NFLX – Page 2 – Paul Vs The Market

Selling Spotify; Snowflake too expensive

September 21, 2020 paul.essen Comments 1 comment

The much-anticipated Snowflake (SNOW) IPO (initial public offering) was this past week, and despite having been burned a bit recently by jumping into an IPO too soon (hello, Jumia!), I was pretty set on at least dipping my toe in for Snowflake since I was so excited for it.

Then, over the course of around 24 hours, the price per share basically tripled.

Needless to say, I’m definitely holding off on buying any shares for now. I’m still going to keep Snowflake on my radar, particularly a few months from now when the lock-up period expires. If we get a pretty significant pullback (and I think it would have to be close to a 50% pullback at this point), then I might take the plunge.

In anticipation for possibly buying some shares of Snowflake, I had sold my shares of Spotify (SPOT). I had bought because I was intrigued by the moves they were making in the podcast space by signing such huge draws like The Ringer and Joe Rogan. I thought having those programs could be a key differentiator that would let them stand apart from Amazon Prime Music or Apple Music or other competitors. I even had dreams of them possibly becoming the Netflix of podcasts.

None of that seems to have happened yet. In fact, it doesn’t seem like Spotify has much of a plan at all when it comes to podcasts yet. I still have some minor concerns that Spotify has the necessary visionary leadership to transform itself into something greater. It doesn’t help that right after they acquired Joe Rogan’s material (a figure they had to have known was mildly controversial) it was discovered that some of his past episodes were no longer available. If they’re planning on censoring a figure like Rogan, that would seem to immediately lessen his appeal.

Since I wasn’t able to get in on Snowflake at a reasonable price, I used some of the proceeds from the sale of Spotify to add to my Nano-X (NNOX) position after it took a tumble in the wake of a short report by Citron Research (check it out here). I always love to hear intelligent bear cases for the companies I hold, and I tried my best not to completely dismiss Citron’s concerns without giving them their due, but it was a little hard given their history with companies in my portfolio. The most egregious is probably back in October of 2017 when Citron had released a short report on Shopify (SHOP) with a price target of $60 (check it out here). Not only did Shopify never even come close to hitting $60, but it is now at ~$900 (or 15X larger than Citron’s price target). So while I always try my best to take any criticism seriously, I am not at all worried about the short report by Citron and was instead happy to get some more shares of Nano-X at a lower price. The rest I will keep in reserve (for now) to deploy a little later.

Netflix 2020 Q2 Earnings

July 22, 2020 paul.essen Comments 0 Comment

Netflix reported Q2 earnings last week that apparently disappointed Wall Street, as the stock dropped around 8% in the aftermath. Here are some of the high level takeaways:

Revenue growth of 25% year over year
Subscriber growth of 27% year over year
10 million net subscriber addition for Q2, but only 2.5 million net additions forecasted for Q3
Ted Sarandos promoted to co-CEO

That last bullet point makes me ever-so-slightly uneasy. Co-CEO arrangements seem incredibly hard to manage and despite Reed Hastings’ comments, this feels like the first step towards him eventually stepping down into a different role. It’s not a huge deal, but something has my eyebrow raised and which I will be keeping an eye on in the future.

Subscriber growth for Q2 was pretty impressive (10 million additions), but it sounds like investors were disappointed by the conservative guidance for Q3 (2.5 million additions, a significant slowdown). The low forecast doesn’t bother me much because of just how many subscribers have probably gotten pulled forward during the past two quarters. If you haven’t signed up for Netflix during a global pandemic that involves significant quarantining and social distancing measures, you probably either never will or just can’t right now due to personal finances or insufficient internet access.

Some people were interested in getting some insight into Netflix’s potential profitability this quarter considering they were expected to spend less on content costs due to COVID shutting down a lot of production. I’m less interested in that because I still see Netflix as a company in its growth phase. I am more focused on them growing that subscriber number and won’t be worried about that those earnings for years down the line.

Netflix breaks their numbers down by the following regions (year over year subscriber growth in parenthesis):

UCAN: U.S. and Canada (10%)
EMEA: Europe, Middle East, and Africa (39%)
LATAM: Latin America (29%)
APAC: Asia-Pacific (74%)

As you can see, growth in the United States and Canada is the slowest of the four regions. Netflix currently has around 1 paid subscription for every 6 people in the United States and Canada. If we assume that UCAN represents a mature and fully saturated market, then it looks like Netflix still has a lot of room to run in the other regions. Here are my estimates on their current ratio of subscriptions to total population:

UCAN: 1:6
EMEA: 1:33 (1:12 if you exclude Africa)
LATAM: 1:14
APAC: 1:150 (excluding China)

Obviously this is an overly simplistic way of looking at things considering many parts of the world don’t have the infrastructure or disposable income for a video streaming service like Netflix. Still, there’s a lot of room for growth for Netflix globally and I’m happy to see those growth rates remain high in those under-penetrated areas.

One last note: The average revenue per user (ARPU) is lower outside the UCAN region due to a number of factors, including some cheaper mobile only plans in some countries. It’ll be interesting to see if Netflix has the pricing power to increase that over time.

Overall, I remain fully confident in Netflix’s ability to beat the market over the next 3+ years. The short term might be a bit choppy with some subscribers pulled forward because of the pandemic, but Netflix is one of very few entertainment companies that can legitimately claim to have a global brand, and I expect them to only strengthen that brand going forward.

The Freedom Portfolio – July 2020

June 30, 2020 paul.essen Comments 4 comments

Wow.

2020 has been such a crummy year in so many ways, but when it comes to investing returns, I don’t know if I’ll ever see a quarter quite like the second quarter of this year.

This might be the best investing quarter that I will ever have.

The Freedom Portfolio was up 73% this past quarter alone. That is a ridiculous return for a whole year, let alone a single quarter. Granted, some of that is coming off of the Coronavirus-induced lows, but that’s just a tiny part of it. The Freedom Portfolio is still up 64% year-to-date and is now up 81% since inception, for a nearly 40% annual return. During that same time period, the S&P 500 is up only 10%, giving the Freedom Portfolio an outperformance of 71 percentage points.

For those who prefer visuals, here’s what it looks like:

Two years is still a pretty short period of time in the grand scheme of things, and I’m sure that gap will narrow at some point in the coming years, but at the same time I do believe evidence is starting to emerge that it is possible to beat the market… and that I’m doing it.

Here is the performance broken down by position over the past quarter:

Ticker	Percent Change
RDFN	169%
LVGO	163%
SE	144%
SHOP	128%
TTD	116%
TSLA	106%
SQ	100%
MELI	99%
JMIA	86%
YEXT	61%
JD	48%
FSLY	43%
SWAV	41%
AMZN	40%
BZUN	38%
ROKU	33%
AAXN	31%
TDOC	22%
NFLX	21%
SPOT	19%
DIS	15%
CRWD	1%
NVCR	-13%

Notable Performers

Best Performers

Not to brag (too much), but this list was nearly impossible to trim down. Two companies had stocks that appreciated over 150% this quarter alone. Another six appreciated 100% or more. Amazon (AMZN) had an incredible quarter that saw it gain 40% and yet it was (relatively speaking) a disappointment compared to the rest of the Freedom Portfolio and in fact dropped from a Babylon 5 level position to an Enterprise level position.

