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Recklessly Bold Predictions for 2021

Recklessly Bold Predictions for 2021

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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 Some of these numbers were pulled a few days ago and thus might be slightly out of date by the time this post is published.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!

The JIB is down to one

The JIB is down to one

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A little over two years ago, I wrote about three Chinese companies that I was very bullish on. At the time, talk of FANG stocks and BAT stocks were all the rage, so I cheekily dubbed my three companies “the JIB”. Here are how those baskets of stocks have performed since I wrote that article (numbers from December 3rd):

The JIB (up an average of 110%)

  • JD.com (JD): Up 292%
  • Baozun (BZUN): Up 22%
  • iQiyi (IQ): Up 17%

FAANG (up an average of 98%)

  • Facebook (FB): Up 99%
  • Apple (AAPL): Up 152%
  • Amazon (AMZN): Up 95%
  • Netflix (NFLX): Up 69%
  • Alphabet (GOOG): Up 76%

BAT (up an average of 64%)

  • Alibaba (BABA): Up 87%
  • Baidu (BIDU): Down 20%
  • Tencent (TCEHY): Up 127%

Not too bad, if I can be permitted to toot my own horn for a moment. I did end up selling my position in iQiyi earlier in the year, though, so my own personal return on the JIB is slightly different than what is laid out above. Still, I’m fairly proud of how the JIB has managed to hold up against the much more highly touted FANG and BAT stocks.

But as you may have noticed, the gains for the JIB were a bit uneven, with both Baozun and iQiyi returning less than 25% while JD.com did the heavy lifting with a nearly 300% return. As mentioned before, I sold iQiyi earlier in the year when it looked like their competition was getting to them and I think it has become time to say goodbye to Baozun as well. The hope with Baozun was that it could be the “Shopify of China” and benefit from riding the same trends that Shopify has. For whatever reason (trade war, bad execution, etc) that just hasn’t quite come to pass. Growth has been okay, but nothing near what other ecommerce companies have seen during COVID, and recently I’ve found myself wanting more and more to redeploy those funds into a new idea.

That new idea is Fiverr (FVRR), and I now have a new Millennium Falcon level position in it. I’ve used the service in the past to find an artist to illustrate my book, Penny Invests, and was pretty impressed by the wide variety of services provided. I believe they are well positioned to ride the trend of entrepreneurship, the gig economy, remote work, and people looking for side hustles.

A few other tiny shifts to the portfolio to report (none of these changes affect what size of a position they are):

  • Sold a small bit of Tesla (TSLA) – I’m still a huge believer in the company, but the valuation is getting a little ridiculous even for me and even with the addition to the S&P coming up, I feel like this stock has a lot of optimism baked in already. I wanted to take a tiny bit off the table to bolster a few other positions, such as:
  • Buying a bit more of Zoom (ZM) – Zoom has nearly doubled since I originally bought it earlier in the year, but it is also down almost 30% from recent highs from a few months ago. I’m beginning to see the optionality still ahead of Zoom even after the pandemic is over and the recent pullback seems like a bit of an overreaction to vaccine news. I think Zoom survives just find in a post-pandemic world and still has room to thrive and flourish.
  • Buying a bit more of Crowdstrike (CRWD) – Crowdstrike recently had a pretty impressive earnings report and it reminded me that I wanted to add a little bit more to my position. Sometimes it is as simple as that.
  • Buying a bit more of Nano-X (NNOX) – Nano-X recently did a live virtual demonstration of their technology and while I didn’t quite think it was the same slam dunk as many did, I was suitably impressed and think the chances of it being an outright fraud are lower than before. It felt like a safe time to add a bit to my position.
Recklessly Bold Predictions for 2020

Recklessly Bold Predictions for 2020

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One year ago, I made a set of bold predictions for what 2019 would bring. With the year winding down, I thought it would be fun to check in to see how I did and maybe make a few predictions for 2020 as well. First up, how did my 2019 predictions go?

Note: 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.

2019 Predictions

The race to $1 trillion – again

The Prediction: That Amazon (AMZN), Apple (AAPL), and Microsoft (MSFT) would all return to a $1 trillion market cap, and in that order.

Reality:

  • Microsoft returned to the club in April and currently sits around a market cap of $1.2 trillion
  • Apple returned in September and currently sits around a market cap of $1.3 trillion
  • Amazon hasn’t yet returned to the club and currently sits at a market cap of slightly under $900 billion

Have to take a loss here, although I do think I was impressively close. I ended up being very wrong about Amazon (not only were they not the first to return to an over $1 trillion market cap, they were the only one not to return at all), but at least Microsoft and Apple came roaring back to smash the $1 trillion barrier. I’m still (obviously) a big believer in Amazon, though, and am looking forward to them not only crossing $1 trillion next year, but also passing up Microsoft and Apple in the process.

Tesla doubles

The Prediction: Tesla (TSLA) will hit a market cap of $100 billion in 2019.

Reality: Another swing and a miss. The profits that were promised didn’t show up and Tesla was actually down big for most of 2019 (sitting closer to a $30 billion market cap) before a recent recovery which has put it up slightly for the year and at a market cap of $76 billion. Tesla is currently sitting at an all-time high, though (and hit the $420 “funding secured” level), so maybe I can get a tiny bit of partial credit? There’s still a few days left in the year for them to surge another 31% or so, right? Regardless of if they hit the $100 billion market cap, I’m still optimistic regarding Tesla’s outlook going forward. Hopefully increased international sales will help to boost their profitability in 2020 and finally push that market cap north of $100 billion.

Twitter gains on Facebook

The Prediction: Twitter (TWTR) gets to half of Facebook’s (FB) market cap.

Reality: My boldest prediction gets the biggest miss. Twitter has had a pretty up-and-down year while Facebook has had a pretty strong one. The end result is that Twitter is sitting at a market cap of $25 billion while Facebook is at a market cap of around $590 billion. That puts Twitter at around 4% of Facebook’s market cap, which is… uh… slightly short of the 50% I predicted.

Loyal readers will know that I ended up selling my Twitter position around the middle of 2019 because I had lost faith in the company for a few reasons. I still am amazed at the discrepancy in market caps between Twitter and Facebook considering the level of impact that each seems to have in our society, but maybe that’s just the way that things are going to be between those two businesses for the foreseeable future.

