We're Not in (Ar)Kansas Anymore
Things that happened last week:
At least 6 prominent tech companies filed an S-1 to go public.
Google searches for the term “SPACs” hit an all time high, up 5x vs. pre-pandemic times.
Miguel Bezos’ investment in Amazon also hit an all time high, a 20,294x return.
Apple’s 30% App Store fee is still 30%.
Exxon got kicked out of the Dow Jones Index.
WalMart is making a run for TikTok.
And last but most certainly not least, Messi decided to leave Barcelona.
If you’re interested in investing, startups and soccer, these are fascinating times. But the speed of change can get overwhelming. Events appear interrelated and not totally under anyone’s control. There are cyclical and structural forces at play, as well as a global pandemic that seems to keep hitting the fast-forward button every Monday.
Let’s try to digest the list from last week.
Going public never felt so good
After years of hearing the drumbeat from Silicon Valley about the virtues of staying private, we get a tsunami of S-1 filings. The list of notables includes: Palantir, Snowflake Computing, Asana, Unity, JFrog and Sumo Logic. All of these are very interesting companies that you can explore on the SEC website.
AirBnb has also filled an S-1, though confidentially, so we can’t access it yet. But they certainly fit the pattern: amazing tech company going public now.
A short side note on Palantir. This is a defense contractor co-founded by a keynote speaker at the 2016 Republican National Convention. I’m not adding a view on that, it’s the world we’re living in. I do recommend reading the rant-letter from the CEO in the S-1. Aggressive but not empty of truths about the state of tech and its influence in global affairs.
S-1 fillings are normally linked to IPOs, the going-public and somewhat obscure processes led by Wall Street firms. This time around several of those S-1s are tied to direct listings rather than IPOs. Silicon Valley is skipping Wall Street. You can read a comparison of IPOs, direct listing and SPACs in this blog post from renowned venture capitalist Bill Gurley.
SPACs are all the rage these days. Famed value investor Bill Ackman just raised a massive $4 billion SPAC to invest in a “mature unicorn”, in his words. Also in his words: “We’re looking for a simple, predictable free cash flow-generative company, very high barriers to entry with minimal exposure to what we call risks, extrinsic risks we can’t control”. “We’re looking for the super durable great growth business that we can own for the next decade.” Aren’t we all looking for that...
Ackman is far from alone in joining the SPAC party. Others include:
Gary Cohn, former Director of the National Economic Council and Goldman Sachs President.
TPG, a leading private equity firm.
Paul Ryan, former Speaker of the House (yes, a politician).
Billy Beane, Oakland Athletics general manager (yes, the one played by Brad Pitt in Moneyball).
There are others, but you get the picture. The nuance is that if you have a track record in finance that is measured in decades, your SPAC can be in the billions. If you're in sports, politics or any other non-business field you will have to settle for something in the hundreds of millions ($300 million seems to be the magic number).
What do these S-1s, SPACs, direct listing and IPOs mean? I’ll say what seems obvious, sometimes in retrospect, sometimes in the present moment. If it’s such a great market to go public and there are so many effective ways to do it, we’re probably not at the bottom of the cycle. That’s not the most courageous way to write a sentence, I realize, but who’s brave enough to call a top?
Apple + Amazon = (Sam Walton x Algo-Dancing) + Tesla
The combined market cap of Apple and Amazon is approaching $4 trillion. Throw in Tesla and we’re there. These companies are so good that it’s getting bad. It’s easy to hate on Facebook and Google, that’s beginner level. But getting worked up about two loved and trusted brands like Amazon and Apple is a whole different game. It’s the big leagues of discontent.
Why is this happening? And how does it relate to all of those S-1s?
If pushed to come up with an explanation, I’d blame the pandemic. We were on a pleasant and predictable digital transformation journey until COVID19. The pandemic accelerated everything. In Elon Musk terminology, we were riding through a forest at a rapid but not dangerous speed in a Tesla Model S, when suddenly the car turned into an early -not fully finished- version of the Falcon 9 rocket and we’re in the middle of take off. Our brains are still not Neura-linked to process things this quickly.
We can sense that it’s powerful, amusing and not reversible. Even if we don’t understand everything, we get some of the gist. For instance, Big Tech is clearly benefiting from the move to digital, so their stock prices going up looks like a rational response. The concentration of economic power might be too much and trillion dollar market caps feel strange. But we could, even in the middle of the pandemic, understand or rationalize many of the things we were seeing.
This week feels different. A lot of what is happening is just surprising, and it’s not only in tech and finance. Dicks’ Sporting Goods, a brick and mortar retailer of goods that are not necessarily “essential”, reported a 20% jump in sales for the May-July 2020 period relative to 2019. Existing home sales in the US were up 8.7% in July 2020 vs. July 2019 with the median price up 8.5%, which means that the total transaction value of homes sold increased 18% year over year, from $1.5 to nearly $1.8 trillion. Notice that homes and sporting goods jumped by 18-20% not in relation to a pandemic bottom in April or May of this year, but relative to 2019, which was a very strong year for the economy!
If you can read this type of news and understand all of its causes and implications, I’m impressed. Still, you might be challenged if asked to explain how it is that Sam Walton’s masterpiece just decided to join a group of teenagers in the digital dance floor known as TikTok. I need a minute to process this one, even if there is a perfect answer, the question is worth the pause.
Calling a top after all: Rockefeller, Messi and Mercado Libre
When I sat down to write this, I didn’t expect to make perfect sense of this week’s events. The expectation has been met.
However, I am calling a top on a crucial topic. Not the markets or tech. In fact for the latter, when I look at the two sectors I am most familiar with -education and health care- the digital transformation is barely getting started. I see decades of innovation and value creation ahead for two sectors that represent about 20% of global GDP. So even if valuations are stretched and going public is too easy right now, my bet is that any drawdown in tech-related asset prices will be cyclical and therefore temporary.
My call is related to the bidding war for Lionel Messi. His transfer from Barcelona has two front runners: the UK’s Manchester City and France’s PSG. Both soccer clubs are owned by middle east oil money. I’m calling this a top. While Exxon getting a boot from the Dow Jones is a leading indicator (or was it negative oil prices?), European soccer club ownership will be a lagging one - and a great one if you believe in clean energy and a sustainable future.
What could happen in the world of soccer? A wave of team owners coming from tech. Mark Cuban but more global and focused on the sport we (people not born in the US) most love. I imagine Tobi Lutke (Shopify, Germany) teaming up with Marcos Galperin (Mercado Libre, Argentina) to build a soccer powerhouse only rivaled by the one built by Eduardo Saverin (Facebook, Brazil) and Daniel Ek (Spotify, Sweden). Some matchup this would be. And perhaps they’d bring some much needed innovation and integrity to the sport.
That future might be a decade or two away. Until then it will be fascinating to see the interplay between the things we knew (WalMart, Ackman), the things we now know (Amazon, direct listings), the surprises that will transform us (Musk, AI), and the things we day-dream about: finance, tech and capitalism at the service of a more humane world. Stay tuned!
PS Algo-Dancing is the algorithm-induced addiction to watching teenagers dancing to catchy music on your smartphone.