Anyway, to avoid going on for too long, I’m going to just stick to a top 3:

Livongo Health (LVGO): I first bought shares in this company last quarter and I am really glad I did. Livongo seems to be riding the telemedicine wave in the wake of Coronavirus, but I honestly thought this was an impressive company even before the pandemic. Their growth rates were incredible before and their model of health nudges and delivering medical supplies directly to the consumer should only benefit from a new normal that sees people visiting doctors and pharmacies less often. Few companies have gained my trust in terms of future performance more than Livongo over these past few months.

Sea Limited (SE): Although if any company could challenge Livongo’s claim to that title, it would be Sea. I’ve had my eyes opened to the potential of the Southeast Asia region and I was already a big fan of eCommerce and digital payment companies in developing regions (see, Mercado Libre (MELI)). Sea is following a slightly different path with their gaming business, and the competitive landscape is a little different with Alibaba looming, but I’m still really excited to see if Sea can become the dominant player in eCommerce and digital payments in Southeast Asia over the coming decade.

Redfin (RDFN): One of my favorite investments, and finally the performance is catching up to my conviction in the company. Early in 2020, Redfin looked to be on track for having a great year, before the stock got whacked hard by Coronavirus. I was confident that the short term challenges would be a long term gain for Redfin, though, as they had an advantage with virtual tours and low mortgage rates could heat up the housing market. It looks like I was right, and I’m thrilled to see people are finally realizing what a great investment Redfin can be.

Worst Performers

Again, not to brag too much, but it’s hard to find any contenders here. Only four positions under-performed the S&P, and two of those (Crowdstrike (CRWD) and Spotify (SPOT)) were only owned for a few weeks so it’s an unfair comparison. Thus, the only companies it makes sense to write about are…

Disney (DIS): It’s not at all a surprise that Disney hasn’t been the best performer this past quarter considering how almost all of their business lines have taken a major hit from Coronavirus induced lockdowns. Amusement Parks and Cruises are shut down. Movie theaters are shut down. Live sports are shut down. Short term, things will be messy for Disney, but assuming life ever gets back to some semblance of normality (which I believe it will), then I still like the long terms prospects. Disney+ is still killing it and they still have an amazing library of IP to pull from.

Novocure (NVCR): It makes some sense that Novocure is down a tiny bit this part quarter, as it sounds like Coronavirus is causing some delays in the clinical trials that were hoped to show how their Tumor Treating Fields could be effective with other types of cancers. I’m absolutely not worried at all, and even added to my position, as I see this as purely a short term speed bump and no challenge to the long term thesis.

Changes in the Portfolio

It was an unexpectedly active quarter for the Freedom Portfolio, as I closed out some lower conviction positions and added some new positions as well. Stock prices were also so volatile that there were some instances where I both added to my position AND trimmed some in the same quarter (Sea Limited).

Going forward, I’m hoping to try to write short pieces explaining my trades within a week of me making them, instead of saving them all up for the quarterly recaps. So if you don’t see this section in the next recap, that will be why.

Sells

KushCo (KSHB): It was long past time to sell. Too many things had happened to ruin the bull case and the company had gotten reduced to issuing more stock at depressed prices just to stay solvent. I don’t regret the initial investment because I thought it was worth the risk, but I do regret having held on for so long.

The Rubicon Project (RUBI): You might be asking yourself where this company came from since it wasn’t in the Freedom Portfolio last quarter. Teleria merged with the Rubicon Project and the combined entity took on the latter’s name. That’s not the reason I sold, though. The main catalyst was that the former CEO of Teleria, who had become the COO of the combined entity, ended up leaving the company soon after the merger was completed. That was enough of a red flag for me to exit for now, although I will keep an eye on the company to see how it executes going forward.

iQiyi (IQ): This one hurt for a few reasons. The first reason is that selling my entire iQiyi position effectively breaks up The JIB. The second reason is that just a few weeks after selling my shares, the stock popped big on news that Tencent (TCEHY) was planning on investing in the company, which makes it a lot more interesting. I have no plans to buy back into the company yet, but I will keep an eye on it.

Invitae (NVTA), Guardant Health (GH), CRISPR Therapeutics (CRSP), and Editas Medicine (EDIT): I group all of these together because my reasons for selling them were pretty similar. I was looking to reduce the number of positions that I have, and all of these were lower conviction holdings because they score so low on the “Understanding” level of my P.A.U.L. scoring system. I personally find it difficult to grasp what kind of advantages and moats and optionality these companies possess, and so I felt it was better to re-deploy those funds to companies I had higher conviction in.

I can’t help but note that Invitae made sure to get a parting shot in at me, though. One month after I sold, they announced an acquisition which caused the stock to jump 60% in two days. That hurt, but I consoled myself by remembering that I used the proceeds to buy shares of Sea Limited, which had almost doubled in that same month.

Trimmed the following positions: Teladoc (TDOC), JD.com (JD), Shopify (SHOP), and Sea Limited (SE). I trimmed all of these positions because many of them had appreciated a ton and I wanted to free up some money for some new ideas. Selling shares of Shopify really hurt, though. Why? Because up until then, I hadn’t sold a single share from my original purchase at $44.55 a share despite watching it skyrocket and increase by 1,800% (that’s not a typo). Because of my past experience with Netflix, I had sworn I wouldn’t sell my winners too early again, and I am worried I might be doing that here. Still, Shopify was approaching 20% of my portfolio and I only sold a small percentage of my position (less than 10%), so I resigned myself to trimming a little bit.

Buys

Axon Enterprise (AAXN): I kept hearing good things about the moat that this company has from some investors I really respect on Twitter, so I started digging into it more. This company is basically the old “Taser” company, although the exciting part of their business now appears to be body cameras and the fees they charge police departments to store the video generated by those cameras. I spoke to a friend who is familiar with the product and they gave a fairly glowing review, so I decided to dip my toe in with a small position. We’ll see how it performs in the coming years, especially in the current “defund the police” environment.

Zoom Video Communications (ZM): It sounds bad, but I feel like I was basically begrudgingly pulled into this position. I struggle so much seeing what kind of moat this company can possible have when so many other huge tech giants also offer video conferencing (and have been for years), but I also know a lot of investors I really respect really believe in the company, so I decided to start a small position. It’s already up 70%(!) from where I bought it two months ago, so I guess I have been proven wrong so far.

