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.
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!
It wasn’t too long ago that Twitter (TWTR) was one of my Freedom Portfolio holdings that I thought had the most upside and was most excited about. In fact, it was just a little over 6 months ago where one of my recklessly bold predictions was that Twitter would get to half the market cap of Facebook (FB). My thinking was that the impact of Twitter didn’t match its market cap and that Twitter as a platform was far more useful and important than Facebook or Instagram. I frankly still think that is true. So why is the headline of this piece “Selling Twitter” and not “Doubling Down on Twitter”?
There are two main reasons.
Decreased Ambitions
Part of the reason my enthusiasm for Twitter had been waning for a bit is because they no longer seem to focused on growth and instead seem focused on monetizing the audience they already have. The company seems to be getting increasingly profitable, which is good, and I wouldn’t be shocked if this was a market beater going forward, but there doesn’t seem to be any grand ambitions at Twitter anymore, and they seem content with the user base and core functionality that they have now. There’s nothing necessarily wrong with that, but it’s not the reason why I saw potential in the company. There don’t seem to be any more grand experiments like buying the rights to Thursday Night Football. Instead of being focused on adding more users, they seem more focused on purging ones that they already have. Which brings me to my larger concern…
At War With Itself
Twitter has gotten increasingly involved in the messy area of policing the content on their platform. While that’s likely a good thing in terms of cracking down on toxic and abusive behavior, it does put them in an extremely difficult spot of picking and choosing which speech is acceptable and which isn’t. I think the degree to which Twitter is now deciding which content is acceptable on its platform and which isn’t is opening up a Pandora’s Box that they’ll find incredibly difficult to close. Once you’ve banned a controversial figure, how do you justify letting them back on your platform?
But the real difficult question is: Where do you draw the line? Everybody’s line is different, and now social media companies are trying to draw a single definitive one for everybody. There is no way this ends well and is bound to end up ultimately angering everybody.
For example: Just yesterday YouTube, which is owned by Alphabet (GOOG), managed to get itself in a bunch of trouble over how it handled a conservative comedian named Steven Crowder who a Vox journalist named Carlos Maza has accused of harassing him. I desperately don’t want to delve into politics and therefore don’t want to weigh in on the merits of the charge, but what is important is how the way that YouTube handled things managed to anger both sides. In a 24 hour period, they at first they refused to do anything, since Crowder’s videos didn’t appear to violate any of their terms of service. However, they pretty quickly seemed to bow to the Heckler’s Veto and half-reversed course and temporarily de-monetized his channel. Liberals are incensed that YouTube didn’t go further and ban him altogether, while conservatives are angry that he was punished at all and are calling for leftist comedians who direct vile language at conservatives to be treated similarly. Now, things like “VoxAdpocalypse” are trending across social media.
This is the inevitable future of content regulation on social media that I am worried about. It’s an incredibly easy slippery slope to slide down. If somebody like Crowder should be de-monetized (or eventually banned), then what about people like Sarah Jeong, who had some controversy over anti-white jokes? What about the non-PC jokes of Family Guy and South Park?
Social media companies like Facebook and Twitter live and die based on content and engagement. Some of these recent moves to regulate content is putting these companies on a path to be at war with the content and engagement that they need to survive. That’s not a good place to be, and it is why I, with some reluctance, am no longer a Twitter investor.
Two Freedom Portfolio holdings made news last night and this morning: Twitter (TWTR) and Tesla (TSLA). Here are some quick thoughts on each:
Twitter
Twitter released their Q1 earnings this morning, and the market seems to like what it has seen, as the stock is up around 10% as of the time of this writing. I can understand why, and overall it was a pretty decent report, but I found myself a little disappointed. Why? Because the focus seems to be more on making money rather than user growth. Obviously making money is huge and the ultimate goal of every company, but part of my investment thesis for Twitter was the opportunity to grow its user base. I looked at the hundreds of millions of users that Twitter had compared to the billions that Facebook (FB) had and wondered why Twitter couldn’t get there too. I personally find Twitter to be so much more useful and irreplaceable than Facebook or Instagram. Apparently billions of people disagree with me.
