Categories
Daily Update

Daily Debrief 11/17 – Bulls on Parade and the Post-Covid Economy

https://anchor.fm/millennialmkts/episodes/Daily-Debrief-1117–Bulls-on-Parade-and-the-Post-Covid-Economy-emjf5u

Bulls on parade: Morgan Stanley and Goldman Sachs both came out with bull forecasts for stocks in 2021. From MS, “We extend our S&P 500 price target horizon to December 2021, and raise our base case estimate to 3,900 from 3,350 … Importantly, the average stock should do better than the index over the next year. Near term, we continue to see a range of 3150-3550 for the S&P 500 as the market deals with the second wave of virus, remaining election uncertainties and the specter of higher rates.”

Morgan Stanley’s Bull, Base, and Bear Cases. These cases indicate the odds are positioned toward upside scenarios. Source: Morgan Stanley
Source: FactSet, Morgan Stanley estimates

Not to be outdone, GS is “expecting global real GDP growth of 6%. [Goldman’s] rates team forecast steepening yield curves and higher break-even inflation from Q2. [Goldman’s] commodities team emphasise that all major commodity markets are in deficit, and they expect rising prices over the next 12 months.” These themes contribute to their Base Case of 4,300 for the S&P, which is ever above Morgan Stanley’s Bull Case.

Goldman continues: “The powerful, valuation-driven, initial rally in the equity markets between March and September this year is very typical of the initial ‘Hope’ phase of a bull market, which generally begins during a recession when earnings are still falling. This phase is typically followed by what we call the ‘Growth’ phase, when most of the profit and dividend growth actually comes through. Often, the transition between the two phases is marked by heightened volatility and a market setback as investors wait for, or begin to doubt, the recovery that has been priced.

MS and GS are both saying that we will now enter the “Growth” phase of the markets, with strong earnings growth due to a number of factors including:

  1. Loose monetary policy from the Fed with extraordinarily low nominal interest rates and negative real interest rates for support
  2. Indications of pent-up demand from consumers supporting a strong pro-risk cyclical bounceback
  3. This bear market was ‘event-driven’ and not due to structural or cyclical issues, therefore the recovery will be as sharp as the decline
  4. Cost-cutting by businesses during the pandemic will further juice margins and as an extension, earnings

When a consensus is quickly forming, be weary. This does not mean that we disagree, only that we are staying alert for risks to the Bull thesis.

New consumer behavior: The Coronavirus has shifted the behavior of American consumers and the changes are likely to become permanent. Per the WSJ “A recent survey by consulting firm McKinsey & Co. found that about three out of four people have tried a new shopping method due to the coronavirus and that more than half of all consumers intend to continue using curbside pickup and grocery-delivery services after the pandemic is over. Nearly 70% of consumers surveyed intend to continue buying online for store pickup. The pandemic collapsed into three months a process of adopting e-commerce that otherwise would have taken 10 years in the U.S., Harriet Torry reports.”

Asia powers ahead: It has been repeated over and over but still it seems Europeans and American don’t understand it, in order for a full economic recovery, containing the virus is a prerequisite. What region has contained the virus best? Asia. What region has the best performing economies in 2020? Asia.

Trump plans Lame Duck China attack: President Trump will attempt to pursue aggressive measures against China to cement his legacy as a China Hawk president per Axios. (link) They continue to say “He’ll try to make it politically untenable for the Biden administration to change course as China acts aggressively from India to Hong Kong to Taiwan, and the pandemic triggers a second global wave of shutdowns.”

Trump on China: '100 Trade Deals' wouldn't make up for coronavirus

Trump plans to sanction or restrict Chinese companies similar to the actions he pursued against Huawei in his first term. Expect BABA, TCEHY, JD, and others to trade choppily off headlines depending on the details of the Trump administration’s actions. Here is a list of public Chinese companies. (link)

Tesla to Join S&P 500: S&P Dow Jones Indices announced Monday after hours that Tesla will join the S&P 500 on Monday, Dec. 21.Upon entry, Tesla will already one of the S&P 500′s 10 most valuable companies based on Monday’s closing price. Tesla was denied entry in September after it met criteria to be included in the S&P 500 but was not initially picked by the S&P 500 Index Committee. TSLA is up 14% pre-market. Elon may soon become the richest man alive.

Tweets and charts we like:

The Oracle, Warren Buffet’s Berkshire Positions as of 9/30/20 – Selling Banks (although increasing BoA position) and buying Pharma

S&P 500 is NOT diversification

New York City exposure bounceback:

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The main beneficiary of cloud computing market consolidation has been Microsoft who has doubled its market share in public cloud

Majority of student loan debt belongs to high earners (top two income quintiles) who come from non-wealthy background with over 50% of the debt belonging to those in the bottom 5th wealth quintile.

Fed sedates the market and the results speak for themselves

That’s your millennialmkts daily debrief, thanks for reading and good luck!

Posts are not investment advice or endorsements.

Categories
Daily Update

Daily Debrief 11/16 – Economy Roll-Over and Moderna Vaccine

Is the economy rolling over?: Some real-time economic indicators are showing an economic slowdown. Restaurant Booking continued its decline in the US after its post-Covid peak in September. Seated diners also decreased globally and especially in Europe in November.

AirBnB searches are also declining in Europe, Japan, Brazil, the UK, and the US.

