Posts from stocks

The Light At The End Of The Tunnel

In my Jan 1st post talking about what I expected to happen this year, I wrote:

I think we will see the end of the Covid Pandemic in the US sometime in the second quarter. I believe the US will work out the challenges we are having getting out of the gate and will be vaccinating at least 40mm people a month in the US in the first quarter. When you add that to the 90mm people in the US that the CDC believes have already been infected, we will have well over 200mm people in the US who have some protection from the virus by the end of March.

Seven weeks later, it seems like that is pretty much what is playing out. I have read that about half of the population of the US now has some protection against the Covid 19 virus, either via having had the disease or by being vaccinated at least once. At the current vaccination rate of 1.8mm a day, the number of people who have at least some protection against the Covid 19 virus will be about 70% by the end of March.

What that means is the virus will spread less, infecting less people, and less folks in the hospital or worse. I believe that means a gradual re-opening of the economy throughout much of the US in the second quarter with schools, stores, restaurants, and nightlife coming back. I am sure that precautions will continue for much, if not all, of 2021 because nobody wants to take this lightly after what we have all been through.

If that is in fact the case, and we don’t know for sure that it is, what does that mean for the economy, businesses, tech, and more?

I wish I knew. But I have some suspicions.

As I have written here quite a few times, I believe that habits that we have formed in the last twelve months will stick with us even when we don’t need to use them anymore. I believe work from home has proven to be very effective for some, possibly even a majority, of knowledge workers. E-commerce has delivered (no pun intended) and the gains it has made against in-store retail will not be given back much, if at all. Remote learning is here to stay. So is telehealth.

I also believe that the things we have not been able to do in the last year; travel, be tourists, see live music, live theater, live sports, and all of that will be in more demand than ever. As Joni Mitchell said, “you don’t know what you got until it is gone.” We want all of that back and I think we will embrace being with others experiencing things in the real world with a passion.

But where all of this lands is anyone’s guess. And there are many businesses whose near-term fortunes depend on how the balance of remote vs in-person lands over the rest of 2021.

I also think a re-opening may not be great for the stock market, which was a major beneficiary of the pandemic. The NASDAQ is basically up 100% since March 20, 2020. I wrote a bit about why I think that might be the case last week. I don’t know how quickly a re-opening will impact the stock market, but I do think it could.

But let’s not get negative here. And end to the Covid pandemic and a re-opening of the economy would be about the best thing that could happen to the US and the world and I am becoming more and more optimistic that it will start happening in the second quarter of 2021.

#Current Affairs#economics#employment#stocks

The Revenge Of Retail

A number of people have been asking me what I think of the Game Stop situation. This is not really my world. I don’t trade stocks, we hold them. I don’t use Robinhood, though I have an account thanks to my friend Howard. I don’t hang out on Reddit, though I visit it from time to time.

So I have not paid enough attention to this one, but it certainly is fascinating. The generational aspect of this is important. Boomer hedgies getting crushed by young folks self-organizing in social media. It feels like a moment where you realize that the power structure has shifted and things won’t be the same.

The financial system in the US, and in other developed countries, is a rigged system and has been for a very long time. Only big institutions can get into hot IPOs. Only rich people can invest in startups. Many of these rules are designed to protect “widows and orphans” but all they really do is make the rich richer and keep those without money out of the game.

Not anymore. Whether it is crypto (Coinbase) or day trading (Robinhood), the retail investor now has the tools to get into the game and win the game.

The new startup investing is buying into the Ethereum crowdsale. Had you done that in the summer of 2014, you would be looking at roughly 1,000 times your money right now. And that crowdsale was launched by a team led by a 20 year old. Though the SEC and others would like to impose the same rules on crypto that protect the rich and keep out everyone else, that has not happened and I pray that it won’t.

The new hedge fund is the Robinhood army self organizing on Reddit. They can move a stock more easily than the largest hedge fund.

There will be calls to regulate this “madness.” But it is the same madness we have always had. It is just a different crowd in charge.

I do worry that this Game Stop short squeeze will end badly and not only the hedge funds will get hurt. Markets can be brutal. But regulating markets to protect the small investor is not the answer. As we can see, the small investor is often a lot smarter than the large investor.

What we need to do is stop printing money to stabilize the economy. And start addressing the real economic issues that exist on main street, not wall street. Monetary policy is not the answer. Fiscal policy is. That won’t stop more Game Stops from happening. They are a by-product of markets. But it will get the money to where it is needed versus where it is just gameplay.