Twitter has moved the goal posts yet again. It’s no longer about Monthly Active Users (MAUs) or Daily Active Users (DAUs), it’s about Monetizable Daily Active Users (mDAUs). Is it a better metric? It could be, but it definitely shows where the focus of the company is right now. There is no incentive to grow the user base unless that user can be monetized. There’s nothing necessarily wrong with that, but it does seem to be a shift in thinking that Twitter is no longer a growth company doing everything it can to grab market share, but instead is working towards becoming a more mature (and profitable) company. It could still be a good investment going forward, but I think it deserves a re-evaluation by me to see if I still want to keep it in the Freedom Portfolio.
One more concern:
We are taking an even more proactive approach to reducing abuse on Twitter and its effects in 2019. Improvements in Q1 emphasized proactive detection of rule violations and physical, or off-platform, safety — including making it easier to report Tweets that share personal information, helping us remove 2.5 times more of this content since launch.
A lot was made in the shareholder letter of how much content that Twitter was taking down in order to help foster a healthier discourse. I’m all for higher quality content and against abusive messaging, but I really hope Twitter is keeping a close eye on whether or not they are removing the right content and not just more content. We’re told that 2.5 times more content is being removed and we’re supposed to trust that that is a good thing. It very well could be, but if incentives aren’t aligned properly and the main metric of success is removing more content and not just the right content, then that’s not a good thing and is one more example of growth being de-emphasized.
And by “right content”, I’m not making any allusions to political content or any judgement on any bias against conservatives that many people think that Twitter has. I will note, however, that I believe that the major social media companies underestimated the quagmire they were stepping into when they decide to more heavily police their content. Twitter and Facebook are private companies who can enforce whatever standards they want and aren’t bound by things like the First Amendment, but once they decided to take a stand on things like fake news and harassment and hate speech, they entered a very murky and uncertain area. One person’s hate speech is another person’s freedom of speech, and almost every decision is bound to anger one side or another. It’s telling that both sides of the political aisle seem to have the social media companies in their sights now. It’s not a good position to be in, and I consider it to be a major liability for Twitter going forward.
Tesla
Tesla held an Autonomy Investor Day yesterday where they released more information about Tesla’s pretty ambitious plans for a self-driving taxi fleet within a year. Part of my long term investment thesis for Tesla was the hope that they could take the lead in self-driving cars due to the amazing amount of data collected from their auto-pilot functionality. In essence, I saw Tesla as running a mass market beta test to iron out the flaws in their system. I thought that could give them the ability to catch up with competitors like Alphabet’s (GOOG) Waymo which might be ahead.
None of that thinking has changed after last night. The biggest news coming out of that event seems to be that Elon Musk has claimed that this could all happen as soon as next year. That seems wildly optimistic, and something that isn’t news is that Elon Musk tends to be wildly optimistic. The market seems similarly unimpressed, as Tesla is down a bit as of this writing. It’s been a bit of a trend in 2019, as Tesla is down around 16% year to date.
I’m generally a fan of Elon Musk, and I’m a fan (and shareholder) of Tesla. However, I worry sometimes that Musk (and by extension Tesla) are too concerned about “burning the shorts” and focused on short term share price instead of the long term health of the company. Pretty much everybody knows Tesla won’t have fully automated robo-taxis in a year, so why throw out that goal? At this point, I really do think it would be in the best interests of Musk and Tesla for Musk to step down as Chief Executive Officer and instead become something like a Chief Evangelical Officer. That way Tesla can have a less controversial leader who can set more realistic goals and make the right decisions for the company both long and short term while still benefiting from the aura and optimism of Elon Musk.
Plus, it would give Musk more time to spend on SpaceX… or maybe even get some sleep.
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
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:
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?
Google continues to lag in the increasingly competitive cloud computing race
Ditto for Youtube
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:
The threat of Google (GOOG) entering the Chinese market was being overblown
They owned a large chunk of iQiyi (IQ), which I was pretty excited about
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!
Twitter (TWTR) is a Serenity level holding in the Freedom Portfolio. They released fourth quarter earnings Thursday morning and the market’s reaction is a great example of why I prefer buying and holding for the long term and not worrying about short term fluctuations. Like Amazon (AMZN) recently, Twitter reported what looked to be a great quarter which beat expectations, yet dropped the next day for reasons I don’t fully understand.
