SITALWeek #275
Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, magicians and comedians, and whatever else made me think last week. Please grab me on Twitter with any thoughts or feedback.
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In today’s post: Abstracting banks; the real cost of IPOs; TSMC buys land in the desert; lower rates driving higher asset prices; ergodicity goes mainstream; raising money in the face of the unknown; the similarities between investing, magic, and stand-up comedy; and lots more below...
Stuff about Innovation and Technology
Gamers and Fans Flock to YouTube
100B hours of video game content was viewed on YouTube this year, up 100% from two years ago. More than 80,000 gamers have over 100,000 channel subscribers each, and over 1,000 have more than 5M subscribers each. Leading the viewing was Minecraft at 201B views followed by Roblox at 75B views. In total, 10% of the 100B hours was watched live.
Empowering Gamers to Generate Content
Manticore’s Core platform is a “ground-breaking user-generated content (UGC) platform for creating and playing: to democratize and open gaming to a whole new wave of creators, from all horizons” that will pay out 50% of revenues to all users generating gaming content – and cover the entire stack of needs for developers. Essentially, this takes the UGC model of YouTube and applies it to a gaming platform. It’s exciting to see so much value created in the gaming industry both outside of and built from core platforms – those non-zero-sum value propositions tend to accelerate growth for industries.
The Abstraction of Banking
The idea of a bank is to lend money out in relation to the deposits it has. This provides liquidity in the economy and allows people to bet on the future by borrowing today. Since the financial crisis over a decade ago, banks are doing a lot less lending. Speaking at a Goldman Sachs conference last week, JP Morgan Chase CEO Jamie Dimon lamented the change: “The banking system as a size relative to the global economy gets smaller and smaller and smaller and smaller. And remember, the market sets capital requirements, not just the bank and not the regulator. So you've had 80% of the mortgage go outside of banking. Tremendous amount of private credit is going outside of banking. And you can go down one after another, things that are leaving banking because they get more favorable treatment outside. And the regulator (inaudible) out what they want because eventually they're going to regulate the banking system out of business.” Dimon went on to discuss how the government also replaced banks as agents to intermediate in times of market crises: “you saw it in March and you may see it again, is the ability of banks to intermediate because they hit a whole bunch of walls...And of course, who -- if the banks can't intermediate, who intermediates? The Fed. Is that what they want? If they are the permanent -- step in when something goes wrong to come intermediate, and that's what happened in March with the repo market.”
So, what does the next decade look like for financial services? Or, more bluntly, what is the point of a bank? The idea of holding assets and lending money is being abstracted. Stripe’s new Treasury product white labels banking as a service. Google Pay is becoming a banking marketplace. Affirm is aiming to displace credit cards for point-of-sale lending. Modern mobile-first banks, like Chime, are making banking friendlier and easier for a younger generation. The list goes on and on, and function after function of big banks are disappearing. What could happen is an extreme power law where a small number of traditional banks act as a system of record for holding assets, while many innovative companies proliferate in the fintech space. Or, as was suggested on Net Interest, Dimon’s comments may simply be calling on regulators to catch up and regulate the disruptors more. In the meantime, I still seem to write a lot of paper checks, and yesterday I saw a line to get into a local Wells Fargo branch. Meanwhile what’s Dimon’s reaction at the same GS conference to watching all the fintech innovation from the sidelines? "We could have done that, too, and we didn't.”
Across the Pond, Amazon’s Still a Little Fish
Here’s an insightful look at Amazon’s failure to execute across Europe as ecommerce remains, in many instances, a regional market. Although the numbers could be skewed by growth in AWS, Amazon has less to show for its international investments compared to the other Internet giants (in Q3 2020, Amazon’s international revenue was 38% of the total, down from 39% in the prior year; by comparison, Facebook garnered 53% of its revenue outside the US, Netflix’s subscribers outside of the US and Canada represent 62% of their total subscribers, and Google generates 54% of its revenues outside the US; sources: most recent quarterly filings for each company). The same can be said of leading ecommerce platforms around the world who have not expanded from their home territories. Ecommerce's end state may simply be more regional than search, social, and streaming.
TSMC to Set Up Shop across from In-N-Out
TSMC has purchased 1000+ acres in North Phoenix for $89M (conveniently near an In-N-Out Burger) for what could be the beginning of a huge semiconductor supply chain expansion on US soil. So far, TSMC’s US expansion plans are too little, too late to make much of a dent in the global tensions between the US and China. I would still love to see a major $100B+ JV between the big US chip designers and TSMC to roll out several leading-edge facilities. Apple, perhaps, has the most to gain from funding such an endeavor, as they increasingly generate much of their value from chip design (it’s always been a story of success via vertical integration, but, as of late, the chips seem to outshine the other areas of the business in my opinion), and Apple has the most to lose if something catastrophic happens to TSMC. The CHIPS for America Act in the US is now joined by a new effort in the EU to increase investment in domestic chip innovation and supply.
