The I/O Fund believes venture capitalists are some of the world’s best tech growth investors so we were thrilled to join Jason Calacanis on This Week in Startups. Jason is a successful angel investor with a portfolio that includes Uber, Robinhood, Wealthfront and Calm. In the fast-moving podcast, we covered topics including:
· SPACs, which ones you should own and which ones you should avoid
· The difference between bubbles and bear markets
· How Roku has been able to stave off Big Tech
· Why I/O Fund is ultra-bullish on Nvidia
· Whether China is worth the risk
· If hybrid work-from-home is an investable trend
Timestamps:
1:19 SPACs
5:25 Interesting SPAC story
16:43 Roku
27:00 Will tech spin-offs create more value?
30:45 Nvidia
36:16 Robinhood
43:21 Chinese stocks
48:43 Post-pandemic world
49:52 Hybrid work-from-home
59:26 Crypto
1:11:32 Gemini
SPACS
SPACS gives a chance to investors to invest in early-stage tech. It has got its pros and cons. Some of the merits include that individual investors can get a better price and higher returns. It would be prudent for investors to have the right skill sets to choose the best stocks since the early growth company’s financials could be limited compared to well-established companies. Investors also should be careful about companies banking on a lot of forward growth because if they miss estimates and the stock sell’s off immediately.
At the same time, we cannot ignore the SPAC market as we could miss some of the best growth opportunities. We will need to have some risk management and a good exit strategy; this is how I/O Fund approaches the SPAC market. We found stories that we liked, played some momentum, and we had an exit strategy.
Video clip: From 0:25 till 5:22 minutes.
Macro Trends (Is it a bear market now?)
The current market situation is not like the 1999 or 2008 bear markets. Many investors think that the sell-off of the last year was a bear market. It was just a bubble because of irrational, momentum-driven, and human psychology. We have seen many such bubbles in the past few years. So, bubbles don’t mean bear markets. It means that there’s an excess of liquidity. What leads to bear markets and recessions is typically Central Bank policy, which is incredibly loose right now. The U.S Federal Reserve is expected to continue this policy to stimulate growth a little longer.
Video clip: 9:22 to 11:05
Can Roku fight big tech?
Roku has the first-mover advantage in advertising-based video on demand (AVOD) versus subscription video on demand (SVOD) specifically not only by the cord cutters but also from the brand advertisers. They have designed an operating system that is cheap and flawless and fits well with smart TVs. All that is great because they have the hardware and the operating system. But ultimately, Roku’s path to Wall Street gains is that they are an ad platform.
We are moving into a world where advertisers on linear pay-TV are moving on to the cord-cutter companies like Roku. For the first time in 37 years, Budweiser did not advertise in the super bowl this year. So, the addressable market is huge for companies like Roku.
Video clip: 16:55 to 21:05
Bullish on Nvidia
Nvidia has yet to tap its real market, which is Artificial Intelligence (AI). A lot of people talk about gaming. But I firmly believe that this is a data center and an AI accelerator play. Most of the industries in the future will run on Nvidia. This is a big statement from me since I have researched very well and been writing about it for about three years. The stock is up 340% since my initial coverage. The main differentiator for Nvidia is GPU chips which are very good for AI.
Video clip: 30:45 to 33:08
Our exposure in Chinese stocks
I/O fund has exposure in Chinese stocks through an Electric Vehicle (EV) stock and a cloud infrastructure stock. We stayed in those markets because China has about 1.3 billion people and a lot of them are making decent money. So, when you think of EV companies selling to this huge population subsidized by the Chinese government we strategically played in that market.
There are cities in China that are of the size of Los Angeles that no one even knows the name of these multiple cities. The investment thesis is phenomenal but political risk is high. However, the market’s short-sightedness can make you miss the rally. For example, the French stocks, who was going to invest in French stocks last year? However, after the country announced the second lockdown last year, the stock market was up 25% in about a month. So, we think that inevitably this might happen with China and we are seeing the evidence of that in one of the position’s we are holding which is showing technically strong signs that it is going up.
Video clip: 43:21 to 47:19
Hybrid work-from-home
Hybrid work-from-home stocks and why the I/O Fund thinks it’s an investable trend
49:52
Free Market Redistribution of Wealth
You can see the exodus of people moving from one state to another. People are actually able to make more money from the tools the tech is providing. They also have more time and on their own terms. It’s more like a free market national redistribution of wealth and it’s happening in a positive manner.
Video clip: 55:55 to 56.18
Crypto Investment
In the past we have mentioned that the debate on crypto has been distracting investors from the opportunity that these new technologies can deliver. We have invested in Crypto from a tech perspective. We think Bitcoin has done the unthinkable. An actual store of value on par with gold and with the dollar. We are comfortable since it has some real-world disruptive value and we run technical on it and ride the trend.
Video clip: 59:26 to 1:00:35
The I/O Fund currently owns shares of ROKU, NVDA, STEM, Bitcoin, Ethereum, alt-coins, and crypto brokerages such as Voyager Digital. This is not financial advice. Please consult with your financial advisor in regards to any stocks you buy.
Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock or crypto/asset in the companies mentioned in this podcast.
Inflation has continued to concern investors into the month of August, causing many growth stocks to give back any footing they gained in the prior month. Since the February top in tech growth, only select names in the cloud and semiconductor space, as well as big tech, are at new highs, while many high fliers from last year are still building a base. We believe the future for tech is bright, but the sentiment towards these names right now is met with caution as the market digests the potential for real inflation that may not be transitory.