Here are some of the important numbers:
Earnings per Share: 31 cents versus 25 cents expected
Revenue: $909 million versus $868 million expected
Monthly Active Users: 321 million versus 321 million expected
So despite meeting or exceeding expectations across the board, Twitter was down close to double digit percentages afterwards. There was some speculation that it could be a reaction to a projected increase in spending or possibly disappointment in the daily active user numbers that they released. The reasons for a short term drop are relatively unimportant to me as long as the long term growth story remains intact, although one of my bold predictions is certainly off to a bad start.
Which brings me to the title of this article and something that has been baffling me for a long time. As of this writing, Facebook (FB) has a market cap of roughly $480 billion while Twitter’s market cap is around $23 billion, making Facebook around 20 times the size of Twitter. While there are any number of good reasons why Facebook is so much larger than Twitter (number of active users and revenue/profitability being the main ones), the difference still seems insane to me considering the impact that both companies seem to have on our society.
It doesn’t seem like a single day goes by where news either is being made or broken by Twitter. Either it’s policy being announced by the President or athletes are sniping at the media (or each other) or controversy erupting over a sitcom star’s tweets or a former New York Time’s editor’s alleged plagiarism. Just last night, I learned of the bombshell blackmail allegations between Jeff Bezos and the National Enquirer through Twitter.
I’ve written a post about developments with the National Enquirer and its parent company, AMI. You can find it here: https://t.co/G1ykJAPPwy
I find Twitter absolutely invaluable for keeping up with breaking news and getting real time reporting and reaction and also simply reading up on the opinions of people who I respect. Wondering why the star running back isn’t on the field? Twitter often has the answer before the sideline reporters on TV. Interested in a diverse array of responses to the State of the Union address? I can check Twitter while watching and get hundreds of different takes without having to wait until the end to get a few (mostly identical) takes on TV. Interested in some instant feedback on a company’s earnings or opinions on a just announced merger? FinTwit is invaluable. I learn about breaking news on Twitter now far more often than I do in any other media, and possibly even all other media combined. I would easily give up Facebook and all of their properties before I would give up Twitter.
And that’s why it’s mind-boggling to me that Twitter has thus far been unable to take this amazingly impactful platform and transform it into a better and more profitable business. I can’t think of very many other companies that has a bigger discrepancy between how important they are and their market cap.
I’ve owned shares of Twitter for a few years now, and as you can tell from the chart below, it’s been quite a ride. The low point was probably in 2016 immediately after Twitter essentially announced that they couldn’t find somebody interested in buying the company. Part of me was relieved, because I thought Twitter had a lot of potential as a stand-alone company, but mostly I was shocked that so many other companies had taken a look and decided that they weren’t interested in what I thought was an incredibly powerful platform at what appeared to be a discount price.
Twitter in green and the S&P 500 in blue
In addition (and perhaps related) to management’s seeming inability to capitalize on the power of the platform to improve the business, I’ve also been worried about the lack of innovation with regards to Twitter lately. Besides a bump in character limit and cracking down harder on what they perceive as harassment and toxic behavior, how has Twitter improved lately? Despite widespread desire for it, there’s still no “edit” button. In fact, the one rumor coming out of Twitter is that instead of adding functionality, they’re considering removing some in the form of getting rid of “likes”. Not exactly earth-shattering disruption there.
Artist rendition of the Stark difference in innovation between Twitter and Square
The difference is even more stark when you compare the innovation at Twitter with the innovation going on at the other company that Jack Dorsey (CEO of Twitter) is the CEO at: Square (SQ). While Twitter has been essentially treading water, Square has released their new Square Terminal, their Square Cash app which allows bitcoin trading, and been working towards a banking license. That’s a breakneck pace for any company, and makes Twitter look especially bad. It makes me worry that all of Jack Dorsey’s passion and creative energy is directed at Square, with Twitter being an after thought. Maybe it’s time to consider if this CEO-of-two-companies thing isn’t a good long term solution and to look for somebody who can give Twitter the full attention it deserves?
It’s not like it should be hard to come up with interesting ideas to pursue. A few years ago Twitter seemed prime to jump into the arena of video streaming live events when it bought the rights to Thursday Night Football. It made sense to me, as Twitter oftentimes can greatly enhance the experience of live events as it provides additional commentary on what’s going on. The experiment seemed well received, but Twitter lost the rights the next year and hasn’t seemed keen to make any major pushes since then. I understand that viewing rights to the major professional sports can be pricey, but why not make a big push towards eSports where the market is more fragmented and in its earlier stages?
Similarly, I think that one of the more under-reported stories in the past year or so is the growing acceptance and growing legality of sports gambling. This also seems like a big potential opportunity for a real time communication platform like Twitter. Wouldn’t it be cool to be watching Yankees / Red Sox and be able to make a bet in the middle of the 6th inning on whether or not Chris Sale will pitch into the 8th inning? Or bet on if Klay Thompson will hit a 3 pointer in the 3rd quarter? Twitter has the capability of instantaneously connecting millions of people who might be watching the same event. Think of the possibilities with peer-to-peer prediction markets. Dealing with payments could be a challenge, but why not work together with a payment processor like Square? I hear their CEOs are close…
These are just two ideas, but there’s undoubtedly dozens if not hundreds more. It seems like now, more than ever, there’s an appetite for people communicate online about shared experiences. Twitter has done a good job of feeding that appetite so far, but there’s a lot more work to be done. I hope they’re up for it.
P.A.U.L. Score
Protected: 5
When I wrote about The P.A.U.L. System, Twitter was the example I used of a company that had a strong moat because of network effects, so it makes sense that it would excel here. Obviously no moat is completely unassailable, and Twitter could still get disrupted, but starting an entirely new social network from scratch is hard to do. Twitter has a number of wildly popular personalities active on the service that span all different sorts of interests. There’s something for anybody. Music lovers have Taylor Swift and Lady Gaga and Justin Bieber and Rihanna. Sports fans have Ronaldo and Lebron James. Donald Trump has basically turned Twitter into his own quasi-spokesperson and there are plenty of politicians on all sides that can be followed. It’s hard to envision something easily rising up to replace Twitter.
Alternatives: 3
This is an incredibly tough one to measure and really gets at the heart of why I am torn on Twitter as an investment. As I mentioned above, Twitter seems like it has so much potential and so many opportunities to branch into all sorts of different things. At the same time, it’s fairly indisputable that they’ve failed to realize much of that potential so far. For that reason, I can’t go any higher than a 3, and even that is hard to make a case for.
Understandable: 4
Once you understand that Twitter’s customers aren’t necessarily the people who use it, but the advertisers who want to market to those people, then Twitter is pretty simple to understand. They want a large user base who uses the service a lot so they can sell those eyeballs to advertisers to make money. It’s also helpful if they can get data on their users to help advertisers more accurately target their advertising. Follow the aforementioned Taylor Swift? Then you might be interested in knowing when her new album is out. This is why it makes sense that Twitter has been transitioning from monthly active users (MAUs) to daily active users (DAUs) to monetizable daily active users (mDAUs). Each change has moved them one step closer to accurately identifying how they’re doing in terms of growing an audience that they can make money off of.
Long Runway: 3
This is an area where I have reduced my expectations for Twitter some recently. Previously I looked at the number of users that Facebook had and figured that if they could get billions of users for multiple apps (Facebook, Instagram, Facebook Messenger), then clearly Twitter should be able to reach a billion users at a minimum as well.
Frankly, Twitter’s recent growth numbers don’t support that theory anymore. Maybe the platform is too complicated, or people are scared off by the reports of toxic users, or maybe people just don’t want a social network geared more towards interacting with strangers than with friends. For whatever reason, it now looks like Twitter will probably never grow to the same size as Facebook. I still think there’s a lot more room to grow, but the ceiling might be a little lower than I might’ve thought before.
Total Score: 15
An okay score, but I think one that adequately measures how torn I am about Twitter as an investment. So much potential, but so little of it realized yet. I’m still a believer, but I desperately want to see some signs of innovation or improvement out of them soon. I’m also keeping a close eye on how they deal with the careful balance between preventing abuse and harassment without trampling free speech. If they continue to struggle in these two areas, it could be a warning sign.
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:
Amazon (again)
Microsoft (first timer)
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.
It seems like an eternity ago that Amazon (AMZN) was above $2,000 a share and was the second US publicly traded company to hit a $1 trillion market cap. In reality, it was a mere two months ago. Since then, the market has taken a tumble, with Amazon falling particularly hard, losing about a quarter of its value to sit at around $1,600 a share.
During that time, Amazon released its third quarter earnings. There was a lot to like:
Earnings per share was $5.75 versus an estimate of $3.14
Operating income was $3.7 billion versus an estimate of $2.1 billion
Total revenue increased 29% year over year
Amazon Web Services (AWS) sales increased 46% year over year
Their “other” category, which seems to be mainly comprised of their advertising business, increased a whopping 123% year over year
So why did the market react negatively to the news? It largely seemed to be due to weak fourth quarter guidance. Wall street was hoping for $73.79 billion in revenue whereas Amazon guidance was in the range of $66.5 billion to $72.5 billion in revenue: a difference of about 2% for the high end of their range. Call me crazy, but the resulting 10% drop in the stock price seemed like a bit of an overreaction to me. I’m still a huge believer in Amazon over the long term. Some perspective is also in order. Even with the recent huge drop, Amazon is still up around 30% for 2018. I would be seriously considering adding to my position if Amazon weren’t already the largest position in the Freedom Portfolio.
As of the writing of this post, Amazon is a Babylon 5 level holding and is the largest holding in the freedom portfolio. It is also the second best performer to date in the freedom portfolio. I initially purchased my shares of Amazon for $256 a share in April of 2013. Shares are currently trading near $1,600, which is an increase of around 480% and a huge outperformance over the S&P 500 during that time (see the flat-looking blue line below).
Amazon (in green) versus the S&P (in blue)
Amazon is the company that I have the highest conviction in and I believe it has a truly enviable combination of high upside and low risk. Below, I will lay out the reasons I love Amazon as an investment, along with potential areas of concern and conclude with the P.A.U.L. score.
Pros
Leadership
I’m not sure there is a more universally respected businessperson alive than Jeff Bezos. His singular vision has managed to propel Amazon from a tiny online seller of books to a global behemoth with a market cap of $1 trillion (although it has given back a lot of that lately). His obsession over customer satisfaction and his Day 1 philosophy are hugely responsible for the success that Amazon has seen. I can’t imagine somebody I would rather have leading the company that is my largest holding.
E-commerce dominance
When it comes to United States e-commerce sales, Amazon is completely dominant with close to a 50% market share. The next closest competitor doesn’t even have double digits. Even scarier? They’ve been gaining market share. Accounting for 50% of e-commerce sales might make it seem like there’s not much room for growth, but consider that even with that dominance, Amazon still only accounts for 5% of total retail sales in the US. There is still a lot of opportunity for Amazon to grab a larger market share of total retail sales, especially if they start expanding their physical store presence.
AWS – Amazon Web Services
It feels like I’ve been hearing about things “moving to the cloud” for decades. In recent years, it finally seems to be happening, and Amazon is one of the leaders. Amazon Web Services now provides the majority of Amazon’s profit, which allows them to keep their margins small in their e-commerce operations while still investing heavily in new ventures. IBM (IBM) spent $34 billion to acquire Red Hat and one of the major narratives was that it was an attempt to play catch up in cloud computing. That should give you an idea of the opportunity that the cloud represents, and Amazon is one of the leaders.
Prime
While Amazon Prime is beneficial in that it provides consistent recurring revenue for Amazon, the perhaps less obvious benefit is how it helps to lock people into the Amazon ecosystem. There’s plenty of music streaming services, but why choose Apple or Spotify over Amazon Music if you’re already a Prime member? Want a smart home device? Being a Prime member might be a tie-breaker when deciding between competing Google or Apple products.