2020 Predictions

So not a great record in 2019, even accounting for the fact that they were “bold” predictions. Let’s see if I can do better in the coming year. Since next year is 2020 and my bold predictions are supposed to be at least a little fun and silly, I thought it could be interesting to have my picks for next year be based around the number “20”. As usual, I think the odds are against most of these predictions because they’re supposed to be things that are unlikely to happen, but also maybe are things I think are more likely than others might expect. Like with last year, I will be ordering them in what I consider to be decreasing order of likeliness.

Disney and Netflix both gain 20%+

A 20% gain might not seem like a super bold prediction, but I’m making it a parlay and predicting that both Netflix (NFLX) and Disney (DIS) reach that mark in 2020. Many people see streaming as a zero sum game where the success of something like Disney+ means that it has to come at the expense of Netflix. I’m not so sure that’s the case, and think that a rising tide can lift multiple streaming service boats. Disney+ and Netflix serve different demographics and being signed up for both is still cheaper than an old traditional cable package.

Netflix and Disney have had a pretty different 2019 in terms of performance. Disney is up over 30% for the year after a record smashing box office and the incredibly well-received launch of Disney+. Can they keep the momentum going into 2020? I believe they can and that Disney+ will continue to outperform expectations (which is why I predict a 20%+ gain), but there certainly are some dark clouds as well. The biggest is that there is practically no way Disney’s 2020 box office can come close to matching 2019’s. Consider that in 2020 Disney will have:

  • No Avengers movie
  • No Star Wars movie
  • New IP like Onward and Soul versus sequels to popular films like Frozen 2 and Toy Story 4
  • Live action Mulan versus remakes of Lion King and Aladdin
  • A potential let down for Marvel movies after the big conclusion in Endgame and with unproven IP like The Eternals

I think the market will be willing to overlook an understandable step back in 2020’s box office and will instead focus on the growth that Disney is seeing in their streaming services, but I wouldn’t at all be surprised to see at least one article written in 2020 wondering aloud if Disney has lost its magic after a drop in their box office receipts.

Meanwhile, Netflix has had a much rockier 2019 which has seen it basically flat for the year, although it is sneakily up around 30% over the past 3 months. A combination of some big subscriber target misses, slowing growth domestically, and deep-pocketed competitors (Disney+, Apple TV Plus, etc) entering the market all weighed heavily on Netflix’s stock price. I believe stories of their demise have been greatly exaggerated. International growth remains strong, and Netflix still has a clear lead in almost every market they are in. And while I have little doubt Netflix has come close to a saturation point in the US, I believe they remain in a strong position which will allow them to keep customer defections to a minimum. Netflix has managed to remain must see TV with a series of much talked about and/or well regarded recent releases, such as:

  • Marriage Story
  • The Irishman
  • 6 Underground
  • Always be my Maybe

Yes, they will no longer be the only (significant) game in town, but they’re still very much a leader in an industry which I think will continue to grow.

Square will add $20 to its share price

Square (SQ) has had a rough go of it lately. Since September of last year, Square has lost about a third of its value and sits at around $65 a share as of this writing. I’m a bit flummoxed as to why Square has continued to flounder despite putting up some great growth rates (and while seeing Shopify soar in 2019). So my second bold prediction is that in 2020 Square will add $20 to its share price (a roughly 30% gain) and will get close to returning to its all time highs.

Redfin will add $20 to its share price

Now we’re talking. Redfin (RDFN) is currently sitting at around $21 a share, so a $20 increase would effectively mean the stock doubles in 2020. Redfin the stock has been treading water for years despite putting up some pretty impressive growth and taking market share in a market where things move pretty slowly. I’m going to boldly predict that 2020 is the year that investors finally realize the gains that Redfin has made and the stock responds accordingly.

Bonus Prediction #1: Bitcoin to $20k

My predictions this year felt a little tamer than last year’s, so I wanted to throw out a few more bonus ones just for run. This one is not necessarily investing related, since I personally view cryptocurrencies as pure speculation, but I admit to being intrigued by bitcoin (full disclosure: I do own a tiny amount).

In 2017, bitcoin neared an exchange rate of $20k per bitcoin before collapsing. After a bit of a rebound, bitcoin is now worth around $7k. I boldly predict that bitcoin stages a bit of a comeback in 2020 and returns to the $20k level from a few years ago.

Bonus Prediction #2: Somebody will buy Nintendo

Gaming has been a pretty hot sector for awhile now, and some deep pocketed tech giants (Apple, Alphabet, Amazon, etc) are starting to show an interest in getting involved. My second (and last) bold call is that some company acquires Nintendo (NTDOY). It would be a pricey acquisition, but it would also instantly give the acquirer a ton of invaluable intellectual property that is globally recognized. Expanding that IP into mobile games and other platforms like Xbox or Steam could be incredibly valuable.

Your Bold Predictions

So those are my bold predictions for 2020. What are yours? Let me know in the comments and we can track them together! Regardless of what happens in 2020, I want to wish you a very prosperous and happy new year. Thanks for reading!

Ruminations on the Future of Video Games

Ruminations on the Future of Video Games

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Video games are a big deal.

In fact, I’ll bet they’re a bigger deal than you realize.

It’s always tricky comparing the size of different industries, but at this point it feels pretty safe saying that the video game industry is bigger than the movie and music industries combined, and the gap is projected to only increase in the coming years. Major esports events already draw more viewers than the Super Bowl. Read Dead Redemption 2 had a bigger opening weekend of sales than Avengers: Infinity War (although that record was later smashed by Avengers: Endgame). Netflix (NFLX) considers Fortnite to be a bigger competitor than HBO and Activision Blizzard (ATVI) spent more money to acquire the maker of Candy Crush than Disney (DIS) spent to acquire the Star Wars franchise.

So yeah, video games are kinda a big deal.

I’ve loved video games for as long as I can remember. I had an Atari 2600 as a kid, and then later an NES which got an incredible amount of use. In college, the most popular pastime when hanging out with friends was playing the Nintendo 64 and since then it’s been the Xbox 360 and Xbox One. It’s not been just consoles, either. I got hooked on computer games like Warcraft 2, Alpha Centauri, X-Com, Knights of the Old Republic, and many more.

While I don’t play video games nearly as much as an adult now that I have a job and a family, I do still count it as one of my favorite hobbies. I have very fond memories of saving Clementine, surviving a suicide mission, and saving Earth from an alien invasion. I’m thrilled to see video games grow in acceptance and no longer be considered a niche activity that are only done by geeks (something that I proudly consider myself).