#crypto#Current Affairs#economics#stocks

Innovation In Capital Markets

A few years ago, maybe in 2016, we held a discussion of blockchain and crypto technologies at the annual meeting of our limited partners. I recall someone in the audience suggesting that the NYSE and Nasdaq could rebuild their markets on top of these technologies. I replied that I thought it was more likely that new markets built on blockchains and existing for crypto assets would emerge to compete with them.

And here we are, with a 24×7 global marketplace for crypto assets that has a market capitalization of over half a trillion and daily volumes in the hundreds of billions. This pales in comparison to the legacy capital markets, but that is always the case with a new entrant on the scene.

The legacy capital markets are not sitting still. There is real innovation happening in the IPO process for example.

But if you want to see the world we are headed into, I think it is better to look at the crypto markets. They operate day and night, they are global, and anyone can buy, sell, hold, and send these assets as long as they have a crypto wallet and a browser or a phone. You don’t have to be wealthy to invest in crypto startups. Anyone can do it.

The crypto markets are also innovating in areas like lockups, vesting, and governance. In a traditional IPO, the existing shareholders are typically locked up for 180 days and then the lockups come off entirely. In the crypto markets, we see all sorts of different forms of vesting and lockups being tried. What is emerging are lockups for existing holders that are much longer, but with small amounts of early and regular liquidity.

We are also seeing a lot of innovation around governance, with crypto projects working on ways to allow the community of token holders to have real say in the way a crypto project operates. We have seen a number of communities make very significant changes in things like total supply of tokens, inflation rates, and technology roadmaps in recent months. I cannot think of a public company that allows its shareholders that level of impact on their direction.

Right now these markets are operating as parallel universes, but I don’t think that will be the case forever. It is fairly simple to tokenize equity securities and trade the tokenized version in the crypto markets. That is not really happening just yet, but I expect that it will in the not too distant future. Then we will have the opportunity to see two identical assets trade in the traditional and emerging markets. There will be arbitrage opportunities and more when this happens and the new markets will put pressure on the traditional markets to adapt and change and evolve as fast as they can. That will be hard, if not impossible.

The global nature of the crypto markets is also a challenge for regulators, who have stood in the way of innovation and continue to do so. Why, for example, does one have to be wealthy to invest in startups in the US? That’s simply a way to keep the wealthy rich and everyone else not rich. If you trade crypto assets and something is not available in the US, you can trade or lend or stake elsewhere. And many/most do that. This allows innovation to happen in crypto even when some jurisdictions, like the US, are slow to embrace and hostile toward innovation in capital markets.

So if you want to see the future of capital markets look here, not there. That’s where all of the innovation, experimentation, and new stuff is happening.

#blockchain#crypto#hacking finance#stocks

Knowing What You Are Looking For

There are many ways to invest successfully. Public stocks, bonds, private equity, real estate, venture capital, etc. And within each category, there are so many different investment opportunities.

In public stocks, there are something like 5,000 listed stocks in the US. In venture capital, there were something like 30,000 companies that raised venture capital in 2019.

How do you make sense out of all of that opportunity?

I’ve always been a fan of knowing what you are looking for and ignoring everything else. We call that thesis based investing at USV, but it is actually more than that.

We can say that we are looking to back trusted brands that increase access to capital, wellness, and knowledge, and we do. But we do more than that. In each of those sectors, we go deeper and identify specific areas within them that we want to target. We call those “deep dives.” We identify areas we want to focus on and areas we don’t want to focus on.

All of this is a relentless effort to figure out what we are looking for and then go out and find it. It is not a static thing. It is a dynamic thing. A pandemic comes along and rocks our world. Time to revisit the thesis and the deep dives. When the pandemic ends, and it will, we will factor that into our thinking too.

In a world with so much opportunity, it pays to ignore the vast majority of it and focus on a tiny bit of it. That may seem counterintuitive, but I am certain that it is the right thing to do.

#stocks#VC & Technology

The Covid Rotation

Yesterday morning we got the news that Pfizer’s mRNA Covid vaccine developed in partnership with BioNTech saw 90% efficacy in phase three clinical trials. While this is terrific news, Wall Street saw it as bad news for companies that are doing well during this pandemic (Zoom, Peloton, e-commerce, etc).