In our last update, we stated that “if we monitor the price relations with intermarket analysis, the market is telling us that inflation fears are likely overblown, even if the trend in inflation continues.” With the inflationary trend accelerating into August, coupled with the Overnight Reverse Repurchase Agreements (reverse repos) exceeding an unprecedented $1 Trillion dollars, it appears that the FED is ready to begin hiking rates sooner than expected.
Just like last month, the market continues to tell us is that inflation fears, as it relates to the continuation of the bull market, are likely still overblown. Most importantly, if we look at history, some of the best market gains in a bull market occur in the final innings. We believe this market still has a lot of room to run, and view any coming pullback as a buying opportunity.
Inflation and Reverse Repo
With the CPI up 5.37% YoY, compared with an average growth rate around 3.4%, the case for inflation is strong. Some would argue that this YoY number is coming from an unusually low water mark due to a global shutdown of the economy, and thus inflating the YoY growth rate. I believe this to be true, to an extent, especially as complex supply chains start to ramp up to meet demand.
However, if we look at the CPI over a 3 month period, which is coming from a high water mark of a newly re-opened economy, then the CPI is suggesting an 8.1% annualized growth rate. This simply cannot be explained by anything other than a build-up of inflation in the economy.
Further concern can be found in the recent and historic growth in the M2 money supply, which is the metric that most economists believe leads to inflation. To better understand M2, it’s important to understand this layer of the money supply in relationship to the FED’s famous Quantitative Easing program (QE), which was started as a response to the Great Financial Crisis in 2008.
Quantitative Easing, in its most simple form, is the FED buying mortgage back securities and treasuries from authorized banks in an attempt to put more liquidity into the economy. It would seem that this is inflationary by nature, yet this is simply not the case.
What many fail to realize is that the FED takes real assets in the form of Treasuries and Mortgage Backed Securities from the economy, and in exchange, banks do not receive cash, rather an increase to their reserve that can be loaned out. So, in order for these reserves to become inflationary, they would need to be loaned out by these banks. If the banks are not loaning out these reserves in an equal ratio that they are selling the securities to the FED, it ultimately has a deflationary effect on the economy – this is due to less securities in rotation, without the cash to replace them.
The FED can create excess reserves for banks to loan out, but they can’t force them to make loans, nor can they direct people on how to spend any cash they receive from loans. This is where the M2 money supply comes into place. M2 is simply not controlled by the FED, and it refers to the part of the money supply that includes highly liquid assets, like bank deposits, money market securities and bank deposits, etc. This is real money in the economy that can be taken out by people to purchase goods and services.
Here’s a quick visual to better understand this concept.
As more and more reserves were being put into the banking system (orange), the actual money that was filtering out into the economy (purple), was staying steady. That is, until February of 2020.
Since February of 2020, we have seen a greater than 30% increase in the M2. This is a clear increase in the level of the money supply that historically affects inflation. Coupled with the immediate shut down of intricate supply chains from the global COVID response, governments around the world have created an extreme case of more money chasing fewer goods. Even if supply chains come back to meet demand, the level of fiscal and monetary response will likely remain.
Further complications are found with the velocity of the M2 money supply. In other words, how fast is this new excess moving through the economy in the form of purchasing goods/services? This metric tells a different story. The speed of money moving through the economy is continuing its historic deflationary decline, even with the M2 money supply reaching its own historic increase.
Some have argued that this phenomenon would counteract the increase in M2. However, what appears to be happening instead is that we are seeing an unusual glut in the banking system that can’t be ignored. The result of these two facts – the increase in the money supply coupled with a decrease in the velocity of money – is that the excess of money being in the economy appears to be in the form of deposits into financial institutions. When you factor in that banks have a limit to the amount of money they can legally hold, it creates an oversupply in the system, which is ultimately what is going on with the reverse repo anomalies.
In short, a reverse repo is an agreement to purchase securities from an authorized institution in order to sell them back at a slightly higher price. Reverse repos (and repos) are used for short-term borrowing and lending, often overnight so that institutions can meet deposits and reserve requirements.
When you realize that these large institutions need to buy and sell overnight funds in order to meet deposits, as well as reserve requirements and reserve limits, it starts to make more sense. If more and more of these institutions have reached their limit on the reserves that they can take in, then less institutions can bid on the offerings, thus causing the issues we are now seeing.
These types of anomalies signal that there is too much liquidity in the system. This typically signals to the FED that they’ve reached their limit on the effectiveness of loose money effectiveness. What usually follows is a campaign to raise rates in order to tighten liquidity in the system.
In our last article, we discussed this chain of events and why it spooks investors. In short, inflation leads to bonds getting sold off in anticipation of the FED raising rates, thus pushing up rates and the cost to borrow. This eventually causes a top in equities, as the business cycle resets through a recession. This is why inflation is so important – it is the first indication that the party is coming to an end.
Regardless of where one stands on inflation, it’s important to acknowledge that the FED recognizes it. They do everything in their power to not surprise the market, and if you pay attention, they tend to signal their intentions well in advance. Recently a handful of historically dovish FED chairs have expressed their opinion that a rate hike needs to occur as early as September.
All signals are pointing to an imminent rate hike sooner than expected. Inflation is continuing its advance, the reverse repo rate is out of hand, and the FED has no choice but the tighten sooner than expected. So, is this the end of the bull market? As stated in our last report, “Even if inflation is likely not transitory, and here to stay, the markets are still telling us that the time to worry may not be right now.”
Yield Curve
Historically, a rare phenomenon that precedes a recession is an inverted yield curve. Investors are expected to be compensated for taking on more risk. When this gets reversed, and a 10 year bond is yielding less than a 2 year bond, this is what’s known as an inverted yield curve.
There are many reasons why this phenomenon might happen, the short answer is that investors have lost faith in the economy and pile into the perceived safety of longer dated bonds. It’s thus believed that the market will be in a recession in the intermediate future, so two-year bonds will likely come due in an environment with rates much lower than they are at the moment. Thus, we see a continued buying of longer duration bonds and the selling of shorter duration bonds.
An inverted yield curve has preceded every recession since 1956, including the 2020 recession. So, why wouldn’t investors just exit the market once this phenomenon happens? There are two primary reasons why:
Once the yield curve inverts the economy falls into a recession, on average, within 24 months. Considering the stock market looks 6-9 months out, we can expect a peak in the stock market about every 1-1.3 months after the yield curve inverts.
History tells us that some of the best gains in bull markets tend to happen in the final push.
The above graph shows not only how long a bull market can continue from the moment of the yield curve inversion, but also the level of gains that typically happen in the final innings of the bull market.
So where is the yield curve today? The spread between the 10 year yield and 2 year yield is just over +1%.
In other words, the yield curve is not inverted, and still showing a healthy slope. Short of a black swan event, the fact that we are not inverted yet suggests that the clock hasn’t started yet for the end of this bull market.
Intermarket Analysis
On February 16th, the high growth market topped, as rates and copper broke through important resistance levels. This signaled inflation was here; however, the extent of which was not fully known. Markets tend to sell first and ask questions later, thus we saw overreactions across the board in rising commodity prices and selloffs in growth stocks and bonds.
Since then, we have a clearer understanding of the extent of inflation we are facing, coupled with the FED announcing that they will likely increase rates sooner than expected. As a result, we are not seeing any trends that suggest the market is overly concerned at the moment.
As the above chart shows, in light of this information, the bond market is continuing to catch a bid, as the 10-year yield is on the doorstep of breaking back below the price level that we saw before the February 16th reaction to inflation. Copper, along with most commodities, is making a lower low from its May 11th top, and is now threatening to test the support that signaled the February 16th breakout due to inflation fears.
Just as intriguing, these trends are continuing despite the various FED chairs’ comments about tightening sooner rather than later. These officials have a history for being dovish, so it is likely that their remarks will filter into policy. The fact that the market is not reacting to the Fed and the inevitable rate hikes means either the market is calling their bluff (and thinks a rate hike will not occur), or the market may not care about a small rate hike in the near future.
NASDAQ100 Levels to Monitor
If we look at the NASDAQ100, one of our key benchmarks, we can see that price is in a classic coiling pattern just below the 15150 level. The pattern appears to be what’s known as an ascending triangle, which is marked in blue. This type of pattern typically resolves to the upside. However, Tuesday we saw a close below any low since the pattern started to form. This means that the immediate breakout scenario we were tracking has failed for now.
It’s my belief that the market is marching towards a large degree correction within a much larger uptrend. Whether that large degree correction has started or not will depend on what supports hold. Below is a visual of what I generally believe is playing out.
As long as NDX can hold the 14460 region, the blue path is my primary expectation. Below 14780 would shift the odds, and also be a warning sign. But, the key support that I am watching is if we break below the 14460 region. If this happens, then I’m expecting a large degree correction to play out, which should take us below the 13300 level at a minimum. If we can hold the above levels, then breakout above 15150, then we can see a push towards 16,000 NDX, at a minimum, before this larger degree correction plays out.
Regardless, what general scenario plays out, we view this coming correction as a necessary part of a much larger uptrend. Rising inflation data coupled with the realization that the FED will be raising rates sooner than expected. More times than not, this causes a larger degree correction than we’ve seen in quite a while, which I believe will likely happen within the next 30 days, if not already.
History tells us that the time to worry is when the bond market starts to worry. Once the yield curve inverts, we are officially on the clock, and plan to shift our strategy towards a long portfolio with tighter risk controls. We believe this market has much farther to run, but a much needed correction will need to reset sentiment for this to happen.
According to Fubo’s recent earnings call, a free-to-play app is scheduled to launch in Q3 and a sports betting app is scheduled to launch in Q4. As we stated over the past two quarters, owning a live sports audience will convert for a lower customer acquisition cost and better lifetime value on both free-to-play fantasy and sports betting compared to the competing sports betting companies who must find media partners. Fubo management refers to this as a flywheel, and we agree there is substantial potential for a flywheel effect specifically due to the enthusiasm of sports fans.
Below, we review the company’s record-breaking audience growth, the much-debated gross margins, the likelihood that Fubo will have to raise money (and when this might occur), plus what we hope to see in Q3 from the company.
Perfect 10.000 on Audience Growth
We had made the point that short sellers were exploiting the one-time event of live sports being canceled last year. The results of a live sports comeback are seen clearly in Fubo’s results with 196% growth year-over-year in revenue to $130.9 million, beating analyst estimates by $9.46 million. Subscription revenue grew by 189% YoY to $114.4 million and advertising revenue grew by 281% YoY to $16.5 million.
The most important number was the sequential growth, as Fubo certainly had tailwinds from low Covid comps. In this case, sequential revenue grew QoQ by 9%. This is key because Q2 is a seasonally low quarter for sports. My first guess was that this was due to the NBA playoffs. However, according to management’s earnings call, it was due to “engagement reach[ing] record highs as we added exclusive sports streaming rights with CONMEBOL and began beta testing predictive, free-to-play gaming integrated into our streaming platform ahead of our expected launch this fall.”
Going into Q3, we had published Apptopia data showing that the company was already illustrating strong downloads and DAU growth, likely from the Olympics. The return of sports events is a major boost for the company’s year-over-year top line growth, yet the sequential strength is where Fubo provides a glimpse of a more sustainable trajectory. The management now expects the fiscal year 2021 revenue from $560 to $570 million, which represents an increase of 116% at the mid-point. Previously, it had estimated revenue to be $520 to $530 million.
The monthly average revenue per user (ARPU) increased by 30% to $71.43; this was one of the key drivers for the increase in margins. The adjusted contribution margin came in at 8.3%, up from -4.4% in the same period last year. This is a step in the right direction, although there’s more work to be done on profitability before we see institutional interest pick up.
Fubo is in a high-growth phase. It’s not uncommon for a rapidly growing company to show losses; however, we want to see a deceleration of these losses as the company scales. Fubo’s gross losses shrunk from $4 million in Q1 to $2 million in the recent quarter. Considering that their gross losses were $18 million in the year-ago quarter.
It’s also important to point out that Fubo’s cash balance of $400 million supports about 9 quarters of operations ($406 million in cash / $47 million in Q2 adjusted EBITDA). Therefore, it’s reasonable to expect the company may raise money in the near term, which can dilute shareholders. As an investor, I am not too concerned about this (Tesla did it many times), although my preference would be that Fubo raises cash in Q1 or Q2 after the launch of its betting app so the market can understand and assess the company’s full potential.
Source: Fubo Investor Relations
As seen above, the advertising revenue growth was the best ad revenue quarter in the company’s history. Advertising ARPU grew by 62% YoY to $8.70, up 22% on a QoQ basis. The company has a goal to double the advertising revenue this year.
My main contention is that as long the company can grow its audience, the market will reward it in the long-term. Our previous analysis was focused on the microtrend of live sports OTT and we think these users are stickier than Wall Street realizes.
Source: Fubo Investor Relations
The company has successfully been able to increase its paid subscribers. The customers continued to prefer fuboTV over legacy pay TV services due to the unique customer experience, innovative product experience, and bundled wide premium content. The company added 91,291 net subscribers in the recent quarter bringing the total to 681,721. This beat the analysts’ estimate of 602,000 and the management guidance of 600,000 to 605,000.
The company also increased the full-year subscriber guidance to a range of 910,000 to 920,000, from previous guidance of 830,000 to 850,000.
It’s crucial to not only grow the audience but also retain them. The company has been able to improve the churn rate by 203 basis points year-over-year. The company’s investment in subscriber intelligence and insights helps to lower the churn rate. Management points towards its first-party data for reaching household income above $85,000 and mainly males. This can help the company reach its target of $35 CPMs with current CPMs in the low $20s.
Fubo users streamed over 245 million hours which is an increase of 148%. The company’s monthly active users (MAUs) watched 134 hours per month on average, demonstrating strong customer engagement – we hope this engagement translates well for the free-to-play and sports betting app.
Improving Bottom Line Already with Sports Betting on the Way
The company’s margins are improving with increasing revenue and the management expects this trend to continue. Operating expenses as a percentage of total revenue were 155% compared to 252% in the Q2 2020. Subscriber-related expenses, primarily include content cost, accounted for 92% of total revenue compared to 120% in 2Q 2020. Sales and marketing expenses were 16% compared to 18% in Q1 2021.
We think the market has over-penalized the company for its gross margins with evidence that DraftKings’ sales and marketing costs exceed Fubo’s subscriber costs & broadcasting and transmission fees (when we compare operating margins). Meanwhile, DraftKings trades at a 300% higher valuation. Therefore, if Fubo can illustrate its sports betting capabilities, it should fetch a higher valuation.
Net loss per share was ($0.68) compared to ($2.08) in 2Q 2020. Adjusted net loss was ($51.3) million compared to ($51.5) million in the 2Q 2020. The adjusted EBITDA improved from (95%) to minus (36%) in Q2 2021.
The launch of the company’s Sportsbook is an important driver of the overall strategy as it aims to develop a flywheel that turns passive viewers into active participants. The monetization here can be substantial if Fubo sees cohorts spending more than $100 on their platform. As stated, the income of over $85,000 and persona of their viewing audience lends itself perfectly to sports betting, which is men watching sports. You really can’t get a better audience than that to target a sports betting app.
Fubo Sportsbook will represent an industry-first live sync integration between video and the Sportsbook. Recently, the company has released a short video presentation that is worth watching. The short sellers accused Fubo of buying a headline with Balto Sports, which was surprising to me to find out these analysts don’t know that YCombinator often incubates small teams. This is common knowledge in tech.
The unique feature is that FuboTV’s sports betting app will allow its users to watch and bet from the same platform. Fubo announced last month that it had completed a market access agreement in Pennsylvania with The Cordish Companies. Currently, the company has market access deals in 4 states, namely, Pennsylvania, Iowa, New Jersey, and Indiana.
FUBO commands about 6% of the virtual MVPD space. So, it’s very likely that over the long-term, the company is aiming between 3% and 6% of the total betting TAM. Right now, sports betting is expected to be a $218 billion market globally.
In the words David Gandler, “The secular decline of traditional television; the shift of TV ad dollars to connected devices; and online sports wagering, a market opportunity which we believe complements our sports-first live TV streaming platform.”
Analyst views
Evercore ISI analyst Shweta Khajuria responded to the results by repeating her Outperform rating and lifting her target price to $40 from $33.90. “We continue to view Fubo as a key beneficiary to three industry trends,” she writes in a research report. “Cord cutting, as viewers shift away from linear TV to streaming; mix-shift of advertising dollars from linear TV to [streaming]; and growing demand for online sports betting.”
Likewise, Oppenheimer analyst Jed Kelly reiterated his Outperform rating, while lifting his price target to $42 from $32. Kelly cited stronger-than-expected subscriber growth, driven by a “strong sports calendar,” and improved churn. “Most OTT providers have focused on low-cost entertainment offerings, forcing sports fans to remain tethered to pay TV,” he writes. “FuboTV is exploiting the opportunity in sports by providing a comparable viewership experience at a lower cost than its pay TV counterparts.”
What’s next for Q3
We have already published Apptopia data that shows July was strong in terms of audience growth. You can view the full article on Forbes here.
Source: Apptopia
Also, the company’s exclusive rights to South American World Cup Qualifiers is a game-changer as it helps to solidify the company’s brand ahead of next year’s FIFA World Cup. The company was also able to increase the number of consumers in the recent quarter through the launch of LG Smart TVs. It has also partnered with Vizio to launch on their popular SmartCast platform.
Additionally, with the NFL football season, we would expect the growth in the DAUs to continue in the second half of the year. If the company can launch the free-to-play soon, then we may see the flywheel effects of this as soon as Q3.
I/O Fund has partnered three times now with Apptopia to deliver pre-earnings numbers – twice for our free newsletter subscribers and once for premium. Stay tuned for our next pre-earnings coverage next quarter.
As stated in the article, Beth Kindig and I/O Fund currently own shares of FUBO. This is not financial advice. Please consult with your financial advisor in regards to any stocks you buy.
Royston Roche contributed to this article.As stated in the article, Beth Kindig and I/O Fund currently own shares of FUBO. This is not financial advice. Please consult with your financial advisor in regards to any stocks you buy.
Recently I joined Ed Gotham from CMC markets in the Opto Sessions podcast. I discussed what tech trends will shine in the next five to ten years, how I started I/O Fund, and how we spot the right tech stocks. Also, don’t miss out on the quick-fire questions towards the end of the session.
Here's a timeline followed by a written summary of the key points:
Interview timestamps:
0:29 Introduction
02:06 IPO valuations
06:24 Airbnb
07:50 Trends for the next 10 years
09:00 Isn’t Waymo going to kill AI
9:41 Nvidia
12:50 Robotics
17:29 Market inefficiency with tech
20:00 Palantir
25:43 Snowflake vs Fastly
29:28 Background of Beth Kindig
33:04 I/O Fund focus
36:56 Electric vehicles
39:33 Xpeng
41:54 Thoughts on investing in Chinese market
49:25 Strategy at I/O Fund
59:23 Market trends
1:01:49 Favorite pick
1:06:01 Destructive theme
Trends for the next decade
I believe that Artificial intelligence is an important theme for the next five to ten years. I have a decade working in the tech industry, which helps me to understand the key trends. It’s difficult for someone who is not from a tech background to pick good AI stocks. The reason is that a lot of companies use the buzzword “AI” in their description, and many companies are not actually AI companies.
The optimal innovation will come from private companies. Even though big companies like Google might spend a lot on research and development; they will have to rely on M&A to truly beat their competitors.
When I was working as a privacy advocate around the time mobile data was creeping into every marketer and advertiser’s coffer, I had raised concerns about companies tracking customers without their consent through cookies. With AI, companies do not need to track a customer’s every move. For example, Netflix’s recommendation engines are run on AI. When a customer chooses a few movies, Netflix’s AI will figure out what you might want to watch next without tracking your every move, like the data collection practices of the last decade.
Manufacturing and agriculture are also becoming AI industries. For example, John Deere is a prominent company in robotics. When you look from a budget perspective, the returns on automation are attractive to corporations.
The market is inefficient with tech because tech does not cooperate with forward earnings revisions and cash flow analysis. It is all about the product and so investors have to understand the product and see where the company is headed on a product road map before the market spots it. This was the case of Nvidia back in 2018 when the market could not price it correctly. Meanwhile, if you looked at the product and understood it, you would know that Nvidia was the best choice for the AI accelerator chip because of its parallel computing.
Palantir went public at the same valuation as their last private round; this was the reason why the stock doubled. That was a smart move. I had a done a deep dive analysis on Palantir and the reason why I passed on this company is because they have a lot of government contracts. I have seen in the past that companies with government contracts can make it difficult for them to move to the commercial space. It doesn’t mean that they cannot pull off, but that particular risk was too significant for us to invest at the onset.
Technology Background
I arrived in the Silicon Valley area in the year 2010. I initially worked with real estate companies to fund my education. I then started to write about private tech companies and the granular differences between products. I worked with many startups writing about their products and also worked as a product evangelist for a holding company.
I can build a portfolio of 30 companies from 10 different technologies because I worked with 300+ startups. I was at security conferences, ad tech conferences, streaming media & OTT conferences, among others, and my job was to communicate very clearly why you should go with a particular product over its competitors.
What is I/O Fund focus?
Similar to how I covered private companies, I figured it could be helpful to provide the same level of analysis on public companies and describe why a particular company will be a winner before the market is able to accurately price the company. I started to write about public markets and people made good money on my articles. Some of the stocks I wrote about did very well.
In July of 2019, I joined with a portfolio manager who knows how to build a portfolio. His expertise is in technical analysis and analyzing charts. We began to cover tech stocks together. I strongly believe technical analysis is very much required for tech stocks. One reason is that tech companies can rise 400 percent in a year and the same company can drop 70 percent. So, this is why technical analysis plays an essential role while in addition to product analysis and financial analysis on tech companies.
In May 2020, we combined our money and launched what we call a fund. We transparently send notifications to our subscribers every time we enter or exit stocks. Readers can transparently know we are actively entering these quality companies that we have identified (or perhaps we are pausing and not entering for the time being). Our gains are outstanding and we are ahead of Ark funds partly due to large positions in Bitcoin and Blockchain.