Streaming Video
While Netflix is the big name in the streaming video space and the clear leader, Amazon is certainly no slouch. While their originals haven’t quite earned the same critical acclaim as Netflix yet, they’re well positioned to continue to ride the wave of cord-cutting and the transition to online video streaming.
eSports
Speaking of online video streaming: One of the big trends that I have been keen on following is eSports, where people watch other people play video games the same way they watch players play football or baseball. A few years ago, Amazon bought Twitch, one of the leading video game streaming sites. While it’s difficult to say how much it might be worth now, there have been some estimates that say it could be worth $20 billion in the very near future. While eSports is still in the early innings in many ways in terms of recognition among the general public, it already has some surprisingly large numbers associated with it in terms of prize money and viewership.
Traditional Sports?
Amazon has bid on the 22 regional sports TV networks that the justice department has forced Disney (DIS) to sell as part of their takeover of Fox assets. With the entire entertainment industry in flux due to cable cutting, video streaming and the entrance of deep-pocketed tech companies, live sports could be something else that gives Amazon an advantage over the traditional media companies going forward. Paired with eSports, this kind of live entertainment could also give Amazon a leg up over Netflix in the future.
Whole Foods
While on the surface it would seem to be an odd pairing, the Whole Foods acquisition opens up a lot of possibilities for Amazon. Americans spend a lot of money on groceries, and if Amazon can develop a better way for people to buy groceries, it gives them another massive opportunity. They’ve already been experimenting with grocery stores without checkout lines. That doesn’t even touch on the opportunity for grocery delivery or a meal prep service like Blue Apron.
Amazon Delivery Services
Speaking of delivery, Amazon has also started working towards their own delivery service. In fact, just today I saw two Amazon Prime delivery vans on the road and a week or so ago I drove by a parking lot lined with dozens of them. It’s not necessarily their biggest opportunity, but it is an important one. Amazon spends billions of dollars on shipping a year. Getting more involved in delivery gives them greater ability to control shipping costs and greater quality control over shipping as well. I’m also hoping it is one step closer to the drone delivery service they teased us with a few years ago.
Connected Home
Everybody probably knows about the Amazon Echo family of products and Alexa, but Amazon hasn’t been content to stop there. Did you know Amazon has an Alexa powered microwave? While some of these ideas might seem ludicrous, and I’m sure many will end up failing, it’s worth reflecting on just how far we’ve come in terms of the connected home. Just a decade ago, this type of voice interaction with digital assistants seemed firmly in the realm of sci-fi, like the computer from Star Trek. Now, it seems a whole lot more feasible. I’m by no means a cutting edge adopter of smart home technologies, but I recently tried out a few smart plugs to go with my Echo Dot at home. Now, instead of having to manually plug in Christmas lights all over the house, I can simply say, “Alexa, turn on Christmas lights”, and all of the lights magically turn on (accompanied by Christmas music if I wish). It may seem like a small thing, but the kid in me still found it pretty magical, and I can’t wait to see what’s next.
Advertising
Can you name the top digital ad sales platforms in the United States? I imagine most of you would guess Google/Alphabet and Facebook. Some of you might even get Microsoft and Verizon. And because I’m asking the question here, I’m sure you’re expecting Amazon to be up there, but would you have expected them to be 3rd? This is a huge opportunity for Amazon because it’s such a high margin business and because they have so much information on customers who are often on their site because they’re ready to buy. That’s invaluable for marketers.
India
China has been largely closed off to Amazon thanks to some strict Chinese government regulations which have favored domestic companies. However, India’s massive population and growing economy presents an opportunity which could be just as big, if not bigger. Amazon seems to recognize this, and has been investing billions of dollars in their operations there. Amazon doesn’t have nearly the dominance in Indian e-commerce as it does in the US, as Amazon and the Walmart backed Flipkart are basically tied for first. However,
CONNNNNNNNNNS!!!!!!