However, while the industry would appear to be healthy when looking at things like revenue growth and the increasing popularity of esports, there are some dark clouds hovering over it that has had me concerned about the future of the industry and if it can survive.

Many articles have been written about how incredibly difficult it can be working in the video games industry and how commonplace burnout can be. The increased cost of developing games has led to a push to find new ways to monetize them, such as through lootboxes, downloadable content, micro-transactions, and others. It has gotten to the point where some decry that it feels like incomplete games are being sold, with new maps and functionality added later (for an additional cost).

Additionally, those higher production costs make creating non-sequel / original / new IP games an even riskier proposition than before. And if the game doesn’t easily lend itself to becoming a franchise (like Call of Duty or Madden), then it puts additional pressure on that single game to perform. Bioshock Infinite was an amazing game that I wish there were more of, but it didn’t seem to sell enough copies to offset the high production costs. So despite getting critical acclaim and being by all accounts a hit, the developer had to shut down. Yes, there was some well received DLC, but despite the name, the game didn’t lend itself to new versions coming out every year.

Those same high production costs lead to another problem: Loads of filler content will be added to games so that publishers can claim hundreds of hours of playtime in order to justify the price of the game.

Filler content has become a bigger issue for me in recent years, although it’s hard to tell if that’s just because I’m more sensitive to it due to valuing my free time more, or if it’s because changes in the gaming industry have made it a bigger issue. Either way, I’m not the only one to notice. I don’t agree with everything from this Kotaku article, but I do agree with the idea behind the headline of wishing that more games respected my time, especially these days now that I have so little of it. I prefer concentrated content versus dilution. I love the Dragon Age and Mass Effect games, but it feels like each subsequent iteration gets filled with more and more meaningless fetch quests. In many ways, I respect and enjoy games like Firewatch that have a specific story to tell and wastes no time telling it.

So there are some dark clouds over this otherwise very promising industry. What’s the solution? Could the industry be ripe for disruption?

It certainly seems like it.

Google Stadia launched just this week, largely to negative reviews. For those who don’t know, Stadia is Google’s (GOOG) cloud gaming service which effectively does away with expensive gaming consoles in favor of doing the processing in the cloud and streaming the resulting video back to you. While the technology behind it is neat, and I’m amazed how far internet speeds have come in my lifetime, it also struck me as a solution in search of a problem. Full priced games and monthly subscription cost didn’t seem to offer much savings over buying a console, and performance is generally worse. In fact, given how eagerly Google has been shutting down various services lately, there is also a very real risk of buying a game and not being able to play it if/when they shut the service down. In fact, if I was a betting man, I would take the under on the service still existing 3 years from now.

But that’s just one of many disruptive efforts underway.

Not too long ago, Apple (AAPL) launched their new Apple Arcade service. Google has its own gaming subscription, as does Microsoft (MSFT) with their game pass. Even publishers like EA (EA) are getting into the subscription game with EA Access. In the case of the latter two, those efforts are trying to capitalize on the shift from purchasing physical media from a third party to buying (or renting) digital copies straight from the source. One only has to look at the five year chart of Gamestop (GME), which has lost nearly 90% of its value during that time, to see how powerful that trend has been. But the shift from physical copies to digital copies is part of an even larger shift away from the idea of owning games and instead subscribing to a gaming service.

In other words: the Netflix model.

Netflix helped to accelerate the shift away from movies being something physical that you bought and owned (a DVD or Blu-ray disc) to something more ethereal that people pay a fee to access and once they stop they no longer can watch it. Video games are already part of the way there. Xbox Live Games with Gold kick-started the idea that you pay a monthly fee for a service which will give you access to certain games for free each month. Now, Game Pass seems like the final culmination in Microsoft’s attempt to move to a Netflix model.

So what changes? I honestly think the shift to a subscription model could be good for the industry and for gamers. Businesses often prefer subscription revenue because it turns something that is “lumpy” (ie, the business gets a ton of money when it releases a new game, or movie, or piece of software but makes little to no money between releases) into something that is more consistent and reliable.

For a game developer, getting revenue based on subscriptions instead of big releases might help smooth out a few issues. Maybe it makes it easier for more developers to have the patience of Blizzard and release their games “when it’s done” instead of rushing an unfinished product out the door. Or maybe there’s less of a need to keep going back to “crunch time” to get that new release out to keep the lights on. Perhaps there is less pressure to artificially create a type of subscription revenue by having loot boxes or other in-game purchases. In fact, maybe the subscription services themselves at some point ban (or heavily discourage) in-game purchases outright in an attempt to garner goodwill from the gaming community.

Perhaps more importantly, I wonder if this could help encourage companies to take a chance on games that have passionate, but smaller, target audiences instead of always going for as broad a market as possible. Right now, in order for a game to be a financial success it has to appeal to a broad enough group of people to sell enough copies. But what if there was a way to measure the depth of people’s interest in addition to the breadth?

Imagine a game that appeals to a small, but very passionate fan-base. Perhaps if the game was sold through traditional channels, it would sell 1 million copies, which isn’t quite enough to recoup costs and turn a profit. However, imagine those fans are so passionate that they would sign up for a subscription service just to play that game. It’s not unreasonable at all to think that a company like Microsoft might pay the developer more than a million copies would’ve netted them in order to have exclusive rights to that game and acquire those million subscribers. We’ve seen something similar happen with Netflix where they have revitalized things like comedy specials and brought back cult hits (but not ratings darlings) like Arrested Development. Not every Netflix show has to appeal to everybody, as long as for each subscriber they have a handful of shows that really appeal to them.

Done right, this new era of subscription video game services has the chance to really unleash a bunch of niche games catered to more specific audiences with creative new game-play and original IP. Or, it could all go wrong and lead us to a new hellish gaming dystopia. The truth will no doubt be somewhere in between, but I choose to believe it will lean more towards the former. Time will tell.

Netflix is Unconcerned About Disney+

Netflix is Unconcerned About Disney+

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Netflix (NFLX) announced their Q1 numbers yesterday, and there was a lot to like:

  • They crushed EPS (earnings per share ) with 76 cents vs. 57 cents expected.
  • Beat on revenue of $4.52 billion vs. $4.50 billion expected.
  • Paid subscriber additions also beat expectations by a fair amount. Domestic additions were 1.74 million vs. an expected 1.61 million.
    International growth was 7.86 million vs. 7.31 million.
  • Revenue increased 22% year over year and earnings per share increased 18% year-over-year.

