Recklessly Bold Predictions for 2023

January 2, 2023 paul.essen Comments 2 comments

It’s once again time for my recurring series where I try to make the most ridiculously bad predictions imaginable!

Okay, so that’s not quite the point of my annual Recklessly Bold Predictions, but you could definitely be forgiven for thinking that was the case this year. I honestly don’t think I could’ve made worse predictions if I had tried. Not only did the majority of my predictions not come close to happening, but several went to the opposite extreme.

Let’s get these over with quick, so we can get on to some 2023 predictions which can’t possibly be any worse than my 2022 ones…. right?

2022 Predictions

Novocure (NVCR) will triple

I still have really high hopes for Novocure and I’m hoping that a few years from now I’ll realize I was perhaps a year too early with this prediction, given the current schedule of anticipated trial results. In fact, I just might re-up this prediction for 2023. For 2022, though, this was an epic miss. Novocure was essentially flat for the year, which is a far cry from tripling. Still, that is far from my worst prediction. That honor probably would go to…

Redfin (RDFN) will triple

Redfin dropped roughly 90% in 2022. 90%! I don’t even have the words to describe how bad this prediction was. The whipsawing of the housing market from red-hot to ice-cold in a matter of months certainly did Redfin no favors and I probably underestimated how big of an impact a challenging real estate market would have on the company. I think management has done an excellent job navigating a super difficult environment and that in many ways the company is better positioned relative to their competition but this is a painful reminder that some factor’s are outside of a company’s control and those things can absolutely wreck havoc with the business. I still love the potential of Redfin long term, although 2023 could continue to be rough if a recession joins high interest rates as headwinds for the real estate market.

Teladoc (TDOC) will triple

Another really awful prediction. I’m really torn with Teladoc. Every quarter their results have some fly in the ointment, but the future looks rosy to me and I think the worst might be over, only to have more concerns pop up in the next earnings report. There still seems to be a big opportunity in telehealth, but I’m beginning to wonder if it’s as big as I once thought and if Teladoc has any appreciable moat.

FuboTV (FUBO) or Nano-X (NNOX) adds $22

If “Redfin will triple” wasn’t my worst prediction, then “Fubo adds $22” certainly has to be. Instead of adding $22, Fubo lost roughly $13 going from $15 to $2. Similar to Redfin, I think Fubo was a little bit a victim of changing macro conditions. In 2021, the market was fairly forgiving of money burning companies that were putting up great growth numbers. In 2022, there was a lot less appetite for those types of companies. To make matters worse, Fubo also abandoned plans to grow a sports gambling business to pair with streaming service, which makes it a little harder to envision how they might turn profitable in the near future.

Not sure if I have much to say about Nanox. It’s a company I think I was just flat-out wrong about and that doesn’t seem nearly as capable of executing as I hoped. I sold my shares in mid-2022 and haven’t looked back since.

Annual Inflation Rate for 2022 is > 8%

Finally! Something approaching a win! It looks like inflation for 2022 is going to come in a little closer to 7%, but given how atrocious my other predictions were…. can I at least have half a point for this one? Please?

Regardless. Let’s put 2022 in the rear-view mirror and look forward to 2023.

2023 Predictions

Novocure (NVCR) will triple

No, I didn’t accidentally copy and paste and forget to change the title. As I alluded to above, I’m circling back to this prediction again. Why might Novocure triple in 2023 when it couldn’t get it done in 2022? Two words: Trial Results. Novocure is expecting trial results for the treatment of lung cancer and ovarian cancer in 2023. If they receive positive results, that could really expand their total addressable market to 4-5x where it currently is. It would also make me more optimistic that they would receive positive results from their brain metastasis and pancreatic cancer trials which they expect data from in 2024. Those two cancers could double their total addressable market on top of 4-5x from lunch cancer and ovarian cancer. There are a lot of potential positive catalysts for Novocure in 2023. I think some of them will pan out.

Sea Limited (SE) back above $100

On one hand, getting back to $100 a share would mean roughly doubling from where it is now, which seems pretty extreme. On the other hand, shares were trading for over $300 a little over a year ago, so $100 a share doesn’t seem that ridiculous. There are a lot of fair reasons why Sea shares have dropped over the past 18 months. Their gaming division has seen a drastic slowdown and they have closed operations in a bunch of countries because they were proving too difficult to turn profitable. A strong argument could be made that they were too aggressive trying to expand internationally. However, I still think there’s a lot to like with Sea. Southeast Asia still has a lot of strong demographic tailwinds and I think ecommerce and digital currency growth will continue even without a global pandemic accelerating growth. Will their gaming segment ever recover? That’s a little harder to say, but if Sea can continue to show strong growth with Shopee and Sea Money, I think the market will eventually take notice.

The Trade Desk (TTD) back above $100

I’ve been really impressed with how well the Trade Desk has executed over the past few years. Not only have they had to deal with changes in consumer behavior due to the pandemic, but they’ve also dealt with a shifting ad landscape with Apple’s decision around iOS 14.5. I’m a little baffled why the stock is down over the past year, especially considering how much growth they still have in front of them. The shift to streaming services and connected TV seems clearer than ever, and yet the ad spend there still hasn’t seemed to have caught up with reality. Add to that that services like Netflix are considering ad-supported tiers and it seems like a lot of opportunity for a company like the Trade Desk.

Bitcoin back above $30k

Over the past few years, a lot of people have asked what my thoughts were on crypto. My go to response was to compare it to the early days of the internet: I thought there was a lot of potential and almost certainly some huge opportunities, but also probably a ton of pretenders / frauds as well. I’m old enough to remember the times before the dot com bubble bursting where companies were raising huge amounts of money without any clear business plan or idea how to become profitable. The hysteria around NFTs and cryptocurrency trading seemed very similar to me, which is why I only ever dipped my toe into Bitcoin and Ethereum despite being fairly bullish on crypto.

2022 has been a rough one for all things cryptocurrency related, and to carry on my internet-analogy further, I wonder if we just saw the equivalent of the dot-com bubble bursting. Time will tell. However, nothing that has happened over the past few years has made me any less bullish on Bitcoin. I still think there is a big need for a decentralized and non-inflationary currency / store of value. If anything, the events of 2022 simply cause me to believe that even more strongly than ever. Which brings me to…

The Fed will reduce rates to 2.5% (or lower) in 2023

I typically don’t try to worry too much about what the federal reserve might do and I don’t let it affect how I invest. However, I have long been fascinated by the whole monetary situation around the US dollar, the federal reserve, and the ballooning debt of the US government. Simply put, it seems impossible for the federal reserve to continue to raise interest rates and keep them there for any length of time without causing some severe issues for the US government. We’ve seen some historically fast increases in interest rates this year, and I wonder if we might see the reverse in 2023 even if inflation doesn’t completely get squashed.

Well, those are my recklessly bold predictions for 2023. I don’t think it’s possible that I can do worse this time than I did in 2022, so I at least have that to look forward to. What do you think? Have any bold predictions of your own? Let me know!

Recklessly Bold Predictions for 2022

December 16, 2021 paul.essen Comments 7 comments

It’s that time of year again! Going in to 2021, I was feeling pretty good about my track record with my bold predictions. After all, I got the majority of my predictions (3.5 out of 5… don’t ask how I get a prediction half right) right for 2020. In fact, I was feeling so good that I felt like maybe my predictions weren’t bold enough.

Well, I can safely banish that thought. 2021 is here to put me back in my place. Not only have my 2021 predictions uniformly not panned out, but some of them have missed in a big way. I need to keep score in good times and in bad, though, so let me hold my nose and go through what I predicted might happen in 2021.

Note: As normal, I am scoring these a few weeks before the end of the year so I can get my 2022 picks in on time. There’s still some time for the numbers to change, but considering how far off I am on most of these, I feel like it’s safe to call them now. The numbers below are from market close on December 10.

2021 Predictions

Shopify (SHOP) will become 1/8th the size of Amazon (AMZN)

In retrospect, this wasn’t a terribly bold prediction considering Shopify started at 9% the size of Amazon and simply had to get up to 12.5% the size of Amazon. As a result, it’s not surprising that this was the closest of my 2021 picks to end up being right. Both Amazon and Shopify are up in 2021 YTD and Shopify is currently outperforming Amazon, so I was at least directionally right, even if Shopify has fallen a bit short currently at 11% the size of Amazon. I still believe the future for Shopify is bright, though, and look forward to it continuing to outperform Amazon in the coming years.

Etsy (ETSY) will grow to 3% the size of Amazon

Another one where I was directionally right, although just barely. When I made my prediction, Etsy was 1.5% the size of Amazon. This prediction would’ve looked a lot better had I been able to score Etsy a month ago, but sadly the last 30 days still count and right now Etsy is barely holding on against Amazon and is currently 1.6% the size of the Everything Store. Like Shopify above, though, I think Etsy has more upside going forward and look forward to it outperforming Amazon over the coming years.

Mercado Libre plus Sea Limited market caps combined to $300 billion

Another big miss, and my largest yet (but the biggest is still to come). A year ago the combined market cap was $187 billion. Now? $190 billion, or $110 billion short of my prediction. Not much to say here. Not only have Mercado Libre and Sea Limited not had the good 2021 that I thought they might, they’ve actually had a very rough past month or two. None of this shakes my confidence in both of those companies going forward. If I didn’t have a general rule against re-using predictions, I would totally predict that both of these companies hit a combined market cap of $300 billion next year. There are a lot of tailwinds for both of those companies, and both seem to be executing at a very high level.

Either Fiverr or Redfin will double

Here it is. This is by far my worse prediction this year. Not only did neither company double, but both companies almost got cut in half. Redfin is down 51% for the year and Fiverr is down 43%. Hard to miss worse than that. I still believe strongly in both of these companies long term, but there’s been no doubt it has been a challenging 2021 for both companies.

Somebody will acquire Teladoc

Nope. I’m actually pretty surprised this hasn’t happened considering the whole of Teladoc is now worth considerably less than it had paid to acquire Livongo a year ago. Seems like it would be an attractive acquisition target for some deep-pocketed company. I hope it doesn’t happen, but I remain surprised nonetheless.

Okay, now that all of that ugliness is behind us, let’s look forward to 2022. Hopefully I can manage to do at least a tiny bit better.

2022 Predictions

It’s the three year anniversary of the Freedom Portfolio, so why not kick things off with a trio of predictions for companies I think will triple in the coming year?

Novocure (NVCR) will triple

Any prediction of a stock tripling over the course of a year may seem bold, but for Novocure I don’t think it’s very bold at all. Why? Because tripling wouldn’t be much higher than where it was just about 6 months ago. Earlier this year Novocure jumped 50% in a single day and eventually hit a high of around $220 a share after some extremely positive results in one of their trials. Since then, it’s been a consistent march downward over concerns over their earnings report and slowdowns in growth in their core treatment. I remain extremely bullish that getting approved to treat new forms of cancer will more than make up for any struggles in the glioblastoma space and think Novocure has an excellent chance to reclaim those highs it reached in 2021 in 2022.

Redfin (RDFN) will triple

Similar to Novocure, a triple for Redfin wouldn’t require it to get much higher than where it was earlier in 2021. Redfin had an incredible run from mid-2020 to early 2021 as it rode a red-hot real estate market higher. Since then, however, despite the business continuing to execute well, the stock has gotten punished by a number of factors outside of their control. The first was a housing market slowdown and the second was Zillow blowing up their iBuying program. It’s bizarre to me that the latter would be a knock on Redfin in any way since CEO Glenn Kelman had always consistently communicated that he believed that iBuying was only a part of a more comprehensive whole suite of services to offer customers and not something to get overly aggressive into. As a result, Redfin has been more cautious with iBuying and the disaster with Zillow seems to be a complete vindication of him. I think 2022 might be the year that investors realize that Redfin, and not Zillow, is the best bet for being the one to disrupt the real estate market and be a leader going forward.

Teladoc (TDOC) will triple

You might notice a recurring theme with my predictions because, like Novocure and Redfin, a Teladoc triple would just bring it slightly higher than where it was back in January 2021. I honestly can’t figure out why the market has soured as much on Teladoc as it has. Perhaps it thinks telehealth will completely disappear once the pandemic is over? Perhaps it’s because they see no moat with Teladoc and that anybody can kick off a Zoom meeting to do telehealth on their own? I have no idea, but my thesis in Teladoc as an investment hasn’t changed even as the stock has plummeted. I predict 2022 will be a much better year for Teladoc.

FuboTV (FUBO) or Nano-X (NNOX) adds $22

How about a “22”-themed prediction for 2022? FuboTV the business has had a pretty impressive 2021 in terms of growth, even if FUBO the stock has been doing awful. A $22 gain from here would be more than a double, but it would also be short of the highs from earlier in 2021. As for Nano-X, the business hasn’t been executing nearly as well as Fubo with multiple delays and dialed back expectations. I do still believe the upside is there and with a new CEO, 2022 could be the year Nano-X finally starts to live up to its potential. Like with FuboTV, a $22 gain would be more than a double for Nano-X, but it would still be far short of where the stock was earlier in the year. I think there’s a decent chance both stocks hit the mark in 2022, but for my official prediction, I’ll just go with one of them making it.

Annual Inflation Rate for 2022 is > 8%

Typically I make a random prediction of an acquisition here, but I couldn’t think of any interesting sounding ones for 2022. So instead, I’ll go with another oddball pick in terms of inflation rate. Full disclosure: I have a really bad track record of predicting big increases in inflation that never quite pan out (something I did a lot in 2008-2012). Never let it be said that I am one to learn my lesson, though. I don’t think inflation will be quite as transitory as we’ve been told. I think a combination of federal reserve and US government actions are going to lead to some levels of inflation that people my age or younger really haven’t experienced before. If I’m right, it will be very interesting to see how people react.

So what do you think? Can I do better in 2022 than I did in 2021? Which prediction is my worst? Which ones might actually happen? Let me know in the comments below!

Estimating Upside: Part 3 – The Fast Growers

September 9, 2021 paul.essen Comments 0 Comment

Five months ago (I can’t believe it has been that long), I started a series that I called, “Estimating Upside” where I would I tried to estimate roughly how much upside the companies in the Freedom Portfolio had over the next 5 years.

I divided the companies into three groups:

Slow Growers: Companies that can 2x to 3x over the next 5 years – a 15% to 25% compound annual growth rate (CAGR)
Medium Growers: – Companies that can 4x to 7x over the next 5 years – a 32% to 48% compound annual growth rate (CAGR)
Fast Growers: – Companies that can 8x to 10x over the next 5 years – a 52% to 58% compound annual growth rate (CAGR)

I previously wrote about those first two groups. You can find the slow growers here and the medium growers here. Somehow I let three months go by between that last post and now. You would think that writing about the fast growers would be the most exciting part of this whole exercise! Anyway, it’s time to finally get around to finishing this series up.

Before we dive in, I wanted to note two things:

The market caps listed below are as of August 24th
Enjoy the data and graphics associated with the widgets below? Then I encourage you to check out stockcard.io where you can check out the same data on many more companies. You can save 10% on a VIP subscription by using my promo code: “paul”

Now let’s get on to the show.

Fast Growers – 8x to 10x – 52% to 58% CAGR

Etsy (ETSY) – Now: $25 billion – Then: $200 to $250 billion

I believe the COVID lockdowns have shown that ecommerce has become big enough that it is no longer just Amazon (AMZN) dominating everybody else and sucking up all the oxygen in the space. Additionally, I believe that the hard times encountered by many during COVID will see an increase in people looking for “side hustles” or to start up their own business. Etsy should be well positioned to capitalize on both. They’ve also been aggressively looking to expand both the areas they operate in and also internationally with their recent acquisitions of Depop (a global fashion resale marketplace) and Ello7 (the “Etsy of Brazil”). Finally, just check out that market cap. $25 billion is roughly 2% the size of Amazon (AMZN) and half the size of Ebay (EBAY). It seems like there’s plenty of room for Etsy to become a major player in ecommerce right now.