Will manufacturing remain strong: A relatively low historical low level of inventory-to-sales ratio in manufacturing and trade says yes. With a ratio of 1.32, this signifies that manufacturers aren’t buried under a glut of inventory and can continue to create output at a high level, given that demand orders continue to come in at the same or increased levels. For reference, inventory-to-sales ratios peaked at around 1.7 earlier this year due to a decrease in order demand, but manufacturers have been able to quickly readjust.

Source: Department of Commerce, IHS Global Insight, Goldman Sachs Global Investment Research

Further signs of manufacturing strength is commentary from large-cap capital goods companies the last two weeks. They indicate that on the supply side factories will continue to run, but also are able to adapt quickly to changing conditions. On the demand side, they indicate a gradual improvement or steadiness in forecasted orders.

Vaccine Update: There is light at the end of this tunnel, however, as Moderna released the results of its MRNA vaccine, and as expected they are excellent, as well as shelf-life information for distribution of its vaccine. (link) (link)

  • Phase 3 met statistical criteria of 94.5% efficacy, which is incredibly high
  • Moderna intends to submit for an Emergency Use Authorization (EUA) with U.S. FDA in the coming weeks and expects the EUA to be based on the final analysis of 151 cases and a median follow-up of more than 2 months
  • Vaccine now expected to remain stable at standard refrigerator temperatures of 2° to 8°C (36° to 46°F) for 30 days, up from previous estimate of 7 days
  • Shipping and long-term storage conditions at standard freezer temperatures of -20°C (-4°F) for 6 months

Assuming an R0 (pronounced “R naught,” is a mathematical term that indicates how contagious an infectious disease is) of 2.5, it would take just over 60% vaccination coverage to achieve herd immunity. That may be feasible over the course of 2021.

Vaccines currently in phase-3 trials are only meant for adults, including the elderly and early data from Pfizer/BioNTech has suggested an efficiency of over 90% and the Moderna results released just this morning. Next we should likely hear from AstraZeneca over the coming weeks. Early stage vaccine trials currently in phase 3 have been largely effective in individuals between age eighteen and fifty-five.

Most vaccines currently in phase 3 will require two shots. An exception is the vaccine by Johnson and Johnson, which is expected to be a single-shot vaccine. people might need injections at regular intervals as is the case with flu vaccines. A study from Imperial College London highlighted that the proportion of people in England with antibodies dropped by more than a quarter in the space of three months.

Guitar Center: Guess no one has been learning how to play guitar during the lockdown. “Guitar Center Inc., the largest musical instrument retailer in the U.S., is finalizing terms of a bankruptcy with support from the majority of its creditors, according to people with knowledge of the plans. The company could file for Chapter 11 bankruptcy as soon as this weekend with a pre-packaged plan. Guitar Center’s heavy debt load and financial pressures date back to a 2007 deal by [private equity firm] Bain Capital that took the firm private for $2.1 billion.” Guitar Center skipped interest payments on its 2021 and 2022 bonds, and this is almost always exclusively done to work out terms with bondholders and creditors while retaining liquidity.

Against the Robinhood Herd: Robinhood traders are literally memelords who chase popular stocks that have extreme performance. Remember the trading of now bankrupt Hertz? Bloomberg reports, “When Robinhood users pile into a stock in large numbers, the average excess return on the day surges to 14%. But this is followed by a reversal of nearly 5% over the subsequent month, a new paper found.”

HTZ trading

Herding into single positions after violent movement increases the chances of and exacerbates big market reversals. The authors of the paper, including behavioral pioner Terrance Odean continue, “Robinhood users are more subject to attention biases … The combination of naïve investors and the simplification of information is associated with herding episodes.” Don’t be caught chasing when the tide comes out, millennials.

Doordash: “DoorDash Inc., the biggest U.S. food
delivery company, is seizing on the pandemic-fueled boom in
demand for meals brought to your door, as well as investor
exuberance over new stock listings, with its filing Friday for
an initial public offering.” according to Bloomberg News.

What’s most surprising in the prospectus is a profitable quarter – “The prospectus reveals a sharp jump in revenue this year
and more surprisingly, a profitable quarter. The company, in its
filing with the U.S. Securities and Exchange Commission, listed
the size of the offering as $100 million, a placeholder that
will likely change when terms for the share sale are set later.
Private investors valued DoorDash at around $16 billion in June.”

What we are watching:

More Moderna vaccine news and commentary.

Tweets and charts we like:

Very few.
Some vaccine distribution plays
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Fifteen countries have formed the world’s largest trading bloc, covering nearly a third of the global economy.
The Regional Comprehensive Economic Partnership (RCEP) is made up of 10 Southeast Asian countries, as well as South Korea, China, Japan, Australia and New Zealand.
Avoid SPACs if you are an investor. If you are a speculator, then go crazy.
Azure starting gaining market share from AWS in cloud computing.

That’s your millennialmkts daily debrief, thanks for reading and good luck!

Posts are not investment advice or endorsements.

Categories
Valuation

DraftKings Updated Model – Dependent on Betting Market Growth

  • DKNG reported earnings and gave guidance for 2021 above consensus estimates
  • We believe DKNG is fully valued at these levels and would look for proof of increased total market opportunity or DraftKings outsized market share

What’s new: DKNG reported Quarterly adjusted revenues of $133mn (+42% year-over-year (y/y)), which was at the high-end of the pre-announced $131mn-$133mn range. (link) DKNG also reported adjusted EBITDA of -$197mn, better than Wall St. Consensus expectation of -$203mn.

