Sunday Finds + 3 Thoughts From Last Week
Podcast episode on Zillow + Adobe
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. Google Pixel success
Was this on anyone’s prediction list from five years ago? From the Nikkei:
Google is preparing its largest-ever launch order for its latest mobile phone range as it takes on Apple, Samsung and other Asian rivals in a shrinking global market.
Google has requested more than 8 million units for its Pixel 7 range, sources familiar with the matter told Nikkei Asia. It has told several suppliers it roughly aims to double its smartphone sales for 2023 compared with this year, two people with direct knowledge said.
And more:
After the introduction of the Pixel 6 range, Google's shipments in the second half of 2021 and first half of 2022 increased nearly 130% to some 6.2 million units, compared with only 2.7 million in the same period a year earlier, according to research company Canalys.
Google has been telling suppliers since 2021 that its position as the only U.S. maker of Android smartphones will help it boost business at home and in Europe and Japan, people briefed on the matter said.
Obviously, Google/Alphabet is still light years away from being the size of Apple’s smartphone business, but I wouldn’t be surprised to see the Pixel line take significant market share within the next five years if it keeps up this growth rate.
Growing its hardware sales will be beneficial for multiple reasons. First, it lowers the traffic acquisition costs (TAC) for Google Search. When you measure ROI not on actual hardware sales but by the profitability of the greatest business ever invented, that makes it hard to keep up with. I would be worried if I was anyone but Apple trying to compete with Pixel over the next five years.
Second, growing Pixel sales further widen the moat for search, maps, and YouTube for Alphabet. I mean, it was already absurdly large due to Android, Chrome, and Gsuite, but this is just a nice little cherry on top.
This is a good reminder that the only thing stopping Google Search is regulation from the government or a brutal economic downturn. What an incredible business.
2. Where the venture capital dollars flow
Wasn’t the venture capital industry supposed to be about making big bets on innovative technologies? Instead, over the last few years we got this:
Noom, a health coaching platform valued at $3.7 billion last year, is laying off a portion of staff for the second time in a matter of months, TechCrunch has learned from sources.
Noom has laid off 10% of its staff, or around 500 people, which is a reduction that mostly impacts its coaching team. It’s the second layoff impacting Noom’s coaching team in a matter of months, impacting hundreds of employees.
Nothing against a company trying to get people healthy, that is a noble pursuit. But I doubt this is what society, investors, and even the general partners had in mind when they get into the venture capital industry.
Take my views with a grain of salt as I am very far removed from the VC world. But I feel like the industry lost its way over the last five years as valuations bubbled up to obscene levels.
However, over the next few years, this bubble will burst, and we’ll hopefully get billions of dollars flowing to truly innovative areas (environmental tech, nuclear energy, materials science, etc.) that can improve the world.
Pumping up Noom to a $3.7 billion valuation was never going to be the answer, though.
3. Real Estate. A slow-moving trainwreck
Since our October podcast theme is housing, the industry has been on my mind lately. And man does it seem like a slow-moving trainwreck. I can hardly watch it sometimes.
Mortgage rates are soaring at the fastest pace in recorded history, and the Federal Reserve does not seem set to slow down its interest rate hikes anytime soon (which will lead to mortgage rates rising further).
Major cracks are already showing, and there’s no reason to think this won’t continue over the next year or so unless mortgage rates decline.
And these aren’t just two random examples, I could have found dozens of facts pointing to a huge decline in housing demand in 2022. Good thing this is an industry that doesn’t employ much leverage, right?
This doesn’t even include commercial real estate, which is more screwed over the next five years with in-person workers still down significantly from pre-COVID. The uncertainty within these sectors is incredible, and I wouldn’t want to touch them with a 10-foot pole as an investor.
What happens if mortgage rates hit 10%? How bad of an impact would a 20% decline in housing prices be on consumer spending? Was the housing market just a giant interest rate bet since the GFC?
Honestly, I kind of hope the housing market collapses. Boomers have enough wealth already, and it would pave the way for millennials and gen z to start buying some homes.
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
What Does Adobe’s Next Decade Look Like? With Leandro From Best Anchor Stocks
Investing Power Hour #28: PS5 Supply Explosion, NFLX Ad Tier, Investors Regret TWTR Deal
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3 Good Reads
Murphy's Law and Building a Home - the Ramp Report
We were in complete shock. Not only did our home price go up significantly, it also had put us in a spot of potentially backing out of the build. The problem was, the builder said if we backed out now, they would keep our deposit until the home sold, which was still 9+ months out. Our contract wasn't very forgiving but we also didn't get lawyers involved beforehand or during this process.
Michael Burry on Berkshire Hathaway - Burry’s Memo
This disdain for GAAP is not new for Buffett. For years, he has exhorted investors to take into account "look-through camnings," or operating earnings that include Berkshire's share of the profits of the companies in which it holds common stock less capital gains in those stocks. Before tax, these "look-through eamings" contribute another $743 million to Berkshire in 1997. Buffett argues that the companies reinvest the earnings for him, which makes them invisible to GAAP—but certainly not to him or us.
Zalando: The Starting Point for Fashion - One Foot Bars
The company’s platform strategy enables this huge and growing assortment. In addition to the standard wholesale model, the company provides brands and retailers with a direct-to-consumer sales channel via their Partner and Connected Retail Program, which connects the inventory of brands and retail partners with over 48 million customers, resulting in endless choice for Zalando customers and significant business opportunities for brand and retail partners. It’s a win-win situation because more partners who provide a larger assortment of items on the platform attract more customers, which increases the business opportunities for partners, drives more partners to the platform, enables an even larger variety, and, thereby, draws even more customers to the platform and so forth. It’s a classic flywheel effect.
1 Good Listen
Gustav Soderstrom is Spotify’s Chief Research & Development Officer. He has the CPO & CTO responsibility, overseeing the product, design, data, and engineering teams at Spotify and is responsible for Spotify’s product strategy. Gustav is also an entrepreneur and investor who has founded and sold startups that he co-founded to Meta’s Oculus in 2014 and then also his first startup which he co-founded and led as CEO, up until their acquisition by Yahoo! Gustav is also the host of the podcast mini-series -- Spotify: A product story -- which offers a glimpse into the decisions that have guided Spotify’s product evolution.
Smart and Funny Tweets:
