Superbowl ad campaign targeted to Pornhub for their new Devour food brand.

In the age of the #MeToo movement & all the spiels about “brand safety” in the advertising world one would have to be utterly tone deaf to broader cultural trends to run such an ad campaign. There’s no way a risk-adverse roll up play consisting of old line brands intentionally creates custom ad campaigns targeting porn unless they are desperate.

When a company starts running cutting-edge ad campaigns on Pornhub or introduces their version of Shingy, they may not yet be a short (after all, subpar performance can be announced with increase share buybacks or a company can position itself for buyout to only later become a writedown by the acquirer) but buying out of the money put options ahead of earnings releases might not be a bad idea.

Zillow Flips Upward on Home Flipping Story

For the past couple quarters Zillow has slid after reporting quarterly results. The big themes on the slide were the erosion in the growth rate of their core business (selling ads to Realtors) coupled with new (perceived?) risks to their business from adding new business lines including lending and home flipping.

In after hours on the most recent quarter the stock immediately slid after reporting results, with the stock falling nearly 10% from $34.97 a share to $31.97. The stock then quickly reversed course, ending after hours at $37.94 & closing out the next day up an additional 26.37% during trade to end at $44.28 a share.

When I up, down, touch the ground, puts me in the mood, in the mood, for food – Winnie the Pooh

A quarter ago when Zillow announced results Jim Cramer mentioned how such a stock could torpedo a portfolio, they could still have a lot of downside & how the desperation among the company was “unbecoming.”

I am not surprised they jumped on the announcement they were changing CEOs back to Rich Barton & were aiming to create an extra $20 billion in revenues within 5 years by flipping up to 5,000 homes a month.

Even after the recent huge 35%+ swing in share price, Zillow is still valued at about $9 billion. At some point it would even make sense for someone like Massa to jump in and buy Zillow shares to maintain narrative control over his large investments in Opendoor. It is hard to claim the over $1 billion invested into Opendoor with a valuation now around $3.7 billion is rational if Zillow (which is the dominant player in the category) is only worth around $6 billion & jumping into the home flipping category is considered value eroding for Zillow.

If you had to create Zillow again from scratch you probably couldn’t, as such an effort would almost certainly get hit by the Google Panda algorithm. Further, Realtor.com, their most direct competitor in the search results, isn’t really closing the gap.

If you do the math on the home flipping, it is a lot of revenues, but is not a lot of profits. From a few recent interviews I have read, it sounds like Zillow is mostly interested in light-touch quick flips, and while that strategy certainly limits downside risk, there is also a limit to the size of the market & the profit potential in that market. In Q4 of last year Zillow made $1,723 in profit on the 141 homes it sold.

Zillow paid $264,134 on average per home it sold in the quarter, and spent over $20,000 per home on renovation and selling costs. Once interest and holding costs were taken into account, Zillow’s cost per home was $291,518 per home, meaning the $293,241 in revenue it generated per sale amounted to a 0.5% profit margin. Earlier in the year, when housing activity was stronger, Zillow appears to have generated more than twice the margin.

Forbes Staff writers Samantha Sharf & Antoine Gara

As Zillow and other iBuyer competitors scale up the home flipping business, they may be able to increase capacity utilization, but they likely will drive down margins on the business unless they go into tougher projects (greater risk + longer turnover times) and perhaps decide that their core business model is strong enough that they can afford risking pissing off Realtors and squeezing them out of the conversion process on their owned inventory.

Penny Stocks

I think most penny stocks are penny stocks for a reason – either they are failed businesses, scams, or have some other reason they remain publicly traded while having little to no economic value (based on their market price).

In some cases regulatory changes can cause formerly broken businesses to become once again viable. That is what some people are betting on with Fannie Mae (FNMA) & Freddie Mac (FMCC).

GSEs up up & away

However, most penny stocks never break out of the category, or only do so for a scarce & fleeting bit of time. As much capital as there is in the world, if a penny stock had some sort of powerful strategic advantage it would in most cases quickly go private.

One penny stock I was curious about, but ultimately never touched, was Health Warehouse (HEWA). They currently trade at 32 cents a share & are valued at about $15.6 million.

They had absolutely fantastic rankings in Google about a year ago. The month their organic rankings fell off so did their stock price, giving up about half its value.

The reason I never bought any of their stock is the thing seemed so illiquid you would end up moving the market cap 10% or 20% if you were to invest enough in it for the returns to count for anything. And then if you thought you could boost the rankings of their property you would also have to invest quite a bit again, so it is something where you would probably need to invest about 6 figures into in order to see a worthwhile return, but that is a big chunk of change to put in a penny stock.

