Sunday Finds + 3 Thoughts From Last Week
Coupang and Axon Enterprise
3 Thoughts From Last Week:
Don’t let post-earnings moves scare you. Last week there was an insane amount of double-digit moves in after-hours trading. Facebook tanked 20%, Amazon soared 15%, and many other smaller companies like Spotify and Snap made huge moves immediately after reporting earnings. This type of thing can feel scary/stressful if you don’t understand why it occurs. So…why do stocks go vertical immediately after releasing an earnings report? Because algorithmic traders buy and sell shares based on a few financial metrics like earnings per share (sidebar: highly recommend reading The Number to understand this phenomenon), revenue, and possibly on other things like guidance. It is the only explanation for the speed of these moves, as no human is capable of analyzing a multi-page earnings report in 10 seconds. The best thing to do as a long-term fundamental investor is to embrace these moves, as they can sometimes present buying opportunities in companies when the market is misled by weird earnings per share numbers. If you believe a company put out a good report, confirming your long-term thesis is intact, but the stock drops 15% because of an earnings per share “miss”, the next few trading days can sometimes provide incredible buying opportunities. Obviously, each situation is unique and most of the time stocks fall 20% for a reason that makes sense. But sometimes they don’t.
What is a slam-dunk secular thesis for the next decade? Going off of the most interesting tweet I saw last week (link below), here are a few secular growth categories I am confident in for the next decade. First, the obvious one is the continued penetration of the cloud. It made people incredibly rich last decade, and given its gigantic market opportunity, the trend looks highly likely to continue over the next decade. Unfortunately, cloud/SaaS businesses almost always fall into my “too hard pile”, but if you are knowledgeable about the industry the investment opportunities seem mouth-watering. Another layup is the growth of interactive entertainment (video games). This includes both time and money spent. With all the dollars pouring into the industry, it is hard to see how interactive entertainment doesn’t grow and likely steal market share from TV/movies/video over the next decade and beyond. Lastly, it is pretty clear the “war on cash” (transition from physical to digital exchanges of currency) will continue unabated from now until 2030. However, the opportunity set within this category and the broader fintech landscape has muddied over the past few years, which has kept me hesitant from investing in any particular company. The fact that VC capital has flooded the industry and every stock seems to trade at north of 10x sales doesn’t help either. Two stocks that have piqued my interest in the space are Wise and Remitly, both new age remittance companies, but they remain on the watchlist for now (listen to our shows on them here and here). You might have read this section and thought “duh, those are obvious secular themes. How insightful.” And that is somewhat true. But I would much rather invest, research, and think about industries with proven market opportunities that clearly create value for customers instead of speculating on cutting edge or unproven industries like AR/VR, gene therapy, space travel, and the metaverse. Those might become clear secular growth industries at some point (and we may look back 20 years from now and see that the growth started today), but from an investing standpoint, I think it can be a much better risk/reward to stick within proven industries.
Social networks vs. digital utilities. Social network stocks, at least among fintwit, seem to be very popular investments. This includes Facebook, of course, but also Snap, Pinterest, and Twitter. Personally, I am hesitant to plop down a long-term bet on any social network because of durability concerns. They just seem too trendy to me. I would much rather invest in what one might call digital utilities, because it is much easier to predict end-customer demand five or ten years from now. It is not a black or white distinction, but in my mind, things like search/maps (i.e. Google), music streaming, payment rails, video conferencing, digital signatures, and website building are way better pools to fish in than social networks. Why? Because end demand is consistent and customers tend to stick with the products for many years with little worries about churn. It is also very difficult for competitors to build something that is meaningfully better than an existing solution (think about Zoom and Visa here) unless the value provided is the product being bundled with something else. Slap on a well-liked brand and you have a potential compounder on your hands. Unlike these digital utilities, social networks are more susceptible to disruption because it is easier for a competitor to invent something that customers value more, like Tik Tok. It creates a need for Facebook to stay on the innovation treadmill, while someone like Visa has an easier time sitting on autopilot with its core business. This doesn’t mean all social networks will be bad investments and that all digital utilities will be good investments. They are just a more difficult puzzle to solve.
See you next week,
Brett
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Smart and Funny Tweets:
