Welcome to Chit Chat Money’s Sunday Finds + 3 Thoughts From Last Week. In this newsletter you will find three topics I thought about last week, links to shows we’ve recently released, and links to some interesting articles, podcasts, and tweets. Check out the archive here.
1. What’s Going on With Activision Blizzard Merger?
I think a lot of people have forgotten about this over the last six months, but Activision Blizzard is still set to be acquired by Microsoft at $95 a share in one of the largest acquisitions in history.
Currently, Activision trades at ~$73. With the deal set to close sometime in 2023, investors could get a 30% return within a year if the deal goes through. Not too shabby of an IRR, if you ask me.
With such a wide spread from the proposed price right now, it is clear many investors do not believe the deal will get approved, for whatever reason. However…I kind of think the stock looks interesting here as an arb investment?
Countries like Brazil have started to approve the deal, and we’ve seen competitors like Take-Two Interactive say it will be fine for the industry.
The company itself seems to be executing strongly as well:
Overwatch 2 has reached over 25 million players in its first 10 days and it has already achieved a "daily player base spread near-even across EMEA, Asia, and the Americas that’s nearly triple the previous daily player peak from the original Overwatch."
There’s also a big Diablo game coming out within the next year or so.
I haven’t looked at the company or the deal close enough to feel comfortable investing for the merger arb, but I feel like the chances it goes through are increasing (plus, the approval will take less time compared to if you invested earlier this year) and the downside from a broken deal are lower given the health of the business.
Doesn’t seem like a bad place to put your money during a bear market.
2. The Snap stock roundtrip
It’s the first week of earnings season, so that must mean another 20% drop for Snap stock:
The company posted decent growth numbers for the quarter (19% user growth, 6% revenue growth, free cash flow positive), but then rang the death knell for itself:
Given uncertainties related to the operating environment, we are not providing our expectations for revenue or adjusted EBITDA for the fourth quarter of 2022.
The stock is now down 83.5% this year and belongs in the graveyard of bubble companies like Peloton and Carvana. In fact, it has completely roundtripped its March 2020 lows and is getting close to its 2018 low that came when it botched an app redesign.
If I had any confidence in the advertising side of this business (or the management team) I would be compelled to research the company here. The service clearly has a loyal and young user base that consistently grows.
However, the problem is and has always been the fact it is mainly used for messaging, which is incredibly hard to monetize through ads. Just open the app once and you’ll see the clickbaity stuff that Snap is trying to advertise over on its “Discover” page. Nobody could use that feature and think it is a good business.
Unless Snap can come up with a service that is more easily monetizable, the stock remains uninvestable to me. If you own shares, I hope this is a nice contra-indicator for you and this 20%+ drop marks the bottom. I just don’t see this business turning into a consistent earner though.
3. Semiconductor earnings and the ending of the supply shortages
The majority of the large semiconductor companies have reported earnings in the last few weeks. From perusing the reports/conference calls, it is clear that investors are worried about two things:
The Chinese export ban
A potential supply glut hitting in 2023
If you look at where the stocks trade, investors are pretty bearish on both these developments. The ramifications of a supply glut are pretty obvious: too many chips and not enough demand means that the world doesn’t need to manufacture as many chips. That means lower revenue and earnings for all the players in the semiconductor supply chain.
(side note: it will also be interesting to see what disinflationary effects this has)
I can get with the supply glut being a bear case for semi stocks. But I don’t understand why a disentanglement from China is something to worry about if you have a time horizon longer than five years.
Yes, plenty of semiconductor companies have current revenue exposure to China. But assuming a full break-up from the nation, that revenue should come back in one form or another as long as the non-Chinese world wants to buy computer chips. This should benefit equipment companies like ASML, Applied Materials, and Lam Research but also non-Chinese manufacturers like TSMC, Samsung, and Intel.
On top of this, if/when the break-up occurs, much of the geopolitical risk will have gone away. Wouldn’t the stocks re-rate to a higher multiple once earnings stabilize? Just thinking out loud here, but I honestly think the semiconductor industry breaking up from China would be great for investors over the long haul.
Unless, of course, China invades Taiwan and nukes (figuratively) TSMC. Then we are all screwed.
If you can get past the supply glut risk, I think a bunch of semiconductor stocks look interesting at these prices.
Anyone reading this, please correct me if I am missing something, because I probably am.
See you next week,
Brett
***Our fund, Arch Capital, may own securities discussed in this newsletter. Check our holdings page and read our full disclosure to learn more.***
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Catch up on Our Shows From Last Week
Not So Deep Dive: Dream Finders Homes (Ticker: DFH)
Is Roku the Next Great Internet Platform, or Just a Commodity? With Alex Morris
Investing Power Hour #29: NFLX and TSLA Earnings, Reflecting on Mistakes From 2021
3 Good Reads
The team primarily conducts investigations into potential misconduct by current and former ByteDance employees. But in at least two cases, the Internal Audit team also planned to collect TikTok data about the location of a U.S. citizen who had never had an employment relationship with the company, the materials show. It is unclear from the materials whether data about these Americans was actually collected; however, the plan was for a Beijing-based ByteDance team to obtain location data from U.S. users’ devices.
The Playing Field (from multiple years ago, but highly applicable today) - Graham Duncan
One great portfolio manager I know told the story of being driven somewhere by an analyst on a rainy night when a truck swerved and almost ran them off the road. “Why is stuff like this always happening to me?” the analyst instinctually responded. But to the portfolio manager, that response reflected a terrible mindset, whether on the road or in the market: a sense that the world is acting on you as opposed to your acting on the world. It is a mindset that is hard to change. But from what I’ve seen, great investors don’t have it. Instead, they’ve come to understand which factors in the market they can control and which factors they cannot.
Why we Are Challenging FIGS to Tell the Truth - ScrubsMag
Trina gathered trade secrets on just about every aspect of the business we built over the course of 17 years. She then violated her contract with us and her employer, Blackstone Capital, by sharing a highly-confidential, 300-page report with her friend, Heather Hasson. Six months later, they started FIGS, using our stolen report as their blueprint.
1 Good Listen
Archea Energy: Turning Pollution Into Profit - Business Breakdowns
Archaea is one of the largest and fastest growing providers of renewable natural gas in the US. The company uses methane produced by landfills as its feedstock to create renewable electricity and natural gas.