Also with the earnings release, management increased revenue guidance to $540mn to $560mn, and introduced 2021 revenue guidance of $750mn-$850mn (+45% y/y at the midpoint), the consensus estimate was $776mn. This range doesn’t include contributions from Michigan or Virginia, which could both launch online sports betting late this year or early next. Management’s guidance assumes that they continue to operate in all states where they are currently live and announced sport calendars aren’t disrupted.

Valuation Methodology: I continue from my initial valuation of DKNG last week – What’s clear is that more states will legalize betting and more Americans will be exposed to sports betting and online gambling avenues and the market will grow overall. What is less clear, however, is how fast this market will grow. I approach this valuation by starting high level, focusing on the growth of online betting markets, and then following with DKNG’s market share of the future betting markets. I believe DKNG is simply a beneficiary of overall online betting market growth, not some standalone idiosyncratic tech pioneer, therefore I believe starting with Total Available Market (TAM) is the best approach for a valuation here. From Deutsche Bank in their updated Note on DKNG ‘Limited Changes to Forecasts’ “We expect the market to continue to trade shares around TAM and growth trajectory views, much of which will be dictated by the pace of legalization and investors garnering a better understanding of how [that] ultimately flows to net revenue and, down the road, EBITDA.” (Sell-side Research Link – sub req.) We use 2025 EBITDA as anything beyond five years is simply impossible to predict. Feel free to disagree with me in the comments and tell me why you disagree.

I try to keep this analysis high level so we can plug and play growth figures for both the market and DKNG’s share of that future market because analyzing line items or on modelling on revenue multiples, is a pointless exercise for growth companies because appreciating from $500M to $5B is way more likely than $100B to $1trn. This is a rapidly changing company in a disruptive industry and it’s stock price reflects expectations of the future of American online gambling and DraftKings’ ability to capture an increasing share of that market growth.

How is the Street valuing DKNG?: Goldman is Neutral rated with a 12-month price target of $53 based on equal parts 2030 EV/EBITDA (discounted), 21.3X 2024 Sales, and a Discounted Cash Flow mode. (GS Research portal – sub req)

Morgan Stanley is in-line and equal-weighted with a price target of $37 valuing DKNG on a 18.5x 2025 EBITDA model. 18.5X is a comparable tech multiple. (MS Research portal – sub req)

Deutsche Bank models DKNG at a price target of $48 on a multiples of 25x 2027 EBITDA, discounted at 5% for 5 years. They note that every 10% move in EBITDA from their current forecast is worth ~$4 to their Price Target and every multiple point is ~$2. (Sell-side Research Link – sub req.)

Our Model: I start off with management’s 45% y/y growth figure for 2021. I credit DKNG with this growth next year, then crucially, I decrease the growth rate by 5% every year forward, so 40% growth in 22, 35% in 23, etc. because DKNG is starting from a smaller revenue base so 45% will be easier to achieve in 21 than it will be from a higher base in 23.

If the online sports betting and gambling markets grow at these rates from 2020-2025 (about a 35% annual growth rate), and DKNG is able to capture a 23% blended total market share of these markets, at a 30% EBITDA margin and 18.5x EBITDA multiplier (we borrow this from MS), I get a valuation of around $39, implying ~9% downside. Let’s look closer:

I start off by estimating the online sports betting and gambling market size below. I go off the estimated 2020 figure of around $3.14bn – $1.33bn from sports gambling, $1.5bn from iGaming, and $286mm from Daily Fantasy. Next I grow them by the CAGR’s in the previous paragraph and you see the results. For purposes of this valuation I designate this growth profile as my Base case. I don’t want you to stay fixated on the ~35% CAGR but rather to see the effects of the rate on overall market size come 2025. We can argue all day about the numbers, but trying to estimate the growth of the market to the decimal for 5 years out is not an efficient exercise. This is still a nascent market experiencing a lot of disruption with no clear predecessor case studies.

We get a TAM of over $14bn in 2025 with our estimates

Is this a reasonable TAM: Deutsche Bank is a noted Bear on this sort of sports betting TAM Share argument in the 20bn to 25bn range for sports betting. They say in their “A Lot of Unfounded “Expectations” at a Lofty Price; Remain Sell” Note on Penn National, “Said simply, in the period from March 2019 through February 2020, prior to the pandemic, the per adult spend on sports betting (GGR/NJ adult population) was $51. Given there are 240 mm adults in the US, to arrive at even a $20bn TAM, implied that not only does every state legalize and all 240 mm adults can bet sports on their mobile phones, but that … the adult spend grows by ~65% from this $51 level”. (DB portal -sub req) I look at the idea of full legalization and spend per adult in the table below.

This image has an empty alt attribute; its file name is image-5.png
Our estimates

To get to our $20bn TAM, indeed every US adult would need to be spending $84 a year on sports betting and online gambling. This ties out with DB’s 65% figure.

Next I estimate the DraftKings’ EBITDA based on the market size and their share of this future market. An important point is DKNG’s promotions and how much it subtracts from top-line revenue. We use 20% here, but management has stated in the past that promotions are generally in the high 20%’s. We give DKNG credit for being able to continue to decrease promotional activity in the future, so for our 2025 EBITDA analysis we settle on 20%. Just for reference, promotions were ~26% in Q1 and Q2 of this year.

