Weekly Roundup
Howdy folks,
We’ve got a lot to cover in today’s edition. The first thing I’d like to showcase is two charts: one illustrating the performance of the S&P 500 over the last month, vs. the performance over the last week.
Last Month Performance
Source: Finviz.com
Last Week Performance
Source: Finviz.com
What sticks out to me the most is the performance of big tech (i.e. Apple, Microsoft, Nvidia, Google, Amazon, and Tesla). In full disclosure, I own positions in all six of those companies, and rarely sell my shares (but more on that in a bit).
There are a myriad of factors that will contribute to increased volatility in the stock market this year. As I’ve written about before, economists believe that inflation will linger for at least another 12 months. Moreover, the capital markets tend to act in extremes during election years, which we’re currently in. I think what we need to focus on is “zooming out.” I would argue that the performance of the last 5 trading days are simply optics, and not indicative of the underlying fundamentals for many of these companies.
My latest articles are below and I’ll explain why I feel this way:
Article 1: Google Acquires Mandiant
Disclosure: Own 7 shares of Google at $2,925/share
About a month ago, Alphabet announced its intent to acquire cybersecurity company Mandiant for $5.4 billion. I found this deal particularly interesting because Microsoft had been rumored to be in the mix for a bid, but ended up passing.
Since the advent of COVID, I've seen many interviews of CEOs and read many articles where the term "digital transformation" is referenced. Although it could be agued that this is a new buzz term / corporate jargon, I've found it interesting to see where and what types of IT investments companies are prioritizing.
There are a lot of research papers indicating that the cybersecurity landscape in general has a lot of tailwinds. The point that I find most interesting is that as corporations around the globe embrace remote work environments, companies now face pressure on how to build secure infrastructure off premise.
Google, Amazon, and Microsoft have invested heavily in cybersecurity over the last year. Microsoft acquired RiskIQ as well as CloudKnox, while Amazon acquired Wickr. Google acquired Siemplify earlier this year, and now plans to acquire Mandiant. Although all of these acquisition targets have different specialties, the overlapping theme is that these companies (and the products they develop) will be integrated into the respective cloud offerings of the tech behemoths.
I've written before that AWS alone could be reasonably valued at $500 billion as a standalone business. Moreover, Microsoft's Azure environment is an absolute monster and growth engine for the company. Google Cloud, however, is just getting started. Despite generating nearly $20 billion in revenue from Google Cloud in 2021, this segment remains unprofitable for Alphabet.
I think that by integrating Siemplify and Mandiant into the cloud environment, Google is quickly creating differentiated, end-to-end secure cloud offering. Should the company execute on the integration, Google will have the ability to cross-sell and upsell different products and services to new and existing customers, thereby creating a stickier and higher-margin customer base.
All 3 of these companies are core holdings in my portfolio, and I believe that we will see impressive double digit revenue growth and margin expansion from all of them for years to come. While Microsoft's next big horizon is gaming (Activision), and Amazon's on entertainment (MGM), I feel that Google identified a solid growth sector that it already participates in (security).
Article 2: Amazon splits its stock
Disclosure: Own 27 shares of Google at $2,675/share
Stock splits are a very interesting financial vehicle. When a company splits its stock, this means that it issues more outstanding shares commensurate with a predetermined multiple. As a result, existing shareholders receive more shares, at a now lower price, thereby protecting any dilution.
Here’s an example: Amazon is going to a 20-for-1 split this summer. This means that for each share of Amazon I own, I’ll now receive 20 shares. However, the price per share will appear lower than my cost basis above. However, the market value of my position will be the same (I am just getting more shares at an artificially lower price).
What makes stock splits so interesting is that they carry a psychological effect. More specifically, what tends to happen is that after a stock split the price per share usually increases significantly because more investors pour into the stock because they think it’s cheaper.
In the article, I highlight stock splits from Apple, Tesla, and Nvidia which all occurred during the last two years. In each case, the stock price rocketed significantly roughly 30 days following the split, only the drop back down to pre-split adjusted levels.
This makes sense because savvy traders simply rode the momentum and bought before the split, which a plan to sell following the split. I personally am not sold that we are out of the woods just yet from an economic standpoint. Although we’ve had a nice bounce in the markets over the last month, I view it as a fleeting bear market rally. I’m not here to make a prediction on the likelihood of a recession, per se, but I do think things are going to get worse before they get better. For this reason, I am mulling over a “momentum trade” whereby I’d buy more Amazon stock now, and sell it this summer after the split to lock in some gains and build up some easy cash.
