Sunday Finds + 3 Thoughts From Last Week
Roblox + WM Technology
3 Thoughts From Last Week:
What is the cheapest stock down 50% right now? I posted this question on the Twitter machine the other day and got some interesting replies. A lot of people said Facebook/Meta Platforms, which could definitely be the case if these short-term worries with IDFA/metaverse spending are overblown. I personally have no insight into the situation and think it is extremely difficult to make predictions on what the company looks like five years from now, but perhaps that is where the opportunity lies. A lot of other people tossed out cannabis stocks, which I have some sympathy with. Almost every stock in the industry is down over 50% and there is a clear path to double-digit growth in consumer spending over the next decade. Seems like a great hunting ground for potential long-term compounders. Avoiding any stocks we already own (which you can find here), I honestly think Roku could be a good answer to this question. I haven’t followed the business for a while, but very few people understand the model and its long-term potential to be the number one operating system for connected TVs worldwide. Gross profit has tripled in less than two years to $1.4 billion, and if you believe what Anthony Wood is selling with the company’s advertising potential, there’s a chance Roku does $10 billion in annual gross profit at some point over the next decade. How much that turns into cash flow, I don’t know. But whatever it is, the market will likely assign an enterprise value closer to $100 billion than the $13.5 billion it currently trades at.
Stop using trailing EBITDA multiples in a vacuum. On a similar note, I’ve seen many investors throw around the thought that Roku is still overvalued because it only generated like $200 million in EBITDA over the last twelve months. It is crazy to me that people think that means anything. The value of a stock you buy is the future cash flow it will generate that can be distributed back to you as a shareholder. The amount of EBITDA/cash flow generated in the past (except for how it relates to cash on the balance sheet) means nothing. Creating an artificial restriction on yourself to only buying stocks that have a trailing EV/FCF (or, god forbid, using a P/E) below some arbitrary number like 20 or 30 is one of the worst mistakes an investor can make. It’s just false comfort wrapped in a meaningless number (caveat: things are obviously different if you are a quantitative investor).
Did we finally find a reason for crypto? I can’t believe I’m saying this, but the crypto guys may have a point after what happened in Canada last week. If you didn’t hear, the Canadien government decided to freeze some of the trucker protesters bank accounts last week by authorizing an emergency act. While I don’t know much about the actual protests, this decision by the government is highly distressing to me. Freezing a bank account is one of the most drastic measures you can take against a person or groups of people (you literally can’t operate in society at that point). Doing it to people who haven’t been convicted of a crime, or deciding they are guilty until proven innocent, is not the type of system I would like to live under. If these people are committing terrible crimes like the government says they are, the police can arrest them and they can all go to court and have the judicial system decide their fate, as civilized societies are supposed to do. So what does this have to do with crypto? Well, one of the big narratives about Bitcoin, Ethereum, and the other coins is that it allows you to escape the increasingly “Big Brother-Esque” system that the Canadien government just exemplified. I sympathize with this view, and I think the majority of people around the world do too. However, looking at the crypto system today, I don’t really think it brings much of an improvement. You have constant hacks to worry about, the fact the coins cannot be used in the physical world, and the fact that the Feds have proven time and time again they can steal the coins if they want to. This is all summed up perfectly in a tweet about the recent story about the Bitcoin hackers who stole 0.5% of all the currency in existence. I wish crypto was an outlet for people to avoid censorship. But right now that seems to be a narrative that has no basis in reality.
See you next week,
Brett
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