I use a healthy 30% EBITDA margin across all levels of market share and market size. As you can see, our Base Case is $785 mm in EBITDA for 2025. Not bad for a company expected to have over negative $400mm in EBITDA for 2020.

Our estimates

Finally, given the current stock price of $42.84 at close on 11/13, what is the implied 2025E EBITDA multiple for all these scenarios? Here’s a table summarizing that below:

At the close of 11/13 DKNG is valued at 20.38x our 2025 estimated EBITDA based on our model assumptions and estimates

Every additional turn in the EBITDA multiple adds ~$2 to our price and every additional $100 mm in 2025 EBITDA adds ~$5. If the market grows by only 15%/ year with lower market share and EBITDA margins in our Bear Case, we get a valuation of $14. Likewise, if the market grows at 45%/year with higher market share and EBITDA margins in our Bull Case, we get a $75 valuation.

I layout some clearer Bear/Base/Bull Case scenarios at the bottom as well in more detail:

Upside Risks to Valuation:

  1. Stronger than expected performance in 2021, which could accelerate growth in TAM realizations
  2. Better-than expected margin performance, especially less promotion activity that eats into top-line revenue
  3. DKNG is able to take outsized market share
  4. Favorable regulatory events and large states making progress toward sports betting

Downside Risks to Valuation:

  1. Considerable stock unloaded coming off management lockup agreements from the IPO
  2. TAM expectations becoming more muted, leaving far-out forecasts like the 2025 EBITDA we use being especially vulnerable
  3. Promotional activity could last longer than we think and be a drag on revenue
  4. Greater impact from competitors, leading to decreased market share and/or further necessitated promotional spend
  5. Negative legislative outcomes

Model for download here:

Posts are not investment advice or endorsements.

Categories
Daily Update

Daily Debrief 11/13 – Covid Cruises and Instagram Shops

Covid Cruises: In one of the least surprising developments of the pandemic, “five people aboard the SeaDream 1 cruise ship have tested positive for Covid-19, the ship’s captain said in an announcement, … SeaDream 1 is the first cruise vessel to resume sailing in the Caribbean since the start of the pandemic.” (link) The ship was carrying only 53 passengers and 66 crew, followed testing protocol, and yet there is an outbreak on-board. Cruise companies are planning to welcome thousands of passengers on board for sailings as soon as early next year, you can draw your own conclusions. On a related note, you can volunteer for trial test cruises where cruise companies work out the kinks on sailing during a pandemic here. (link)

All the cruise ships that have had confirmed cases of COVID-19 onboard |  Markets Insider
We love these pictures, if you have more of them then please send them our way.

Wall St Bullish Call: Goldman Sachs, one of the more bullish Wall St shops throughout this pandemic, has shouted from the mountaintop, “There will be growth in the spring.” They continue, “The economy is likely to reaccelerate next spring as mass immunization fully reopens the high-contact consumer services that account for most of the remaining output gap.” This coincides with our Covid dark winter theme on yesterday’s debrief. Once this dark winter, is over, however, flowers will begin to bloom and people will begin to be vaccinated. This mass immunization program will reopen the high-contact consumer services that are currently bogging down the economic recovery.

Virus-sensitive services are unable to close their pre-virus contribution gap without a vaccine

However the biggest assumption in this bull call is when GS says, “We expect a further $1tn fiscal stimulus package, some of which might pass in December during the lame duck session of Congress and would otherwise pass in early 2021, in time to boost disposable income in Q1.”

The biggest assumption in this bull call is the size and timing of the second Covid-relief package

Death of the 60/40 Portfolio?: Perhaps the most famous personal finance allocation, the 60/40 portfolio, 60% in stocks and 40% in bonds, to smooth out the stock market’s volatility and still meet retirement goals, is nearing its end. JPMorgan Asset Management is cutting its projections for returns over the next decade and signaling more pain for 60/40 allocations that have long formed the bedrock of traditional portfolios. “Such a balanced approach will earn 4.2%, down from 5.4%, in coming years, according to the $2.3 trillion fund manager” reported by Bloomberg News.

The reason is primarily due to historically low rates on bonds (JPM even goes as far to forecast negative inflation-adjusted returns across almost all developed country sovereign bonds) and elevated valuations in US large cap stocks, especially FAANG and tech stocks. High valuations signify future returns have been pulled forward and concurrently, future returns will be lower.

What does JP Morgan suggest to do in this environment that they are forecasting? They recommend allocating to alternative assets like Private Equity, and Property & Infrastructure. These are more opaque investments and difficult to access for the retail investor, but you can buy the stocks of alternative asset managers like Blackstone $BX, KKR $KKR, and Brookfield $BPY $BIP among others if you subscribe to JPM’s view.

Instagram Shop: A favorite millennial pastime, Instagram, released a new update yesterday with the biggest change being the Shop tab. “Today we’re announcing some big changes to Instagram – a Reels tab and a Shop tab. The Shop tab gives you a better way to connect with brands and creators and discover products you love .. With the Shop tab, we’re making it easy to get inspired by creators you love, shop on Instagram, and support small businesses. You can find personalized recommendations, editors’ picks curated by our @shop channel, shoppable videos, new product collections, and more.” (link)

We personally won’t be buying anything through Insta Shop anytime soon as we have millennial student loans to pay, but it seems Zucc and co at $FB can do no wrong in terms of monetizing social media. They 100% purposefully placed the Shop tab where “Likes” used to be because instead of studying how to put an American on Mars, today’s nerds are studying where you’re conditioned to tap on your phone the most. We digress. Let’s see if Instagram Shops is another genius revenue-generating move or a dud.