Article 3: Matterport and the metaverse
Disclosure: Liquidated entire position
Matterport went public in July 2021 through a special purpose acquisition company (also known as a “blank check” company). Matterport has developed a 3D rendering technology whereby users can scan physical spaces such as a retail outlet, and create a digital twin which can be viewed on a tablet.
I’ll admit that the tech is pretty sophisticated and intrigues me. I am even considering purchasing a Matterport myself. But from an investment standpoint, I am torn on this one. I owned 500 shares at $11/share before the de-SPAC event. However, following the public offering, Matterport announced strategic alliances with Facebook and Amazon. The company will be integral in Facebook’s metaverse ambitions as well as Amazon’s growth in the cloud.
The stock rocketed to nearly $40/share in November, which, fundamentally speaking, grossly overvalued the company. I sold my shares in 2 tranches, half at roughly $22/share and the other half at breakeven.
Although I think the company has a lot of momentum, I won’t be buying just yet. I’d rather stick to blue chip names. However, Cathie Wood recently initiated a position in Matterport, and I do think its current valuation presents a good opportunity for a speculative buy.
Article 4: Snowflake and Q4 Earnings
Disclosure: No position
I've been intrigued by Snowflake for several reasons. I have a friend who used to work there, and I work at a quasi-competitor. Moreover, the company had the biggest software IPO of all time in Sept. 2020 (same month Palantir went public). Brad Gerstner also speaks very highly about the company and its CEO, and I tend to pay close attention to what Gerstner says.
I spoke to someone who has actually used Snowflake and was told "the product is so easy to use, it's like playing a video game." That is a pretty cool way to describe user experience and functionality.
While analyzing the stock, I've really harped on its lack of profitability and its path to $10 billion ARR. I still stand by my call that Snowflake will not reach $10 billion ARR without acquisitions. But after its Q4 earnings investors can see how rapidly revenue is growing and its improving net retention rate. Basically all of the company's KPIs are incredible with the exception of its losses. See investor deck here
All in all, I think Snowflake is a tradeable stock at the moment. There is definitely money to be made with this company, but for a long term position, I still think it's fairly overvalued.
The biggest tailwind I see is the increasing digital transformation across companies of all sizes. What I mean by that is Snowflake's consumption pricing model (as opposed to subscription software) could be incredibly lucrative in the long run as companies rely and collect more and more data. However, predicting growth rates off of broader, macro industry trends is a bit of a shot in the dark. There are awesome research papers about how much IT leaders will spend on security, data warehousing, among other tools. And although that can provide a proxy for a company's growth, these estimates tend to be in a very large range.
I want to make it clear that I do not dislike Snowflake, I simply haven't been totally compelled to buy the stock just yet. The company has achieved a lot in fairly short order, and seems to have more positive momentum than not.
Upcoming articles and posts:
CrowdStrike: This Cybersecurity Stock Could Just Be Getting Started
Coinbase and Matterport: Cathie Wood Just Bought These Metaverse And Crypto Stocks. Should You?
Google: Should You Buy Alphabet Before The Stock Split?
Microsoft: Microsoft is Showing Investors Why It's a Must Own Stock in 2022
Apple: Apple's Q4 Earnings Showcase Why It's a Must Own Stock for 2022 and Beyond
DocuSign: What's Next For DocuSign After Q4 Earnings?
Twitter: I’ll be monitoring Elon Musk’s Twitter more frequently now that he is on the Board. I am particularly interested in what changes he tries to make and what he shares with us.
Fractional Shares in Alternative Assets: I am very interested in alternative asset investing (i.e. assets beyond tradeable equities). There are a number of products and apps that allow users to buy shares in things such as trading cards, comic books, sneakers, etc. I’d like to do a profile of these companies as many of them have attracted significant venture capital.
Coinbase: I am working on a larger piece about why I think Coinbase is significantly undervalued, with a particular focus on its in-house venture fund. Stay tuned!
As always, please comment or share this post if you liked it! I’d love to know what you think. When I’m not working on Moneyball, I’ll be glued to the tv watching the Sixers and Phillies over the next several months! Let’s go!