Spotify (SPOT): I keep darting into and out of a position in Spotify because I really like the moves they are making in acquiring deals with major players in the podcast space, but I also struggle with how they are going to successfully monetize them. I decided to jump back in after hearing about the deal they made with Joe Rogan. I’m going to try really hard to just hang on for at least a year this time to see how this podcast experiment plays out.

Fastly (FSLY) and Crowdstrike (CRWD): Much like some of the companies above, I’ve been hearing a lot of good things about these companies from investors that I have a lot of respect for, so I decided to open some small positions while I do some further research. I’m looking forward to learning more so that my conviction can grow and I can become just as bullish on these companies as they are.

Additions to already existing positions: Disney (DIS), Livongo Health (LVGO), Novocure (NVCR), Redfin (RDFN), Sea Limited (SE), The Trade Desk (TTD), Yext (YEXT), Roku (ROKU).

The Freedom Portfolio – July 2020

Obviously a lot of this is influenced by the incredible performance this quarter, but I’m really excited where the Freedom Portfolio sits right now. A couple of positions (Shopify and Tesla) have seen huge run-ups and will likely see periods of under-performance over the coming quarters and maybe even years, but I really like a lot of the Serenity level holdings I have and am looking forward to them taking off and being the next big growers in my portfolio.

Ticker	Company Name	Allocation
SHOP	Shopify	Babylon 5
MELI	MercadoLibre	Babylon 5
AMZN	Amazon	Enterprise
TSLA	Tesla Motors	Enterprise
TDOC	Teladoc	Serenity
RDFN	Redfin	Serenity
NFLX	Netflix	Serenity
SE	Sea Limited	Serenity
LVGO	Livongo Health	Serenity
DIS	Walt Disney	Serenity
TTD	The Trade Desk	Serenity
SQ	Square	Serenity
NVCR	NovoCure	Serenity
JD	JD.com	Serenity
ROKU	Roku	Serenity
BZUN	Baozun	Serenity
YEXT	Yext	M. Falcon
ZM	Zoom Video	M. Falcon
AAXN	Axon Enterprises	M. Falcon
SWAV	ShockWave Medical	M. Falcon
FSLY	Fastly	M. Falcon
SPOT	Spotify	M. Falcon
CRWD	CrowdStrike	M. Falcon
JMIA	Jumia Technologies	M. Falcon

Thanks, as always, for reading. I hope you’ve been having as much fun following along with me as I’ve had doing this so far.

The Freedom Portfolio – April 2020

March 31, 2020 paul.essen Comments 2 comments

I don’t know how to start this quarterly update.

Just a month ago, I was watching the Freedom Portfolio have a scorching start to the new decade thanks to the incredible run of companies like Tesla (TSLA). I was even wondering if I might be able to talk about how the portfolio had managed to double over a mere 15 months. That kind of thinking seems patently ridiculous now.

For those unaware, this past month has seen the fastest market drop in history as COVID-19 (aka, Coronavirus) has brought the US economy to a screeching halt. The volatility has been extreme, and it has gotten to the point where I don’t even blink when multiple positions in the Freedom Portfolio are up (or down) 20%+ in a day. Redfin (RDFN) was recently up 20% and 30% in back-to-back days and is still down something close to 50% in the past month alone. So I’ve very quickly had to shift my mindset from one of, “Isn’t the market an amazing way to generate wealth?” to “Don’t panic! This kind of thing happens sometimes”.

After some consideration, I decided that I wanted to get one main point across with this quarterly update: That I am completely and utterly unfazed by what the stock market has done this quarter.

I laid out most of my thoughts in my previous article: Don’t Panic (and also: COVID-19 Update: What a month), but the short version is this: I was investing during the Great Financial Crisis. I know that markets often go down and the drop is often much faster than when it goes up. Volatility like this is the price paid for superior long term returns. I don’t know where the market will go over the coming months or even year, but I am very confident that over the next 5+ years (which is my investing time frame), that the market will be up from where it is now. Throughout this entire market drop, I only sold one position and immediately re-allocated those funds to another (new) position. I stayed invested in stocks the entire time and even increased my 401(k) contribution and shifted some of my emergency fund money from CDs to the market. I am not calling a bottom, but I am absolutely convinced that stocks are on sale right now for anybody who has a 5+ year time horizon like I do.

Before I get to the results for this past quarter, I want to make a very important note. The market has been extremely volatile lately, and it hasn’t been uncommon for the market to move more in a single day than it has in some previous months or years. I saw one stat that said, “In 2017 the S&P had daily moves of more than 1% 8 times. In the last 27 trading days it’s happened 21 times.”

All this is to say that the numbers contained below are very tentative and could easily be out of date by the time you read this. I typically like to write these quarterly updates a week or two in advance, and most of these numbers will be coming from March 26th/27th, but who knows how things might change by the time April 1st comes along. If things change too much, I suppose I can always write this article off as an April Fool’s Day joke.

So basically, treat the numbers below as very tentative.

With that being said, it looks like the Freedom Portfolio will end up down around 6% for the first quarter of 2020. That’s not good, but still far better than the S&P 500, which is down roughly 21%. Since inception, the Freedom Portfolio is now convincingly beating the S&P with a positive return of 4% versus a negative return of 11% for the S&P. That’s an outperformance of 15 percentage points over a year and a half.

In terms of beating the market, that’s a pretty great quarter for the Freedom Portfolio. Obviously, it’s a bit of a mixed bag because my portfolio has lost tens of thousands of dollars over a mere 30 days, which is almost certainly the biggest loss of wealth I’ve ever experienced in my life in that short of an amount of time, but I am pleased that my portfolio has held up better than the market overall during these trying times and has opened up a convincing lead. Here’s hoping the Freedom Portfolio can expand that lead as the market rebounds.

Here is the performance broken down by position over the past quarter:

Ticker	Percent Change
TDOC	80.7%
TSLA	24.0%
JD	17.3%
SE	13.2%
SHOP	13.1%
NFLX	9.9%
AMZN	4.2%
MDB	0.5%
NVTA	0.0%
IQ	-7.0%
LVGO	-7.0%
SQ	-11.4%
GH	-11.4%
BZUN	-12.1%
RDFN	-14.7%
MELI	-16.6%
NVCR	-20.2%
TTD	-20.9%
SWAV	-23.0%
YEXT	-23.2%
DIS	-27.6%
CRSP	-28.4%
TLRA	-29.2%
EDIT	-30.0%
ROKU	-32.2%
KSHB	-34.2%
JMIA	-51.6%

Notable Performers

Best Performers

Teladoc (TDOC): It should be no secret why Teladoc had an amazing quarter. I don’t want to make light of a situation which is killing people and obviously Teladoc management would never want to phrase it this way, but you couldn’t have written up a better script for Teladoc than a highly contagious pandemic where the government is encouraging people to practice social distancing. I had invested in Teladoc because I thought telemedicine would be big in the future and COVID-19 seems to have only accelerated that future to now.

