Podcast Summary
Evaluating Companies During Market Volatility: Investors should assess companies based on business fundamentals, revenue, earnings, PE ratios, and valuations during market downturns to distinguish between solid investments and speculative assets.
The current market volatility is a reminder of the dot-com crash and the importance of evaluating companies based on their business fundamentals, revenue, earnings, PE ratios, and valuations. Five tech companies, Block, Zoom, Netflix, Coinbase, and Airbnb, that have experienced significant declines since their pandemic highs were analyzed in this context. While some companies like FinTech (Square/Block), B2B, consumer subscription (Netflix), and marketplaces have solid fundamentals, others like crypto or certain speculative assets lack underlying value. It's crucial for investors to differentiate between these categories during market downturns. The ongoing market instability highlights the significance of evaluating companies based on their business fundamentals, rather than just speculation or hype.
Bullish on Square's Long-Term Growth Potential: Despite market cap decline and high PE ratio, the speaker sees Square's high revenue growth rate and Cash App business as reasons for a decade-long investment. Confidence in Jack Dorsey's leadership and crypto expertise also supports this view.
The speaker is bullish on the long-term growth potential of Square, now known as Block, despite its significant decline in market cap and high PE ratio. The speaker believes that the company's high revenue growth rate, led by its Cash App business, makes it a high-growth company worthy of a decade-long investment horizon. The speaker also expresses confidence in Jack Dorsey's leadership and his understanding of the crypto space. The speaker's personal investment in Square and its transformation into a visionary company in the digital payments and crypto space further solidifies their belief in its potential. However, it's important to note that this is not financial advice and should be taken as such.
Buying Stocks with Strong Fundamentals During Economic Downturns: During economic downturns, investors can consider buying stocks with strong fundamentals for long-term growth, such as Disney, which has high revenue growth and profitability despite being traded at a lower valuation.
During economic downturns, people may still be interested in buying certain stocks, such as Peloton and Disney, which have strong fundamentals and the potential for long-term growth. Disney, despite its correction and being valued at $44 billion, has strong revenue growth and high profitability, despite being traded at 10 times sales and 44 times profits. For founders looking to delegate and prioritize, hiring expert freelancers through services like Marketer Hire can provide access to on-demand marketing specialists and help businesses scale up or down based on their needs. Private market investors have a different outlook, thinking in decades rather than quarters, and may still invest in down rounds if they believe in the team, product, and growth potential of a company.
Bullish on high-growth companies like Netflix: Speakers remain optimistic about high-growth companies' potential for expansion, profits, and revenue, making Netflix a worthwhile investment despite its high price-to-earnings ratio, long-term relevance, and ongoing investment in original content, while acknowledging potential long-term risks from competition and market saturation.
Despite the current high valuation and intense competition, the speakers remain bullish on high-growth companies like Netflix due to their revenue, profits, and potential for expansion. Netflix, specifically, is seen as a worthwhile investment despite its expensive price-to-earnings ratio, as it continues to generate profits and invest in original content. The long-term relevance and value of its library are also considered crucial factors. However, the ongoing investment in content could represent a long-term risk, as competitors continue to build their own libraries and the market becomes more saturated. Overall, the speakers believe that these companies, especially those with revenue and profits, will continue to be favored in the market, even during economic downturns.
Exploring new areas for Netflix to stay competitive: Netflix could expand into podcasting and video game streaming to reduce costs and stay competitive, while mergers and acquisitions could also be considered but face challenges due to current political climate. SuperSide offers cost-effective design solutions and Coinbase's drop in value may present a buying opportunity.
The streaming industry is becoming increasingly competitive, with Netflix being one of the services that could potentially lose market share due to its high price point. The speaker suggests that Netflix could consider expanding into new areas, such as podcasting and video game streaming, to become more cost-effective and competitive. Another interesting point raised is the potential for mergers and acquisitions in the industry, but the current political climate may make such moves difficult. Additionally, the speaker recommends SuperSide as a cost-effective design solution for businesses. Finally, the speaker mentions Coinbase, a cryptocurrency exchange, which has seen a significant drop in value and could be a potential buying opportunity.
Coinbase's Unique Founder and Product Offerings Make it a Wild Card for Investors: Despite market volatility, Coinbase's innovative founder and focus on crypto, NFTs, and digital assets set it apart from traditional financial institutions, making it a compelling option for high-growth investors. Increasing institutional interest and ease of access to crypto may further boost its potential growth.
Despite Coinbase's recent $50 billion market cap loss and lower price-earnings ratio compared to other high-growth companies, its unique founder, Brian Armstrong, and its innovative product offerings make it a potential wild card for investors. The company's focus on crypto, NFTs, and other digital assets sets it apart from more traditional financial institutions, and its ability to adapt to changing market trends could lead to significant growth opportunities. While the crypto market remains volatile and uncertain, Coinbase's founder-led innovation and product velocity make it a compelling option for investors looking to add a high-growth company to their portfolio. Additionally, the increasing ease of access to crypto through ETFs and other investment vehicles may make it an attractive option for institutional investors, further boosting Coinbase's potential growth.