Those are some pretty great numbers all around. It’s especially nice to see them continue to beat expectations on subscriber growth despite a price increase in the United States. Similarly, the revenue increase was impressive considering the strong dollar has been pressuring their international revenue (reported in dollars). Nearly 60% of Netflix’s paid subscribers are international now, and as you can see above, that’s also where most of their growth is coming from. As time goes on, the strength of the dollar will play a bigger and bigger role in Netflix’s revenue.

On the same day that Disney (DIS) stock popped after announcing details of their upcoming streaming service, Netflix stock dropped a fair bit. Clearly there was some concern by people about upcoming competition in the video streaming arena by not just Disney, but also other behemoths like Apple (APPL). Netflix CEO Reed Hastings has been pretty consistent about saying that they aren’t concerned with competition in the video streaming market and he maintained that stance this quarter. While only time will tell, I think he’s right. The shift from bundled cable packages to video streaming is still in the early innings and there is room for multiple winners. It’s worth noting that the top end of Disney’s projections for subscribers is 90 million in 5 years. Netflix has 50% more than that right now and is still growing at a pretty rapid pace. Obviously, Disney is such a powerful content producer that they continue to bear watching (and I’m clearly a big believer in the company), but there’s little evidence right now that their entry will hugely negatively impact Netflix.

There is one area where Disney is competing pretty directly with Netflix and crushing them (so far), though: India. Disney acquired Hotstar as part of their deal to acquire a number of Fox assets. By most metrics, Hotstar has a huge advantage over Netflix in India right now. While the tone on Netflix’s earnings call was optimistic when India was brought up, it’s telling that they have had to experiment with cheaper, mobile-only plans. There are many reasons to believe that India is the most important international market for Netflix going forward, so their progress here bears some close watching.

The one fly in the ointment for this quarter’s earnings was their guidance for next quarter, although it was amusing to see some of the after-hours price gyrations as people wildly overreacted (in my opinion) to different aspects of the report:

If this isn’t a great argument for ignoring short term price fluctuations, I don’t know what is.

It sounds like the big disappointment was that Netflix guided for an increase of 5 million paid subscriptions next quarter versus the 5.5 million that analysts were expecting. I’m not terribly concerned. Netflix has a history of conservative estimates that they end up beating. Even if they “only” add 5 million subscribers, that’s still pretty impressive. Think of it this way: (5 million subscribers a quarter) x (4 quarters a year) x (5 years) = 100 million subscribers. That “bad guidance” puts them on a pace to beat the 90 million upper-end estimate that played a role in boosting Disney’s stock just recently.

Obviously it’s not a perfect comparison. Netflix has the valuation of a high growth company and Disney doesn’t. Disney also figures to see accelerating growth with their streaming service while Netflix is likely to see the opposite. Still, I think it’s a useful comparison because it shows that Netflix is still growing rapidly and has a long runway ahead of it.

Especially if they can be competitive in the Indian market.

Breaking up Big Tech

Breaking up Big Tech

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Recently, while talking about anchoring, I mentioned the government attempt to break up Microsoft (MSFT) back in 2001 and how it looks silly now in retrospect to think that bundling Internet Explorer with Windows would give the company too dominant of a monopoly.

Well, breaking up “big tech” is back in the news these days thanks to democratic presidential candidate Elizabeth Warren’s proposal entitled “Here’s how we can break up Big Tech“. She is by far not the only candidate to have proposed breaking up larger tech companies or increasing regulations on them.

The US government isn’t the only regulator to worry about. In recent years, the EU has levied a few pretty hefty fines against Alphabet (GOOG) and Apple (AAPL) and rumor has it they have their eyes on Amazon (AMZN) and Facebook (FB) as well. Additionally, India has begun putting in place regulations which effectively handicapped foreign companies like Amazon from doing business in the country.

This isn’t a political blog, so there’s no need for me to go into my thoughts on how wise these actions are. However, government regulation and threats to break up companies is a very clear factor to consider when investing as it can quickly change the narrative around an investing thesis. I mentioned previously that for the most part I tend to avoid investing in some of the larger companies (Amazon being the glaring exception) and this is among the many reasons why. Success attracts attention from the government and that attention is rarely favorable.

One of the “Cons” mentioned when I wrote about “Why Amazon is my Largest Holding” was “government intervention” and this is precisely the reason why. If two years from now we have a President Warren and there is real talk about lawsuits to split Amazon Web Services off from Amazon or to ban them from running advertising then that is a very large blow to the growth story for the company.

It’s far too early to anticipate what will happen in an election so far away, but the situation does bear monitoring. I’m still confidently holding my Babylon 5 level position in Amazon, but for the first time in a long time I can see a scenario where I might want to trim that position a few years down the line.

How to prevent anchoring from sinking your portfolio

How to prevent anchoring from sinking your portfolio

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One tricky thing with investing is that things are always changing. An indestructible monopoly one day (can you believe that Microsoft (MSFT) was almost broken up by the government over the bundling of Internet Explorer with Windows?) can find itself suddenly behind the times and struggling to catch up a mere decade later. Similarly, sometimes all it takes is one or two amazing products to turn a tiny and irrelevant company like Apple (AAPL) into the largest publicly traded company in the world over the same time period. Check out the turnover among largest companies just in the last 20 years or so below:

https://www.visualcapitalist.com/chart-largest-companies-market-cap-15-years/

Some companies like Exxon (XOM) and Microsoft (MSFT) are still going strong or have even rebounded, but others like General Electric (GE) have had a much worse time. It’s even more amazing if you go back a few decades more and see companies like Sears, Eastman Kodak, and Polaroid on the list.

While this constant change is tricky and challenging, I also find it incredibly exciting as well. Yes, dominance in the market can be fleeting, but that means there are smaller, fast growing disruptors ready to replace the old dinosaurs. My biggest winners so far haven’t been from huge companies that seem to have monopoly on some huge industry. My biggest winners have been the companies pushing forward creative destruction and disrupting those industries or even creating entirely new ones. Everybody thought Walmart (WMT) had an iron grip on retail in the United States until Amazon (AMZN) came along with eCommerce operation with an obsession on customer satisfaction. Nobody could compete with Blockbuster Video until Netflix (NFLX) put them out of business.