Verdict: Etsy is one of my favorite “new” ideas (if you can consider a company I started investing in a year ago “new”). They had huge growth during COVID, aren’t resting on their laurels, are growing and strengthening their network, and appear to have a long runway ahead of them for growth. Looking to hold this company for many years.

Fiverr (FVRR) – Now: $6 billion – Then: $48 to $60 billion

For Etsy, I mentioned an increase in people looking for “side hustles”. What better company to capitalize on that then Fiverr? If your answer was Upwork (UPWK), then my response would be that Upwork seems to be more geared towards contractors versus the side hustles I am thinking about, but I also don’t see why there can’t be multiple winners in this space. Like Etsy, Fiverr appears to be doing a great job of strengthening its network of buyers and sellers as well and starting to move “upstream” with Fiverr Business to capture some of that freelance work for businesses. The traditional employer / employee dynamic seems to be shifting. More people are demanding flexibility in terms of remote work and worker shortages seem to be putting employees back in the driver’s seat. I believe Fiverr will thrive in this new era.

Verdict: In case it wasn’t obvious, I’m also very excited about the future prospects for Fiverr. The recent large drop in the stock price after a slight decrease in future projections doesn’t have me worried at all. Looking to hold on for many years.

Redfin (RDFN) – Now: $5 billion – Then: $40 billion to $50 billion

Real estate is highly fragmented and Redfin currently has a market share of just around 1%. That market share has been rising slowly, but steadily, and I think the stickiness of the business and the value proposition that it offers means that those gains could accelerate over time. I think it’s very reasonable to think they could triple or quadruple their market share over the next 5 years. It’s a different business model, but competitor Zillow (Z) has a market cap of $40 billion right now, so it’s not at all unreasonable for a real estate company to reach those heights. Between their brokerage, mortgage, title, Redfin Now and Redfin Direct, they have a ton of areas they can grow into.

Verdict: I’m obviously super bullish on Redfin and love the risk/reward with this company. I do think it could take many years for the advantages that Redfin possesses to become obvious to the market, but I am quite content to hold onto my shares in the meantime.

fuboTV (FUBO) – Now: $4 billion – Then: $24 billion to $40 billion

Netflix and other streaming services can offer plenty of scripted content for people looking to cut the cord and leave cable, but live sports is a bit harder to come by. Fubo has the chance to be the go-to for people looking to fill that void. Additionally, there is a good chance Fubo can add on a compelling gambling offering as well. DraftKings (DKNG) is another gambling play with a market cap of $25 billion and Netflix obviously is much larger with a market cap of $260 billion. I believe video streaming will be big enough to have multiple winners, and while Fubo is a risky play right now, I do believe getting to the same market cap as DraftKings (and 1/10th the size of Netflix) is very achievable if they can execute.

Verdict: A few years ago, there was a lot of hype over marijuana legalization, but I thought that was overshadowing that sports gambling was becoming increasingly legal and accepted. I believe Fubo can benefit from that growing trend in addition to the obvious transition to streaming video. Excited to see where this company will be a few years from now.

ShockWave Medical (SWAV) – Now: $7 billion – Then: $56 to $70 billion

I’ll be honest, when I first created these categories and ranked Shockwave here, it was a $4 billion company. Unfortunately, it took me so long to getting around to writing this that it has already almost doubled. At the time, I thought a $32 to $40 billion market cap was attainable, but even I have to admit that $56 to $70 billion is a bit of a stretch. It’s obviously not unheard of for a medical device company to get that large, but a lot of the companies that I think are most similar tend to be under $50 billion.

Verdict: Even though I might not believe ShockWave can be a 10 bagger in the next 5 years, that doesn’t dull my excitement for the company. They still have an innovative solution for a problem that doesn’t seem like it will be getting any smaller anytime soon.

Nano-X Imaging (NNOX), DermTech (DMTK), and TransMedics Group (TMDX) – Now: $1 billion – Then: $8 billion to $10 billion

I started writing up descriptions for each of these companies separately when I realized that I kept repeating myself. So, to avoid unnecessary redundancy, I decided to just put them all together since they are all very similar companies (medical devices in the early stages of attempting to revolutionize their particular area) with similar market caps.

The case for any of these companies going up 10x should be an easy case to make after the above. If ShockWave can get to a $7 billion market cap, then Nano-X / DermTech / TransMedics can most certainly get to at least that large based on the potential they have to upend medical imaging / skin cancer diagnoses / organ transportation around the world. The reason for the lower market cap is undoubtedly because of the increased risk, as these companies are generally earlier along on the FDA approval process. Any of these could be huge winners, but there’s also an increased chance of

Verdict: That wide range of outcomes is why I am happy keeping all of these companies to a smaller position size for now. I love the upside, but there’s plenty of potential pitfalls as well. If/when the risk on these companies goes down some, there will be plenty of time to add to my position.

Your Thoughts

What do you think? A jump of 8x to 10x over 5 years is pretty extreme. Which of these have virtually no chance? I love to hear reasons why I am wrong so please let me know!

Estimating Upside: Part 2 – The Medium Growers

May 17, 2021 paul.essen Comments 2 comments

A few weeks ago, I wrote a post called: Estimating Upside: Part 1 – The Slow Growers. It was the first part of a three part series where I attempted to give my best guess on the reasonable upside for the positions in the Freedom Portfolio if my investing thesis plays out. I divided all of the positions into three groups:

Slow Growers: Companies that can 2x to 3x over the next 5 years – a 15% to 25% compound annual growth rate (CAGR)
Medium Growers: – Companies that can 4x to 7x over the next 5 years – a 32% to 48% compound annual growth rate (CAGR)
Fast Growers: – Companies that can 8x to 10x over the next 5 years – a 52% to 58% compound annual growth rate (CAGR)

The slow growers were already covered in part 1, so now it is time to over the medium growers. For each company, I will list the current-ish market cap as well as what that market cap would look like 5 years from now after a potential 4x to 7x. Market Caps are as of April 26th (yes, it really did take me this long to write this).

Shopify (SHOP) – Now: $144 billion – Then: $577 billion to $1 trillion

There are a lot of ecommerce companies in this “medium growers” group, starting with Shopify. COVID induced lockdowns in 2020 seemed to supercharge ecommerce growth and also, I think, showed that ecommerce was big enough that Amazon (AMZN) couldn’t dominate it all. Many brands wanted to break free and control their own destiny rather than relying on Amazon’s marketplace, and Shopify was glad to accept the mantle of the “rebellion” bravely fighting against Amazon’s “evil empire”. I think the transition from brick-and-mortar to ecommerce is going to continue and I inside the area of ecommerce I think Shopify continues to take market share from Amazon as their incentives are better aligned with their customers and they aren’t trying to compete with them. There’s also plenty of opportunity for overseas expansion. Combine these opportunities with a management team which has proven they can execute and I think hitting that $1 trillion market cap isn’t such a crazy thought.

Verdict: I love Shopify. It’s my top holding and best performing investment. I’m just as thrilled about the future for this company as I was years ago. Happy to hold for years to come.

JD.com (JD) – Now: $114 billion – Then: $458 billion to $801 billion

There are obviously differences in their businesses, but Alibaba (BABA) is a similar enough company to provide a glimpse into the upside that JD still has. Alibaba has a market cap of over $600 billion. It seems perfectly reasonable to think that JD could approach those levels over the coming years considering the different growth initiatives they are undertaking in China and their ambitions to expand outside of China.

Verdict: The ecommerce space in China seems a bit crowded, but with over a billion people, there’s room for plenty of winners. I would be lying if I said I wasn’t concerned over what has gone on with Jack Ma over the past few months, though. Richard Lui has had his own run-ins with the law in the past, so it’s not inconceivable that something could come up between him and the Chinese authorities. I like the upside with JD, but I am closely watching things and won’t hesitate to trim or sell completely if it looks like things are going south.

