Your last chance to watch our big event; Zoom Is Not the Next Amazon; The Gambler Who Cracked the Horse-Racing Code; How the Sacklers Shifted $10.8 Billion of Their Opioid Fortune; The Billionaire Who Wanted to Die Broke... Is Now Officially Broke
1) On Wednesday, I hosted a special event with my colleagues Enrique Abeyta and Berna Barshay.
For the first time, I shared on camera my big prediction for the outcome of November's upcoming election and what effect it could have on the stock market. We discussed which sectors will break out (or break down)... and we even shared the name and ticker of a stock that has the potential to double from here.
If you missed the event, you're not too late – a replay is still available. But don't delay... The whole thing goes offline tonight at midnight. Watch it right here.
2) I think my friend Doug Kass of Seabreeze Partners is probably right that Zoom Video Communications (ZM) is a good short here.
It's a great company, and I love its video-conferencing services. But Zoom has many competitors, so I don't think it has much pricing power... and the valuation is truly absurd (a $132 billion market cap, equal to 105 times trailing revenue). Here's Doug...
Zoom Is Not the Next Amazon
* Last night, I shorted Zoom at $497/share
The newest "shiny object" that the retail investors are gravitating towards is Zoom.
It is always interesting to me to observe that the more a stock like Zoom rises, the more popular it becomes.
But, to me, the most amazing thing is not the parabolic nature of Zoom's price chart – it is the size of the company's market capitalization relative to other healthy, growing, and larger tech companies.
Zoom is now worth close to $150 billion.
By contrast, Microsoft (MSFT) is worth $1.5 trillion (and, to me, is not cheap at 30x EPS which is about the highest multiple it has had in recent times).
Apple's (AAPL) market capitalization is $1.8 trillion and is also very pricey at ~30x EPS for a low growth business.
On a last quarter reported basis, ZM had $328 million of revenue, MSFT's sales are $38 billion, and Apple has $60 billion in sales.
To put that into perspective, Doug notes that Zoom has less than 1% of Microsoft and Apple's revenues... yet its market cap is 10% and 8% the size of those two tech giants! More from Doug:
So $1 of ZM revenue is being capitalized at 11.6x a dollar of MSFT revenue, and 14.5x a dollar of Apple revenue.
Granted ZM is growing faster right now. That is where the good news ends.
Here are the pricing plans for ZM.
Zoom as a product is incredibly cheap, which partly explains the rapid uptake. I am not sure how big this company can be. It also seems like everyone is using Zoom right now. This quarter they are currently in – which should be another blowout as implied by the price action – could be close to about as big as they can be, or at least at the point where the growth rate will materially slow.
Then the market is being priced for COVID going away at some point and things getting back to normal. That means at some point ZM by definition will have to be a shrinking company. At that point, on the other hand, a company like Microsoft should see growth re-accelerate.
I also doubt whether ZM, can earn anywhere close to the margins Microsoft and Apple earn.
Moreover, in the fullness of time, what ZM does is not hard to do, and there are already equivalent competing products from big, well-heeled tech companies like Alphabet (GOOGL) and MSFT.
This is more about the absurdity of the amount of market cap being ascribed to a company like Zoom.
We have recently seen how fast the air can come out of some of these things, like Nikola (NKLA), or said another way, how companies with little in the way of fundamentals can trade up to absurd amounts of market cap.
I am not even sure how you get there with Zoom if you even try to tell the fairytale story. The company's market is of limited size at these price points, the earnings potential is limited for this type of product, and the competitive risk is high.
$150 billion of market cap, and the fairytale story isn't even there. In fact, the fairytale is the world goes back to normal, and when that fairytale happens, Zoom's business will plummet.
I get why retail traders and some institutional investors are fascinated with Zoom, what I don't get is why every institution isn't saying "sold to you?"
Zoom is an example of 2000. I realized how absurd it was back then when Sycamore Networks, at under $500 million in sales had 2/3 of the market capitalization of Lucent, which had tens of billions of dollars in sales. We know how that ended. And it could very well end the same with Zoom.
3) This fascinating article from Bloomberg has many implications for investors: The Gambler Who Cracked the Horse-Racing Code. Excerpt:
Veteran gamblers know you can't beat the horses. There are too many variables and too many possible outcomes. Front-runners break a leg. Jockeys fall. Champion thoroughbreds decide, for no apparent reason, that they're simply not in the mood...
What if that wasn't true? What if there was one person who masterminded a system that guaranteed a profit? One person who'd made almost a billion dollars, and who'd never told his story – until now?
... A breakthrough came when Benter hit on the idea of incorporating a data set hiding in plain sight: the Jockey Club's publicly available betting odds. Building his own set of odds from scratch had been profitable, but he found that using the public odds as a starting point and refining them with his proprietary algorithm was dramatically more profitable. He considered the move his single most important innovation, and in the 1990-91 season, he said, he won about $3 million...