New Instagram Look – Homepage, Reels, and Shop tabs

Significance of Monday move: In less than one week, investors have cleared two key hurdles: US election event risk (no markets don’t care what Trump’s tweeting) and uncertainty over the vaccine timeline. These events marked the beginning of a return to conventional risk, not pandemic and election risk. What followed? A 15 Sigma event in momentum stocks, in other words something that should only happen … take a deep breath and say this with us .. 0.0000000000000000000000000000000000000000000000000002% of the time, according to Bloomberg calculations using historical return data. For those of you counting, that’s 51 zeroes after the decimal point.

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The most extreme daily momentum crashes have occurred during the Great Financial Crisis and now the Great Covid Crisis.

Melania Concedes: On the official White House events website, Melania Trump seems to have conceded the race.

Politics aside, ignore Trump’s rhetoric. Markets don’t care. (link if it’s still up by the time you read this)

What we are watching:

Powell said he expects that more policy help will be needed from both the Fed and Congress.” But what if that help from Congress doesn’t come in time due to the gridlock politics in Washington? Congressional stimulus is looking increasingly unlikely with no meaningful progress in weeks. Assuming no additional immediate stimulus until after Biden is in office, we think it’s increasingly likely the Fed once again takes leadership and acts first if real-time economic indicators deteriorate rapidly due to the virus surge. Here’s what scares Jerome Powell.

Money Printer Go Brr Jerome Powell GIF - MoneyPrinterGoBrr JeromePowell Cash GIFs
Will the money printer go “brrr” once again?

Tweets and charts we like:

Image
House Mouse is a Powerhouse
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The acclaimed and successful investing community at reddit.com/r/wallstreettbets has figured out the markets and made this handy graph for distribution
Big yikes
Consumer sentiment and as an extension, spending is all about perception, not necessarily always reality
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Big Yikes 2.0
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The data is clear, the findings are unmistakable .. There are simply too many CFAs

That’s your millennialmkts daily debrief, thanks for reading and good luck!

Posts are not investment advice or endorsements.

Categories
Daily Update

Daily Update 11/12 – The Dark Covid Winter Ahead

Loveless Lockdown 2.0: New York governor and the national voice on coronavirus, Andrew Cuomo, has announced new measures directed toward slowing the spread of the virus. The positivity rate in New York has increased to 2.93%, compared to only 1.16% on Oct 23rd, signifying real community spread, not an increase in cases due to increased testing capacity. The governor of Ohio also enacted mask rules and may close bars and restaurants. We can expect more measures as we undoubtedly continue to break records in cases in the coming weeks.

Hospitalizations: Another sign of real Covid community spread is hospitalizations, and we have hit a new record with 61,964 Americans hospitalized as of 11/10. Luckily, and perhaps crucially, the hospitals in the current hotspot region, the Midwest, especially the upper Midwest states such as ND, SD, and MN, don’t seem to be nearing a statewide breaking point. Wisconsin however is worrying, according to the state’s figures.

Source: https://covidtracking.com/
With 1,136 available beds, signifying a 90% occupancy rate state-wide, if Wisconsin continues a hospitalization rate of increase similar to that of last week’s, the entire state’s hospital system will be a breaking point in 3 and a half weeks.
Source: https://www.dhs.wisconsin.gov/covid-19/hosp-data.htm

Economic effects of virus resurgence: This blog is about markets, so let’s talk economic effects of the virus. According to Goldman Sachs “The virus resurgence poses a key risk to the growth outlook. Overall consumer activity has held up remarkably well thus far, with high-frequency indicators of consumer spending suggesting continued recovery through October”

During the summer Covid wave overall consumer activity decelerated and states with more virus spread, largely southern states, had correspondingly lower consumer spending growth. However, Goldman “find[s] a much smaller response of consumer spending to statewide virus spread in the recent resurgence … [and] find[s] a much smaller virus impact on continuing [unemployment] claims in the recent resurgence.” Will this relatively more muted impact from the virus on the economy continue as cases and hospitalizations accelerate?

American Tech Manufacturing: Taiwan Semiconductor Manufacturing Company ($TSM), a global tech powerhouse that manufactures the most cutting edge chips in the world today, approved investment of $15 bn for expanding production, plant construction, and R&D in Arizona. This announcement follows after TSMC announced a new semiconductor fabrication facility to be opened in Arizona earlier this year. Wccftech.com writes “This fab (fabrication plant) came after concerns were raised by the American government about the integrity of the country’s semiconductor supply chain. The bulk of TSMC’s chip fabrication is in Taiwan, and global, pandemic-induced supply chain disruption this year and the island’s proximity to the People’s Republic of China caused policymakers in Washington to press the company to set up a facility inside homeland U.S.” – (link)

Apple and ARM sitting in a tree: M-A-K-I-N-G Macs. Anandtech says in their analysis, “Whilst in the past 5 years Intel has managed to increase their best single-thread performance by about 28%, Apple has managed to improve their designs by 198%, or 2.98x (let’s call it 3x) the performance of the Apple A9 of late 2015. Anybody looking at the absurdness of that graph will realise that there simply was no other choice but for Apple to ditch Intel and x86 in favour of their own in-house microarchitecture – staying par for the course would have meant stagnation and worse consumer products.(link) Apple microprocessors are estimated to be roughly 5.8% of Intel’s ($INTC) total revenue according to Morgan Stanley. Add another nail in the proverbial coffin that is Intel. And who does the manufacturing of these new and increasingly powerful chips you ask? TSMC of course.