Sea Limited (SE) – Now: $141 billion – Then: $565 billion to $989 billion

The run of ecommerce companies continues with Sea Limited. With a population twice that of the United States and a GDP that is forecasted to grow at twice the rate of the United States, Southeast Asia is a really interesting area to invest in. While there is a lot of competition here as well, Sea appears to be currently leading the pack in the race to become the top ecommerce company in Southeast Asia. Assuming they can keep that lead, there’s a massive opportunity in front of them. That’s not even counting the fact that they are actually primarily a gaming company and have one of the most popular games in the world right now (Free Fire). The game is helping them make inroads in digital payments both in their domestic markets AND in areas like Latin America. Founder Forrest Li seems to have a lot of ambition and if they can capture even half of that, then hitting a $500 billion market cap seems pretty reasonable.

Verdict: Sea Limited is one of my top holdings and, with the possible exception of Shopify, is possibly the company which I am most excited about in the coming years. There seems to be incredible amounts of upside paired with what seems like an acceptable amount of risk. It’s hard for me to imagine not holding all of my shares for many years to come.

Mercado Libre (MELI) – Now: $81 billion – Then: $324 billion to $567 billion

The run on ecommerce companies wraps up with Mercado Libre. Latin America also has around twice the population of the United States. However, unlike Southeast Asia, the Latin American region seems to have a little more geopolitical uncertainty around it. Between socialism in Venezuela and corruption in Argentina, there’s a lot of negative headlines that have often been coming out of Latin America. In some ways, though, I think that can be framed as a potential positive for Mercado Libre. They have been able to put up incredible growth numbers despite the chaos that has sometimes roiled the markets they operate in. If those situations were to stabilize or even improve, then just imagine what Mercado Libre could do then. Why couldn’t the ecommerce leader of Latin America grow to a $500 billion company a few years down the line?

Verdict: Just like with Sea Limited, Mercado Libre is a top holding for me with high conviction. I imagine there could still be some bumps in the road ahead but I’m ready to weather those short term storms and excited about where the company can go long term.

Skillz (SKLZ) – Now: $8 billion – Then: $34 billion to $59 billion

It’s hard to come up with a great parallel for Skillz to try to judge how large it could reasonably grow. However, if companies like EA and Activision Blizzard can reach $40 billion and $70 billion market caps respectively then a 4x to 7x for Skillz seems reasonable if the bull case plays out. There’s still a ton of risk, though, and I suspect there’s almost as big a chance that it gets cut in half (or worse) over the same time period. Time will tell.

Verdict: I think the potential upside outweighs the downside right now, but I intend to have a short leash on this position. There’s a lot of ways things can go wrong, and I reserve the right to change my mind pretty quickly on this one if it looks like management is unable to execute.

Axon (AXON) – Now: $10 billion – Then: $40 billion to $70 billion

Speaking of hard to find parallels, where is the competition for Axon? More so than most of the other companies in this post, this guess is a complete shot in the dark. However, they recently raised guidance for 2021 and seem to be riding a wave of desire for monitoring police interactions with the public. At the same time, their business is transitioning away from a focus on selling tasers to a stickier and recurring revenue from body cameras, which should help juice their numbers over the coming years. Can the potential leading provider of cloud services for the majority of US police departments be worth $40 – $70 billion a few years down the line? It seems reasonable to me.

Verdict: Axon isn’t the sexiest company, and I doubt they’ll ever put up eye-popping growth rates, but this seems like a really good bet for consistently strong growth for the foreseeable future. If a strong competitor shows up, it might be time to reevaluate, but until then I’m happy to hold for years.

Teladoc (TDOC) – Now: $29 billion – Then: $117 billion to $205 billion

Anybody who follows politics at all knows that one of the hot political topics of the past decade or two has been about the sheer amount of money Americans spend on healthcare and how quickly it has gone up. One of the things that has me excited about Teladoc is because I believe it can ride that desire of saving money in healthcare. There are a lot of big $90+ billion market cap health insurance companies out there, with United Healthcare tipping the scales at over $370 billion. If Teladoc can truly save people time and money on healthcare, then reaching the levels of those big boys seems well within reach.

Verdict: It’s been a rough 10 months or so for Teladoc the stock, but I still believe they are excellently positioned to be the major player in telemedicine in the United States, and I also believe telemedicine isn’t just going to go away once COVID has faded into the background. I’m very content to hold onto my shares for now to see how the company handles the next year or so.

ROKU (ROKU) – Now: $47 billion – Then: $189 billion to $331 billion

We started with a string of ecommerce companies. Now, it’s time for a string of connected TV companies. Roku is first up, and they’ve certainly been flexing their muscle as the operating system of connected TVs lately. They won a battle of wills with HBO and are currently standing up to YouTubeTV. They’ve dipped their toe into original content and are building out their advertising business. The trend of cable cutting seems inevitable, but also is still in the early innings with plenty of runway left. Comcast is a $260B company. It seems reasonable to think that Roku could approach those levels after another half decade of cable cutting.

Verdict: Every once in awhile I will see news about some of the big TV manufacturers and how they have their own impressive smart TV operating system and I get a little concerned over Roku’s future. Then I look at the massive opportunity in connected TV and remind myself that Roku is far more than simply a hardware company. They are in a really strong position to benefit from the move to streaming and I’m looking forward to being along for the ride.

The Trade Desk (TTD) – Now: $36 billion – Then: $142 billion to $249 billion

Advertising is a big business. Alphabet and Facebook are basically just advertising companies. At the same time, there’s a lot of interesting battles being waged right now both between the big tech titans (Apple’s IDFA changes to attempt to hurt companies like Facebook) and between the advertisers who want to break free of the “walled gardens”. The Trade Desk seems well positioned to capitalize on these changes. How big can they get? Facebook and Alphabet are $900B and $1.5T companies respectively, so it doesn’t seem completely unreasonable to think that the Trade Desk could get to around a tenth of their size.

Verdict: Jeff Green seems like a really smart leader and the perfect CEO to lead the Trade Desk through this uncertain advertising future. Whatever advertising looks like 5 years from now, I feel pretty confident that the Trade Desk will be a strong player.

Magnite (MGNI) – Now: $5 billion – Then: $19 billion to $33 billion

I’m not an expert on advertising. I don’t have any good way to determine if a demand side platform (like The Trade Desk) has a higher upside than a supply side platform (like Magnite). But if I’m putting a lot of chips on the “connected TV” trend, then it makes sense that a supply side platform like Magnite would benefit. If the Trade Desk is $36B now, then why couldn’t Magnite get to that level in 5 years?

Verdict: Magnite is a relatively low conviction holding for me right now. It’s still small enough that if my conviction grows, I have plenty of time to add more. As it is, I’m happy to leave it at this size for now.

Zoom (ZM) – Now: $99 billion – Then: $395 billion to $692 billion

There’s really no precedent for a company that solely does video calls getting to a half a trillion dollar valuation. I would also venture to say there’s little precedent for a worldwide pandemic forcing lockdowns and large swaths of the workforce to work remotely. I do think a lot of things will return to normal. The office isn’t completely dead. Business travel isn’t a thing of the past. But I also think a lot has changed. I think plenty of managers have realized that remote work can be effective work, and deals can still be done without a physical handshake. I think families have gotten accustomed to keeping in touch with relatives living far away not with a simple phone call, but with a video call. I think the idea of taking a class remotely is a lot less ridiculous of a proposition than it was just a few years ago. And I think Zoom is excellent positioned to take advantage of this new normal. Zoom has become a verb, and I think that’s a good sign of the prominent position it holds in the minds of consumers and the future prospects for the company.

Verdict: There seems to be a very wide range of outcomes for Zoom over the next 18 months or so. On one hand, life could get mostly back to normal and Zoom gets overtaken by a horde of video conferencing competitors and never again reaches the heights that they reached during the pandemic. On the other hand, they could become the go-to option for a new normal of remote work and reduced business trips while also expanding into areas like remote learning and remote experiences. I tend to think the latter is more likely than the former, but time will tell.

Snowflake (SNOW) – Now: $69 billion – Then: $275 billion to $480 billion

Snowflake is sitting at the intersection of a lot of interesting trends. They seem well positioned to benefit from the explosion of big data and the continued migration to the cloud. If a company like Oracle can be a $200B+ company now, why can’t Snowflake reach about that size in 5-10 years?