Benter had achieved something without known precedent: a kind of horse-racing hedge fund, and a quantitative one at that, using probabilistic modeling to beat the market and deliver returns to investors. Probably the only other one of its kind was Woods's operation, and Benter had written its code base. Their returns kept growing. Woods made $10 million in the 1994-95 season and bought a Rolls-Royce that he never drove. Benter purchased a stake in a French vineyard. It was impossible to keep their success secret, and they both attracted employees and hangers-on, some of whom switched back and forth between the Benter and Woods teams.
4) Kudos to Bloomberg for this excellent piece of investigative journalism – tracking the Purdue Pharma blood money: How the Sacklers Shifted $10.8 Billion of Their Opioid Fortune. Excerpt:
As the U.S. bumbles its way through the coronavirus pandemic, it can be easy to overlook the opioid epidemic that's shattered so many lives. But a trove of documents that Bloomberg Businessweek has spent months analyzing helps explain how the company at the center of the crisis moved money around in the years prior to declaring bankruptcy.
Purdue Pharma LP faced its first court challenge in 2007, pleading guilty to misleading the public about the addictive potential of its flagship painkiller, OxyContin. By 2019 more than 130 people were dying daily from opioid overdoses in the U.S., and Purdue faced thousands of lawsuits for its role in the epidemic. The company, owned by the Sackler family, declared bankruptcy in September of that year to short-circuit the lawsuits.
But in the years prior to the bankruptcy, Purdue and its subsidiaries moved billions to companies ultimately registered in Luxembourg, the British Virgin Islands, and Delaware. The trail that traces those billions is labyrinthine, but here's what we know about their maneuvering based on hundreds of pages of publicly available information...
From 2008 through 2017, $10.8 billion flowed out of Purdue in hundreds of transactions through numerous subsidiaries.
5) At the exact opposite end of the moral spectrum from the Sacklers is Chuck Feeney – what an exemplar he is! The Billionaire Who Wanted to Die Broke... Is Now Officially Broke. Excerpt:
Charles "Chuck" Feeney, 89, who cofounded airport retailer Duty Free Shoppers with Robert Miller in 1960, amassed billions while living a life of monklike frugality. As a philanthropist, he pioneered the idea of Giving While Living – spending most of your fortune on big, hands-on charity bets instead of funding a foundation upon death. Since you can't take it with you – why not give it all away, have control of where it goes and see the results with your own eyes?
"We learned a lot. We would do some things differently, but I am very satisfied. I feel very good about completing this on my watch," Feeney tells Forbes. "My thanks to all who joined us on this journey. And to those wondering about Giving While Living: Try it, you'll like it."
Over the last four decades, Feeney has donated more than $8 billion to charities, universities and foundations worldwide through his foundation, the Atlantic Philanthropies. When I first met him in 2012, he estimated he had set aside about $2 million for his and his wife's retirement. In other words, he's given away 375,000% more money than his current net worth. And he gave it away anonymously.
While many wealthy philanthropists enlist an army of publicists to trumpet their donations, Feeney went to great lengths to keep his gifts secret. Because of his clandestine, globe-trotting philanthropy campaign, Forbes called him the James Bond of Philanthropy.
But Feeney has come in from the cold. The man who amassed a fortune selling luxury goods to tourists, and later launched private equity powerhouse General Atlantic, lives in an apartment in San Francisco that has the austerity of a freshman dorm room. When I visited a few years ago, inkjet-printed photos of friends and family hung from the walls over a plain, wooden table. On the table sat a small Lucite plaque that read: "Congratulations to Chuck Feeney for $8 billion of philanthropic giving."
That's Feeney – understated profile, oversize impact. No longer a secret, his extreme charity and big-bet grants have won over the most influential entrepreneurs and philanthropists.
His stark generosity and gutsy investments influenced Bill Gates and Warren Buffett when they launched the Giving Pledge in 2010 – an aggressive campaign to convince the world's wealthiest to give away at least half their fortunes before their deaths. "Chuck was a cornerstone in terms of inspiration for the Giving Pledge," says Warren Buffett. "He's a model for us all. It's going to take me 12 years after my death to get done what he's doing within his lifetime."
Feeney gave big money to big problems – whether bringing peace to Northern Ireland, modernizing Vietnam's health care system, or spending $350 million to turn New York's long-neglected Roosevelt Island into a technology hub. He didn't wait to grant gifts after death or set up a legacy fund that annually tosses pennies at a $10 problem. He hunted for causes where he can have a dramatic impact and went all-in.
Best regards,
Whitney