AnandTech charts A-series chips versus Intel chips

Tweets and graphs we like:

China remains by far the largest electric vehicle market, with more than half of electric cars sold globally in 2019, followed by Europe with 560,000 and the United States with roughly 330,000 electric passenger cars sold last year.
Source: https://www.statista.com/chart/17178/global-electric-car-ownership/
Unironically have to agree here. Remember, the key to long term gains is to avoid panic selling.
In the words of the acclaimed investor Meek Mill, “it’s levels to this, young boy”
Uncertainty for small businesses continues to increase with 40% of businesses not sure that they will survive in the future.
Lower your carbon emissions, save the Great tits!
Avert your eyes unless you’re ready for pain, millenials.

That’s your millennialmkts daily update for today, November 11th. Thanks for reading and good luck!

Categories
Daily Update

Daily Update 11/11 – Issuing Stock

News Wrap:

  • Issuing Stock: Seeing its stock rise over 15% on Monday, American Airlines ($AAL) wasted no time getting on the phone with their bankers and was the first company to announce it would be issuing stock. The airline announced it would issue 38.5 mm shares, with an option to sell 5.775 mm more, at market price. This would raise $584 million in proceeds at Monday’s last close price. The company guided cash burn of $25 to $30 million/day in Q4 of this year. If completed and assuming the option is exercised, this offering would be ~8% dilutive.
  • Not to be outdone, Carnival ($CCL), after notching the biggest one-day gain since the cruise operator went public in July 1987, has announced another $1.5bn “at the market” equity raise, its fourth equity raise this year. This follows the $1bn ATM equity raise in September, the $0.9bn early conversion of the convertible bond in August, and the $0.6bn equity raise in April. CCL’s monthly cash burn was guided to be $530m in Q4 and it has $1bn debt maturing in Q4, signifying the need to raise more cash. If completed, this offering would be ~9.7% dilutive at the 11/10 closing price.
  • We can expect more stock issues from names like $RCL, $NCLH, $DAL, $UAL, $CNK, $AMC and others who have been burning cash due to forced curtailed business activity during the pandemic. This is the prudent thing to do for these beleaguered companies, but is not share holder friendly.

Grounded plans, closed movie theaters, docked cruise ships.

  • More Vaccine Details: A key consideration in administering the vaccine is the administration sites themselves. There is a view that many different sites would be used for administration, including pharmacies, doctor offices, and mass inoculation areas (pop-up tents in parking lots, for example). The nature of the vaccine’s handling requirements could dictate which sites are most appropriate, particularly given not all sites will have the equipment required for storage.
Australia Reports New Single-Day Coronavirus Death Toll | Voice of America  - English
Will we all be vaccinated in pop-up tents?
  • For all you urban millennial readers and listeners, you can expect to be able to receive your first dose earliest around April 1 and conservatively by July. Rural populations, however, will likely take longer to reach. The government has procured a significant amount of vaccine doses such that patients won’t be charged for either the COVID-19 vaccine or its distribution, though some providers could potentially charge an administration fee. Various plans are also under development with the objective of ensuring there will be no out-of-pocket expenses for the administration of the vaccine either.
  • Chinese regulator push-back on Tencent and Alibaba: In the latest development to curb the power of China’s internet giants, the anti-trust body issued an order seeking public comment to “ward off monopolies.” We see this as an ominous sign for $BABA and $TCEHY and more will surely come. Or perhaps the CCP is simply trying to remind Chinese tech billionaires who really runs the show, but will refrain from actual anti-trust actions. Time will tell. (link in Chinese)
  • Apple chip reveal: Apple unveiled its first Apple Silicon Macs at its event, marking the beginning of the end of Intel chips being inside Apple notebooks and desktops. The first in a family of Apple Silicon chips based on ARM is called the Apple M1 chip. Apple’s System on a Chip (SoC) will also be able to run iPhone and iPad apps on the Mac for the first time. More here: (link)
  • Herd immunity: The hypothesis of herd immunity being achieved in certain population centers like NYC as well as European hotspots like in Italy and Spain was debated fiercely. We think we can put the idea to rest and that no significant amount of herd immunity has been achieved anywhere. We also believe NYC and other past US hotspots are at risk of being hotspots once again when we look at what’s happening in regions in Europe.
The Northwest region (blue) which includes Lombardy, Piedmont, Liguria, and the Aosta Valley. This region was the most affected in the first wave and is leading the second wave as well. The Northeast (orange) and South (yellow) are also following similarly in the second wave as the first, signifying it’s the same regions being reinfected, not new ones.
In Germany we can see a similar result – North Rhine-Westphalia (brown), Bavaria (orange), and Baden-Wurttemberg (blue) are leading the second wave just like they led the first.

Tweets and graphs we like:

Millennials worried all those hours spent practicing that stupid dance was for nothing.
No solar panels to install on the ex-CEO, Trevor Milton’s house this quarter I suppose.
We like this distinction between *true* value (names with valuations at historical lows) and *anti-momentum* (Covid affected companies down >50% this year)
Say it with me – SOGU. Stocks Only Go Up.
Great to see some Gen X and Boomer participation in a millennial past time!