Verdict: Eight months after its IPO, Snowflake the stock is still sitting right around the same level it was at post-IPO. The business has continued to grow nicely that entire time, however. I wanted to buy at the IPO but couldn’t stomach the crazy valuation. Now, it is a little more palatable. If Snowflake can continue to put up the nice growth numbers that they have been, and I think they can, then I think that this company can be an impressive out-performer over the coming years. Happy to hold for a long time.

Crowdstrike (CRWD) – Now: $50 billion – Then: $201 billion to $352 billion

It’s a little hard to predict the upside for Crowdstrike because it already seems to be larger than most of its competitors, which was a little surprising for me. Still, cybersecurity seems like it will only get more important in the coming years. If advertising companies can be worth hundreds of billions of dollars, and Apple can make big waves by touting how seriously that they take their customer’s privacy, then why couldn’t a company helping to keep private information safe get to hundreds of billions of dollars as well?

Verdict: I’m high on Crowdstrike right now but I also have it on a bit of a short leash. I got burned badly by FireEye (FEYE), another cybersecurity company, awhile back. I have a hard time personally judging how good of a moat any cybersecurity company has while also being keenly aware that all it takes is one massive security breach for confidence, and any moat they might have, to be completely shattered. If the company should stumble in any way (note: I mean the company’s execution and not the stock price), I would probably give some serious consideration towards trimming the position or selling entirely.

Your Thoughts

What do you think? Am I too optimistic on the above companies? Is a 4x or 7x just patently absurd? Please let me know in the comments if you agree or disagree and, more importantly, why. Thanks!

Don’t Panic

May 11, 2021 paul.essen Comments 0 Comment

It’s amazing to me how short of a memory some people seem to have. It was just a little over a year ago when the market had one of the quickest and most severe drops of all time. At the height of the carnage, my portfolio was down by over a third from recent highs. However, for those who have a long term investing mindset, March of 2020 proved to be an amazing time to have bought shares of some of those high quality companies that had been beaten down. And even if you didn’t have dry powder to deploy, simply not panicking and holding onto your shares instead of selling them proved to be a very lucrative strategy.

Right now, my portfolio is again down by over a third from recent highs. There are a lot of differences from 2020, though. There is no clear catalyst for this drop, no pandemic starting to ravage the world and no lockdowns threatening so many businesses. The drop this time around also seems to be far more concentrated in “growth” stocks while the broader market seems to be largely unaffected. We’re also seeing many companies drop big in the aftermath of earnings that weren’t just good, but oftentimes incredible.

But perhaps the biggest difference to me is when you zoom out and look at some of the performances over the past 18 months. Here are some of my largest positions in my portfolio. All of these are down by at least 25% or more over the past few months. Some are down a lot more. But take a look at what happens when you zoom out just a little bit and look at their performance over the past 18 months (even counting the recent drops):

Shopify (SHOP) +240%
Mercado Libre (MELI) +180%
Sea (SE) +640%
Tesla (TSLA) +900%
Square (SQ) +245%
Teladoc (TDOC) +80%
Redfin (RDFN) +200%

Many of these companies have had absolutely incredible and unsustainable runs recently. It is not at all surprising to see them have a bit of a pullback. Volatility is the price of admission for superior returns. In order to outperform the market over the long term, you need to be able to tolerate times like these and keep a level head. Yes, seeing all this red day after day can be unsettling, but I am no more deterred to deviate from my investing strategy now than I was in March of 2020 or the fourth quarter of 2018. I remain fully invested, and the majority of my portfolio remains unchanged from the beginning of the year. Last quarter was a bad quarter. This quarter is shaping up like a bad quarter. All of 2021 could be a bad year, but I remain confident that by staying the course and investing for the long term, that 5+ years down the line I will be very happy with my decisions today.

Don’t panic.

Estimating Upside: Part 1 – The Slow Growers

March 24, 2021 paul.essen Comments 5 comments

I’ve said it many times, but I’ll say it again: 2020 was a hell of a year for the Freedom Portfolio. The portfolio as a whole was up 175% with a number of individual positions tripling or more. That’s many years of growth all squeezed into a short period of time. As a result, it felt like time to try to take a step back and see if my investment thesis for these companies still holds. For many of my positions, the upside that I am looking for is a 5-10 bagger over the next 5-10 years. However, with some of those companies already doubling or tripling, is that upside still there, or should I be looking for better opportunities?

To answer this question, I’m planning on going through each of my holdings over the coming weeks/months. For each holding, I intend to figure out what I think is the maximum reasonably upside that could be expected from the company over the next 5 years. Why 5 years? Because I am a long term investor who always enters a position with the intention of holding it for 5+ years (even if that sometimes doesn’t happen) and because trying to project out any further than 5 years seems way too difficult at the current pace of innovation.

For each position, I decided to place it into one of three groups:

Slow Growers: Companies that can 2x to 3x over the next 5 years – a 15% to 25% compound annual growth rate (CAGR)
Medium Growers: – Companies that can 4x to 7x over the next 5 years – a 32% to 48% compound annual growth rate (CAGR)
Fast Growers: – Companies that can 8x to 10x over the next 5 years – a 52% to 58% compound annual growth rate (CAGR)

Part 1 is dedicated to the slow growers, with the plan for parts 2 and 3 to be released in the coming weeks/months. For each company, I will list the current-ish market cap as well as what that market cap would look like 5 years from now after a potential double or triple.

Note: There’s been a fair amount of market volatility lately, so it feels worthwhile to note that these market caps were pulled on March 11th.

Let’s go.

Amazon (AMZN) – Now: $1.5 trillion – Then: $3 to $4.5 trillion

It’s a little hard to wrap my head around how much larger a $1.5 trillion market cap company can get. On one hand, it’s already massive with big expectations of growth already baked in. On the other hand, it still feels like there’s a lot of runway left with cloud computing, ecommerce and advertising and Amazon seems to have a really strong advantage in all three of those business lines. A 15% to 25% CAGR might seem a little conservative for such a relentless innovative and strong business like Amazon, but it would also represent them adding 5 Walmarts (WMT) or 10 Exxons (XOM) worth of market cap, which feels pretty significant.

Verdict: Amazon is so large that it’s hard to imagine there’s a tremendous amount of upside left in it, but at the same time there might not be a company out there which I am more confident will be a market beater going forward. I’ve already trimmed some of my position after Bezos stepped down as CEO. I don’t see any reason to sell any more in the near future.

Tesla (TSLA) – Now: $650 billion – Then: $1.3 to $1.9 trillion

Again, this is hard to wrap my head around. A mere car company with a market cap over $1 trillion? As any Tesla bull will be quick to say, Tesla is more than just a car company and is poised to be a major player in not just all sorts of transportation (EVs, autonomous, taxis, ride-sharing, etc), but energy as well. I think Tesla is well positioned to be a leader in a lot of those areas, but what is that worth? Even if you combine the market caps of the top car manufacturers AND Uber and Lyft AND toss in an Exxon for good measure, you don’t get to $1 trillion right now. Even if Tesla disrupts transportation and multiple other areas like I think they could, it feels like a stretch to say they can grow much beyond a low-to-mid $1 trillion market cap over the next five years.

Verdict: I’ve mentioned a few times that, despite still being bullish on Tesla, even I couldn’t justify the valuation over the past few months. I’ve trimmed a decent amount recently and feel much more confident with the size of my position now and see no reason to change it any more in the near future.

NovoCure (NVCR) – Now: $13 billion – Then: $27 to $40 billion

Seeing the market cap of NovoCure was a bit of a surprise to me. When I first bought shares of NovoCure in 2017 at about $18 a share, it was a much smaller company. I knew it had been a pretty great performer, but it still surprised me to see that it had grown to such a large market cap. I still think there’s a big opportunity in front of NovoCure to use their Tumor Treating Fields to treat a wide variety of cancers and, importantly, the treatment can be used in addition to others so competition should be less of a factor. Still, it’s a little tough to see them growing much beyond the $30-40 billion range unless they find a way to expand TTF beyond cancer treatment, which I don’t quite see happening.

Verdict: Novocure has some pretty clear catalysts that are also on a pretty clear timeline. I love the technology, but I could see a scenario in the coming years where I start to redeploy capital to other companies unless they discover new potential uses for TTFs.