This constant churning and disruption and the speed at which it happens has some important implications for investing for me. For starters, it gives me an aversion to investing in those largest companies. Yes, I know Amazon (AMZN) is the largest holding in the Freedom Portfolio and I indirectly own Alibaba (BABA) as well, but that aversion has kept me out of companies like Apple (AAPL) and Facebook (FB) and Microsoft (MSFT) and played a role in me selling my position in Alphabet (GOOG). It’s also why I tend to avoid large established financial institutions. I’m always trying to be on the lookout for how companies can be disrupted both in terms of companies to avoid and for the challengers to potentially invest in.

The enemy to all of this is anchoring. What is “anchoring”? According to Wikipedia, anchoring “is a cognitive bias where an individual relies too heavily on an initial piece of information offered (considered to be the “anchor”) when making decisions”.

There are two main ways that I’ve noticed anchoring affecting my investing. One, is when I invest in a company with a thesis that gradually gets disproven over time without me noticing. Oftentimes this happens because there were a number of parts to the thesis that get knocked off one-by-one and not all at once. For example, maybe I invested in Alphabet because I saw a number of compelling opportunities for them:

  • Entry into the Chinese market
  • Smart home devices
  • Increased hardware sales from the Pixelbook and Pixel phones
  • Waymo and self-driving cars
  • Cloud computing
  • Youtube

Looks like a plethora of potential, right? Fast forward a few months later and how do things look?

There was no single day where Google dropped a bunch of news that it was killing off Pixelbooks and Project Dragonfly. No company will brag about not being leader in a segment or lagging behind. As a result, it’s easy to just continue holding a position for months or even years without even second-guessing if the original thesis that caused you to buy it in the first place is still intact.

The other way that I’ve notice anchoring hurting my investing is when I get too irrationally hung up on some price per share. Oftentimes this takes the form of either the price I paid or maybe a recent high that the stock has pulled back from. Let’s take Activision Blizzard (ATVI) as an example. Just a year ago it got as high as $80 per share before crashing back down to $43 a share now. Let’s say I bought shares for $50 about two years ago and so am looking at a loss of $7 a share now. Maybe I no longer believe in the company (there has to be some reason the stock has dropped nearly 50%) but I’m a prideful person and just can’t stand taking a loss, so I decide to hang onto it until it gets back to $50 a share so I can break even. Or perhaps I bought for $40 a share and so am still up $3 a share now, but really can’t stop thinking about that $80 price point from just a few months ago and how I should’ve sold then and maybe if I hold on longer it will get back there.

Both of the above are examples of anchoring. There’s nothing magical or special about the $40 and $50 price points that I bought at, yet somehow I’m letting those arbitrary numbers influence if I still want to own the company. Owning a position in a company should be about whether or not you like the company’s prospects for the future. It shouldn’t be about what price you paid for shares or the most recent high.

So what is an investor to do? There’s a mental trick to combat anchoring that I use which I really love and I wish I could remember where I heard it so that I can give credit where its due. The trick is a simple one: Imagine that you wake up tomorrow and somebody has hacked your brokerage account and sold every single one of your positions and everything is now in cash. What would you do with that money?

Obviously this an imperfect and overly simplistic exercise since there would possibly be tax implications and fees associated with everything which might color your decisions. Still, just framing the situation this way can help illuminate any underlying biases that you may not realize that you had. If somebody forced you to sell a particular position, would you buy it back? If not, then that’s a pretty compelling reason to consider going ahead and selling it yourself.

I like to run this exercise a few times a year, and with the weather warming up and spring right around the corner, now seemed like as good a time as any. I did my best to take a dispassionate look at the Freedom Portfolio and decide, if Thanos snapped his fingers and every position was sold tomorrow, which positions I would buy back. Below are the decisions that I made, along with a brief explanation of why.

Sells

Axos Financial (AX) – I originally bought Axos financial back in 2013 when it was called “Bank of Internet”. The original idea was that, as an exclusively online bank that didn’t have to deal with the overhead of brick and mortar locations, they were better positioned to succeed. That lack of brick and mortar overhead allowed them to offer better interest rates on things savings accounts and CDs to gain market share while still allowing them to be more profitable than their legacy competitors.

It turned out to be a good investment, as the stock would go from around $10 when I purchased it all the way up to over $40 in the following 5 years. However, over the past 6 months or so the stock had pulled back some to around $30. While re-evaluating I realized that part of me was still anchoring to that $40 price and I even found myself thinking, “if only it could get back to $40 then I can sell it”. I realized then it was time to sell if the only thing keeping me from selling it now was a psychological attachment to a previous high.

nVidia (NVDA) – It’s been a rough few months for nVidia which saw it lose close to half of its value. While the immediate reasons for the drop should be relatively short term and something the company can recover from, I realized that I now have enough doubt about their edge in the competitive and constantly changing industry that they’re in that it felt like time to sell. My experience with chipmakers like nVidia is that it’s incredibly difficult to build any kind of sustainable competitive advantage or moat and that while you might have the best tech one year, there’s very little preventing an upstart competitor from overtaking you next year. I’m not saying that is going to happen with nVidia this year or next, but I would rather get out before it happens rather than after.

Bladex (BLX) – This one is simple. My original thesis for buying Bladex is that I wanted some exposure to the growing Latin American market and it felt like a good way to get it. Now? I can’t think of a single reason why I would own this instead of MercadoLibre (MELI), so it was an easy call to sell Bladex and use those funds to buy more MercadoLibre.

Baidu (BIDU) – There were three main points behind my original idea to buy Baidu:

  1. The threat of Google (GOOG) entering the Chinese market was being overblown
  2. They owned a large chunk of iQiyi (IQ), which I was pretty excited about
  3. They were making big investments in AI which should pay off in the future

Re-evaluating now, it seems like the concern over the threat of Google has passed, and I’ve become a little more skeptical of exactly how investing in AI is supposed to magically result in increased profit (whenever I think about it, I just imagine the Underpants Gnomes from South Park with a sign saying: “Invest in AI -> ? -> Profit”). I still really like iQiyi, but I’ve gradually been adding to my position in that company directly and there doesn’t seem to be a compelling reason to own the parent anymore.

Tencent (TCEHY) – A few months ago, I sold a part of my Tencent position to buy some Naspers, which is a South African company that owns almost a third of Tencent yet trades at a discount to Tencent’s valuation and offers some interesting diversification since they own some other companies as well (in fact, they just recently spun one of them off). Given that Naspers should provide about the same amount of exposure to Tencent in addition to some extra upside with their other businesses, I decided it made sense to just sell my Tencent position and transfer those funds into more Naspers.