And the tough thing with search is the trend isn’t really your friend & no matter what your best efforts are, if an algorithm update moves against a site it can more than undo any work you’ve done.

“Google can’t help but being predatory in saying, well, you used to get all this traffic for free, our goal, over the last, now it’s about 10 years, has been to say, no, traffic is not going to be free. Those 10 blue links you used to see are now disappearing, so below the fold”

IAC Chairman Barry Diller

If your point of leverage & potential high returns come from the fact that you are overly indexed to the online ecosystem, any change in one of the core players can cause a steep decline in growth rates, sales volume, leverage with suppliers & profit margins. And online-only plays are ultimately playing against the clock as their offline analogs slowly adopt best practices to compete online.

Picks vs Trends

Last year’s sell off was relentless. Even trades that had long bases & were overly obvious still cratered with the broader market. No matter what you were in, if you were in almost anything (other than a short position) you were virtually guaranteed to lose as asset prices deflated.

Up, up, up since December 24th.

Amazon.com announced they were nixing their New York City HQ2, and would grow their other locations instead. JBG Smith Properties (JBGS) instantly jumped on the news & is making fresh all-time highs.

Since December 24th much of the market has seen a relentless bid higher. Enterprise software is up, game makers up even after weak performance, REITs & many other bond proxies near 52-week highs, gold strong even as the Dollar has been strong, oil prices recovering, the Nasdaq has entered a new bull market, etc.

Some individual names have recently bombed though:

Even some companies which reported strong results have seen shares slide. Yandex (YNDX) slid 8.54% yesterday & their conference call didn’t sound particularly horrible. Their ride sharing is already profitable if you back out self-driving & food delivery, they are likely to benefit from the hype cycle around the Lyft & Uber IPOs, they are still projecting search revenue increases of 18% to 20% this year, and while they saw rising TAC it was due in part to them gaining search marketshare on Android devices.

The above being stated, Yandex was as low as $24.90 on October 19 last year on rumor they could get acquired by Sberbank & they are now down to $31.47, so that is still a big 26.4% jump off those lows.

Part of the recent bullishness is alleged positive trade talks with China. But ultimately Trump has zero incentive to quickly solve the trade war stuff, because once it is over & people do not have some gain to look forward to & they realize their lives haven’t improved much he can’t use that narrative to drive re-election. So he is going to have to drag the trade war stuff out for at least another year & some of that will be via significant headline risk.

Now there is sort of a bullish mindset across the markets & maybe it holds, but I recently bought a bit of Virtu (VIRT) in case it doesn’t & those sort of one-off edge case slides start to spread throughout the market.

Central banks have been stocking up on gold while CLOs are the new CDOsMMT is getting lots of love

If I am correct, I suspect we will see many Democrat candidates (perhaps all?) adopt MMT as a tenant of their platform. And here is a crazy thought for you – what if Trump beats them to it?

Although I don’t have any concern about the government funding itself, I do have lots of worry that inflation would quickly rise and before too long, the government would be forced to cut back its spending, and that typical of governments, it would prove much more difficult than instituting spending. Therefore I would expect fixed-income to be a terrible investment under MMT. Even if the government pegs rates low, inflation will be the real risk. It would make little sense to sit in an asset that pays fixed.

Add to that a record selling of U.S Treasury bonds by foreigners:

Foreigners sold $77.35 billion in U.S. Treasuries in the month, after net sales of $13.2 billion in November. December’s outflow was the largest since the U.S. government agency started recording Treasury debt transactions in January 1978.

And a more symmetrical view of promoting inflation:

“I think the Fed is going to change that policy subtly over time,” Dudley said. “They are going to talk about, ‘We want to hit 2 percent inflation on average.’ And that’s going to imply to people that if they miss on the low side for a while, that they’ll be willing to miss on the high side for a while.” – former New York Fed President William Dudley

EA – it’s in the Game

So much for the game market being destroyed. Two days later and it is as if the poor quarter from EA never even happened.

Eh? What Bad quarterly earnings report do you speak of?

Activision (ATVI) hasn’t recovered anywhere near the degree EA did, Nintendo (NTDOY) is not far from 52-week lows, Take Two Interactive (TTWO) hasn’t regained much of what they lost & NetEase (NTES) is still off big.

Gaming company stocks after EA quarterly results announcement.

