YNDX Again

You Have to be Awake to be in the Game

Once again Yandex was up big on open, cratered, and then recovered a bit.

A big part of day trading is being awake during the trading day. ūüôā

I screwed up my back and my sleep so I didn’t catch open, though thankfully am feeling a bit better now. I woke up right as the stock was bottoming and didn’t have my mind set to be able to trade then.

Yandex News

Yandex’s founder Arkady Volozh has a significant voting share in the company & put out a statement he had no interest in selling his stake.

Two other notes about Yandex.

First, as of their February report their US-based shares are largely held by a single entity:

Yandex said that as of Feb. 15, 2018, there was one holder of its shares based in the United States which held almost all Class A shares, or around 42.10 percent of shares by voting rights. It did not disclose the name.

Second, Russia has a draft law which will limit foreign ownership in news aggregators.

Russian-language news aggregators Google and Yandex will fall under the draft law limiting participation of foreigners in news aggregators ownership structure, submitted to the State Duma on Monday, co-author of the initiative and State Duma representative Anton Gorelkin told TASS on Monday.

In theory, if such a law were passed it would hit Google harder than Yandex in the Russian market, as Google would either be forced to create a separate operating entity for their Russian news search, or they would have to shut down their news search vertical.

If that law were passed Yandex could rebuy some of their shares and/or sell an equity stake to a local business (like Sberbank) to get the foreign ownership level below 20%.

If Google creates a separate operating entity in Russia that will play absolutely horribly with the polarized political conversation in the United States. Which would mean they would likely be forced to abandon the news vertical, which would then likely cause Yandex’s service to be more differentiated & help Yandex further gain search marketshare across Russia.

Russia was the first market to fine Google for their Android bundling. Since then Yandex has dramatically closed the gap with Google on mobile search usage, lowering the usage gap from 36% to 5%.

And Yandex still leads on desktop + overall.

If Google lacks local news coverage then Yandex could in short order end up with perhaps 70% to even 75% of the Russian search marketshare. That would grow Yandex search revenues at least 25% on top of the general growth of search usage & search ad click prices.

Longterm the above should make Yandex a buy, however there still are 3 big issues:

  • If the news aggregation regulation passes will Yandex spin out¬†a separate news subsidiary? Or will foreign ownership need to be reduced?
  • It is in Russia. Is the company going to come under state control & get plundered?
  • If a single US shareholder owned a large stake in the company is the current massive selling over the past 3 trading days that entity being forced to lower its stake?

Yahoo! Finance lists the following holders information.

Major Holders

Currency in USD

3.57% % of Shares Held by All Insider
83.95% % of Shares Held by Institutions
87.06% % of Float Held by Institutions
423 Number of Institutions Holding Shares

Top Institutional Holders

Holder Shares Date Reported % Out Value
Wellington Management Company, LLP 14,742,445 Jun 29, 2018 5.08% 509,351,463
FMR, LLC 11,880,500 Jun 29, 2018 4.09% 410,471,265
Capital Research Global Investors 9,238,886 Jun 29, 2018 3.18% 319,203,504
Oppenheimer Funds, Inc. 8,924,602 Jun 29, 2018 3.07% 308,344,992
Carmignac Gestion 8,543,751 Jun 29, 2018 2.94% 295,186,590
Morgan Stanley 6,197,172 Jun 29, 2018 2.13% 214,112,287
Blackrock Inc. 6,161,700 Jun 29, 2018 2.12% 212,886,730
Melvin Capital Management LP 5,754,408 Jun 29, 2018 1.98% 198,814,792
Wells Fargo & Company 5,426,630 Jun 29, 2018 1.87% 187,490,062
Harding Loevner LLC 4,722,149 Jun 29, 2018 1.63% 163,150,244

Top Mutual Fund Holders

Holder Shares Date Reported % Out Value
Fidelity Series Emerging Markets Opportunities Fund 4,644,580 Jun 29, 2018 1.60% 160,470,235
Invesco Developing Markets Fund 2,592,126 Jun 29, 2018 0.89% 89,557,951
VanEck Vectors ETF Tr-Russia ETF 2,068,048 Jun 29, 2018 0.71% 71,451,056
Baron Emerging Markets Fund 2,019,815 Dec 30, 2017 0.70% 65,765,179
Price (T.Rowe) Emerging Markets Stock Fund 1,668,630 Jun 29, 2018 0.57% 57,651,165
Smallcap World Fund 1,530,000 Mar 30, 2018 0.53% 60,052,500
Vanguard International Value Fund 1,381,815 Jan 30, 2018 0.48% 53,199,877
Artisan Developing World Fund 1,329,473 Dec 30, 2017 0.46% 43,287,642
Ivy Emerging Markets Equity Fund 1,283,000 Dec 30, 2017 0.44% 41,774,481
Wells Fargo Emerging Markets Equity Fd 1,240,106 Jun 29, 2018 0.43% 42,845,661