Music Royalty’s Hard Knocks
Musician David Crosby highlights the zero- (and often negative-) sum, economics of the music royalty business with his remarks on the reported $300M+ sale made by Bob Dylan for Dylan’s entire publishing catalog to date: “I am selling mine also ...I can’t work ...and streaming stole my record money ...I have a family and a mortgage and I have to take care of them so it’s my only option ..I’m sure the others feel the same”. The entertainment industry is complicated, and a lot of artists choose to take more money up front while sacrificing future paydays (as Chapelle recently complained about), but it still feels odd when I listen to a song knowing the people who created it aren’t earning much, if anything.
Musk’s Musings and EV Licensing
I thought this BI interview with Elon Musk was more insightful than the typical interview (where Elon metaphorically punches the journalist in the face). It’s behind the BI paywall, but it’s worth a read if you have access. Musk was more open about licensing various parts of Tesla’s tech stack to other auto companies. He also discussed how he often sleeps in conference rooms at factories, and how he remains focused on “[increasing] the scope and scale of consciousness so that we can try to figure out how to answer these questions, and what questions to ask” (a reference to the philosophy of The Hitchhiker's Guide to the Galaxy). AI is discussed quite a bit, and Musk thinks no one is coming close to what Google’s DeepMind is achieving in the field. He also commented: “I'm trying to use technology to maximize the probability that the future is good. And, at a foundational level, that means ensuring we have a future, which is why sustainable energy is so important for the future of Earth.” And, “Science is great for science. Science is discovering things about the universe that already existed, and engineering is about creating things that never existed. I think to create something new that, as far as we know, never existed in the universe before. That's great.”
Miscellaneous Stuff
Dolly Parton: More Real than Real
RuPaul interviews Dolly Parton for Marie Claire. Parton, who normally wakes up around 3am after an average four hours of sleep, said: “Well, I’m energized by just what I do. It’s like, work begets work, energy begets energy. I just really stay alive because I just live on creative and spiritual energy. I’m like the little Energizer Bunny. I’m just recharged by the excitement of being able to still be active and to still be able to create stuff and to be still in demand.” Parton, who earlier this year donated $1M that contributed to the creation of the Moderna COVID vaccine, also dropped a new Christmas album last week that includes duets with Miley Cyrus, Willie Nelson, and more.
Stuff about Geopolitics, Economics, and the Finance Industry
Low Rates Fuel High Asset Prices
The average investment-grade corporate bond now has an inflation-adjusted yield of zero. Meanwhile, I recently spotted an original Mike Tyson’s Punchout Nintendo cartridge for $90,000 on Rally Rd.
Ergodicity Finally Headlining
It’s thrilling to see ergodicity economics hit the mainstream in this well done Bloomberg article. The path through time matters, but all traditional economic and finance theory ignores this crucial factor. Here are the dozen times we’ve discussed elements of ergodicity in SITALWeek if you’re interested in further reading on the topic.
Pandemic Advantages Homeowners
Homeowners in the US have gained $1T in equity due to home price increases during the pandemic. This highlights the pandemic-accelerated bifurcation of the haves and the have nots. Rising home prices could also be a significant bolster to consumer spending in the coming years if homeowners tap the equity with cash-out refis or HELOCs.
Overcoming Fragility in Face of the Unknown
In November of 2011, Netflix raised a desperate round of $400M at a split-adjusted price of around $10 per share. After bottoming a little lower around one year later, the stock has since risen 50x. The shares sold in the offering would be worth around $20B today. In April of this year, Airbnb raised $1B in debt financing at an implied price equivalent to around ~$30 – around 1/5th of where the stock traded in its IPO debut last week (discussed by the company’s CEO, who struggled to respond to the IPO pop, here). It’s interesting to reflect on these two offerings, whose only connection is dilutive fund raising in a time of uncertainty for each business. It’s hard to fault either company for the capital raises given the circumstances, but were they due to a lack of confidence in the future, or a failure to have enough resilient buffer on their balance sheets? Even the strongest managers, with clear visions for their companies, cannot confidently face off against the unknown while beholden to fear. On the flip side, overconfidence in narrow predictions can be just as damaging. As we often note, balancing resilience and optionality, while cultivating a culture of innovation and adaptation, is the best insurance against unforeseen change.