Chinese Electric Vehicles
I stated on the podcast that Chinese EV companies will do well. The people in China are nationalists. The government is giving subsidies for buying Chinese electric vehicles and they are very particular about what tech products are supported (or subsidized). Xpeng and other Chinese electric vehicle companies teamed up with Nvidia for AI features. This helped companies like Xpeng and NIO to develop autonomous features on their cars. Semiconductor companies also benefited from this trend. In contrast, Tesla tried to manufacture their own chips, which in my opinion, is a mistake.
There are risks as a US investor investing in Chinese stocks and it depends on the style of investing. If you are regularly looking into the markets and you are an active investor, buying Chinese companies makes sense; otherwise you have better opportunities in the US if you are a passive investor. In the case of the I/O Fund, our portfolio manager keeps an eye on the markets so we can take advantage of higher volatility.
Strategy at I/O Fund:
Our strategy is to leverage experts from the tech industry and to do deep dive research on stocks. We are very good at shutting out the noise in the market. We believe long-form research has an important, long shelf life. FAANG has shown us that good tech companies will remain quality stocks for 10 to 20 years. We are always looking for buy and hold. We also add momentum so that we make strong gains in six months. We will invest until it peaks and then trim and let it fall.
Most of what I wrote in 2018 is very accurate even after three years, as proven by the earnings call and product roadmap. Knox is very good at trend following. We believe a blend of both is required. We are also very much diversified within tech, which is why we can beat Ark, including our exposure to Bitcoin. As a technology analyst, I see blockchain, bitcoin, and ethereum differently than people who are not from the tech industry. Even though Cathie Wood had spoken about Bitcoin, she did not take the big bets necessary to have gains in the last few months like we did. Notably, I’ve been covering crypto since 2013 and feel strongly that the security (due to hashrate) behind Blockchain is a technological wonder and overlooked by the talking heads on TV.
Regarding our specific portfolio/risk strategy, two-thirds of our portfolio as a long-term buy and hold, and the other one-third is more active.
IPO valuations:
We have seen many initial public offerings (IPOs) at sky-high valuations in the last couple of years. Despite the excellent product, Zoom took about 10 to 12 months to consistently trade above its opening price. Zoom is a good case study as the company had the highest growth rate at year 6 of any tech company that has gone public and was profitable.
If you had bought Zoom in July of 2019, for example, you would be holding losses until February 2020. I count holding a non-performing asset for this long as a double loss as the allocation could have gone to a better investment and seen gains during the same time period.
Snowflake is another excellent example; it went from a $12 billion valuation during its last private round to a $68 billion valuation within a year. On the other hand, Airbnb went from $18 billion to $90 billion in just six months. I strongly believe that overnight rise in valuation cannot sustain. At the I/O Fund, we have an excellent risk management process in place to protect our portfolio in these challenging situations.
Investors were taken by surprise last week when the US consumer price index rose 5.4% year-over-year in June, the fastest pace seen since August 2008. On a monthly basis, it rose 0.9%. Excluding the volatile food and energy prices, while the Core Consumer Price Index rose 4.5% in June, this was the fastest pace since 1991.
Source: YCharts
There is an argument that the recent rise in inflation is temporary. One prime reason is attributed to the supply constraints due to the pandemic. The sudden rise in used cars and trucks accounted for a major portion of the inflation number, and this was mainly due to the global chip shortage, which reduced the supply of new cars. Used cars and trucks rose 10.5% in June from the previous month, when you compare on a yearly basis, prices rose about 45%.
Last week, we discussed in detail technical signals that suggest the market is not currently concerned with inflation. We see this in the new uptrend in bonds and the collapse of certain economically sensitive commodities. The market is shrugging off inflation fears, for now.
You can read our Portfolio Manager’s July Market Update that discusses this in detail here.
We are prepared to shift our investing thesis if the narrative changes. If inflation is not transitory, this reality will show up in price relations first. For example, if bonds continue down while commodities continue up, this could lead to the FED increasing the Fed Fund rate sooner than expected.
Historically, the rise in interest rates has been negative for equities, which ultimately stops the bull market. Some of the possible reasons are when the discount rate increases the present value of future cash flows will be lower. Another reason is that debt servicing costs for companies with high debt will be higher. The exception will be banking stocks which benefit from rising interest rates.
Even if this happens, history tells us that the time to worry is not when the first rate hike happens, but up to 18 months on average after the yield curve inverts. So, even if rates increase ahead of schedule, history tells us that we still have time for the bull market to run.
It’s important to remember that what causes the cascade of events that leads to a bear market, is the FED reacting to rising inflation. So, the sky-high data regarding inflation is nothing to shrug off completely. If inflation numbers do not subside, the FED will have no choice but to raise rates, and we could be looking to invest in an inflationary environment.
Stocks can make solid investments precisely because they beat inflation in the long-term. On a more granular level, the more traditional thinking here is that dividend stocks are ideal during periods of inflation because of the periodic dividend payouts. Dividends also help to fund your increased expenses due to inflation. While growth appreciation stocks are good in the long term, many institutions will see dividend stocks that have reasonable growth as an important hedge. They will also typically view low debt companies with low debt servicing costs as favorable.
Please note: the I/O Fund is a tech growth portfolio that places an emphasis on growth over profits, and for this reason, the I/O Fund does not currently hold stocks for their dividends. Below, we discuss what inflation trades can look like for a more forward-looking discussion.
Dividend Stocks that Institutions Could Favor for an Inflation Trade
Broadcom Inc. (NASDAQ: AVGO) shares rose 50% in the past year. The company’s revenue growth has been strong as it grew at a compound annual growth rate (CAGR) of 16% in the past five years. It also has a very good profit margin which also plays an important role in the long-term stability of dividend payouts.
