theStreetFika: Scones, Sips, Strategy & Stocks

On September 15th, Apple announced Apple One and Apple Premier; two monthly subscription plans that bundle Apple’s premium services - Apple Music, Apple TV+, Apple Arcade, and iCloud storage, for either individuals or families. Premier adds on Apple News+ and Apple Fitness+. What is the strategy and motivation driving this announcement?  While Apple’s primary business model remains selling premium hardware at high margins, the company has a longstanding goal of increasing its services revenue. The latest bundles are all about the latter. Let me explain: They neither help Apple connect better with its customers nor reduce churn on Apple’s hardware (HW) products - not that Apple needs any help connecting with its customers or reducing churn. Apple is a darling for its customers and its churn is near zero. More importantly, they don’t aim at expanding Apple’s HW market share. They don’t make an iPhone (or any Apple HW for that matter) any more accessible and do not help in any way mov...

In the previous post , I discussed that Nvidia’s deal for Arm is very smart because it was structured as a majority stock acquisition. In this post, I will discuss the strategy driving the acquisition and how Arm will help make Nvidia the most important chip maker in the world. Last July, Nvidia surpassed Intel to become the largest U.S. chip maker by market value. However, by most measures, Nvidia remains a niche player; compared to Intel’s $72 billion in revenue last year, Nvidia’s sales were a little over $11 billion. So how can Nvidia grow to its market value? Nvidia thinks the answer is Arm. This answer is not obvious to everyone, though, because the two companies’ business models couldn’t have been more different. While Nvidia sells vertically integrated solutions and doesn’t share its IP, Arm sells modular designs that are available to everyone in the ecosystem.  Nvidia started as a niche player and made its name making and selling best in class graphic processor units (GPU)...

Last week, Nvidia announced that it is acquiring Arm from SoftBank for $40 billion. Under the terms of the transaction, Nvidia will pay SoftBank $21.5 billion in stock and $12 billion in cash. SoftBank may also receive up to $5 billion in cash or common stock if Arm meets certain financial targets. Finally, Nvidia will issue $1.5 billion in equity to Arm employees.  Let’s meet the two main parties involved in the biggest chip deal in history and evaluate who got the better deal:  SoftBank is a Japanese conglomerate famous for its big bets on the tech sector. Some have worked (e.g. Alibaba) while many have flopped (e.g. WeWork). Arm will join the second group and SoftBank is a loser in this deal. Selling Arm for $32 billion - not including $5 billion in potential add-ons- means that Arm was yet another flop investment. Had SoftBank bought Nvidia shares or, for that matter, an ETF tracking the S&P 500 - which is up 55% since then- it would have gotten a much higher ROI than...

2020 has certainly been the year of blank check acquisition companies - or SPACs.  That's how Nikola- the sexy electric truck shop-, Utz - the iconic snacks company- and Virgin Galactic went public earlier in the year. Plus, it's also how electric vehicle makers Fisker, Canoo, and Lordstown Motors announced they will go public. Plus Plus, famous investor Bill Ackman recently took his SPAC (Pershing Square Tontine) public in the largest-ever blank-check IPO (it raised A whopping $4B). The objective is to buy a mature unicorn. Ackman actually said Pershing might buy a “mature unicorn” 6 times in the filing. However not all private companies are psyched about merging with SPACs to go public. Airbnb reportedly turned down an offer to merge with Bill Ackman's SPAC, saying it prefers going public via traditional. Airbnb isn't alone. Snowflake, Slack, Shopify and BigCommerce are other flashy SPACs that declined the backdoor to going public and opted for the front door through...

In a previous post, " SPAC: The investing trend du jour ", I discussed what's an SPAC and why plenty of private companies are preferring to merge with a blank check firm or SPAC rather than go through the time-consuming and expensive process of raising money through a more traditional IPO. With all the excitement around SPACs, is it a good idea for investors to hop on the SPAC wagon? The case against investing in SPACs SPAC historical track record is not great: Goldman Sachs said in a report earlier this month that the 56 SPACs it looked at since January 2018 outperformed the S&P 500 by 11 percentage points in the first three months after an acquisition but lagged the broader market in the 12 months after the deal. And a recent study by IPO research and investing firm Renaissance Capital found that 89 SPACs that had gone public since 2015 have posted an average loss of 18.5%, compared to an average gain of 37.2% for traditional IPOs. A typical SPAC will offer stock a...

