Good morning, hope your week is off to a good start. On to the update:
1. A $22 billion company you’ve probably never heard of
Atlassian develops software that helps teams collaborate on projects. They are a SAAS company (software-as-a-service). This means their products are stored and accessed via the cloud. The next few slides are from a presentation they gave in 2017. You can view the whole presentation here.
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Important: We categorize investments in two ways. Strategic or tactical; occasionally, they can be both. Most of the trades we cover fall into the tactical bucket.
Strategic: Occasionally, we have insight into a specific company or theme and we are willing to make a 5-10 year bet to see if it plays out. In this category, we are looking for a business that has the potential to be a monopoly (legal of course), dominate their category, and build a durable moat.
Tactical: For these trades, we have a specific price target to take profits at and a stop to protect our downside. For more information on how we evaluate these trades, read this article.
Stability leads to instability
The headline is part of a quote by the economist Hyman Minsky. He was referring to the economy in general but we can also apply it in the context of business.
When a business reaches a certain level of success, they can, if they aren’t careful, become complacent. They can lose focus on serving their customers and meeting their needs. And if they aren’t careful, competitors will come in and start encroach on their territory. This process could happen so slowly, that upper management might not notice.
Then one day… boooooom…They’re in a fight for their lives and their very existence is at stake. (think Netflix and Blockbuster or the demise of Sears)
The rest of the content is for paying subscribers of Pure Alpha. Want to learn more about becoming a subscriber, click here.
We have become an “asset-light” economy. Quote from Warren Buffett’s annual shareholder meeting.
FAANG stocks were crushed in October. Rally over?
These categories of smart home technology are poised for growth.
Public offerings: How Moderna Therapeutics wants to revolutionize drug manufacturing.
Two signs a recession “might” be near.
Canada is fragile.
1. Spotify vs the record labels
The above chart is Spotify’s gross margin since 2013.
As a refresher, gross margin is (Revenue – Cost of Revenue).
From an article by Music Business Worldwide:
During the last round of negotiations with the three major record labels (Universal, Sony, and Warner), Spotify was able to reduce their payout to the record labels from 55% towards 52%. Hence the bump in gross margin improvement
The reduction was granted on the basis that Spotify hit steep subscriber targets.
See the problem… The percentage Spotify pays out to the labels has a direct effect on their gross margin.
“Is this a healthy correction in a bull market with further to run, a reset lower in belated recognition of this year’s geopolitical risk, or the start of a new bear market?”
Our view: Trying to figure out how deep a correction will be or how long it will last is a waste of time because it is out of our control. All we can control is our behavior. Let’s focus our attention on deploying money into investments that we believe offer more upside than downside.
Paypal is growing at 21% and we still don’t know much about Braintree and Venmo. Braintree and Venmo are two assets Paypal owns. PayPal doesn’t give us much information on the performance of those two businesses. Paypal’s future growth will depend on how well they grow and build defensible businesses with Braintree and Venmo.
Paypal’s three main businesses
• B2B = Business to business
• B2C = Business to consumer
A quick look at their earnings
Excluding the sale of a loan portfolio, revenue grew 21%; in line with expectations. EPS rose 17%, beating analyst estimates and the company raised full-year guidance.
Paypal’s traditional product is the button you see when buying something online. (see above)
Estimates say this button accounted for 86% of last year’s revenue. However, analysts have good visibility as to the growth of this product, thus there is not much room for upside surprises.
The bigger growth driver for Paypal will be Braintree and Venmo.
Braintree is B2B (business to business) product that specializes in mobile and web payment systems for e-commerce companies such as Uber and Airbnb.
Braintree processed 1.64 billion transactions in the third quarter, up 33% from a year ago.
Venmo is a B2C (business to consumer) product that allows you to pay and request money from your friends. Verto analytics estimates that Venmo has 10 million unique monthly users as of August.
According to the WSJ, 24% of Venmo users have used the app in a way that generates money for the company. This is up 17% from a year earlier.
Both of these products, Braintree and Venmo, have a macro tailwind as both digital payments and the use of mobile apps to manage money grows in the coming years; especially with millennials.