The company has a dividend yield of 3.00%. It is comfortably above the US 10-year treasury rate of 1.19%. The company has steadily increased its dividends. The free cash flow from which the dividends are paid is also increasing. In the recent earnings call, the company’s CFO, Kirsten Spears mentioned“Relative to capital allocation, first and foremost, we're dedicated to paying 50% of our free cash flows to our shareholders.” In the recent quarter, it had a free cash flow of $3.4 billion and dividends paid were $1.6 billion.
Intel Corp (NASDAQ: INTC) has a dividend yield of 2.45%. The company raised its dividend in January this year. They increased their quarterly dividend by 5.3% to $0.3475/share. The company had a free cash flow of $1.6 billion in the first quarter of the fiscal year 2022. It also had repurchased $2.4 billion of shares and completed the $20 billion repurchase plan announced in October 2019. The management also assured that they are committed to growing its dividend.
Source: YCharts
Will the rise in interest rates be a concern for the ad-tech industry?
Ad-tech stocks typically have low or no debt. One exception is Magnite, which has a debt-to-equity ratio of 1.13. Magnite accumulated debt when it acquired companies in the past year. More recently it acquired SpotX, a deal that will help to double its CTV business. In the words of Michael Barrett, President and Chief Executive Officer, “We believe the combination is transformative because it immediately gives us critical mass and scale in CTV and more than doubles the size of our CTV business”.
Roku has a debt-to-equity ratio of 0.36. The company’s debt is small and it’s coming down. Interest costs were only $742,000 in the recent quarter when compared to $863,000 in the same period last year. Roku’s revenue in the first quarter grew by 79% year-on-year to $574.2 million. It also added 2.4 million incremental active accounts in the quarter to reach 53.6 million. The company had a net profit of $76.3 million when compared to a net loss of $54.6 million in the same period last year.
Source: YCharts
Looking into the stock returns of the ad tech industry, Roku has been outperforming other companies in the past six months. Recently listed companies like PubMatic and Viant Technology had successful initial trading gains but they have not sustained in the recent months.
Secondary Offerings to Raise Cash
After tech’s historic run last year, many companies have benefited from rising stock prices by tapping secondary offerings. Zoom raised $1.75 billion in January this year by pricing 5.15 million shares at $340 per share. It was able to benefit from the strong share price gains due to the remote working boom. The recent offering was about 10 times its IPO price. Previously the company had issued its shares in the IPO at $36 per share in April 2019. Zoom is a debt-free company.
Shopify raised $1.5 billion by offering 1.18 million shares at $1,315 per share in February this year. The company’s share price grew about 175% during the one-year period before the secondary offering. It had benefitted from the shift to online business during the pandemic.
MongoDB recently raised about $889 million by offering 2.5 million shares at $365 per share. The company has a negative debt-to-equity ratio. Its interest expenses are also high, at $3.7 million in the quarter ending April 30 although down from $13.8 million in the previous year. The stock has a three-year return of 510%.
Source: Ycharts
Conclusion
Many tech companies have low debt right now with many sitting on decent amounts of cash due to raising cash from secondary offerings. The I/O Fund doesn’t own dividend paying stocks as a strategy, per se, yet it’s good to know what kinds of stocks could be favored by institutions should we see inflation haunt the market and consumer spending environment. Specifically, semiconductor companies like Broadcom which continue to have excellent growth and a dividend yield of 3.00% stand out from the list.
Last week, the Portfolio Manager from the I/O Fund spelled out his thoughts regarding inflation fears. In summary, the market’s quiet rotation back into growth stocks and bonds, coupled with the new downtrend in commodities and defensive names, seems to suggest that the market isn’t as concerned with inflation as retail is. You can read this article here.here.
On February 16th, the dynamics of the market shifted as we saw the beginning of a large rotation away from the growth stocks that led us out of the 2020 bear market. Around the same time, the price of copper rose to levels that we haven’t seen since March of 2013, while the yield on the 10-year treasury moved above a key resistance level that has held since February of 2020. In other words, inflation was officially here.
Pictured Above: Copper and Yields broke out on the same day that growth equities topped
Historically, inflation pressures build towards the end of a cycle, resulting in the bond market selling off. The reason for this is because as the FED raises rates to fight inflation, bonds get priced down. Bonds don’t perform well in a rising rate environment; hence a downtrend in bonds usually begins in anticipation of a rate hike. As bonds get sold, rates go up, making the cost for companies to refinance debts more difficult while at the same time harming future projected cash flows for high growth companies. Eventually, stocks catch up to bonds and a bear market begins.
Ultimately, inflation begins the cascade of reactions that leads to a recession, hence the steep selloff in richly valued growth stocks. The real question today is whether the inflation is transitory, as the FED and many economists are claiming, or is it here to stay? If it is truly here to stay, the FED will have no choice but to raise rates, cutting off the bull market. On the other hand, if inflation is transitory, then the recent drawdown in high growth names may have presented a buying opportunity if the bull market resumes.
The popular narrative tends to side with “inflation is here” and “the FED will have no choice but to raise rates soon.” This is backed not only with countless anecdotal claims, but real data. For example, June’s CPI came in at 5.4% YoY which exceeded expectations. This has caused analysts and pundits to point out that the last time we saw a rise this high was in 2007. Just as alarming, housing prices are now exceeding 2007 levels.
This is compelling evidence to support the popular narrative that inflation is here, and likely signals the end of the bull market. However, I believe the markets are a much greater predictor of future economic outcomes. If we monitor the price relations with intermarket analysis (see below), the market is telling us that inflation fears are likely overblown. Even if the trend in inflation continues, we could still see an environment like 1999 where inflation, yields, commodities and equities all advance together.
Intermarket Analysis
On May 12th, the equity markets appear to have hit a significant bottom. Following this low, what we have seen is a quiet rotation out of commodities and value stocks, and back into risk-on assets. Across key sectors, high growth and green tech is up 20% while big tech and cloud is up 15%. Meanwhile, value is up just over 1% while commodities are in negative territory.