2020 is a year for the record books and its latest mania is SPAC investing. A SPAC, also known as blank check company, is a special purpose acquisition company and it’s the hottest trend in investing. According to Goldman, there have been 51 SPAC offerings in 2020, raising a record $21.5 billion, up 145% from the same period a year ago. A SPAC is essentially a shell company listed on a public exchange that uses the funds it raises from selling shares to acquire a private company or startup within a certain time frame, typically two years. In plain English: A SPAC is a company without a company.  SPACs go public for the sole purpose of one day acquiring a real company.  SPACs collect cash from new investors in the  initial public offering (IPO), even though those investors don't know what they'll end up owning.  The SPAC has 2 years to buy a real company, or the $$ gets returned to the investors.  SPACs have been around for years, but gained popularity recently a...

Last Tuesday, Slack reported expectations-beating earnings but its stocked tanked. This is because Slack didn't deliver the Zoom-like growth that investors were expecting.  Slack and Zoom were both expected to be work-from-home (WFH) winners but their realities are turning out to be very different. While Zoom's sales more than quadrupled compared to the same quarter last year, Slack's grew at 49% - just about the same as the previous two quarters. So why is Slack slacking on growth while Zoom is crushing all expectations? The process to buy Slack is much longer than Zoom's. Slack's primary customers are large enterprises. Convincing these enterprises to buy Slack requires salespeople and involves endless negotiations with IT departments who always start with "but we have Microsoft Teams for free". Zoom is more plug-and-play. Unlike Slack, Zoom doesn't require integration with any other enterprise software or tools. Also, the alternatives to Zoom are a...

SoftBank’s shares continued their slide today as investors continue to question SoftBank’s unusual option trades on Big Tech companies. What happened? Long story short, SoftBank went all-in and more on Big Tech. It bought monstrous options that hinge on Big Tech stocks continuing their stratospheric rise. Although SoftBank earned over $4 billion in unrealized gains on these trades, investors are very concerned.  First, the gains are unrealized; they have not and can not be booked yet. In fact as soon as Big Tech stocks gave up some of their gains towards the end of last week, most of these unrealized gains evaporated.  Second and most importantly, engaging in option trades of this size represents a massive shift in the risk profile of the company. SoftBank started in telecommunications and its Founder and CEO - Masa Son - had a 300 year vision. However, it’s clear its investment strategy has changed and the company is very focused on the present and only the present. The chan...

Last week, the Financial Times (FT) reported that SoftBank Group Corp. may be behind the recent roaring rally in large-cap U.S. technology stocks. According to the FT, in addition to buying over $4 billion in individual big tech stocks (Amazon, Apple, Tesla, Microsoft, Facebook, Alphabet), SoftBank bought options tied to around $50 billion worth of these individual stocks. But before the FT dubbed SoftBank the “Nasdaq Whale” and blamed it for the rally, many argued that the frenzy was squarely on the shoulders of “bored” unprofessional investors on platforms such as Robinhood who have taken to option trading as a new hobby while locked in.  Could it be possible that options-buying tied to individual stocks could move markets in this way and trigger this massive rally? In "Bad signs for the epic market rally" , I mentioned that the market is indeed very top heavy; with 1% of the stocks in the S&P 500 - Alphabet, Amazon, Apple, Facebook and Microsoft - accounting for more t...

Earlier this week, Tesla announced that it will sell up to $5 billion in stock. The announcement came a day after the company completed an investor pleasing 5-for-1 stock split. Tesla said in a filing with the Securities and Exchange Commission that the additional shares will be sold "from time to time" and "at-the-market" prices. It said banks will sell shares based on directives from Tesla. Tesla gave few details about how it planned to use the $5 billion, but in a stock market filing it said: “We currently intend to use the net proceeds from this offering to further strengthen our balance sheet, as well as for general corporate purposes.” How does the move affect Tesla and investors? For Tesla, it’s a very smart and timely move after the historic rally in its shares and with the appetite still strong among investors. Instead of tapping the debt markets and hence paying interest for years, Tesla is taking advantage of its share price which has seen an almost 1,000...

In the previous post, I discussed reasons that the stock market is rising despite the economic devastation of the pandemic. In this post, I’ll discuss ominous signs from the market rally: Top 1% account for most of the gains: The market is very top-heavy. 1% of the stocks in the S&P 500 - Alphabet, Amazon, Apple, Facebook and Microsoft - account for more than a fifth of the S&P 500’s market value. While those tech giants have gained around 40 percent so far this year, the 495 other stocks in the index have collectively lost a few percentage points. This is bad because the US workforce is concentrated in the other 99% of the stocks. Insider selling is booming: Some leaders of corporate America are skeptical about the sustainability of this rally and are rushing to cash out. According to CNN Business and TrimTabs Investment Research, insiders have dumped more than $50 billion worth of shares since the start of May. The same source also notes that August is on track to be the thi...