Disney (DIS) – Now: $357 billion – Then: $714 billion to $1 trillion

I continue to be amazed by how Disney stock has not only held up during a pandemic which has obliterated virtually all of their main revenue drivers, but has actually hit new highs. Obviously a lot of that has to do with how incredibly fast their streaming services have grown both domestically and internationally. I have no doubt that Disney will be the strong number two to arise globally in the coming years. Still, it seems like a lot of optimism is already baked in to the share price. What happens if park re-openings take longer than expected, the movie pipeline takes some time to get replenished, and Disney+ growth slows down?

Verdict: I love Disney, but there’s no doubt it has lower upside than a lot of my other companies. As a result, I actually recently trimmed my position some (see below) to add to some companies that hopefully have more upside.

Netflix (NFLX) – Now: $232 billion – Then: $463 to $695 billion

A double or triple over 5 years is really strong growth, but it almost feels like an insult to predict it for Netflix seeing as it has gone up nearly 6 fold over the previous 5 years. It does feel like it’s finally time for their growth to slow down some, though. Netflix long ago saturated the US market and it feels like it has snagged most of the low hanging international fruit as well. There’s still some growth to be had, but much of it will be coming from cheaper plans in countries like India. Additionally, their competition has finally gotten serious about transitioning to online streaming which will undoubtedly limit their ability to raise prices as much as they have been. The rumors of them cracking down on password sharing is one more sign that they’re looking for other levers to pull to get some growth. Still, Netflix remains the global leader in a streaming trend that is still yet to fully play out and that doesn’t seem likely to change. This still feels like an easy market beater going forward.

Verdict: I won’t lie: nostalgia plays a huge role in why I continue to hold Netflix. It was one of my first purchases and has been one of my biggest winners. I almost feel a sense of loyalty to the company. That’s not the only reason I hold it, but I would be lying if I said it didn’t play a role. I could see myself selling some more in the future, but it’s hard for me to imagine ever selling all of my shares.

Square (SQ) – Now: $110 billion – Then: $220 to $330 billion

Like NovoCure, the market cap of Square surprised me a bit. When I first purchased shares in 2018 at $58 a share, the market cap was around $20 billion. My hope then was that Square could grow beyond just being the little dongle for swiping cards for small and mid-sized businesses and could become a major player in digital payments with the Cash App and move into many banking services as well. The former seems to have arrived and the latter looks to be getting closer. Even though Square has grown a ton, I still feel like there’s decent upside left. PayPal, Visa, and Mastercard have market caps between $300 and $500 billion and if bitcoin continues to show strength, there’s no reason why Square can’t double or triple from here.

Verdict: This is one I will be keeping a close eye on. It feels like Square has a lot of potentially huge catalysts (Cash App moving into banking services, bitcoin, NFTs through Tidal) and I do think Dorsey is brilliant, but he’s also eccentric and undeniably distracted. If some of those moonshots look like they’re not panning out or taking longer than expected, I might consider trimming my position some.

Transactions

Sold some Disney (DIS): As mentioned earlier, there’s been a ton of volatility recently and a lot of my positions have seen some pretty massive haircuts. I always remain fully invested and don’t keep cash around, so if I want to “buy on the dip” I need to sell something else first. Because Disney has held up fairly well during this volatility, I decided to trim some so that I had cash to deploy elsewhere.

Bought more Fiverr (FVRR) and FuboTV (FUBO): I’ve made no secret how much I have been loving Fiverr lately and so when it dropped nearly 40% recently I took the opportunity to add more shares. FuboTV was a smaller position that saw a move that was almost as big so I decided to add a bit to FUBO as well.

Your Thoughts

What do you think? Am I too pessimistic on the above companies? Or is a potential double or triple still too optimistic? Please let me know in the comments if you agree or disagree and, more importantly, why. Thanks!

Gamestop

January 29, 2021 paul.essen Comments 2 comments

Roughly five months ago, I started getting mildly interested in a company that I was familiar with because of my hobbies (namely video games), but had never been on my investing radar: Gamestop (GME).

The reason I had started getting interested wasn’t because of the normal reasons I get interested in investing in a company. I didn’t see Gamestop as some kind of disruptive and innovative company which would see huge growth over the next 3+ years. To the contrary, Gamestop seemed like a bit of a dumpster fire. It was a brick and mortar retailer primarily dealing with goods (video games) which were quickly making a transition to digital. Few companies seemed worse positioned to deal with the future.

So why was I interested? For three main reasons:

While the business was undoubtedly in decline, the company wasn’t in danger of imminent bankruptcy. They weren’t saddled with huge amounts of debt that were about to come due which they couldn’t pay off. They had cash on the balance sheet and were still making money.
There was a console refresh (new versions of the Playstation and Xbox consoles) in the upcoming holiday season (December of 2020) which typically provides really good results for Gamestop. Consoles, unlike games, still largely are bought in store.
There was an insane level of short interest (over 100% of the float).

That last point was the most important. Basically, for as bad of a position as Gamestop seemed to be in, the sentiment looked to be a little too negative. I thought there was a potential opportunity to make a short term bet (and I stress that this would’ve been a bet, and not investing, which is what I typically like to do) that the stock might see a little pop and maybe even a short squeeze after they reported holiday season results.

I looked in to doing some options, but ran into some issues getting permissions set up with my broker and by the time I was able to make my bet, the stock had gone from around $5 a share to around $8 a share. I thought I had missed my opportunity.

Obviously, I was wrong.

Despite that, I have absolutely no desire to come anywhere close to touching Gamestop stock right now. The stock price is completely detached from reality right now and the wild swings have nothing to do with business fundamentals and instead everything to do with a fight between a bunch of retail investors and hedge funds. What is going on is very interesting and even pretty important, but I have no desire to try to profit off of it in any way.

In my opinion, taking any sort of position in Gamestop at this point is not very different from playing a roulette wheel. Maybe you get lucky and it works out, but you’re just as likely to get unlucky and get burned. I’m happy it has worked out for many people, but I worry that plenty of others are going to get burned and are going to swear off “investing” forever, even though taking a position in Gamestop right now is the opposite of investing to me.

This blog wasn’t intended to giver personalized advice and I never have wanted to tell people what to do, but I do want to stress to everybody to please, please, please be careful with anything involving Gamestop or any of the stocks making crazy moves right now (looking at you, AMC). There is a very good chance that these stocks return back to the levels they were at a few weeks ago (or even lower) and it can happen a lot faster than you might think.

Related: I’ve had a few people ask me what is going on, and after writing it out a few times over emails and discord channels, I figured I might as well write something here that I could instead point people to.

What’s the TLDR? What happened to Gamestop shares is the mother of all short squeezes plus a really fascinating battle between a bunch of retail investors who decided to pick a fight with some hedge funds.

For more detail, we have to understand what a short squeeze is first:

What is shorting?

Shorting can be thought of as the opposite of “regular” investing. Here is the “normal” order of operations for a hypothetical investment:

Buy shares of a company for $5 a share
The price per share of the company goes up to $10 a share
Sell the shares for $10 a share and make $5 profit for each share ($10 made from selling minus $5 paid to buy)

Here’s how short selling might work for a hypothetical investment:

Sell shares (that you don’t own) of a company for $5 a share by borrowing shares from somebody else
The price per share of the company goes down to $1 a share
Buy shares for $1 a share so you can return the shares that you borrowed and make $4 profit for each share ($5 made for selling minus $1 paid to buy)

The cool thing about “normal” investing (often called being “long” as opposed to being “short”) is that your downside is limited but your upside is unlimited. For example, if you buy a share for $5, then the most money you can lose is the $5 you paid for the share. But if the share price goes to $100, you can make $95. If the share price goes to $1,000 then you can make $995. That kind of asymmetrical risk/reward is part of what makes investing so appealing to me.

Shorting is the opposite. In the example above, if you short a $5 stock then the most money you can make is $5 a share. But the most money you can lose in theoretically unlimited. If the stock doesn’t go down, but instead goes up to $100, then you have lost $95 on your $5 investment. That kind of asymmetry is a lot more dangerous and is why I never consider shorting.

What is a short squeeze?