Leading with authority and innovation, but beware of high-risk investments during uncertain times: During economic uncertainty, avoid high-risk investments like crypto and meme stocks, especially when using borrowed funds, to prevent potential total loss of investment capital.
Founders have the power to disrupt businesses and inspire employees when they lead with authority and innovative ideas. However, during times of economic uncertainty, such as the pandemic, people turned to high-risk investments like crypto and meme stocks for entertainment value, sometimes leading to unsustainable financial decisions. These investments, particularly when made on margin or with leverage, come with significant risk, including the potential for total loss of investment. The concept of "risk of ruin" highlights the danger of losing all of one's investment capital, leaving no room for recovery. Investors should be cautious and avoid making risky bets on volatile assets, especially when using borrowed funds.
Leverage and Market Volatility in Crypto: Investors in crypto should be cautious of high leverage and potential market volatility, which can lead to significant losses if the market turns against them. Only invest what you can afford to lose.
In the world of crypto, leverage plays a significant role in market volatility. Some investors are able to borrow large sums of money from offshore exchanges to buy more crypto than they could afford otherwise. However, if the market turns against them, they may be forced to sell their assets to cover their debts, leading to a domino effect of sell-offs and a potential market crash. This risk is amplified by the high levels of leverage available on some exchanges, which can reach up to 200x. It's important for investors to be aware of this risk and only invest what they can afford to lose. Additionally, the speaker mentioned Airbnb, which has also experienced significant market volatility during the pandemic, losing about 25% of its market cap and bottoming out at $136 per share. Despite this, the company has managed to bounce back.
Market correction: Re-pricing of companies based on fundamentals: The stock market correction reflects a re-alignment of company valuations with their fundamental values, while Bitcoin and other cryptocurrencies have also seen drops due to being re-evaluated as an asset class.
The recent correction in the stock market, specifically in companies like Airbnb, represents a re-pricing of these companies based on their fundamental values. Airbnb, despite losing $4.5 billion over the trailing 12 months, made $830 million in profits in its most recent quarter, indicating it is a profitable company. The market was previously disconnected from reality, with valuations not reflecting revenue, earnings, or growth. This disconnect is now being corrected as investors do the math and re-price companies accordingly. Bitcoin and other cryptocurrencies, which were once considered uncorrelated assets, have also seen significant drops in value during this time, losing almost identical percentages to stocks. This correlation may be due to Bitcoin now being seen as an asset class rather than a currency or a speculative investment.
Institutional investors drive correlation between Bitcoin and stocks: Institutional investors hold a large portion of Bitcoin and Ethereum, leading to correlation with traditional stocks. Individual investment decisions depend on risk tolerance and belief in Bitcoin's potential.
Bitcoin and other cryptocurrencies, such as Ethereum, are highly correlated with traditional stocks due to the same institutional investors buying into them. This correlation exists because the majority of Bitcoin and Ethereum is not owned by retail investors but rather by institutional investors. When faced with the decision to sell one investment to pay bills, Bitcoin might be the last choice due to its momentum and perceived safety as an asset class, despite having no intrinsic value. However, some argue that Bitcoin's stability, finite supply, and smart people investing in it make it a worthwhile investment. Ultimately, the decision to invest in Bitcoin or traditional stocks depends on individual risk tolerance and belief in its potential as a currency or a speculative asset.
Early Bitcoin holders vs recent buyers: Early Bitcoin buyers tend to hold onto their investments, while recent buyers are more likely to sell during market downturns. Analyzing wallet data has limitations and investing in cryptocurrencies like Bitcoin involves significant risks and uncertainty.
The behavior of early Bitcoin holders versus recent buyers can provide insights into market sentiment. Early holders, who bought at lower prices, tend to hold onto their investments, while more recent buyers, who bought at higher prices, are more likely to sell during market downturns. However, it's important to note that analyzing wallet data has its limitations and can be easily manipulated. Additionally, the value of cryptocurrencies like Bitcoin is highly speculative and lacks traditional fundamentals. Comparing Bitcoin and the dot-com bubble, both involve a leap of faith in the continued growth and success of the underlying technology or company. While the dot-com bubble resulted in significant losses for many investors, the long-term potential of Bitcoin and other cryptocurrencies remains uncertain. Ultimately, it's crucial to approach investments in these assets with caution and a solid understanding of the risks involved.
Comparing the Current Market to the Dotcom Bubble: Despite similarities, the current market includes various sectors like crypto, SPACs, and established companies, requiring individual evaluation based on unit economics and earnings potential.