Cons
Bezos stepping down
Just as Bezos’ leadership is a big benefit for Amazon, it’s only fair to also count the possibility of him someday leaving as a potential risk as well. Bezos is only 54 years old, which is relatively young (especially compared to 88 year old Warren Buffett), and he has shown no indications that he is thinking of stepping down anytime soon. However, Bill Gates stepped down as CEO of Microsoft at the age of 45, so being young is no guarantee against leaving a business. Bezos also notably has other interests, such as space flight company Blue Origin, the Washington Post, and now also his Day One Fund. I don’t see Bezos leaving Amazon anytime soon, but at the same time, it wouldn’t completely shock me to see him step down to a smaller role in the next 5 years. Will Amazon continue to be as relentlessly innovative when that happens? Hard to imagine it will.
Government intervention
I’m old enough to remember when people were terrified that Microsoft was an all powerful monopoly that was going to dominate the world for forever because they bundled Internet Explorer with Windows. While that might seem silly now, it didn’t stop the government from suing Microsoft and there was a real concern at the time that the government might force Microsoft to break up. There haven’t been many serious rumors about the government taking action against Amazon, but it’s hard to ignore just how intensely the President seems to dislike the world’s wealthiest man. Amazon has also come under attack from the left as well. Amazon’s percentage of total retail sales is probably small enough to keep them safe for now, but it’s a situation worth keeping a wary eye on. Concern over government action might’ve played a role in why Amazon decided to place one of their new locations (hard to call it a headquarters when there’s three of them) so close to Washington DC.
Foreign competition
Amazon is a big deal in the United States, but it’s had more mixed success overseas. As mentioned above, Amazon is in a pitched battle with Wal-Mart (WMT) owned Flipkart. In Latin America, they’re playing catch-up to fellow Freedom Portfolio-er Mercado Libre (MELI). In China, Amazon has virtually no presence at all. Furthermore, there are some pretty big Chinese companies like Alibaba (BABA) and JD.com (JD) which could conceivably compete with Amazon quite effectively outside of their own home markets. Ultimately, the biggest threat to Amazon might not come from domestic competitors, but foreign ones.
P.A.U.L. Score
Protected: 4
As mentioned above, Amazon has a pretty unassailable lead in the e-commerce space which is continuing to grow. Their growth into other areas like video streaming, tablets, and Alexa-enabled devices just continues to grow their ecosystem that people get more and more attached to. It’s difficult to see how anybody disrupts them in those areas anytime soon.
At the same time, Amazon isn’t invincible. Microsoft has made big gains in the cloud computing space and Amazon hasn’t been nearly as dominant overseas. Therefore they get a good, but not perfect score.
Alternatives: 5
You may recall in my explanation of the P.A.U.L. System that I used Amazon as the textbook example of a company that has not only a proven track record of trying to new things, but also a lot of optionality going forward as well. Amazon does so many things, but there’s still so much more it could do. They’re just starting to dip their toe into physical stores or fully automated grocery stores. Maybe in the future they get into meal kits or food delivery. They’ve started working on their own delivery service. Could drone delivery be in the future? Amazon has gotten into movies and music and TV shows, along with streaming eSports, so why not get into video games? The possibilities almost seem endless.
Understandable: 4
Despite being involved in so many different businesses, I find Amazon to be relatively easy to understand because they all largely work on the same basic model of finding ways to make things easier/cheaper/better for the customer and making money that way.
Long Runway: 5
As mentioned above, while Amazon dominates the US e-commerce market, they’re still a small player in terms of total retail sales. As people get more comfortable with ordering stuff online and as Amazon gets more and more efficient with reducing the time from order to doorstep, I have to imagine their market share for total retail sales will rise. The Whole Foods acquisition and expansion of physical stores should only accelerate things.
What’s more impressive than the long runway ahead of them for total retail sales in the US, though, is the sheer number of other runways they have in front of them in other areas. Amazon’s eSports and cloud computing and streaming video offerings should only continue to expand and the opportunities in India and the connected home seem like they are still in their infancy. I can’t think of any other company that has so much opportunity in front of them in so many different areas than Amazon has.
Total Score: 18
An incredible score, considering the max is 20. Truly a score befitting my only Babylon 5 level holding. Amazon has certainly taken it on the chin recently, along with all of the FAANG stocks, but I’m still a big believer. If it wasn’t already my largest holding, I would certainly be thinking about adding to it here. It’s hard for me to imagine a world where, 5 years from now, Amazon isn’t a dominant player in some way.
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.