Tesla (TSLA): Tesla shows up as a big winner, but it almost feels like a loser to me. Why? Because just around a month and a half ago, Tesla was above $900 a share and absolutely crushing it with early Model Y deliveries and promises of shoring up their balance sheet with secondary offerings and actual profit. Now, the stock is barely above $500 a share and factories are (begrudgingly) being shut down. It has still been an amazing run for the company over the past six months, though, and the future still looks bright.

JD.com (JD): It’s probably a surprise to most people, but China’s stock market has been one of the best performing (if not the best performing) market in the world in 2020. JD.com was basically born during the SARS epidemic when its founder decided to take advantage of the opportunity to sell things online and it sounds like it has been able to come through this COVID-19 crisis stronger as well.

Worst Performers

Jumia Technologies (JMIA): Another quarter, another appearance on the “worst performers” list. I’ve run out of things to say about Jumia. It has flat out been an awful investment so far. I’m probably holding on for now, especially since it has shrunk to such a small position, but I’m definitely not looking to add any more shares.

Kushco Holdings (KSHB): Everything from above can be said for Kushco as well. There’s a possibility of a rebound if/when vaping bounces back and/or marijuana becomes legalized at the federal level in the United States, but those hopes aren’t big enough to buy more shares. Like with Jumia, I am tempted to close out this position.

Roku (ROKU): I’m not sure I understand why Roku has sold off as much as it has this quarter. My best guess is that it has less to do with the company itself and more to do with the sector it is in: connected TV and advertising focused companies. Not only was Roku down big this quarter, but so were companies like The Trade Desk (TTD) and Teleria (TLRA). Perhaps the market is concerned that there will be less money spent on advertising during a recession? Regardless, I’m unconcerned about this drop so far.

Disney (DIS): While it’s a mystery to me why Roku is down big, it’s no mystery at all why Disney has been crushed in the wake of COVID-19. Their amusement parks have been shut down to help prevent the spread of the disease and movie theaters have also been shut down, meaning they can’t release movies like Mulan and Black Widow. Even their TV properties are likely struggling with ESPN having so little professional sports to cover. Maybe they’re seeing a slight bump in Disney+ adoption due to social distancing, but it’s not nearly enough to offset the damage being done elsewhere. No wonder Bob Iger jumped ship early. Disney is going to have some tough earnings reports coming up (especially compared to the incredible year they had last year), and the timing is rough since they just spent a ton of money acquiring Fox and ownership of Hulu, but I still believe in Disney over the long term. I’m holding tight.

Changes in the Portfolio

It’s worth noting that the majority of the moves below were made before the market tanked. Since February 21st, the only moves I have made are the MondoDB sell and the Livongo Health buy. All of the other changes were made earlier in the year and were mostly focused on trying to concentrate my portfolio down into fewer positions (something I alluded to wanting to do in my previous quarterly recap).

Sells

Abiomed (ABMD): I was beginning to lose hope in the promised turnaround and was beginning to wonder if the damage had already been done and would ever fully get reversed. Once the seed of doubt is planted that a medical device might be unsafe, how many studies is it going to take to remove that doubt? Does Abiomed have a second act to rely on? I had lost my conviction in the company, and decided that meant it was time to sell.

StoneCo (STNE): I had bought StoneCo because I loved the idea of buying the “Square of Latin America” and also liked seeing that Berkshire Hathaway had a position in the company. However, I kept struggling with the fact that I hardly knew anything about the company outside of earnings reports. Also, one of the main reasons I love Square is their Cash App, which is something that StoneCo doesn’t seem to have (but possible competitor and other Freedom Portfolio holding Mercado Libre (MELI) does have). This was a lower conviction holding, and I felt like the money was better invested in another company I had a higher conviction in.

MongoDB (MDB): There’s a saying that I like that says, “you can’t borrow conviction”. MongoDB was increasingly feeling like a stock where I was trying to borrow conviction from others. A lot of smart investors I know are high on MongoDB, which is why I had dipped my toe in with a small position. However, I always struggled to understand what gave it an advantage over similar offerings from Amazon (AMZN). It has eternally languished as one of my lower conviction positions and this year I finally decided to close it out to put the funds to better use in higher conviction picks.

Alibaba (BABA): One of my initial reasons for investing in Alibaba was because I liked a lot of the opportunities they seemed to have expanding their eCommerce operations outside of China (specifically Southeast Asia). With my recent purchase of Sea Limited (SE), that itch has been scratched, and there was one less reason to invest in Alibaba. I liked the Chinese exposure that I was getting from the JIB stocks, so it felt like the time to put those funds to better use somewhere else.

Buys

Livongo Health (LVGO): This is a buy from last quarter’s watchlist. I was really interested in their business model, which uses AI to provide “nudges” to people dealing with chronic diseases like diabetes and high blood pressure. It’s a subscription model that appears to be growing nicely and has some good data to back up how it helps improve health outcomes and also save money. They also have held up surprisingly well over the past month for some reason, which is a nice bonus.

Additions to already existing positions: Roku (ROKU), Teleria (TLRA), Yext (YEXT).

Watchlist

I’ve been pretty inactive in terms of buying and/or selling positions in the Freedom Portfolio during this COVID-19 induced market drop because I don’t like to make rash decisions. However, seeing a lot of my positions losing 30%, 40%, or even 50% of their value has really illuminated which companies I really believe in (and want to buy more of) and which have me worried (and make me want to sell). There’s a decent chance I purge some of those companies in the coming quarter in order to load up on some of those companies that I believe i more. In addition to possibly adding to positions I already have, here is what is on my watchlist to buy or sell in the coming quarter:

Luckin Coffee (LK) – China has a lot of people, and they’re not nearly as obsessed with coffee as Americans are… yet. I’m intrigued by this China-based, mobile app / kiosk focused coffee company. The stock is down about 50% from its recent highs, and I’m tempted to dip my toe in now. If it drops more (presumably after some pretty bad earnings reports due to China’s lockdown) then I’ll be even more tempted.

Spotify (SPOT) – Spotify used to be in the Freedom Portfolio, but I sold because I lost conviction in it. I never stopped being intrigued by the company, though, and continue to be impressed by the moves they are making to become the Netflix of audio. Purchasing The Ringer (and their stable of popular podcasts) could be huge and could give them something that differentiates them from things like Amazon Music and Apple Music. I’ll be watching with interest to see what their next moves are.

KushCo and Jumia – See above. These two companies have been awful performers over many quarters, and I’m not sure I can see daylight at the end of the tunnel anymore. I have no plans to sell right now, but the thought has crossed my mind a few times.

Crispr (CRSP) and Editas (EDIT) – It’s really hard for me to have that strong of conviction when it comes to areas I know so little about. Everybody tells me that CRISPR is going to be huge, and I believe them, but I don’t have a strong sense of how to judge which companies are best positioned to take advantage or even how to measure how progress is going. Since I am trying to concentrate my portfolio on my higher conviction picks, then, these two have to be under consideration for being on the chopping block.