Real “Cost” of IPO Pops? Modest Dilution
With the IPO pops of DoorDash and Airbnb in the news last week, I thought it would be worth revisiting the actual cost of IPO pops in typical IPO deals. DoorDash’s IPO raised $3.4B at a price of $102, selling ~33M shares. DoorDash had ~321M shares outstanding prior to the IPO including granted-but-not-yet-vested options and restricted stock units. DoorDash closed day one around $189. If they had raised the same $3.4B at $189, they would have only needed to sell ~18M shares. The extra 15M shares sold thus represent 4.7% dilution to the owners of the 321M shares before the IPO took place. Airbnb’s IPO raised $3.5B at a price of $68, selling ~51M shares. Airbnb had ~650M shares outstanding prior to the IPO including granted-but-not-yet-vested options, restricted stock units, and warrants. Airbnb closed day one at $145. If they had raised the same $3.5B at $145, they would have only needed to sell ~24M shares. The extra 27M shares sold represent an extra 4.2% dilution to the pre-IPO owners. No employees or prior owners sold on the DoorDash IPO, and only the three founders sold around 1.5M shares total on the Airbnb IPO (leaving over $100M on the table). So, that ~4-5% dilution was the only actual cost of the IPO pop to non-selling prior owners, not an 80-100+% move in the stock (which also, by the way, assumes that there is information value rooted in the day-one closing prices, which I’d argue there isn’t). And, given these are both consumer brands, that dilution should be offset partially by the branding halo of the massive volume of press both deal pops generated (indeed, retail investor buyers were likely a major factor in these IPO pops). Effectively, if someone complains about the IPO pop, they are claiming to be upset that their stock went up 100% instead of 105%. I wrote more about the pros and cons of the IPO market in this essay last year. One of the biggest issues for IPOs remains the supply side of the equation. For both DoorDash and Airbnb, less than 10% of the shares are publicly traded until lockup agreements expire. The demand, especially in the current market, is outstripping the supply of shares by a large factor. This supply issue appears to be something both Roblox and Affirm want to address as they postpone their IPOs, according to the WSJ. Allowing more employees and private investors to sell earlier in a public company debut comes with benefits as well as some concerns (as long-time company insiders may have an asymmetric information advantage over new public investors) but, clearly, a middle ground can and should be achieved. The most important piece of information to determine the price of the next trade in a stock is the price of the last trade in the stock in a liquid market. IPOs do not have that information available, therefore there is no good way to reach consensus at a single point in time as to what an asset with a wide range of outcomes is worth when it transitions from the private to the publicly traded world.
What Investors can Learn from Magicians and Comedians
There was an interesting question posed on Twitter: which five people would you pick to invest in your fund and become your mentors? My immediate thought was to think about the key weaknesses most of us investors have, regardless of experience. The first weakness is cognitive bias – the ways in which our brain is engineered to trick us. And, the second one is failure to see the obvious – we get so wrapped up in the stories or the details, that we miss making the most obvious connections. I’ve often said the two most similar crafts to investing are professional magicians and stand-up comedians. These are the professions that understand the most about how the brain works against you in real day-to-day life. So, my list of mentors was a magician, a comic, and three scientists, two of whom are experts at complex systems and the third is an expert on knowing your brain’s weaknesses and strengths. In 2014, I wrote a shareholder update letter (you can find it in full on page 49 under “Outlook” in this SEC document) about investing, comics, and magicians that concluded:
This comparison of the three seemingly unrelated fields largely comes back to the idea of presence – the hardest thing we do every day is to simply be in the moment, 100% focused with vigilance and attention. This is an obsession that all great investors, standups, and magicians are constantly perfecting. If a standup isn’t paying attention all the time, they will miss their next great joke opportunity – and if they fail to follow cues from the audience, they will lose the reaction. If a magician fails to pull off a trick leveraging the brain’s built-in biases, the illusion is revealed and the mystery is lost. The standup and the magician lose their audiences if they lose focus, much like the investor loses long-term performance if they fail to connect dots, avoid cognitive bias, and pay attention. Technology investing is a dynamic environment with a rising pace of change – this creates an even higher burden for presence and the ability to connect unrelated dots. Using these methods, we are able to focus on finding the signal in the noise of data points.
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Disclaimers:
The content of this newsletter is my personal opinion as of the date published and is subject to change without notice and may not reflect the opinion of NZS Capital, LLC. This newsletter is simply an informal gathering of topics I’ve recently read and thought about. It generally covers topics related to the digitization of the global economy, technology and innovation, macro and geopolitics, as well as scientific progress, especially in the fields of cosmology and the brain. I will frequently state things in the newsletter that contradict my own views in order to be provocative. Often I try to make jokes, and they aren’t very funny – sorry.
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