Yesterday after the adverse market reaction to the Kudlow US – China trade war news coverage I saw XOM was down almost 2%, so I bought a chunk of it as today it went ex-div. I sold that shortly after open today for about a half a percent loss BUT about a percent gain in the quarterly dividend payment that will be paid in a month, so it was net up a half percent on a decent sized position. It was a good thing I sold when I did as it has been down, down, down since open & looks like it could slide below $73 today if the market doesn’t turn up soon (edit: yup, it did, $72 & change). 

I was also holding a bit of FNKO that I sold for a small gain this morning.

I still have a small position in Nintedo that is off a bit over 3%, but made a similar amount from going in and out of EA & ATVI a couple times. I suspect whenever Google launches the next version of their Switch they’ll get a bit of a bump. I still have a position in Google along with a bit of Disney & Apple that were purchased about a year back. 

I’m quite glad to be mostly in cash while the market is choppy, another U.S. federal government shutdown could start next Friday, and the March 1st trade war deadline is only 3 weeks away.

A couple other interesting bits…

  • Today Henry Schein finally spun off their veterinary supplies division into a new publicly listed company merged with Vets First Choice. The ticker symbol for Covetrus is CVET.
  • Quinstreet is off about 20% today after meeting expectations . They saw weakness in their core legacy markets of online education (secular declines as the for-profit colleges are ultimately displaced by the nonprofit universities who have partnered with entities like 2U & they lost a large client in Dream Center Education Holdings which is going through restructuring) and home loans (cyclical market softness in response to rising rates hitting refi demand), but saw stronger growth in their other verticals including insurance, credit cards, personal loans, banking, home services & B2B. On the quarter they grew revenues YoY by 19% to $104.1 million. Financial services is 71% of revenues. Education is down to 16% of their revenues. Their recently acquired AmOne personal loan business (which they paid $20.3 million for plus earn out of up to an additional $8 million) is within striking distance of being their #2 revenue driver behind auto insurance. Almost a year ago Kerrisdale Capital Management published an article on SeekingAlpha highlighting how there is a lot of ingredients in the insurance leads sausage.

EA Weak Quarter

EA turned in a weak quarter, which caused their stock to slide 15% & also hit Activision / Blizzard for a 10% decline while the Nintendo ADR was off 6%.

I traded in and out of both EA & ATVI for quick small gains & am holding a bit of Nintendo + Activision / Blizzard. ATVI is now below the December 24 lows.

There was a recent Business Insider article which talked about how big of a struggle Nintendo has with their reliance on first-party titles. 

“Microsoft and Sony rely on major third-party games like “Grand Theft Auto” and “Call of Duty” to bolster sales of the Xbox One and PlayStation 4 consoles, and only produce a handful of major first-party games themselves. … Just about 85% of Nintendo Switch software sales are first-party games — games made and/or published by Nintendo.”

I believe their analysis is exactly backward. Nintendo’s revenue stream being highly differentiated is a point of strength.

On the most recent earnings call Google’s Sundar Pichai answered a question about the Google Play store 30% rake as though the question was specifically about distributing games.

On Google Play, obviously, we do this at scale, thousands of developers rely on it to safely and seamlessly distribute their games to billions of Android users worldwide. And we invest a lot in our infrastructure to continuously make sure their overall experience is safe and results in high engagement and for the developer’s back. So I think there’s a value exchange there and it’s been the industry standard. And so, I think we will continue down that path but obviously always adapt to where the market is.

If tech companies are displacing the roll of publishers by eating into the longtail of games & taking a fat rake off the top, then whoever has the most differentiated revenue stream has the strongest revenue stream.

If a single strong game can be leveraged into an online  game distribution platform, there’s no reason the company with the best gaming IP wouldn’t be able to  the same, or to be able to demand a higher revenue share from any third party platforms their content is distributed on.

There are a limited number of broad-based verticals the big tech companies can charge recurring subscription fees for: TV & movie, music, productivity software, hosting & file backups, games…and not a lot else. There are subscription services for books or audiobooks, but they are tiny.

Tech, telecom & other media companies have invested heavily in video streaming services, ultimately creating a bubble where they have doubled content costs for scripted animation & some highly demanded animators are turning down hundreds of millions of dollars worth of demand.

Spotify acquired podcasting company Gimlet Media for $230 million & they also acquired Anchor.

Consumers spend roughly the same amount of time on video as they do on audio. Video is about a trillion dollar market. And the music and radio industry is worth around a hundred billion dollars. I always come back to the same question: Are our eyes really worth 10 times more than our ears?

Spotify Founder Daniel Ek

What will drive Spotify’s growth? Unique, differentiated content.