Short squeezes happen because of the danger of potentially unlimited losses. Go back to the example above. If somebody shorts a stock at $5 and the stock price goes up to $10, they have now lost $5. The more the price goes up, the more that position loses. So if the price goes up enough, some short sellers might throw in the towel and decide to take their losses and run. In order to close their position out, they need to buy shares in the company to return to the person they originally borrowed shares from (see #3 above in the short example). When those people buy shares to close out their position, that buying activity drives the share price up more. So instead of that ideal short situation that was described above, here is what happens instead:

Instead of going down like shorts expect, shares of a company go up
Some people who were short the stock panic over losing money and close their position out by buying shares
The act of buying shares causes the share price to go up even more, causing more shorts to panic and close out their position
Go back to #3

As you can see, this can snowball in a hurry and cause a major increase in share price very quickly. That’s called a short squeeze.

So what happened?

As mentioned before, the short interest on Gamestop was crazy high. At one point it was over 100%. This caught the attention of a group of investors. There were a couple of different names being used to describe them: Wall Street Bets (WSB), Robinhood investors, retail investors. The important thing is that they were coordinated. They noticed the opportunity for a short squeeze in Gamestop and decided to try to trigger one by buying a bunch of shares. Their motivation seems to be two-fold: to make money, but also to stick it to hedge funds that they see as having manipulated the market and hurting the little guy in the past.

They seem to have been wildly successful so far.

As the short squeeze was being triggered, it seems like the hedge funds underestimated their opponent at first. After all, if you thought Gamestop was a compelling short at $5 and nothing fundamentally has changed in their business, then it has to be an incredible short opportunity at $50 and higher! So instead of cutting their losses, it looks like some hedge funds might have doubled down. The thing with doubling down on short positions, though, is that if the price keeps going up, then it just ultimately worsens the short squeeze.

And remember the asymmetrical risk/reward with shorting? A hypothetical hedge fund with a $1 million short position in Gamestop at $5 a share, if they still held their short position, would now be looking at tens of millions of dollars in losses. That is something many of them might be having trouble weathering, and there are rumors flying about some hedge funds needing to raise money, sell shares in some of their long positions, or even facing bankruptcy.

This is only scratching the surface, and isn’t even getting into all the funny business around brokerages like Robinhood preventing people from buying (but not selling) shares of Gamestop yesterday. The story is still playing out, and it is a fascinating one.

But it is also one I am very content watching from the sidelines.

Recklessly Bold Predictions for 2021

December 22, 2020 paul.essen Comments 7 comments

One year ago, I made a set of bold predictions for what 2020 would bring.

I, like the rest of the world, had no idea what was coming.

Had you told me in advance that we would be seeing a worldwide pandemic that would be leading to months long lockdowns across the globe that would devastate parts of the economy, then I would have told you that my predictions were going to be laughably wrong. Perhaps the only thing more unexpected than the pandemic was how markets have seemed to react to it. Somehow, against all odds, I had an incredible hit rate on my overly bullish predictions.

Note: I know there’s still a little over a week left in 2020, but I generally run my bold predictions from mid-December to mid-December so it doesn’t overlap with my quarterly recaps and fantasy investing so I’m going to call most of these a little early. Some of these numbers were pulled a few days ago and thus might be slightly out of date by the time this post is published.

2020 Predictions

Disney and Netflix both gain 20%+

The Prediction: Disney (DIS) goes from $144.63 to $173.56 and Netflix (NFLX) goes from $323.57 to $388.28.

Mixed: With COVID-induced lockdowns leading to a lot of people stuck at home, Netflix was able to pull forward a lot of growth and had no problem at all blowing past my 20% prediction, ending up with a roughly 60% gain for the year. The bigger shocker is Disney. Despite the pandemic wrecking most of their main business lines (movies, theme parks, live sports, cruises), Disney is somehow still in the running at an 18% gain as of this writing. That’s technically a loss for now (although I’m totally counting it if Disney crosses the line before the end of the year), but considering everything that has happened this year, this feels like a moral victory at least. I’ll take an 18% gain after the year Disney has had.

I’m just as excited as ever about Disney going forward. Their theme park and live sports businesses should eventually rebound and while movies is still a bit of a question mark, their Disney+ initiative has been a monstrous success and presents them with a powerful alternative way to monetize their movies and IP. I was especially impressed by the volume of content they are preparing for the coming years and their plans to expand the Star brand internationally and incorporating the Fox content into Disney+. As for Netflix, I’m ever so slightly less bullish on their prospects for strong growth going forward, which is why I trimmed my position some this year. I just worry about how much more they can expand internationally and how much more they can raise prices. I still think they can be a market beater going forward, which is why I still own shares, but I just don’t feel like they will be beating the market as much as they have in the past.

Square will add $20 to its share price

The Prediction: Square (SQ) goes from $62.56 to $82.56.

Win: This one wasn’t even close. Square went crazy in 2020 and ended up adding $170 to its share price… or 8.5x more than I predicted.

It’s pretty incredible to see a company which is probably best known for its terminals utilized by small and mid-sized food establishments do well during a pandemic which has hit those businesses hard. It makes sense, though, once you realize that Square also has a strong play in the digital wallet space with its Cash App. I remain bullish on the company going forward, but the stock has obviously run up a lot and there’s a lot of optimism baked in at this price so I’m clearly not seeing a repeat of this performance in 2021 and wouldn’t even be surprised if it underperformed the market for a stretch while the business fundamentals catch up to the valuation.

Redfin will add $20 to its share price

The Prediction: Redfin (RDFN) goes from $21.14 to $41.14.

Win: Another one that wasn’t that close. Redfin added $60 to its share price in 2020, or 3x my original prediction. That 270% gain is almost as good as Square’s 280% gain for the year.

Again, a company whose mission is to “Redefine real estate in the consumer’s favor” might not seem like an obvious beneficiary lockdowns put in place in reaction to a global pandemic, but it’s not too hard to see why Redfin was a big winner once you look a little deeper. Real estate is being disrupted, and the old model and incumbents are facing serious challenges from new competition that can offer things like lower commissions, virtual tours, instant offers, concierge service, and much more. Between OpenDoor and Zillow, there’s a lot of competition in this space, but I still think Redfin is the most complete challenger and should continue to benefit from low mortgage rates and the migration of people out of cities and into the suburbs as remote work gets more common.

Bonus Prediction #1: Bitcoin to $20k

The Prediction: Bitcoin will hit $20k (duh).

Win: After crashing with the rest of the market in March of this year (so much for a store of value that is uncorrelated with equities), bitcoin had a slow but steady march upward for the rest of the year. It hit the $20k threshold with plenty of time to spare on December 16th and currently stands at a little over $23k.

It’s hard to say anything too intelligent about where something as speculative as bitcoin might go in the future. What I can say is that between historically low interest rates and increases in the monetary supply, it has been fairly unprecedented times for the Federal Reserve, the US economy, and the dollar. I worry a lot about inflation and the future of the US dollar as a reserve currency, and as a result I see a lot of potential in bitcoin. It might never get to a place where it can serve as a currency, but at this point I don’t believe it has to in order to provide a decent return. Bitcoin can still absolutely go to zero, but I also think the sky is the limit as well.

Bonus Prediction #2: Somebody will buy Nintendo

The Prediction: That Nintendo would get acquired by another company in 2020.

Loss: You can’t win ’em all. With the upcoming console cycle refresh and the big emphasis put on gaming by a lot of the tech giants (Alphabet, Amazon, Apple, Microsoft, etc), I thought there could be a ton of interest in acquiring Nintendo and their unmatched gaming IP. I don’t think it would be a stretch to say that any of those above companies that managed to acquire Nintendo would instantly become a gaming powerhouse and potential leader in the space. It didn’t happen in 2020, but I still think there is a chance this gets done in the coming years.

2021 Predictions

Shopify will become 1/8th the size of Amazon

If you’ve been following this blog at all this year (or even just read the results above), you should have a pretty good sense of what a ridiculously good year this has been for the holdings in the Freedom Portfolio and even the market in general. As a result, I’m a little gun-shy predicting any big absolute gains in 2021 and am more keen on making some predictions on relative gains (ie, one company vs another).