Things we are looking for:

  • Further developments on Chinese anti-trust regulatory actions. Expect further selling of large Chinese names like Alibaba and Tencent in the meantime. Remember, Asia trades on rumors, so any noise coming out is important for these stocks.
  • Will the rotation into *true* value continue over the next few days? We think it’s likely.

Thanks for reading and good luck!

Categories
Daily Update

Daily Update 11/10 – Dust Settles in Post-Vaccine Headline World

Dust
Dust settling on the road to a Covid vaccine

News Wrap:

  • We got the anticipated vaccine headline, now what? The exciting reality of distribution logistics and supply chains of course! Pfizer’s vaccine needs to be housed at an average of 103 degrees below zero Fahrenheit. The number of medical grade ultra-cold deep freezers in the United States is unknown, and it’s up to states to locate them. Specifically, the federal government has worked with 5 pilot jurisdictions (California, Florida, Minnesota, North Dakota, and Philadelphia) to utilize a basic plan for administration, which will then serve as a model for other jurisdictions. Other states and local governments will then use information gathered from these pilot jurisdictions to create their own plans, which will identify vaccination sites, and other necessary logistical considerations. Almost every state has submitted a draft outline for their distribution in their respective jurisdiction at this point.
  • There is no centralized effort for this kind of distribution effort, yet. Federal officials, which includes the CDC, are not working with hospital associations or medical supply chain experts on a national plan. It’s instead up to each of 64 vaccination jurisdictions to identify these freezers, according to an American Hospital Association spokesman.
Vaccine Product Flow and Distribution Challenges Source: Goldman Sachs Global Investment Rearch
  • There are fewer than 10 national suppliers of medical grade deep freezers, experts say and a recent market report identified nine major suppliers. More on How to Ship a Vaccine at –80°C from NYT – (link)
  • Luckily there’s also some good news – some hospitals have these specialized freezers even if they don’t realize it. Although their sizes vary widely “from the size of a table top or the top of a desk to the size of a TV tray.” Additionally, some concern about the freezers’ availability was relieved recently after Pfizer announced it designed a special short-term cooler for keeping its COVID-19 vaccine in dry ice at a cool -109.3 degrees Fahrenheit/ -80 degrees Celsius. Can we source enough dry ice for 1.3bn doses of the vaccine in 2021? Expect to hear more about these bottlenecks as we move forward. More here – (link)
A FedEx employee handling dry ice for boxes that would be used to ship vaccine. A looming shortage of dry ice could hinder shipments.
A FedEx employee handling dry ice for boxes that would be used to ship vaccine.
  • Who gets the vaccine first? Front-line healthcare workers, essential workers, and older adults could and probably will get vaccine first. Phase 1 will consist of a total around 45 million from these populations. Phase 2 will most likely be those who are at risk due to health conditions such as obesity and diabetes, as well as the remaining older population, teachers, and other essential workers. Phase 3 and Phase 4 will be children, young adults, and workers in important industries.
Source: National Association of Medicine, Goldman Sachs Global Investment Research
  • Will Americans take the vaccine? Polling is … inconclusive at best. Pew Polls ate 50/50 and polls from Engine Insights and CBS News are 25% would take/ 25% would not take/ 50% not sure and would wait. However, with the national mood being that of pollsters be damned, we have a better data point: 45% of Americans were vaccinated for the flu last year. Due to increased interest in Covid, I think we can conservatively expect 60% of Americans to take the vaccine, with a more optimistic assumption of up to 80%.
1. Gallup only accepted yes/no answers
Source: Pew Research, Engine Insights, CBS News, Gallup
  • There seems to be some confusion on whether Pfizer accepted federal funds. From what I can see, Pfizer was not a part of Operation Warp Speed, but did accept federal money. Pfizer’s partner in develolping the Covid vaccine, BioNTech, also was given $445 million from the Germany government. See more details below:
Image
  • Enough about the vaccine, how about some Market Mayhem – Beyond Meat fell as much as 11.1% on the news, released around 10:30 AM, that McDonald’s unveiled its own meatless burger, the aptly named McPlant. However, a few hours later, at around 1:30PM, Reuters ran a piece where it was reported that Beyond Meat co-created the McPlant, leading to BYND spiking over 20% on the news. BYND ultimately ended the day -4.05% because it was unclear what role the company would play on the McPlant (if any) and their role was probably thin at best. The stock then promptly dove another 20% after its third quarter revenue missed the lowest estimate. My grocery store has always been fully stocked with Beyond Meat, just saying.
Beyond Meat, Beyond Volatile.
  • And finally, the most important news of the most eventful day for the markets in a long time:

Tweets and Charts I like:

Will the rotation out of stay-at-home names and into back-to-normal names continue?
No one *wants* to own this stuff. The stage is set, what’s more important – that the tech powerhouses continuing to churn out more cash or is the promise of energy demand/airline capacity/vacation bookings/movie tickets sold back to 2019 levels despite near-term expected horrendous earnings.
The number of data points is small (and Obama inherited a crashed market so a recovery was expected in hindsight) but let’s dispel this myth once and for all.
SOGU – Stocks Only Go Up
Categories
Daily Update

Daily Update – 11/9 Vaccine Headline

COVID-19 vaccines from Pfizer

News Wrap:

  • What’s Next? Look for safety and manufacturing headlines to hit within 2 weeks. “Pfizer and BioNTech are continuing to accumulate safety data and currently estimate that a median of two months of safety data following the second (and final) dose of the vaccine candidate – the amount of safety data specified by the FDA in its guidance for potential Emergency Use Authorization – will be available by the third week of November”
  • How many people will be vaccinated? Pfizer expects 50 million vaccine doses by the end of the year to be produced. These will most likely be given to healthcare workers and high risk individuals and seniors at first. They expect 1.3 billion doses in 2021.
  • DOW and S&P up big pre-market. Nasdaq up slightly, signifying rotation into beaten down cyclical stocks vs tech which has rallied significantly this year. Expect big moves today.