Our podcast users spend almost twice the time on the platform, and spend even more time listening to music. We have also seen that by having unique programming, people who previously thought Spotify was not right for them will give it a try.

The New York Times hit fresh 52-week highs (13-year highs) after beating revenue & earnings expectations, growing their digital subscriptions quicker than anticipated & raising their dividend 25%.

They have differentiated content & drive the news agenda.  

So long as Trump is dominating Twitter & private equity firms are eating newspaper chains to do round after round of layoffs the New York Times has a highly differentiated offering & paying a subscription fee is a way of supporting the party. The decline of NUmedia also makes the New York Times relatively more differentiated

The media industry has already shed more than 1,000 jobs this year, but the Times said Wednesday that it added 120 employees to its newsroom last year to bring the total number of journalists to 1,600, the largest staff in the paper’s history.

NYT might be a great short if Democrats win the presidency in 2020 & their base has less to be outraged by (as their own party is in power). If Democrats are in control there is almost no chance the New York Times will reach their 2025 subscriber goal of 10 million active subscribers.

Lightening Up Market Exposure

January was the best opening month for the stock market since 1987. I doubt we will see a repeat of Black Monday with the DJIA off 22.6% in a day, but there are still many potential negative catalysts in the market: debt build up, slowing growth globally, growing political populism & nationalism, trade imbalances across Europe creating ongoing issues, and the trade war between the US and China.

The market may have over-read the Fed’s willingness to hike into a deteriorating market as they lifted rates on December 19th & Jerome Powell stated rates were a long way from neutral on October 3rd of last year. The market might now also be over-reading into Federal Reserve dovishness.

The end of last year was so choppy because there were both tax loss harvesting driving down the price of losing positions & some winners were sold to lock in profits while offsetting tax loss harvesting. Combine those with fear of a hawkish Fed & there were many people with an incentive to sell & algorithmic players riding along to cause heavy moves in a time of year that traditionally has light volume.

We’re at the point where many people who traded on the (incorrect) thinking the Fed would be dovish on the 19th of December now see many of those positions back in the black. I sold out the bigger stake I had in Apple (still have a smaller stake from long ago), the ExxonMobil position I had, the remaining AbbVie I had, etc.

I also dead cat bounce traded Verizon & AT&T on their sour earnings reports, along with Paypal’s fall after reporting earnings. A few days back Funko was off over 8%, so I traded a bit of that & sold it when they were back to off 4%.

Verizon wrote down $4.6 billion – about half the purchase price of Yahoo! & AOL (formerly known as Oath, known as Verizon Media Group after Tim Armstrong left the company). Yahoo! Finance finally launched their subscription offering with a free trial & a $49 monthly recurring fee. Many traditional newspaper chains & upstart online publishers like Buzzfeed & Vice have done rounds of layoffs, so it remains to be seen if Yahoo! Finance has enough pull to be worthy of a monthly subscription years after they shifted from offering lots of original content to mostly referring traffic to third party sites with original news coverage. One thing Yahoo! has going for them is Google gutted Google Finance over a year ago.

One problem with a market that keeps going up is it can allow a speculator to presume they are brilliant because they keep winning on every trade. In a market with bullish sentiment even bad news only temporarily clips stock prices.  

After a healthy run in the markets I prefer to have lower exposure so I don’t have big positions caught offsides if any of the big issues crop up & cause dislocations: hard Brexit, Italian politics in Europe, the yellow jackets in France, the tsunami of bad debts in China, trade war stuff, etc. … I’d rather wait for company specific, sector specific or marketwide slides before deploying much capital.

Housing has many headwinds: the TCJA capping SALT deductions, affordability (particularly in a rising rate environment), lower investment from Chinese investors, slowing economic growth, still rapidly rising healthcare costs ramping local property tax payments, uncertainty with potential policy changes toward Fannie Mae & Freddie Mac, etc.

Weyerhaeuser (WY), a timber REIT, was down to $25 a share in pre-market after missing their numbers top & bottom line, during the day they reversed & closed at $26.75, up 1.94% on the day – about a 6% swing from the bottom. They were one of the biggest dogs in last year’s decline, but they’re up over 30% off their lows. They are one of a few large REITs which is not near or at 52-week highs. From the following table you can see in the column one from the right how most of the REITs are within the top 10% of the range they have traded over the past 52-weeks & the column left of it shows most are within 2% to 3% of their 52-week highs.