Guardant Health (GH) – Similar to the above, I’m far from a healthcare expert, and so it’s hard for me to judge just how good of a moat Guardant Health has and how susceptible they are to disruption. Another company I might consider selling to raise funds to buy something else.

The Freedom Portfolio – April 2020

Due to the incredible volatility in the market the past month or so, the Freedom Portfolio has seen more change than usual. Former Babylon 5 sized position Mercado Libre has shrunk back to an Enterprise level position. Former Serenity sized positions Teladoc, Tesla, and Netflix have surged into Enterprise level positions, and there has been a lot of switching up between Serenity and Millenium Falcon sized positions as well. Will things return to normal once everything related to COVID-19 settles down? Or will Tesla and Teladoc be permanent fixtures among the Enterprise and above levels? I guess we’ll find out.

Ticker	Company Name	Allocation
SHOP	Shopify	Babylon 5
AMZN	Amazon	Babylon 5
MELI	MercadoLibre	Enterprise
TDOC	Teladoc	Enterprise
TSLA	Tesla Motors	Enterprise
NFLX	Netflix	Enterprise
SQ	Square	Serenity
DIS	Walt Disney	Serenity
NVCR	NovoCure	Serenity
JD	JD.com	Serenity
RDFN	Redfin	Serenity
BABA	Alibaba	Serenity
IQ	iQiyi	Serenity
CRSP	CRISPR Therapeutics	Serenity
BZUN	Baozun	Serenity
TTD	The Trade Desk	Serenity
ROKU	Roku	Serenity
TLRA	Telaria	Serenity
YEXT	Yext	M. Falcon
NVTA	Invitae	M. Falcon
SE	Sea Limited	M. Falcon
EDIT	Editas Medicine	M. Falcon
SWAV	ShockWave Medical	M. Falcon
GH	Guardant Health	M. Falcon
JMIA	Jumia Technologies	M. Falcon
KSHB	KushCo	M. Falcon

Thanks, as always, for reading. I hope you all manage to stay safe during these extraordinary times. And remember: Wash your hands.

5 CEOs I admire

February 20, 2020 paul.essen Comments 0 Comment

President’s Day was this past Monday and so this seemed like as good a time as any to make a brief list of some of the CEOs of companies in the Freedom Portfolio that I most admire. Why? I’ve long thought that we as a society spend too much time and energy admiring (or possibly hating) the President and oftentimes give them far too much credit for things like the economy and the stock market and even larger things like our standard of living. On the flip side, I think we don’t spend nearly enough time appreciating the entrepreneurs and business leaders who take risks and are constantly driving innovation forward.

Who has done more to improve the life of the average American? President Obama? Or Steve Jobs, without whom you might not have a tiny portable device that serves as a camera, GPS, handheld gaming system, phone, and also provides access to the entirety of humanity’s knowledge at your fingertips? President Bush? Or Jeff Bezos, who helped drive down prices, changed 2 day (and now 1 day) shipping from a luxury to something expected, and turned voice assistants from something out of Star Trek into reality? Who will do more to save the planet? President Trump? Or Elon Musk?

An argument can be made for both sides, but I personally skew a little more towards the CEOs. With that being said, here are five CEOs from companies in the Freedom Portfolio that stand out to me (alphabetical by last name):

The Five

Jeff Bezos: Founder and CEO of Amazon (AMZN) – Notwithstanding some questionable moves in his personal life, it’s hard to find a more impressive entrepreneur and innovator alive today than Jeff Bezos. He turned a tiny online seller of books into a $1 trillion company that now sells almost anything (and allows others to sell almost anything) and can deliver it all in just a few days. Oh, and they’re also the leader in cloud computing and the third largest online digital ad platform in the US. I love his “Day 1” philosophy and how he seems to be determined to never stop trying new things no matter how large Amazon gets. Truly an incredible leader.

Reed Hastings: Founder and CEO of Netflix (NFLX) – It takes a lot of guts and foresight to start a business as crazy sounding as sending DVDs through the mail and allowing people to keep them as long as they want (or on the flip side, churn through as many as they want). If that is where the story stopped, it would be impressive enough, but not only did Reed Hastings start a company which has revolutionized how we consume media, but he has also reinvented it multiple times in the process.

The first reinvention was having the guts to pivot the DVD-by-mail business into online streaming before it was obvious that it was the future. The second was having the foresight to start investing in original content so that the company wasn’t so reliant on content producers. The third is having the grand vision to not just be content with the US market, but to try to become the leader internationally as well.

Bonus points for being humble enough to be able to admit when you were wrong and to reverse course (*cough*qwikster*cough*).

Bob Iger: CEO of Disney (DIS) – I wish I had a clever pun to make involving Iger and King Midas, but it really feels like everything he touches turns to gold. Just look at the acquisitions made under his watch:

Pixar
Marvel
LucasFilm
21st Century Fox

That’s an incredible amount of content that has achieved huge box office success, critical acclaim, or oftentimes both. While the jury is still out on the last one, I’m very excited about the future potential of Hotstar and there’s little doubt that acquisition helped strengthen the appeal of Disney+ and Hulu. And that brings us to what might best define Iger’s legacy at Disney: the bold entry into streaming with Disney+, Hulu, and ESPN+. Like I mentioned with Reed Hastings previously: it takes a lot of guts to move into streaming. While the creation of Disney+ didn’t require as much foresight since the path had already been charted with Netflix, it probably did take even more guts to disrupt an even more established company and move away from what had been a pretty lucrative arrangement. I think it’s clearly the right move, although only time will tell.

Glenn Kelman: CEO of Redfin (RDFN) – Earnings calls can sometimes be dull affairs, so it’s refreshing to hear a CEO drop phrases such as “It’s on like Donkey Kong”. Those are the kinds of small gems you often get from the self-described “goofy” CEO of Redfin. From the few interviews I’ve read, he also seems like a genuinely humble, honest, and down-to-earth guy. In a world where many CEOs are often described as abrasive or hard to work with or even jerks, that’s a nice change of pace.

But all that would be unimportant if he couldn’t also walk the walk. Luckily, I’ve also been impressed by how visionary and focused on the customer Glenn Kelman has been as CEO of Redfin. They’ve gone from simply a low fee brokerage paired with a well designed website to attempting to fundamentally disrupt the real estate market with things like Redfin Now, Redfin Direct, Redfin Mortgage, Redfin Concierge Service, and much more. There are so many different ways for Redfin to win and grow moving forward and I’m excited to see how it all plays out.