Buys

Baozun (BZUN) – Speaking of the JIB, I continue to like the trio of companies and all three are up since I wrote the article. Baozun was the smallest position of the three and has performed the worst, so I decided to add a little more. There could be some short term turbulence with the trade war and a possible slow down in China, but I still like Baozun over the longer term.

CRISPR (CRSP) and Editas (EDIT) – I’ve long struggled with investing in biotech and pharmaceutical companies because I have a hard time understanding how much of an advantages certain companies have. I’m really tempted by the incredible promise of gene editing, though, and wanted to dip my toe in with Millennium Falcon positions in two of the leading companies in the field. I can’t remember who said it, but there’s a saying that basically says that the moment you buy a stock is when you least understand the underlying company. It may seem counter intuitive but I’ve found it to be true. Buying a financial stake in a company naturally incentivizes me to learn more about the company, so I look forward to just learning more about these companies in the coming months.

MercadoLibre (MELI) – As I mentioned last week in my MercadoLibre write-up, the more that I wrote about how much I liked the various avenues for growth that MercadoLibre has, the more amazed I was that I hadn’t added to my position since the original purchase. I finally decided to remedy that and added a fair amount, bringing the size of my position closer to my conviction in the company. As of today, it is now an Enterprise level position.

Teladoc (TDOC) – This is simply a situation where I started with a small position in a company that looked interesting and now I’m ready to commit a larger portion of my portfolio to it. Teladoc has hit some speed bumps recently, but I still believe the underlying trend towards telemedicine is intact and I’m ready to back up that belief with a larger position.

Naspers (NPSNY) – See Tencent above.

Spotify (SPOT) – Up until about a month ago I had very little interest in investing in Spotify. They just seemed like one more company trying to thrive in the difficult music streaming business. Not only did I not think they had any competitive advantage over their rivals, but I also wondered how they expected to be able to compete with huge tech giants like Apple and Amazon who also have music services.

All of that changed when they went out and bought Gimlet Media and Anchor amid a heavier push into podcasting. Suddenly I understood what their strategy is going forward and I find it to be an intriguing one. If Spotify can get exclusivity for some of the more popular podcasts, then that could be a powerful differentiator which could allow them to draw subscribers from other services or provide the ability to raise prices. The idea of paying for podcasts might sound silly to many, but I’ve come to realize that I probably spend more time listening to podcasts now than I do watching TV and if my favorite podcasts started charging a low monthly fee to listen, it would be something I would give some serious thought to. I have no idea if this new strategy will work out, but I’m intrigued enough to start a small position. A little off topic, but have I mentioned that my friends and I have started a podcast of our own?

So that’s what I do to try to prevent anchoring from sinking my portfolio. Do you have any similar tips and tricks? Thoughts on any of my buys or sells? Hit me up in the comments!

Recklessly Bold Predictions for 2019

Recklessly Bold Predictions for 2019

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I enjoy investing and think it’s a lot of fun, but sometimes responsibly buying and holding a diversified portfolio of companies can admittedly get a little dull. Fantasy Investing can help with that a little bit, but sometimes I just want to make utterly irresponsible and recklessly bold predictions without having to actually risk any money on them because, well, they’re most likely going to end up being wrong.

With the new year coming up, this seemed like as good a time as any to throw out some predictions for 2019. To be clear, I think most of these are long shots, but I also am not just picking these to be random or contrary. I do actually believe that there are non-zero odds of these things happening. Just don’t go running to your bookie to make any bets on these unless you are getting really good odds.

Here are my three predictions, in decreasing order of likeliness:

The race to $1 trillion – again

There was a lot of talk during 2018 about the race to become the first public company to reach a $1 trillion market cap (not counting PetroChina for some reason). Would it be Apple (AAPL)? Amazon (AMZN)? A dark horse like Microsoft (MSFT) or Facebook (FB)? Ultimately, Apple would win the race, with Amazon crossing the finish line not too long after.

With the recent market pullback and both companies now under a $800 billion market cap, that seems like an eternity ago. In reality, it’s merely been a few months.  I don’t try to time the market, and while I am confident that this bear market will turn around, I have no idea when.

But this isn’t “sober, rational, and well-informed predictions”. This is “recklessly bold predictions”. So let’s do a Babe Ruth-esque called shot on what, where, and when.

My first prediction? That these three companies (what) will make it to a $1 trillion market cap (where) in 2019 (when), with two of them making a return trip:

  1. Amazon (again)
  2. Microsoft (first timer)
  3. Apple (again)

Not bold enough? I’ll take it one step closer and say that the order listed above is the order with which those companies make it to $1 trillion in 2019. That’s right, despite being the first to break the seal, Apple doesn’t make it back to $1 trillion until after Amazon and Microsoft make it there first.

Tesla doubles

It’s hard to think of many CEO’s or publicly traded companies that better encapsulate “reckless” and “bold” more than Elon Musk and Tesla (TSLA), and so I simply had to have a prediction for the real life Iron Man and his disruptive car (and energy?) company.

Tesla has weathered the recent market volatility pretty well and is up while a lot of other stocks are down big. Can this continue into 2019? I’m recklessly predicting that not only can it continue, but that Tesla will hit a market cap of $100 billion in 2019, which would make it bigger than the current size of General Motors (GM) and Ford (F) combined.

How? Over the past few years, Tesla has routinely been one of the most shorted companies, and with good reason. The company has been burning through cash and by Elon Musk’s own admission has come close to bankruptcy. Even now, with a profitable quarter in its rear-view mirror, there are still plenty of red flags. What happens once the model 3 backlog is exhausted? Can Tesla still sell as many cars with the federal tax credit starting to get phased out? Will the trade war completely wreck plans to sell outside the US? Can the Model 3 be made profitable at the promised $35k selling point?

I don’t know the answers to many of these questions, but I do think that Tesla has managed to make it through the darkest clouds that it will have to go through. Yes, there are still many hurdles to overcome, but none seem as daunting at the model 3 production ramp up. Assuming Tesla continues to remain profitable in 2019, it just might be time for the shorts to start cutting their loses and a short squeeze just might cause the stock to rally.

Twitter gains on Facebook

As of the time of this writing, Twitter (TWTR) is about 6% the size of Facebook (FB), but their stock price has been going in the opposite direction. Twitter is up around 34% this year despite being down 30% from its 52 week high. Facebook, on the other hand, is down nearly 30% on the year and down almost 40% from its 52 week high.