A Sample of Large US REITs

I bought tiny positions in VLO & TGT today. Both were down significantly on the day. VLO has recovered quite a bit since the Christmas eve bottom in the stock market, but they’ve also seen insider buying & they’ve beat expectations by a wide margin

As long as diesel margins remain high — and there’s little reason to see them falling, given low inventories — then refiners can live with weakness in gasoline. Valero, in particular, has demonstrated its ability to capture opportunities on margins where it can find them, and pay out any windfalls to shareholders. Conversely, such financial strength means gasoline supply could stay strong as the year progresses.

Tons of retail stocks slid in tandem with Amazon.com after Amazon.com gave soft forward guidance, but some of the issues Amazon is facing like mounting regulatory pressures in India are not being felt by purely domestic US retailers. Amazon facing headwinds in an emerging market likely increases the value of retailers with a heavy United States emphasis, because the US-based retailer does not need to jump through hoops to undo those malinvestments & they can focus on improving their core business, while the multinational has to give more thought to how they are fueling international growth & if it makes as much sense to cross-subsidize into emerging markets where any success will likely be met with a row of nails thrown under their tires.

“The secretary of India’s Telecommunications Department, Aruna Sundararajan, last week told a gathering of Indian startups in a closed-door meeting in the tech hub of Bangalore that the government will introduce a “national champion” policy “very soon” to encourage the rise of Indian companies, according to a person familiar with the matter. She said Indian policy makers had noted the success of China’s internet giants, Alibaba Group Holding Ltd. and Tencent Holdings Ltd.”

WSJ article

Walmart’s 16 billion Dollar purchase of Flipkart last year is looking ill timed, particularly as it was done to buy growth instead of profits: “The Flipkart purchase would hurt profit by 25 cents a share, Walmart said.”

And that growth just went oops.

Google also looks to be cleaning up in India as they own Android & the iPhone is not a big seller in India. Mobile usage indexes way higher in India than in many other countries. In addition, Google hasn’t got hosed on massive investments the way Amazon & Walmart just did, while smartly acquiring tuck in companies like Where is My Train relatively cheaply, and avoiding the type of scorn Facebook’s WhatsApp has earned.

Target is only worth a little more than double what Walmart paid for Flipkart. Relative to the market caps of the big tech monopolies both Target & Kroger would be cheap buys if the other big tech players wanted to compete head on with Amazon.com. As Amazon.com becomes an ad farm Google spending less than half of their cash on hand to buy out the largest grocery chain & the biggest broad-based US retailer not named Walmart would be a smart strategy to ensure their conversion process is as smooth as possible & they take the fight to Amazon rather than watching Amazon keep encroaching on their turf.

AbbVie Dead Cat Bounce

AbbVie missed earnings estimates on the top & bottom line, causing their stock to slide over 6% Friday. I traded in and out of it 3 times for small gains & still have a position in them going forward.

President Trump signed a bill re-opening the federal government for 3 weeks, which should help relieve some of the short term concerns in the market. China is engaging in stealth QE & the Federal Reserve floated a trial balloon for ending their balance sheet run off far sooner than most anticipated. The Dow Jones Industrial Average, Nasdaq, S&P 500 & the Russell 2000 Index were all up 3/4% or more on the day, which makes the recent decline in AbbVie stand out even more. ABBV is down over 10% so far this year while the broader market is up 6% to 7%, offsetting some of the steep declines seen in December.

Longer term I am iffy on the healthcare industry, as at some point it becomes such a drag on the domestic economy it could literally blow up the global economy.

 “In 2018, Americans spent nearly $1.2 trillion on hospital care, representing approximately $9,200 for the median household, or 14.7 percent of median household income. That exceeds what the average family paid in federal income and payroll taxes. By 2026, projected hospital spending will exceed $13,000 per household: nearly one-fifth of household income.”

FREEOPP.org

But the tighter labor market is causing lower strain on some parts of government budgets as people who were disabled are now opting to work. On an earnings basis AbbVie is priced quite cheaply, particularly given their history of increasing dividend payments combined with a current yield above 5%. The biosimilars competition in Europe was a known issue before the quarter & they missed revenue guidance by a fraction of a percent. Their forward P/E is around 10, meaning it is a quality name in the US trading at the sort of discount emerging markets trade at. And it is in a market where even generics are seeing huge price spikes.

I traded out of ABBV three times Friday & closed the day with a position up slightly, expecting it to go up Monday. If it gains a few percent right away I might sell it, but if it is a slow grind I am fine holding it for at least a few months. And once I get clarity on some other things I am working on it probably wouldn’t be a name I would mind holding longterm.