Tobias “Tobi” Lütke: Founder and CEO of Shopify (SHOP) – Obviously, the fact that his company has grown 10 fold while I have been a shareholder endears me to Tobi Lütke more than a little bit. I love his vision as CEO of Shopify of “arming the rebels” against the Empire that is Amazon (despite also being an Amazon shareholder) and also love the bold initiative of creating a fulfillment center network to compete with Amazon.

The admiration goes beyond that, though. Lütke is accessible in a way that many other CEOs of his stature aren’t. He is active on Twitter and has on more than on occasion even live-streamed himself playing Starcraft on Twitch. He even offered an internship to a professional Starcraft player based on their gaming achievements alone. As somebody who still plays Starcraft despite its waning popularity, I can’t help but love that. But even beyond that, he seems to have a pretty healthy idea of work/life balance and that 80 hour work weeks aren’t necessary for success. In a world where it seems like we sometimes over-deify those who put in long hours, it’s nice to see an example of the other side.

Honorable Mention

Elon Musk: CEO of Tesla (TSLA) – Musk is obviously an incredible entrepreneur and innovator and as Tesla shareholder I am extreme grateful for what he has managed to do. However, even I have to admit that his behavior sometimes leaves a lot to desire and flirts with the lines of legality and ethics. That’s why I couldn’t quite put him on this list.

Jack Dorsey: Found and CEO of Square (SQ) and Twitter (TWTR) – Look at that title. Not only did Dorsey help start two incredibly successful companies in Twitter and Square, but he’s currently serving as CEO of both. That’s very impressive. So why didn’t he make the list? For starters, he has a bunch of odd behaviors that I have trouble relating to, like only eating one meal a day (or fasting entirely on weekends) and taking ice baths. Some have even taken to calling them disorders. But the larger issue is that I still have a little doubt regarding his abilities as CEO. Twitter still lags badly behind Facebook in most metrics despite being a highly relevant platform and Square has seemingly floundered a bit since high regarded CFO Sarah Friar left. Maybe both companies would be better off without a part-time CEO?

Netflix, Tesla, and Amazon crush earnings season

February 3, 2020 paul.essen Comments 0 Comment

Over the past two weeks, three companies that make up a combined 23% of the freedom portfolio reported earnings. Here are some quick hits for each:

Netflix (NFLX)

Netflix reported earnings on January 21st and as of the time of this writing is up 5% since then. It has been the laggard of this group.

The Good: One of the most closely watched numbers when it comes to Netflix’s earnings report is their subscriber growth. In this area, they didn’t disappoint, adding 8.76 million paid subscribers, easily beating their forecast of 7.6 million. They also beat on earnings estimates. And for all the hype around the new Disney+ original The Mandalorian, Netflix was able to present some impressive numbers showing how popular their new show The Witcher was as well. Perhaps most importantly? It looks like 2019 might have represented peak cash burn for Netflix, as they are forecasting a smaller loss in 2020. The path to profitability is beginning to come into focus.

The Bad: While overall subscriber growth was great, domestic subscriber growth actually fell short of expectations. We now have a few data points indicating that, whether due to the market being saturated or the increasing presence of competition, US subscriber growth has come to a grinding halt. International subscribers more than made up for it, but the margins on international subscribers are worse (due in small part to lower cost mobile only plans in India) and there’s an open question on how much pricing power Netflix has overseas (as well as how much they have in the US now that there is increased competition).

The Future: There are two big questions facing Netflix going forward. First, can they take their foot off the gas in terms of burning through cash to produce new content while still putting up strong growth in subscribers? Secondly, how will the introduction of lower-cost competition both domestically and abroad (Disney+ is expected to launch in many additional markets in 2020) affect churn and depress Netflix’s pricing power? I think Netflix is in a pretty strong position with a huge slate of original content and a first mover advantage worldwide, but only time will tell.

Tesla (TSLA)

Tesla reported earnings on January 29th and the stock immediately popped more than 10% the next trading day. It has continued to climb and with today’s big rise is now around 30% higher than it was a few days ago.

The Good: The company beat expectations on both revenue and earnings per share while also reporting some strong numbers in terms of deliveries. To top it all off, they company also moved forward the expected launch date for the Model Y. It was a little surprising to see such a big jump after the stock had already more than tripled over the past 8 months, but I guess that’s what happens when a stock is so heavily shorted and the company starts to release positive information.

The Bad: But it’s not all sunshine and rainbows. While the company was profitable, they still have a massive debt load which they will have to deal with at some point. The Chinese Gigafactory is online but now they will need to spend big to get the German Gigafactory assembled. Model 3 sales are doing great, but they appear to be cannibalizing the more expensive Model S and Model X sales, which is pressuring margins.

The Future: Tesla seems to have answered the question of if they can scale up production while also being profitable. The next big question for me is if demand keeps up over the coming quarters and years. Has Tesla unlocked some hidden desire for electric vehicles among the population? Or have they mostly been dealing with pent up demand from their passionate fan base? The other big question is just how close Tesla is to full self driving capability. Also, the Model 3 seems to have been a big hit. Can the Model Y and Cybertruck and Tesla Semi continue that streak? Will Tesla take advantage of their high stock price and have a stock offering to raise money to pay down debt? One thing is for sure, Tesla will certainly continue to be an exciting stock for the next few years.

Amazon (AMZN)

Amazon reported earnings after market close on January 30th. The stock initially popped over 10% after hours before getting dragged down by the overall market concerns over coronavirus. As of the time of this writing, it is up around 8%. That may not sound impressive, but it’s an incredible move for such a large company and represents tends of billions of dollars of added market cap (even more than Tesla added).

The Good: Everything? It was a blowout earnings report by almost every measure. Revenue was up 21% year-over-year to $87.4 billion, beating wall street estimates of $86 billion. Operating income was $3.88B compared to the $2.7B consensus. Amazon also reported an earnings per share (EPS) of $6.47, which crushed the consensus estimate of $3.98. Amazon Web Services (AWS) revenue was up 34% and “other” revenue (which is largely made up of their ad business) was up 41%.

Lastly, they reported that they now had over 150 million prime users, which is a nice base of recurring subscription revenue to rely on.

The Bad: As alluded to before, there wasn’t much to criticize in the earnings report. Amazon continues to spend a lot of money to invest in their cloud infrastructure, one day shipping, and international expansion, but given their history these seem like good bets to pay off over the long term.

The Future: It’s going to be interesting to continue to watch the competition in the cloud computing space. Can AWS maintain its lead over Azure and others? Will Amazon’s advertising business continue its incredible growth, or will concerns over harming the customer experience and hurting relationships with clients cause them to take their foot off the gas? The biggest thing I will be keeping my eye on, though, is how their efforts to expand into India are going. It’s a potentially massive opportunity that Amazon has spent a lot of money on but they appear to be getting some push back. If they can become a major player in India, then the next decade could be incredibly positive for Amazon.