For all the crazy run-up that Shopify has had over the past 2 years, it’s still “only” around a $145 billion market cap, which is around 9% the size of Amazon. Shopify is fond of casting themselves as “arming the rebels” against the “Empire” that is Amazon.

Amazon has lots of other business lines (AWS and advertising in particular) that help set it apart from companies like Shopify, but I do believe 2020 showed that ecommerce is too big for Amazon alone to own. I suspect Shopify continues to aggressively take ecommerce market share away from Amazon and grows to become 1/8th the size of Amazon. Assuming no growth in Amazon at all in 2021, that would equate to a roughly 40% gain for Shopify in the coming year. Obviously, if Amazon grows at all, that’s even more growth required out of Shopify.

Etsy will grow to 3% the size of Amazon

This is piggy backing on the same concept above. Again, understanding that Amazon goes well beyond just ecommerce, I was still shocked to discover just how much smaller than Amazon Etsy was. Etsy is currently 1.5% the size of Amazon. Put another way, Amazon is over 60 times larger. As mentioned before, I think 2020 is the year we find out that ecommerce is larger than a single company, and I believe Etsy is one of the big beneficiaries. Etsy getting to be 3% the size of Amazon sounds reasonable, but it would mean the stock doubles in 2021 (assuming Amazon stays flat). I look forward to seeing if that can happen.

Mercado Libre plus Sea Limited market caps combined to $300 billion

The ecommerce trend continues. I still believe we are in the early innings of the transition to ecommerce and I believe that is especially true for some of the more developing markets in Latin America and Southeast Asia. Both markets have large populations with growing middle classes where internet access is also growing. Bonus? Both companies are also moving strongly into digital wallets and other business lines.

Right now, the market cap of both companies combined is around $187 billion. I believe the combined market caps of both companies can reach $300 billion in 2021, which would be an average of a 60% gain. That’s a pretty strong gain for a year, but it also pales in comparison to the nearly 400% and 200% gains respectively that Sea Limited and Mercado Libre for 2020. Regardless of where they end up in 2021, I believe the future is bright for both companies.

Either Fiverr or Redfin will double

Redfin and Fiverr are companies that both had a particularly ridiculous 2020. Redfin has more than tripled and Fiverr is up over 9 times. At the same time, both companies still seem very small to me compared to their total addressable markets. I believe both companies are capable of doubling in 2021, but for the purposes of this particular bold prediction, I am just predicting that one of them will double. Both companies currently have market caps of under $8 billion, so even after potentially doubling they would still be a fairly reasonable size.

Somebody will acquire Teladoc

Teladoc is certainly no stranger to acquisitions to fuel its growth, most recently with their acquisition of Livongo. And yet despite all of that growth, Teladoc is still a dub $30 billion company. At the same time, there are a bunch of deep-pocketed technology companies like Amazon and Apple that have indicated a desire to get into the healthcare space. Both companies could easily afford to get a huge head start by acquiring Teladoc. There are also companies in the healthcare space which would love to get a boost in telehealth.

I think the odds are probably against Teladoc getting acquired, but as a bold prediction, I think it fits pretty well.

What do you all think? Do you like my picks, or did I completely miss the mark? Do you have any bold predictions of your own? Let me know in the comments!

Disney no longer content to play second fiddle to Netflix in streaming

December 11, 2020 paul.essen Comments 0 Comment

I sometimes get people asking me why I have Disney (DIS) in a portfolio which is otherwise filled with a bunch of “growth” companies. I can understand being confused, as compared to other companies in the Freedom Portfolio like Shopify (SHOP), Tesla (TSLA), and Square (SQ), Disney hasn’t quite had the same growth over the past couple of years. Apparently TV networks, movie production, and theme parks isn’t quite as flashy as electric vehicles and leading an ecommerce revolution against Amazon (AMZN).

One of the main reasons I was a big believer in Disney was because I felt they had untapped potential to really leverage their amazing IP if and when they decided to get into the streaming game. There was a stretch a year or two ago where Netflix (NFLX) and Disney were neck and neck in terms of market capitalization, and as much as I loved Netflix, I thought that was pretty incredible considering Netflix was solely online streaming and didn’t have the other business lines like ESPN and ABC and theme parks and everything else that Disney could lean on.

Disney had their investor day yesterday and made it very clear that they are committed to streaming in a huge way and not at all content to concede first place to Netflix (including some seemingly targeted remarks and quality over quantity and carefully curated content). They announced a mind-boggling amount of new content, including 10 new Marvel series, 10 new Star Wars series, and 15 new Disney Animation / Pixar series. They also spent a fair bit of time emphasizing their overseas ambitions with their Star branding and how that will appeal to markets like India and Latin America.

Previously, it seemed like everybody was taking for granted that Netflix would be the clear #1 streaming service in the world for the foreseeable future. That narrative might be starting to change. Back in 2019, Disney was projecting 60 million to 90 million global subscribers by 2024. Yesterday, they upped that projection to 230 million to 260 million. That is incredible.

The market seems to be appreciating what a focused Disney is capable of today, with the stock up nearly 14% as of this writing. That’s a pretty hefty move for a relatively stable stock like Disney, but I think it is warranted. If Netflix is worth a $220 billion valuation for being a leading international streaming service, then Disney certainly deserves significantly more than that considering its superior intellectual property and other business lines.

Long Disney. This is a stock I would love to ultimately gift to my kids when they are old enough to start investing themselves.

A new investment distracting me from earnings season

November 18, 2020 paul.essen Comments 0 Comment

I’ve been a little quiet here recently despite a ton of earnings reports coming out. Over the past few weeks, there’s been some pretty spectacular earnings reports from major holdings in the Freedom Portfolio:

Shopify (SHOP)
Mercado Libre (MELI)
Square (SQ)
Sea Limited (SE)

And a bunch more. So why the radio silence? Because I’ve been a bit distracted by a recent investment of a different type.

Earlier this month, we were blessed to welcome our third daughter to our family. All things considered, she’s been a pretty mellow baby, but anybody who has every dealt with a newborn before can tell you that they are incredible drains on free time and sleep. So even though I have continued to keep my eye on the companies in the Freedom Portfolio, I have struggled to find the time to write about them as much. I didn’t want to have this earnings season pass without anything written, though, so here’s a few thoughts on recent developments:

Great companies dropping in the immediate aftermath of amazing earnings. One theme I have noticed this earnings season is how often stocks have dropped despite really strong earnings being reported. It happened previously with Shopify and Mercado Libre and it happened yesterday with Sea Limited. I’m not at all concerned and would go even further and say it even makes sense. Shopify and Mercado Libre has more than doubled this year. Sea Limited has more than quadrupled. That’s really strong performance which drove up the valuation (and expectations) for those companies. It seems perfectly reasonable for those stocks to “take a breather” to let the financials catch up to the valuation. I still strongly believe in all of those companies going forward and, if anything, my conviction is strengthened by seeing them put up these great numbers. I wouldn’t be surprised to see some of these companies be flat for a few more months or quarters, but I remain really excited to see where these companies are 5+ years down the line.

Tesla to the S&P 500. News broke a few days ago that Tesla (TSLA) was getting added to the S&P 500 index in December. In the two days since, the stock has popped, leading to a few near spiffy pops for me. I get the reason for the short term stock movement, and it will be interesting to see how the stock reacts to so many index funds being required to add so many shares of Tesla in the coming months, but I honestly don’t know if this impacts the company itself very much. I love the company whether it is in the S&P 500 or not.

Buying more Etsy. The Teladoc / Livongo merger went through recently. As part of it, my Livongo shares got converted to some Teladoc shares but I also got paid out some cash for them as well. I used those proceeds to add a bit to my Etsy (ETSY) position after it dropped a bit on the positive COVID-19 vaccine news. I didn’t add much. It remains a Millennium Falcon level position. Coincidentally, I saw my first Etsy commercial just a few days after adding to my position. I know Etsy has had a great 2020 so far, but I really think they can keep their momentum going with the upcoming holiday season and can expand their business beyond just birthdays and anniversaries. Really interested in seeing how the company performs over the coming quarters.