So what is my boldest and least likely call of all? I think this trend not only continues, but accelerates as a combination of Facebook continuing to fall and Twitter continuing to ascend leads to Twitter getting to be half the market cap of Facebook. For that to happen would require massive movement by both stocks, frankly. Facebook would have to be cut in half and Twitter would have to quadruple in order for this to happen. Honestly, I think it’s fair to claim victory even if Twitter just gets to a third of Facebook’s market cap.

What’s your prediction?

So, what do you think? Have a favorite prediction? Think I’m way off base? Have any reckless predictions of your own? Let’s hear them in the comments! Maybe we can work out a little side bet.

I like the cut of this JIB

I like the cut of this JIB

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F.A.N.G.

Have you heard of FANG before? It’s a common acronym for some of the largest technology companies in the United States that have had massive gains over the past few years. The acronym has gotten a little messy thanks to the desire to add Apple and the re-naming of Google as Alphabet, but here are the companies traditionally thought to be a part of the “FANG stocks” :

  • Facebook (FB)
  • Amazon (AMZN)
  • Apple (AAPL)
  • Netflix (NFLX)
  • Google/Alphabet (GOOG)

You might recognize a few of those names from the October edition of the Freedom Portfolio. Investors who have held any of the above companies for any length of time over the past decade have to be pretty pleased with the results.

But I don’t want to talk about those companies right now.

B.A.T.

There’s an equivalent acronym for Chinese companies that is a little less commonly know: BAT. Like with the FANG companies, the BAT companies are some of the largest technology companies in China (and the world). Thankfully, the acronym is a little cleaner in this case. The BAT companies are:

  • Baidu (BIDU)
  • Alibaba (BABA)
  • Tencent (TCEHY)

Again, a lot of these companies are in the Freedom Portfolio. For Americans who don’t have much (if any) experience with these foreign companies, it can sometimes be difficult to wrap their heads around what exactly these companies do. For that reason, it has become common to associate the BAT companies with American equivalents as a shorthand. It’s not ideal, as oftentimes there are just as many differences as similarities, but it can be a good starting off point for understanding what these companies do. Here are the common equivalents given to the BAT stocks:

  • Baidu – Google
  • Alibaba – Amazon
  • Tencent – Facebook

It should be repeated that these comparisons are far from perfect. I would argue that in many ways Alibaba is more similar to Ebay (EBAY) than Amazon and Tencent is far more involved in gaming than Facebook is. If you find yourself interested in any of these companies, I would very strongly recommend digging in deeper to learn more and discover how the companies differ from the companies they are often compared to.

But I don’t want to talk (too much) about these companies, either. 

J.I.B.

No, I want to talk about a even less commonly known acronym: JIB. I know it’s less commonly used because as far as I can tell, it’s an acronym that I am coining right here, right now, although I’m sure it will be spread like wildfire and be used worldwide in a matter of months. JIB refers to three more Chinese tech companies that I believe have some interesting growth potential:

  • JD.com (JD)
  • iQiyi (IQ)
  • Baozun (BZUN)

Like with the BAT stocks, there are some commonly used equivalents.

  • JD.com – Amazon
  • iQiyi – Netflix
  • Baozun – Shopify (SHOP)

JD.com

Just like with the BAT stocks, I want to stress how imperfect these comparisons are. That should be evident with the JD / Amazon comparison, considering that Alibaba was also listed as “the Amazon of China” above. How can two companies be the Amazon of China considering how dominant Amazon is in e-commerce in the United States? The short answer is that the competitive landscape is simply different. In most ways, JD.com is actually an underdog to Alibaba in China. Alibaba has a larger market cap, has a bigger share of the Chinese e-commerce market, and has more cash on its balance sheet.

So why is JD.com like Amazon? Their business models are very similar. Like I mentioned before, Alibaba is more like an eBay in that it is largely facilitates transactions between two parties instead of directly selling things. Their consumer-to-consumer business is like traditional eBay where the seller and buyer are brought together on the platform, but then the seller is responsible for inventory and order fulfillment. They also have a business-to-consumer business where Alibaba again acts more like a middle-man. JD.com, on the other hand, has invested much more in terms of building out fulfillment centers and a logistics network. This gives it a lot more control over the quality of both the products being sold and the delivery of products which could give it an advantage long term over a company like Alibaba, despite currently being the underdog. 

Another similarity/difference worth noting, especially recently, is leadership. Just as Jeff Bezos has played an integral role in the rise of Amazon and continues to be an incredibly important leader, the same can be said of Richard Liu for JD.com. Unlike Jeff Bezos, though, there are some dark clouds hanging over the JD.com founder and CEO. A few months ago he was arrested over a rape allegation. As of the time of this writing, the case is still under investigation. While JD.com is larger than any one person, it would definitely be a blow to the company if he was forced to step down.

iQiyi

To carry on the theme of imperfect comparisons: While iQiyi is called the Netflix of China because of its subscription streaming video service, it isn’t nearly the leader to the same degree as Netflix is in the United States. They do, however, have another interesting connection with Netflix in that they have a licensing agreement with them. It seems like a good win-win scenario for both companies right now: Netflix gets some of their content exposure in China and iQiyi gets some presumably appealing content that other Chinese streaming services can’t offer.

Another way that iQiyi differs from Netflix is that it also has a fairly popular free, ad-supported video service that is more similar to YouTube. That’s a little interesting because iQiyi was recently spun out of Baidu (the aforementioned Google of China) and YouTube is a division of Google.

Lastly, while the Netflix comparison is the more popular one, iQiyi prefers to think of itself as being more similar to Disney (DIS). Why? So far Netflix has focused solely on video content, while iQiyi offers games, novels, and other merchandise which makes it more similar to a company like Disney, which does a great job of finding different ways to monetize their various properties through toys, clothing, amusement parks, etc.

One last point of interest is iQiyi has a partnership with fellow JIB member JD.com. JD.com has a membership program somewhat similar to Amazon Prime and one of the perks that were recently added was a membership to iQiyi’s program. Like the Netflix licensing deal, this seems like a win-win for both companies in that it makes JD.com’s membership more appealing while also giving iQiyi a greater membership base.

Baozun

Baozun might be the hardest of the group to describe what they do because unlike Netflix and Amazon, many people might not have heard of Baozun’s commonly named equivalent: Shopify. Luckily, I wrote something just last week about Shopify and what they do.

