Weekly Market Links - 26 Jul-01 Aug 2021
Crazy earnings growth from ad businesses, higher noodle prices, Robinhood's lacklustre debut.
Macro
US clears the 55% mark, as delta starts to take up more % of infected.
JP nears 40%, while India is at 25%
SEA, exception of Singapore, lags far behind as delta infections grows tremendously. Those not at high vaccinations are at very high risk of overloading their healthcare systems.
Worldwide, supply chains are getting further snarled by floods in both Europe and China.
Countries
USA, Canada
The Centers for Disease Control has reversed their earlier decision - Fully vaccinated Americans must still mask-up in schools or areas of high/substantial transmission.
Even amongst those vaccinated, the delta variant has been found in similar levels of viral loads as unvaccinated people - this is concerning, as it means delta could spread just as easily.
This has implications on reopening plays, such as with tourism/travel and especially brick-and-mortar if delta is found to be spreading substantially and more stringent measures are recovered.
India
Unusual resignations at Reliance are occurring again - and this time, less than 6 months in their tenure. The best part? It's Anil Ambani’s own sons.
South Korea
The top economic policymaker in South Korea warned of a housing bubble, made worse by an incoming interest rate hike.
The Bank of Korea is expected to tighten lending regulations to reign in an overheated property market - and warns that prices could fall at any time as they have excessively risen.
Median prices of apartments in Seoul surpassed US$866K in July. For comparison, a middle-income household could buy a home thereby saving their entire income without spending anything for 15 years in 2020.
The cost of living, especially for instant noodles, is set to increase too. Nongshim’s noodle brands will be priced 6.8% higher from mid-August.
SEA - MY/VN/TH/ID/PH
Vietnam: Ho Chi Minh City is going to outright ban people from going out from 6pm till 6am. Oh noes.
Indonesia: Hyundai and LG have an MOU to manufacture EV batteries, in exchange for incentives and rewards to support the operations of the upcoming plants. More jobs are coming soon.
Malaysia: SK Group has joined a consortium for AirAsia’s digital bank business in Malaysia. Currently AirAsia’s consortium is vying for a digital bank business to operate.
Grab and Singtel were other bidders as well, significant digital banking in SEA will get hotter with competition in the near future, as seen from the digital licenses given out in Singapore last year.
Companies
Apple
Reported almost double their profits. Gross margin rose to 43.3%, compared to 38% one year ago. iPhones dominated the bulk of revenue growth, while Mac and iPad grew by smaller amounts. Insane stuff.
What is great to know is the Wearables section growing at 40% YoY - signifying the take-up rate of their wearables strategy is taking off.
Supply costs are increasing, especially on freight (shipping), but component costs are decreasing on aggregate. That’s great!
Iphones hold a 14.9% market share worldwide.
Apple One bundles will consist of Music, TV+, Arcade and iCloud - another walled garden to fend off the content wars of music, podcasts, games and TV/Movies.
Apple is also raising capital through a 4-part bond deal, but mainly to return capital to shareholders in the form of dividend payments and stock repurchases.
They did the state of becoming “cash neutral” - Unsure if Mr Buffet agrees with this, as the capital may have been better spent growing the business. Well, why buy bonds when there’s Apple?
AON
The US Department of Justice has blocked AON’s $30B acquisition of Willis Towers Watson.
This was slated to be creating the world’s biggest insurance broker - but ultimately creating a monopolistic market structure.
As a result, Aon needs to pay a $1B breaking fee to Willis.
Microsoft
Net income increased by 47%. Office 365 seat growth grew to 17% from 15%.
Stronger than expected Azure growth was delivered (30% yoy growth), but Windows revenue was affected by supply constraints from device makers. Search advertising did amazing well, growing by 53%. We’ll see more great reports of digital ads across the large tech companies.
Microsoft is also coming close to UIPath’s (robotic process automation) quality level, according to Gartner. Its low-cost offering will entice customers to switch wholly into the Microsoft ecosystem.
Robinhood
IPOs at $38 a share and saw some lacklustre trading, even when 35% of its shares were reserved for app users. A huge bulk of regulatory risks were stated in the prospectus.
There were additional announcements. Robinhood is working on automatically stopping customers from trading when products are in high volatility. Called “Price Volatility Protection”, this could be a way for Robinhood to protect their own PNL, as compared to their customers’. Interesting how Robinhood customers loyalties are tested, and thus supporting Robinhood’s financials (be selling order flow, ahem).
Robinhood also wants to be the ‘superapp’ people use on their phones for money - including depositing paychecks, bill payments, or splitting them - hello Paypal, Apple, and everyone else in payments!
Paypal
Revenues increased 17% on a currency-neutral basis to 6.24B.
Pay with Venmo revenues grew by 183% yoy
A merchant signs up to use QR codes every 20 seconds. In-store TPV went up 39% yoy to $6.3B
7M consumers have transacted > 20M times with Buy Now Pay Later products.
Aggressively competing by reducing processing fees, the focus is on in-store payments.
Alphabet/Google
Another crazy quarter, as quarterly profit almost tripled to 61.9B due to increased ad spend on the search engine and Youtube.
Consumer online activity has increased markedly, while advertiser spending has increased sharply due to more attention on digital screens, and shopping.
Google is on track to generate US 130B in ad revenue this year, an increase of ~25%. This would mean controlling about 28.6% of the worldwide digital ad market.
YouTube was the fastest-growing segment, while GCP is continuing to grow while competing with AWS and MSFT.
Oculus Workouts may be integrated with Apple health. This expands use cases of VR/AR into personal fitness and health, where both Facebook and Apple can create new ecosystems and products.
However, there were about 4M product recalls whereby customers reported hives, rashes, and burning sensations - 45 required medical attention. This was due to the Oculus Quest 2 using a lower-quality face liner than its predecessor.