Tweets and Charts I like:

Remember when oil was within striking distance of $100 a barrel and rates weren’t 0%? It was only two years ago.
Our friends in Japan may finally break out of their main index’s 20 year trading range. Still they would need another 56.6% increase (from levels this morning after the vaccine news was released) to hit the heights achieved in 1989.
Trump should’ve hired Quantian as senior advisor instead of Jared.

What I’m looking for:

Biden released his Coronavirus task force this morning too amid the vaccine headlines. Former surgeon general Dr. Vivek Murthy and former Food and Drug Administration commissioner David Kessler will lead the task force. Yale University professor Dr. Marcella Nunez-Smith will also help guide the group. I look forward to learning more about these individuals and their guidance on how to handle the pandemic from now until a vaccine is widely distributed.

Categories
Valuation

DraftKings (DKNG) Valuation

The Dangers Of Betting On Illegal Bookies - ItSportsHub
As sports gambling and iCasinos show promise to become more mainstream in the US, does the valuation of DKNG make sense?

We start off with a valuation of DraftKings Inc. A company with a $16bn market cap at the close of 11/5/2020, with only $188 million in revenue in the past 6 months this is clearly a stock price for future growth. But what kind of future growth is expected?

What’s clear is that more states will legalize betting and more Americans will be exposed to sports betting and online gambling avenues and the market will grow overall. What is less clear, however, is how fast this market will grow. I approach this valuation by starting high level, focusing on the growth of online betting markets, and then following with DKNG’s market share of the future betting markets. I try to keep this analysis high level so we can plug and play growth figures for both the market and DKNG’s share of that future market because analyzing expense line items really is a waste of time here. This is a rapidly changing company in a disruptive industry and it’s stock price reflects expectations of the future of American online gambling and DraftKings’ ability to capture an increasing share of that growth.

If the online sports betting and gambling markets grow at an annual rate of 25% from 2020-2025, and DKNG is able to capture a 23% blended total market share of these markets, at a 30% EBITDA margin and 17.5x EBITDA multiplier (on the higher end but this is a growth company with no earnings yet), I get a valuation of around $28. Let’s look closer:

I start off by estimating the online sports betting and gambling market size below. I go off the estimated 2020 figure of around $3.14bn – $1.33bn from sports gambling, $1.5bn from iGaming, and $286mm from Daily Fantasy. Next I grow them by a CAGR of 10% to 45% and you see the results. For purposes of this valuation I designate a 25% CAGR as my Base Case. I don’t want you to stay fixated on the 25% CAGR but rather to see the effects of the rate on overall market size come 2025. We can argue all day about the numbers, but trying to estimate the growth of the market to the decimal for 5 years out is not an efficient exercise. This is still a nascent market experiencing a lot of disruption with no clear predecessor case studies.

Deutsche Bank is a noted Bear on this sort of Total Available Market (TAM) Share argument in the 20bn to 25bn range. They say, “To arrive at even a $20bn TAM, implied that not only does every state legalize and all 240 mm adults can bet sports on their mobile phones, but that … the adult spend grows by ~65% from this $51 level (referring to the per adult spend on sports betting in NJ from March 2019 thru Feb 2020). I look at the idea of full legalization and spend per adult in the table below.

To get to our $20bn TAM, indeed every US adult would need to be spending $84 a year on sports betting and online gambling. This ties out with DB’s 65% figure.

Next I estimate the DraftKings’ EBITDA based on the market size and their share of it. I use a healthy 30% EBITDA margin across all levels of market share and market size. As you can see, our Base Case is $672 mm in EBITDA for 2025. Not bad for a company expected to have over negative $400mm in EBITDA for 2020.

Finally, given the current stock price of $42.32, what is the implied EBITDA multiple for all these scenarios? Here’s a table summarizing that below:

So in order to justify this stock price for our Base Case, we have to be using a ~23x EBITDA multiple. That’s pretty high, however you can see the rest of the cases in the table ranging from over 120x to 5.88x multiples.

I layout some clearer Bear/Base/Bull Case scenarios at the bottom as well in more detail:

The valuation is clearly rich here, but it can be justified if one believes that 45% CAGR for the sports betting and online gambling industry and/or a greater than 23% market share for DKNG is possible. Perhaps also DKNG is able to squeeze more juice and scale efficiently/cut back on marketing and overhead/etc. and get their EBITDA margins over 30%. Let me know your thoughts and thanks for reading.

Here is the link to download the excel workbook, I try to keep it as simple as possible so anyone can plug and play their own ideas and see how it affects the valuation.

https://millennialmktscom.files.wordpress.com/2020/11/dkng-valuation.xlsx

  • Daniel J.