Nationalism / Re-localizing The Internet Supply Chains

President Trump is given a lot of crap for being “nationalistic” but so many other leaders around the world are approaching the web using the nationalistic playbook…

  • It is hard to find a more nationalistic country in terms of tech ecosystem than China is. Outside of the US there are only a couple mega cap tech companies that are¬†not¬†from¬†China.¬†And¬†China is trying to force sharing of¬†source code as a condition for market access.
  • Eric Schmidt has suggested the web will fracture with there being the Chinese Internet & the other Internet.
  • ¬†Look at the hoops Google is trying to jump through to get back into the Chinese market. And once they state they are willing to do X (censorship, tracking users, passing information onto a local partner who will then pass it on to the CCP)¬†to be in China they’ve established they are willing to do X, so other countries will ask the same.
  • the EU passed GDPR along with regulations requiring streaming services to have a set percent of local content. And they have the laws surrounding things like compulsory copyright / link tax.
  • Vietnam is following China in requiring localized data storage.
  • India requires ecommerce platforms that sell third party brands to sell for local merchants rather than carrying inventory directly
  • Inda¬†passed a law requiring payment data to be stored locally (which was likely¬†a big part of why Berkshire Hathaway invested in Paytm’s parent company).

Other Trades

Funko was up big today (10.21%, closing the day at $20.08), so I sold out my remaining share in it. If it slides tomorrow I will re-establish a position.

I sold out a bit of TCEHY I was holding for a while at a small loss. Last Thursday I bought a small amount that I sold at a gain Friday, so these two trades just about offset.

This afternoon I also went in and out of ABBV, AEM & EBAY for small gains. I picked up a bit more ABBV just before close.


Yandex (YNDX) Beaten & Left for Dead

Yandex followed yesterday’s doom cycle with a dead cat bounce open at $30.48 followed by a rapid decline to $26.42 a share. They’re now worth around $8.7 billion.

The price then touched $28 a share & has since resumed declining, now at $26.63 a share.

I sold the biggest chunk I was holding at open & bought a bit more at $27.50 & $26.79. Both of which I sold at $27.99 as I saw the Russel 2000 turning lower.

I am still holding a small position I bought early into the slide which basically offset the just before close purchase & flip on open.

Yandex is in talks to sell up to 30% of their company to Sberbank, the largest bank in Russia, which is half-owned by their central bank.

So why the decline? Perhaps some investors are concerned over the possibility that Sberbank’s stake could mean potential dilution for existing shareholders — though a share issuance and subsequent buyback would be presumably a zero-sum game. Alternatively, you can’t help but wonder whether Yandex’s autonomy could suffer with a government-owned bank as its controlling stakeholder.

It is rare that a company would have a bidder interested in buying a 30% stake & then see their shares slide 30% in response to news leaking. Ahead of the Yandex IPO they gave Sberbank a golden ticket:

Since 2009, Sberbank has held a priority share in Yandex which was purchased for a symbolic ‚ā¨1. From the company‚Äôs publicly available documents, it appears that this priority share gives Sberbank the right to block the purchase of more than 25% of Yandex‚Äôs shareholders‚Äô equity and/or votes by any of the company‚Äôs shareholders or a third party. A similar right exists regarding the sale of a stake larger than 25% to a third party. However, the golden share does not give Sberbank the right to influence operational decisions, nor does it give it additional dividends.

In May of 2011 Yandex priced their IPO at $25, raising $1.3 billion. On the day of the IPO their stock closed up 55% at $38.84.

Think of how much QE has been done globally since 2011 & what impact it has had on asset prices. Think of how much web usage has grown since 2011 with the rise of mobile.

Russian regulators were the first to fine Google for their mobile OS bundling, which has lifted Yandex’s share of search across the country.

And yet in over 7 years Yandex has went literally nowhere. That is how terrible the Russian economy has been.

Now that QE is running in reverse, Uber & Lyft are racing to IPO before this cycle turns.

When Uber did a deal to merge their Russian operations into Yandex.Taxi Uber put in $225 million and folded their local operations into the company to get a 36.9% stake at a valuation of $3.8 billion.

The current sky high whisper numbers for Lyft & Uber significantly increase the value of Yandex.Taxi (at least until the ride sharing meme fully goes public with no bid & craters).

The Uber Technologies IPO and record-high valuation is a “positive signal for Yandex.Taxi”, BCS Global Markets commented on October 17, noting that the price of Uber’s IPO could serve as a future benchmark for Yandex.Taxi valuation. Even the current $70bn valuation of Uber would imply a 30% premium for the Yandex-Uber deal in Russia.