This is a chart of Jim Cramer’s Covid 100 index:

Wall Street believes the end of the Covid pandemic is in sight and is rotating out of this group. I see that as terrific news, even though I am a large holder of a name or two in that index.

I cannot wait until I can start meeting entrepreneurs again in person. I cannot wait until USV can meet together in person. I cannot wait until I can see live music, movies, theater, etc, etc. These things cannot come soon enough for me.

But I also wonder how many of the habits we acquired during this pandemic (which is NOT over yet), will stick when we can go back to doing all of these things we long to do.

Here are some questions to ponder:

1/ Will our use of Zoom to meet decline materially when the pandemic is over?

2/ Will we get back on planes and resume our business travel like we did before the pandemic?

3/ Will we go back to the spin studio even though we learned to love a spin class on our Peloton?

4/ Will we rush back to stores and abandon our e-commerce habits?

5/ Will we all go back to the office five days a week?

I think the answer is yes to a degree, but almost certainly not totally. We have created new habits in this awful year and they are not going to go away so quickly, or ever.

I don’t know if that means the Covid 100 index is a buying opportunity or it needs to go down some more. I will leave that to Jim Cramer.

I do know that the way we work and live and entertain ourselves has changed materially and forever in this pandemic and things won’t be exactly the same when it is over.

#Current Affairs#stocks

Some Thoughts On SPACs

As many of you know, Special Purpose Acquisition Companies (SPACs) are all the rage on wall street right now. SPACs are publicly traded “shell companies” that raise capital in an IPO process and then use that capital to merge with a privately held business.

SPACs have been around for at least thirty years and I have always thought of them as a “liquidity path of last resort” for our portfolio companies. The thinking was that if you could not go public in a traditional IPO, and if you could not find a traditional M&A buyer, then you would consider a SPAC.

But my thinking on SPACs has changed in this latest SPAC frenzy. I now see them as part of the continued “assault” on the traditional IPO process and largely a good thing.

For most of my career as a VC, the IPO has been the holy grail. Our very best portfolio companies would be offered an opportunity to go public by the top investment banks on wall street. And I have been involved in several dozen IPOs in my career.

The terms of an IPO are fairly locked down and are largely a great business for the top wall street banks and their buy side clients. I don’t take as much offense to this situation as others in the VC business have. I have viewed it as a mutually beneficial relationship between the top banks, VC firms, and the founders and CEOs who lead our portfolio companies.

However, in the last few years, competition has emerged for IPOs. On the left has come direct listings. And on the right, we have SPACs. Now founders and CEOs and Boards have a plethora of options for moving from a privately held business to a publicly held business.

Competition and choice is good. That is deeply held belief of mine across all aspects of life and business. And so the deluge of SPAC money coming to market right now is a good thing for the founders and CEOs who lead our portfolio companies. It offers them a wider array of options for going public than they had before. I am certain that will be a good thing for the tech sector and the VC sector.

All of that said, I do think SPACs have positives and negatives relative to IPOs and Direct Listings. What is right for your company will depend on the circumstances you find yourself in, including whether or not you need to raise primary capital, whether or not you need a lot of secondary liquidity, whether or not your “story” will be exciting to public market investors right out of the gate, how quickly you need to transact, and a host of other factors.

It is also the case that a number of VC firms and growth investors are raising their own SPACs. That too reflects the changing dynamics of the investment business and how fund managers like USV access capital and deploy it. I have always been a traditionalist when it comes to raising capital and deploying it. I like the small VC firm model, a close and long standing relationship with our investors (called LPs), and the rhythm of raising funds and sending the money back again and again. But I appreciate that others don’t see things that way and they may be on to something important with the VC SPAC model. We will see. I like that people are experimenting with the model. It will be revealing to all of us in time.

#hacking finance#stocks#VC & Technology

Not All Gross Margin Is The Same

I wrote a blog post in September of last year arguing that gross margins and operating margins really matter when valuing companies. I argued that “software companies with software margins” are better businesses than tech companies that are not really software companies but a tech-enabled version of some other business.

But gross margins, in particular, can be tricky to compare. In some cases, a software business is in the middle of the revenue flow, takes the revenue, and then passes on a lot of it, and is left with what looks like a low margin, but is in fact a high margin.

An example of that is the Dutch payment processing company Adyen. Here is a screenshot of a part of Adyen’s income statement from Yahoo Finance:

So Adyen operated in the last twelve months with an 18.7% gross margin. Many would think that was a “very low margin business.” But the truth is Adyen is simply passing through that $2.1bn of revenue to financial institutions in the form of interchange and other fees. They do very little with that money.