The current market situation, with the high number of companies experiencing significant drops from their peak valuations, bears some similarities to the dotcom bubble of the late 1990s and early 2000s. However, there are key differences. During the dotcom crash, many overvalued IPOs and publicly traded companies saw massive losses, with some companies like Yahoo, Cisco, and Sisco losing over $100 billion from their peak valuations. The current market, however, includes not only IPOs and publicly traded companies, but also crypto investments and SPACs. While some companies have experienced significant losses, others, like Netflix, Airbnb, and Block, have massive customer bases and revenue, leading to a larger overall market capitalization. The difference lies in the scale and the importance of evaluating unit economics and earnings potential, which were often overlooked during the dotcom bubble. As we move forward in 2021, it will be important to monitor the performance of these various market sectors and evaluate the fundamentals of individual companies to determine if we are truly seeing a peak or if there are still significant gains to be made.
Uncertainty Surrounding the Success of SPACs: Despite accounting for majority of US IPOs in 2021, many SPACs remain empty shells, raising concerns about a potential bubble and making long-term investment the safer option.
The surge in Special Purpose Acquisition Companies (SPACs) in the US stock market, particularly in 2021, raised questions about the sustainability of this trend. SPACs, which are shell companies raised through IPOs with the intention of merging with private companies, accounted for 63% of all US IPO activity in 2021. However, a significant number of these SPACs were yet to find a company to merge with, leaving them as empty shells. Out of the 589 active SPACs in September 2021, 75% had no deals pending or even rumored. This situation raised concerns about a potential bubble in the market, as many investors jumped on the bandwagon to set up SPACs in the hope of making huge profits. However, finding a suitable company to merge with proved to be a challenge, leaving many SPACs as empty shells. This uncertainty surrounding the success of SPACs makes it a risky investment for those looking for quick profits, and it may be prudent to hold these investments for the long term.
Peloton Investor Calls for CEO Removal Over Handling of Crises and Costs: An investor criticized Peloton's CEO for poor crisis management, excessive costs, and confusing pricing, raising concerns over the company's future direction
The current market instability, caused by unprecedented economic measures during the pandemic, has led to overheating and potential cooling in public markets. The letter from a significant Peloton investor calling for CEO John Foley's removal highlights concerns over the company's handling of crises, excessive costs, and poor strategy. The investor's gripes include a large office lease, confusing pricing, mishandled product recalls, and perceived insensitivity to safety issues. These incidents, along with underperformance compared to other NASDAQ 100 companies, have led the investor to call for a new direction for Peloton. The letter's tone is critical, and the issues raised could potentially impact Peloton's leadership and future direction.
Business decisions have consequences, especially during financial uncertainty: Inaccurate forecasting, questionable expenses, and complex acquisitions can impact a company's success during uncertain financial times. Ethical practices and strategic moves, such as accurate forecasting and acquisitions, can help mitigate risks and ensure long-term growth.
Business decisions, no matter how small, can have significant consequences, especially when it comes to appearances of impropriety. A company's success can shield questionable actions, but when growth slows, those actions are scrutinized more closely. For instance, a company's large investments in manufacturing capacity may be justified during a growth period, but if product demand decreases, those investments could lead to serious losses. Similarly, personal expenses charged to a corporate account, no matter how trivial, can raise red flags during times of financial uncertainty. Another key takeaway is the importance of accurate forecasting. Misjudging product demand can lead to costly mistakes, such as canceled investments. In the case of the company discussed, a failure to accurately forecast demand led to the cancellation of investments in manufacturing capacity. Additionally, the potential benefits of strategic acquisitions, such as Apple buying Peloton, can far outweigh the costs. However, the process of making such acquisitions can be complex and subject to regulatory scrutiny, particularly in the tech industry. In summary, businesses must be mindful of the potential consequences of their actions, particularly during periods of financial uncertainty. Accurate forecasting, ethical business practices, and strategic acquisitions can help companies navigate these challenges and thrive in the long term.
A unified fitness solution from tech giants: Tech giants like Google and Apple could merge fitness companies for a comprehensive, subscription-based fitness solution, offering a suite of equipment and services at a competitive price, enhancing connectivity for a convenient and effective workout experience.
The future of fitness technology lies in seamless integration and subscription-based services. The speaker suggests that tech giants like Google and Apple could merge companies like Tonal and Hydrow to create a comprehensive fitness solution. By doing so, they could offer a suite of equipment and services at a competitive price, potentially undercutting high-end gym memberships. The speaker also emphasizes the importance of connectivity, citing examples of how apps and gym equipment can be synced for a more convenient and effective workout experience. This vision of a unified fitness solution could save consumers money in the long run and provide them with a top-tier gym experience from the comfort of their own homes.