If $70 billion is a 30% premium then $120 billion would be closer to something like a 100% premium. This would value the 59.3% Yandex stake in the future taxi spin off at something between $2.9 and $4.5 billion.

With Yandex trading at under a $9 billion market cap that would mean their stake in the taxi business would be imputed as being worth somewhere from 1/3 to 1/2 of their market cap. Given they have nearly $1 billion on their balance sheet & they announced a $100 million buyback authorization in June when the stock was around $34 or $35 there shouldn’t be a whole lot of downside at $26.70 a share.

They announce earnings in 10 days, where they’ll likely announce faster than typical growth due to the impacts of rising oil prices coupled with a weak currency¬†juicing the domestic economy. They¬†might launch another round of buybacks after earnings, there’s the potential minority investment, and the taxi service spin out all as potential catalysts.

Overall market sentiment is quite ugly today with both the Nasdaq & Russell 2000 dropping. On Wednesday Yandex was trading at $35.88 & now they are under $27¬†on massive trade volume that’s about 7x what it has been recently.

I just bought a few more shares at $26.55. I view it more as a trade than a long-term investment though, as we are late cycle with lots of unprofitable garbage bid up & all the sort of late cycle cringeworthy headlines.

Added: I think the bottom is in on Yandex & there was a sell the rumor, buy the news incident. In addition to the Sberbank narrative where there were fears of Putin controlling the company (as Putin visited the company last month), there was another story.

This is the second time it traded down extremely bad this year. The first time it traded like it has the past couple days was when US sanctions against Russia were announced late in afternoon trade (though the sell off started long before the sanctions were announced). The August 8 sanctions were related to the poisoning of Sergei V. Skripal.

The Trump administration agreed with the determination by the British government that set in motion the sanctions. The legislation requires that sanctions be put in place within 60 days, and Representative Ed Royce, Republican of California and the chairman of the House Foreign Relations Committee, sent a letter to President Trump two weeks ago chiding the administration for missing it.

The U.S. is suffering from a lack of faith in institutions. It is suffering nowhere near as bad as Russia is, of course, but it is suffering nonetheless.

The tech companies which avoided meaningful regulation while accumulating power were cheered as savvy for helping president Obama get elected twice, but when president Trump was elected people came out of the woodwork over the damage the tech companies are doing to society. When it was later discovered how many entities were pushing polarized fake storylines that were aligned with the “relevancy” algorithms that didn’t help people who felt they “lost” the election & have been left behind in the financial asset inflation led recovery.

¬†Saying there‚Äôs no comparison to the current period would be a gross understatement. Historically, the Fed has initiated easy money policy only as an emergency stimulus, either during or shortly after a recession. When clear signs of expansion took hold ‚Äď and an emergency measure was no longer necessary ‚Äď the Fed would begin to normalize rates. In the current cycle, this simply did not happen. The recession ended in June 2009 but the Fed held off from hiking rates until December 2015. Until last month, they were acting as if emergency measures were still necessary.

Just ahead of U.S. midterm elections this afternoon the U.S charged a Russian with trying to influence the midterm elections. After that headline came out Yandex shares were up about a dollar. I sold the recently purchased shares on the upward momentum as the last time there were sanctions announced it was frustrating as I was stuck as the bagholder on that for a while. I eventually sold out that prior position at a loss and stopped trading for a few days to regather my thoughts & focus more on web stuff. I didn’t want to hold a giant Yandex position over the weekend while my daughter is sick. I need a clear head to do well in the markets. My current Yandex position size is rather tiny & it is certainly down less than what I gained from the opening bell flip & the couple Yandex momentum trades throughout the day today.

Russia has been hoarding gold & dumped their US treasuries.

There still are a handful of narratives which can drive Yandex higher, but the only way to not get frustrated by such volatility as there was over the past couple days is to have reasonable position sizing.

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‚Äôs trade war is a move to push global trade towards a decentralized system‚Ää‚ÄĒ‚Ääaway 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‚Äôs 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‚ÄĒreversing cause and effect. I call these the ‚Äúwet streets cause rain‚ÄĚ stories. Paper‚Äôs 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.”¬† ‚ÄstMichael 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. ‚Ķ¬† we encourage full-fledged division on that strip. We‚Äôve 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‚Äôs 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‚Äôll be the target of attention-grabbing, behavior-modifying algorithms so exponentially effective you won‚Äôt even realize you‚Äôre being targeted. The best defense against that? An emotional flexibility that allows for constant reinvention, and knowing yourself well enough that you don‚Äôt 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‚Äôs 41 percent fall was ‚Äúthe worst first-day return for an IPO in 17 years.‚ÄĚ

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.


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 ‚Äúendless upsell.‚ÄĚ 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‚Äôs in addition to the constant upsells for other products that either should be included for free (for example, DNSSEC) or that you just don‚Äôt 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.