As with all of the companies discussed so far, while Baozun is similar to Shopify in many ways, it also has some differences. One of the larger differences is that while Shopify tends to focus on small companies trying to set up an e-commerce solution, Baozun has a lot of larger, more established companies as clients who are trying to get access to the Chinese market. The Motley Fool has a good article that explains some of the similarities and differences.

Baozun has some big names as clients: Nike (NKE), Microsoft (MSFT), and Starbucks (SBUX). Why would these massive companies feel like they need a company like Baozun? Because Baozun can help those non-Chinese companies quickly set up online stores on all of the biggest Chinese e-commerce sites and apps, like fellow JIB-er JD.com, Alibaba’s (BABA) Tmall, and Tencent’s (TCEHY) WeChat. There are a lot of major non-Chinese companies who are scrambling to get access to the Chinese market and its  increasingly internet-connected and growing middle-class. Baozun is well position to profit from that trend.

Current Events

I’m pretty excited about the prospects of all of the JIB companies that I mentioned above, and all in the Freedom Portfolio, but I would be remiss if I didn’t mention what has been going on with them lately. Put simply: They’ve been getting hammered. Two of them are down double digit percentages and the third isn’t far behind. There are a bunch of possible reasons behind the drops:

  • General market volatility over the past month
  • Concerns about a slowing Chinese economy
  • Concerns over tariffs and the continuing trade war with the United States
  • Concerns over increasing Chinese government regulations

All are completely valid concerns and I don’t mean to dismiss them, but if you’re looking at holding these companies for the long term (3+ years), then none of those worry me too much. In fact, I’ve been looking at the recent drops in the JIB companies as a possible opportunity to add to my positions. Trade wars down last forever. Economic slowdowns don’t last forever. The opportunity in front of these companies in terms of a growing middle-class not only in China but elsewhere in Asia is real and is too big for me to ignore, though. I wouldn’t be surprised if the next year or two is tough for these companies (part of the reason why I am holding off on making any moves), but over the long term, I like their chances of being big winners.

In short, I like the cut of their jib.

Why I am not (directly) investing in marijuana stocks

Why I am not (directly) investing in marijuana stocks

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Shall we play a game? See how many (intentional and maybe unintentional) euphemisms for marijuana you can find in my post below and put your answers in the comments. Winner gets a hearty round of applause from me!

Have you heard about Tilray (TLRY)? It’s the marijuana stock which has gone from $53 a share to $300 a share and back down to $100 a share… just in the past month! That’s not even as crazy as the single day where trading was halted 5 times due to volatility and went from being up 90% (in one day!) to briefly being negative, to finally finishing in the green.

I’m not usually somebody who gets too hung up on valuations, but even I have to admit that things have gotten way out of whack with many of these marijuana companies. This seems like a classic case of the hype getting ahead of the fundamentals and too many people chasing a pot of gold by investing in the limited number of publicly traded cannabis companies out there. The demand is outstripping the supply. At some point that will reverse, and I’m sure we’ll see some of these high-flying companies get weeded out.

Even more than valuation concerns, though, is the fact that many of these companies are fundamentally dedicated to one thing: growing and selling marijuana. Marijuana is basically just a commodity. Why is that meaningful? Because a key aspect to a commodity is that it is interchangeable with other commodities of the same time. The marijuana that Tilray grows isn’t significantly differentiated from the marijuana that anybody else could grow in their backyard. Apple (AAPL) and Tesla (TSLA) are interesting investments because people are willing to pay a premium for their products because people perceive them to be noticeably superior. Could any marijuana grower ever make such a claim? I’m not so sure, and that’s why I’m concerned about any of them ever having a durable competitive advantage.

This doesn’t mean that I intend to fully ignore the marijuana legalization trend. There clearly is a huge opportunity in this budding market. For me, the key is to find a way to invest in the trend without overpaying for what would appear to be over-hyped companies. The entire sector seems a little risky right now, so there is currently only one Millenium Falcon sized position in the freedom portfolio that is involved in the marijuana legalization trend.

KushCo Holdings (KSHB) is a company that I first heard about from Motley Fool analyst David Kretzmann that I found to be an interesting way to invest in the marijuana legalization trend without having to worry about to pay sky-high valuations for companies that are essentially simply selling a commodity. Instead of selling marijuana itself, KushCo sells a number of different supplies (such as packaging and vaporizers) related to both the recreational and medical marijuana industry. They have also diversified into the hydrocarbon gas market. Hydrocarbon gases are used in the process of creating cannabis based oils. Essentially, as the trend of marijuana legalization continues across Canada and North America, so should the market opportunity for KushCo Holdings. At the same time, they should be slightly more protected from competition than the cannabis growers themselves.

It’s been an incredibly short time span to the point of being meaningless, but the outperformance so far is better than the alternative and I’ve been encouraged by what appears to be at least slightly less volatility than many of the other marijuana stocks.

P.A.U.L. Score

Protected: 2

As near as I can tell, there’s nothing particularly proprietary about the products that KushCo produces and there’s not much preventing competitors from entering the space. If the market for cannabis (both recreational and medicinal) gets to be as big as many people hope, then competition will increase, which will undoubtedly hurt margins. This is easily my biggest concern with the company going forward. What differentiates them from future and current competitors?

Alternatives: 3

KushCo has already shown a willingness to branch out into different products that are still related to cannabis with their hydrocarbon has expansion. As marijuana legalization continues, it seems inevitable that there will be other types of products that the company could move into as well.

Understanding: 2

To be blunt, I’ve never used marijuana and frankly know very little about how it is used medicinally or recreationally. Is there a market for more accessories once legal cannabis becomes more accepted? I suspect so, but I simply don’t know.

Long Runway: 4

As mentioned a few times, marijuana legalization is in early innings but also seems like an inevitable trend. Take a look at the wikipedia article on the current state of cannabis legalization in the world. There’s a lot of opportunity and a lot of near term catalysts. Canada is preparing to legalize recreational marijuana later this year and more and more US states are moving towards legalization as well. When and if the US federal government finally fully legalizes cannabis, the industry could really see some explosive growth.

Total Score: 11

Not a great score, but that’s why it’s only a Millenium Falcon allocation right now. If it goes to zero, I won’t be out much money, but if it can capitalize on the opportunity in front of it, this could be a company that outperforms the market greatly over the next 5 years.

Disclaimer

Nothing written above is intended to be investing advice and is solely my own opinion. I currently own shares of KSHB and TSLA.