The Freedom Portfolio – January 2020

January 15, 2020 paul.essen Comments 6 comments

2019 is in the books! It’s time for another quarterly Freedom Portfolio update. Sorry this update is a little late. Over the past few weeks I’ve been juggling the typical holiday hecticness, setting up the next season of Fantasy Investing (new post coming soon!), trying to stick to a New Year’s Resolution to workout more, and dealing with 3 separate cases of flu in the family.

The fourth quarter was a pretty great one for the Freedom Portfolio, which was up a strong 16% versus roughly 9% for the S&P 500. Since inception, the Freedom Portfolio is now up 11.2% versus 10.4% for the S&P 500. It’s not a huge amount of out-performance, but it’s still a relatively short time frame when it comes to my investing horizon.

Here is the performance broken down by position over the past quarter:

Ticker	Percent Change
TSLA	71.0%
CRSP	58.1%
SWAV	46.4%
TTD	41.5%
EDIT	34.3%
IQ	32.6%
RDFN	32.0%
GH	31.3%
ROKU	30.8%
TLRA	29.6%
SE	28.5%
BABA	28.4%
SHOP	26.9%
TDOC	25.3%
JD	25.0%
NFLX	20.0%
STNE	16.8%
NVCR	14.5%
DIS	11.6%
MDB	9.2%
AMZN	6.5%
MELI	3.9%
SQ	1.5%
ABMD	0.2%
KSHB	-4.1%
YEXT	-6.8%
JMIA	-8.9%
NVTA	-11.5%
BZUN	-22.5%

Notable Performers

Best Performers

Tesla (TSLA): Even for a volatile stock like Tesla, the fourth quarter was a little crazy. Positive news regarding Model 3 deliveries in the US and deliveries in China ramping up earlier than expected seemed to be enough to send shorts scurrying for the exit. Even the widely panned (at the time) Cybertruck demonstration didn’t seem to hurt the stock momentum much (possibly because of the higher than expected number of reservations that Elon Musk announced?). There are still plenty of risks with Tesla, but much like the end of the year last year, they seem to be going into the new year with the good news outweighing the bad… for now.

CRISPR Therapeutics (CRSP): The fourth quarter of 2019 saw some promising news in terms of the types of benefits people were hoping to see from CRISPR (the technology, not the company). That appears to be the biggest reason why CRISPR (the company, not the technology) and Editas (EDIT) both saw big bumps over the past few months. In the case of CRISPR, it was enough of a bump to push it from a Millenium Falcon position to a Serenity level position.

ShockWave Medical (SWAV): It’s a little unclear to me exactly what happened with ShockWave Medical over the past quarter, since there didn’t appear to be any significant news which should’ve moved the stock. My best guess is that, because the IPO lockup period ended on September 3rd, it’s possible a lot of insiders sold their shares (which depressed the price of the stock) and once the selling was over (coincidentally right around the start of the quarter), the stock rebounded some.

ShockWave is actually an interesting case study regarding the dangers of investing in recently IPO’d companies. I typically try to wait before investing in recent IPOs, but broke my rule twice in 2019 (Jumia and ShockWave) and got burned both times. It’s easy to get caught up in the euphoria surrounding an IPO and then get caught owning a stock that plummets once that euphoria wears off. The same pattern happened a lot with IPOs in 2019 where the stock went crazy in the first few months before crashing back down to Earth. Just look at Beyond Meat (BYND)!

The lesson learned for me? Don’t get caught up in the excitement around an IPO, and especially don’t get caught up in feelings of FOMO when an interesting stock keeps going up to ridiculous heights. Chances are good there will be a better entry price once the lockup period ends and the excitement wears off. I’m still bullish on ShockWave, but I do wish I had waited longer to start my position.

The Trade Desk (TTD): Another head-scratcher. While The Trade Desk was up 40%+ the past quarter, if you zoom out a little more you would see that appreciation just about brings it back to where it was in the middle of 2019. A number of high-growth, high-valuation software as a service (SaaS) companies saw some dips in the third quarter of 2019, so this rebound seems like it’s just a recovery from that previous dip.

Worst Performers

Baozun (BZUN): Baozun’s most recent earnings report was pretty good, and contained some strong growth across the board, but it also contained forward guidance which seemed to disappoint investors. I knew that Baozun was likely to be a volatile stock, and the past few years has likely been tough in terms of a slowing Chinese economy and the trade war, so I’m not overly concerned. Still, I’ll be interested to see what their next earnings report looks like. If it looks like there are signs of permanently slowing growth, then it might be time to consider selling.

Invitae (NVTA): Invitae is another stock that I expected volatility from. As of mid-2019 it had almost doubled, so I’m not surprised to see it give some of those gains back later in the year. No huge concerns for me here.

Jumia Technologies (JMIA): Jumia falls squarely into the “recent IPO that I should’ve waited longer to invest in” camp that I mentioned above. I’m still a believer in the eCommerce opportunity in Africa, but in retrospect Jumia was clearly way overvalued and is now sitting considerably below its IPO price. I should’ve waited to see how the company performed for a few quarters instead of jumping in so soon. I excepted a ton of volatility from Jumia (even more than from the companies above), so the drop in stock price doesn’t concern me, although I’ll definitely be keeping an eye on how the company continues to perform. They’re burning through a lot of cash and profitability seems very far away. This remains possibly the riskiest position in the Freedom Portfolio.

Changes in the Portfolio

There was a saying I came across recently which essentially said that every new addition to your portfolio should be better than what you already own, or else you are diluting your returns. It was something that really spoke to me. I always envisioned the ideal number of positions for the Freedom Portfolio being somewhere between 20 and 25, even though I knew that would be hard to stick to. Sure enough, the Freedom Portfolio had ballooned to over 30 positions as of the last check-in. As a result, for the past few months I’ve tried to focus on reducing the number of positions I have by eliminating those I have lower conviction in. You’ll probably see that reflected below.

Sells

Twilio (TWLO): One concern that I have had over the past few months is the performance of software as a service (SaaS) stocks possibly getting ahead of the underlying businesses. I sold my entire position in Twilio because it was one of my lower conviction SaaS companies where I felt like I didn’t fully understand their competitive advantage enough.

Intuitive Surgical (ISRG): Another lower conviction positions that I sold completely out of. I’m still really interested in the robotic assisted surgery space, but there are other opportunities I’m more excited about right now.

Illumina (ILMN): It’s a similar story with Illumina. They’ve run into some slower growth and some speed bumps with their Pacific Bio acquisition. There are enough dark clouds around the company right now that I just didn’t want to have to deal with.

Prosus (PROSY) and Naspers (NPSNY): Prosus was a spin-off of Naspers that happened earlier in the year. Both were intended to be indirect ways to invest in Tencent while getting some exposure to other companies as well. It’s hard to think of a better way to simplify my portfolio than to drop Prosus and Naspers. It helps that I have become concerned about the Chinese government’s increasing scrutiny of Tencent’s gaming business.