Let’s compare that with the big retailer Macy’s. Here is a screenshot of a part of Macy’s income statement from Yahoo Finance:

So Macy’s operated at a 40.1% gross margin over the last twelve months, more than double what Adyen operated at.

That $15bn cost of revenue on Macy’s Income Statement is the cost of purchasing everything you might find in a Macy’s store, the inventory costs associated with that, and the cost and effort of displaying all of that inventory in the stores.

So while it is the case that Macy’s has more than double the gross margin of Adyen, I believe Adyen has a much more attractive business from a margin perspective than Macy’s.

That is because Macy’s expends enormous amounts of working capital and operating expense and effort in its $15bn cost of revenue where Adyen expends very little working capital and operating expense and effort in its $2.1bn cost of revenue.

The trick, I think, is to wrap your head around the cost of revenue or cost of goods sold line item in the income statement and think about what is going on there. If it is very little to no effort, and largely just an accounting entry, then you may have a “low margin business” that is actually a high margin business. On the other hand, if it is a lot of work and capital investment to produce those margins, well then you have what you have and that is often a low margin business.

#stocks#VC & Technology

Correlation and Market Meltdowns

On the first episode of Howard’s new podcast, his guest said, “in panics, all assets are correlated.” I suspect that is true to some extent.

When bad news hits, I have seen traders sell quickly, get to cash, and then take some time to evaluate the situation before acting on the news. That is true of a company missing its quarter, a sudden management change, and many other forms of bad news. It is also the case when macro events hit the market.

So when a macro event hits the markets, all assets get sold in a “risk off” trade to increase liquidity and buy some time to figure out what is going on.

But soon enough, the market starts to sort through winners and losers. That’s when things stop correlating.

The obvious example is Zoom which is clearly a major beneficiary of this macro event we are in the middle of.

Zoom sold off with the market over the last week and a half but has rebounded nicely and year to date is up something like 75%.

Blue Apron, which the market had left for dead, is another example of a business that will likely do well in this macro environment, or at least it seems that the market thinks so.

Contrast that chart with Bookings, one of the largest (the largest?) online travel businesses, and you can see the lack of correlation.

I believe this downturn will see a greater number of winners and losers than most of the downturns I have lived through. That is because we are already into a pretty meaningful transition from an industrial/physical economy to a knowledge/digital economy and the very nature of this macro event is accelerating that transition in many ways. We just won’t go back to doing some things the same way.

I do plan to go out to my favorite restaurants as soon as I can. But I also plan to fly even less for business when this thing is over. Some things will return to normal. Others won’t.

And that is what the market will sort out over the course of this downturn and is already busy sorting out.

Which takes me, naturally, to crypto. Crypto, to true believers like me, was supposed to be a place to go for safety. We can trust crypto when we can’t trust banks or governments, right?

Wrong.

Bitcoin crashed harder than anything in the first few days of the market selloff. It was down 60% over five days from March 7th to March 12th. But since then it has recovered nicely and is now only down about 30%.

Howard’s guest was right. In panics, all assets are correlated because the market needs to deleverage. Margin loans get called. Leveraged bets go bad. Weak hands fold. And in crypto that happened faster and more furiously than any other asset class. That’s because the market infrastructure is less mature, there are places (largely outside of the US) where you could (and maybe still can) get 100x leverage on a crypto trade, and because these markets are not as liquid and other markets.

But now that the deleveraging has happened, we can look at what crypto has to offer.

Bitcoin is “hard money.” There is a fixed supply of it. 21mm bitcoins to be exact, some of which are gone and are never coming back.

Contrast that to what the central banks are doing right now. The printing presses are melting down there is so much money being printed to stabilize the global economy.

So if you want to hedge your portfolio from that risk, where can you go? Actually a few places. But one of them is Bitcoin. And I suspect that will be where some smart money will go over the next few months, quarters, etc.

But that’s not all that crypto has to offer. The entire decentralized finance stack (fintech 2.0) is being built on Ethereum. And we are seeing decentralized bandwidth, storage, and other critical infrastructure being developed in a number of new protocols.

I’m not going to write an entire crypto thesis here. But my point is that crypto won’t be correlated with the overall market for long. It’s doesn’t even appear to be a week in.

#crypto#stocks