Said another way, the headsets are being paused and will be replaced with a silicon cover to address these issues.
On the bright side, 4 million people were willing to use the product.
Something to take note of is that it expects revenue growth in Q3 and Q4 2021 to “decelerate significantly”. The social media giant expects Apple’s recent privacy change to impact financials materially.
To defend against this, it may make sense for the company to focus on creating their own platforms - such as Ray-ban smart glasses.
NVDA
Rumours are that ARM holdings are going to list on their own if Nvidia does not buy them soon.
Pfizer
$7.8B worth of COVID shots were sold in Q2. Sales forecasts for 2021 were lifted to $33.5B, as delta spreads and a booster shot discussion are becoming more prevalent.
Emergency use authorization could come as early as August, regarding a 3rd dose booster should internal tests suggest a higher efficacy.
Pfizer expects full approval for its two-dose vaccines by January 2022.
Panasonic
Reported 27x profit, due to demand for home appliances and automotive batteries.
Panasonic has worked steadily to move from low-margin consumer electronics, to now electric car batteries, power storage and production machinery, but has benefited from the COVID environment regardless.
TSMC
The largest chipmaker is considering building its first European plant in Germany. The goal is just to break even.
This has implications on costs as scaling efficiencies take time to build up in a specific geography.
TSMC already has built a plant in Arizona, US, to start production only in 2024.
What is important to note is that the nanometers being able to be produced are not as small as those produced in Taiwan, thus one has to see that these plants may solve solely demands of the host country rather than for exports.
If this is true, costs may rise as a whole for buyers of these chips as the world becomes less decentralized than now.
Tencent
In a blow from China’s antitrust admin, Tencent is under fire now - Tencent Music will have to give up its exclusive music licensing rights within 30 days.
This has huge ramifications, as Bytedance is already encroaching into Tencent’s market in music rights, which Tencent has a high dependency on in China for revenue.
Bytedance seems well-positioned to gain from this as synergies with Tiktok and other start-ups in its ecosystem are reliant on music. Bytedance is also going into music subscription services, akin to Spotify and Apple Music.
Nikola
Founder Trevor Milton was charged with securities fraud. Turns out, Nikola’s vehicles are far behind that what they claim - a prototype was actually just rolling downhill, and even orders were fake. Juicy stuff.
Samsung
Retains their top spot in global smartphones in Q2, at 18% market share.
However, shipments declined 24%, due to seasonal demand in regions such as India, Central+LatAm, SEA, and disruption in Vietnam due to delta breakouts and subsequent lockdowns.
Samsung is shifting focus toward premium devices over the mid-range, and this is also where supply-side constraints are preventing growth due to limited inventory to cater to demand.
Walmart
A commercial alliance with Adobe was formed, integrating Walmart’s marketplace with the Adobe Commerce - retail businesses can use Walmart’s services to offer seamless pickup and delivery to their customers.
Uber
Shares dropped after Softbank was announcing it was selling 45M shares, with a 30-day lockup. This was to “offset” the decline in Didi, which was about $4B in unrealized losses for Softbank. That’s 4% of the size of the Vision Fund. We haven’t counted the PNL from Chinese online education after the crackdown too, maybe a separate discussion on Softbank is needed!
Uber - Good deal or no, what do you think?
Tesla / SpaceX
Tesla will not offer a regular steering wheel. Instead, it offers a strangely-shaped one, that seems to be impractical at lower speeds and turning tight corners.
Could this be a product design to get consumers to use AI in navigating instead of relying on their own steering?
Cybertrucks are being delayed to 2022, done to focus on other vehicles instead due to an ongoing battery shortage.
At the same time, Tesla is hedging their risk against the global chip shortage by rewriting its vehicle software to support alternative chips.
The flexibility of the software allows a unique advantage to be done, preventing the need for an automaker to close down assembly lines, such as with Daimler and BMW. This ultimately affects people’s livelihoods and production output, giving Tesla a unique advantage that other new-age automakers would want to copy.
Tesla is also shifting their strategy of retail-first, to instead install more charging stations in the malls.
Police in Connecticut, US, have established that using a Tesla saves money for them as compared to standard gasoline vehicles, whereby Teslas pay for themselves, even after police customization - in 4 years. The police are ordering more!
Tesla’s co-founder, JB Straubel, raised more than $700M for his battery recycling start-up, by renewing and re-using car battery materials. The company already has partnerships with Amazon and Panasonic, breaking down electronic waste, treating with chemicals, and sending it back to the supply chain as raw materials.
Industry and Commods
Tech
The plethora of antitrust bills targeting big tech will likely have a spillover effect into start-ups. From the US to China, mergers & acquisitions are being blocked.
This takes away a key exit strategy. The other option is a SPAC, but so far, this is only available for US-based sponsors.
If the effect is too large, we may see venture capitalists, private equity capital shifting their focus elsewhere.
Consistency of this enforcement also matters, so there is predictability in outcomes. And where there is predictability, returns follow.
Predictability hasn't been something common since 2020 eh?
Crypto
A Senate proposal to ramp up IRS surveillance had a last-minute inclusion of cryptocurrency transactions.
If passed, crypto brokers will be required to report crypto transactions as well as for businesses investing in crypto at more than $10K at a time.
Stories of crypto holders being locked out of their wallets are circulating. Namely, a couple having 3000 coins in Ethereum (worth $6M today) cannot access their wallet.
What happened: The private key needed to open and access the crypto wallet was either corrupted, or the downloaded file could not be used.
What now: Somewhere somehow, they cannot access their crypto. They can see the 3000 ETH, but cannot access it.
What this means for us: Risks to do with delivery of a product are commonplace in commodity markets - inter party transactions such as these definitely need a more stringent check on the processes.