Buys

Roku (ROKU): Most people probably only think of the small hardware devices when they think of Roku, but they also have a growing advertising business. With the streaming video wars seemingly heating up with the release of Disney + and Apple TV +, I’ve become more interested in different ways to invest in the connected TV space and Roku seems like a good one.

Telaria (TLRA): Like Roku, Telaria is another way to invest in advertising in the connected TV future. It’s a small company, so I’m starting with a small position right now while I see how the company performs and learn more about the business.

Yext (YEXT): Although it’s a new position, Yext has been on my radar for a few years now. I used to work with some people who now work at Yext, so I was familiar with the company even before they went public. Some investors that I really respect are pretty bullish on Yext, and that has played a big role in why I have opened a small position.

Additions to already existing positions: Sea Limited (SE), NovoCure (NVCR), Abiomed (ABMD), Guardant Health (GH), Baozun (BZUN), CRISPR Therapeutics (CRSP).

Watchlist

One thing I want to improve on in 2020 is being less impulsive in terms of starting new positions and selling current ones. One idea I have of enforcing that is to have a watchlist of stocks every quarter that I am considering buying or selling. Ideally I wouldn’t buy or sell any stock unless it was on my watchlist from the previous quarterly update. I don’t want to make it a hard and fast rule quite yet, but wanted to give it a try to see how it works. Here is my first watchlist:

Livongo Health (LVGO) – Interesting looking healthcare company which uses AI to provide “nudges” to people dealing with chronic diseases. Has a relatively unique subscription model as well.

MondoDB (MDB) – One of my lower conviction holdings (and I’m trying to concentrate my portfolio more). I’m still concerned by their ability to grow in a world with big players like AWS (Amazon Web Services). A contender for selling to deploy capital elsewhere.

Alibaba (BABA) – Another lower conviction holding. It’s already a big player in China. How much larger can they get? How do they perform with a possibly slowing Chinese economy?

Roku (ROKU) – I know I just started this position, but I hadn’t added it to the Freedom Portfolio until now because I had concerns about its ability to differentiate itself in the connected TV future. I’m not sure they have a defensible moat and am willing to sell if it looks like they’re losing ground to competitors or the landscape is changing.

Abiomed (ABMD) – Again, this was a position I just added to, but I think there are a lot of questions swirling around Abiomed that will get answered in the next quarter or two. Can they turn things around and get growth back on track? I think so, but if I end up being wrong then I want to be able to get out quickly.

The Freedom Portfolio – January 2020

So where does the Freedom Portfolio stand going into 2020? Well, thanks to the incredible performance of Shopify and Mercado Libre, it’s interestingly top-heavy with 3 Babylon 5 level positions yet no Enterprise level positions. I don’t expect this to last for too long, however, as Disney and Netflix are right on the cusp and both feel primed to have a strong 2020. Need a reminder of what these terms mean? Check out: Defining my Terms.

Ticker	Company Name	Allocation
SHOP	Shopify	Babylon 5
AMZN	Amazon	Babylon 5
MELI	MercadoLibre	Babylon 5
DIS	Walt Disney	Serenity
NFLX	Netflix	Serenity
SQ	Square	Serenity
NVCR	NovoCure	Serenity
TSLA	Tesla Motors	Serenity
JD	JD.com	Serenity
RDFN	Redfin	Serenity
TDOC	Teladoc	Serenity
BABA	Alibaba	Serenity
IQ	iQiyi	Serenity
CRSP	CRISPR Therapeutics	Serenity
BZUN	Baozun	Serenity
TTD	The Trade Desk	Serenity
EDIT	Editas Medicine	M. Falcon
NVTA	Invitae	M. Falcon
ROKU	Roku	M. Falcon
ABMD	Abiomed	M. Falcon
STNE	Stoneco	M. Falcon
SWAV	ShockWave Medical	M. Falcon
SE	Sea Limited	M. Falcon
MDB	Mongo DB	M. Falcon
GH	Guardant Health	M. Falcon
TLRA	Telaria	M. Falcon
YEXT	Yext	M. Falcon
JMIA	Jumia Technologies	M. Falcon
KSHB	KushCo	M. Falcon

Thanks, as always, for reading, and here’s to a prosperous new decade for all investors.

Recklessly Bold Predictions for 2020

December 20, 2019 paul.essen Comments 1 comment

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

November 25, 2019 paul.essen Comments 0 Comment

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 Stops the Bleeding

October 17, 2019 paul.essen Comments 0 Comment

Around three months ago, right after Netflix (NFLX) announced some disappointing 2nd quarter earnings, I wrote about my concerns over their slowing growth and that I was considering selling some of my shares (which I did end up doing). Since then, the stock has been very volatile and sentiment on the company definitely appears to have changed. Many article were written about Netflix’s amazing growth is finally over now that serious competition is entering the space and the high amounts of spending on original content is about to catch up to them. I mostly didn’t buy those bear cases, and believed that as the world increasingly moves to streaming video, there was still significant growth left for Netflix and room for them to be a major player.

Which isn’t to say I don’t have concerns about Netflix going forward. While there is still plenty of growth left internationally, it does seem like the domestic market is pretty saturated. The entry of cheaper competition and the loss of content like The Office and Friends seems likely to reduce their ability to raise prices in the future. Can the margin on international subs, including places like India where they offer mobile-only plans? Will they ever be able to take their foot off the pedal in terms of creating new content without losing subscribers?

So I was very interested in seeing Netflix’s third quarter earnings, which they announced yesterday. It was the last earnings report before Disney+ and Apple TV+ are launched in November and if they showed another quarter of disappointing subscriber growth, then that would certainly be a big warning sign.

So what did earnings look like? Honestly, they were a bit mixed. Perhaps the most watched number was subscriber additions. Netflix reported 6.8 new subscribers, which barely missed their forecast of 7 million. Still, it was an incredible rebound from the 2.7 million additions they reported in the second quarter. Once again, the majority of the growth came from overseas. Revenue came in right around forecast, although they did beat their earnings per share forecast by a fair amount.

The market seemed torn on how to digest the news. Immediately after the earnings report was released, the stock dropped, before it recovered and started today up around 10%. Since then, it has steadily declined and is now closer to 3-4% up.

I can sympathize with the market a bit. In many ways, it was an impressive report. Netflix continues to grow subscribers at an impressive clip, especially overseas. They continue to be the clear leader in a market that only figures to continue growing by leaps and bounds. At the same time, their growth seems to be decelerating (especially in the US) right before some impressive competitors are entering the space and there’s legitimate questions on how profitable the company can end up being once they’re no longer in growth mode.

My history with Netflix has shown that I always regret underestimating Netflix and Reed Hastings. I trimmed my position a few months ago, but I’m planning on holding onto the rest of my shares for the foreseeable future. I’m well aware of the challenges facing the company, but I also think their growth story isn’t quite over yet. We’ll see if I’m right or not.