Since the May 12th bottom, we have seen beaten down growth stocks take back their leadership role in the market – this is a thesis that we held, positioned for and stated publicly. The I/O Fund has initiated numerous buys since the May 12th bottom, after building a reasonable cash position going into the selloff in February.
Joining growth in a renewed leadership role is bonds. We are seeing bonds in a new uptrend, specifically longer duration treasury (+20 years), which are outperforming the S&P 500 since the May 12th bottom.
If we look a little deeper, copper topped on May 12th, the same day that growth stocks bottomed. Also, on May 12th bonds were confirming their first higher low, which was starting a new uptrend. In short, the bond market was signaling that inflation fears were either overblown, or that they may not be significant enough to force rate hikes.
Pictured Above: The intermarket relationship between copper, bonds and growth stocks from the May 12th bottom
Further evidence that inflation fears may be overblown are found in the recent behavior in lumber. The price of lumber has been the rally cry for investors concerned about inflation. Historically, not a speculative commodity, lumber saw a roughly 180% increase YTD before peaking on May 10th. Since the peak, prices have collapsed by roughly 65%.
This puts the growth in lumber prices at negative for the year, which is rare for a commodity because it’s not speculative. This is further backed by the price of copper. After a roughly 35% rise in prices, from its May 10th peak, the price of copper has decreased by 10%.
The collapse in economically-sensitive commodities is also not typically what you’d expect in an inflationary environment. Also, it’s worth pointing out that the 10-year yield is testing the very breakout zone that triggered the growth sell-off.
Pictured Above: bonds, copper and the 10 year yield are almost back where they were before the February 16th rotation began.
As of now, Bonds have broken out above the February 16th resistance with the 10 year yield only 7% away from reclaiming the February 16th region and copper 11% away. If yields and copper follow bonds, and reset the dynamics that lead to the growth rotation, it would suggest that growth stocks could continue their uptrend. As of now, high growth stocks are about 31% below their high.
Correlations and History
I’d also like to suggest that even if the 10-year yield and copper does hold the February 16th breakout zone, and continues to move up, it doesn’t necessarily mean that growth will continue its downtrend. In today’s market, it is now believed that growth stocks simply cannot go up with yields and commodities with inflation on the rise. However, if we look through history, this is simply not the case.
The chart above compares the NASDAQ100 with copper and the yield on the 10 and 20-year government bonds between 1998 through 2000. Red indicates a downtrend and green indicates an uptrend. Note how all four assets participated in an uptrend in unison from February 1999 – December 1999. These assets remained correlated, and this was during a rising rate environment with elevated inflation.
It’s also worth noting that in 1999 copper topped first, then yields, followed by equities. The drop in copper and yields would be considered a boon to equities today, but this was actually a warning in 1999/early 2000. When assets correlate, it’s good to take notice as history tends to rhyme.
Levels to Watch for the NASDAQ100 and S&P500
In our last market report, we identified the 14080 region as a likely breakout zone for the NASDAQ100.
On June 22nd, the breakout was confirmed and we have seen a move up roughly 5%. We’ve also publicly identified that we believe the NASDAQ100 is targeting the 16000 before we’d potentially see a deeper correction.
With the breakdown in the S&P500 on Monday, July 19th, this threatened to end this target earlier than expected. The recovery since has halted the early correction in the broader markets, and setup some clear levels for us to monitor.
The above chart outlines the levels that we are watching. These are the potential outcomes I see playing out:
Even with the strong bounce off the recent lows, we are not out of the woods yet. Until we can reclaim all-time highs, the current bounce could be a corrective bounce in a deeper correction. If we do see another leg lower, I’m expecting the 14200 level to hold, setting up a short correction in a much larger uptrend.
If the bounce continues and we can move past the 14985-14900 region, we can resume our move to the 16000 region before a larger correction unfolds.
The lowest probability scenario is that the current correction breaks down below 14080. If this support breaks, it will signal that we are in the larger correction earlier than expected.
We believe that any correction is part of a much larger uptrend. We expect much higher prices before the secular bull market that started in March of 2009 end, and that the current selloff in growth has provided a remarkable opportunity to buy some of most innovative, and fastest growing companies at a relative bargain.
Regardless of what scenario, or variation of a scenario plays out, the above information provides context so that emotions do not dictate our investments.
On March 2nd we provided a detailed webinar regarding the state of Bitcoin. We outlined that we could see one more push for Bitcoin into the $64,000 – $107,000 region before we see a major top form.
As the uptrend continued through April and May, Bitcoin topped at $64,895, which was the lower end of our listed range. Because of this, we began a selling campaign, where we took heavy gains by cutting our position in half.
We began buying Bitcoin at $7,717 in 2020, and continued to buy up through the $19,666 breakout. We have re-allocated our cash gains from Bitcoin into beaten down tech stocks. We have also begun buying back into Bitcoin in small increments.
This article was originally published on Forbes on May 21, 2021,12:31am EDToriginally published on Forbes on May 21, 2021,12:31am EDT
FuboTV has been dismissed by quite a few analysts and investors for its negative gross margins. This dismissal, that leans heavily on the lagging financials, is reminiscent of the many times that tech stocks have been misunderstood.
As a tech analyst who is trained in product, I see a sizable runway in live sports OTT and sports betting with Fubo having key advantages over DraftKings. The management has to execute, and while the market calls this speculation, I call it a product road map.
First, FuboTV must continue to grow its audience. I made the argument that this is the most essential piece over the coming quarters when the shorts attacked this company. The bearish reports ignored the most important piece to a media company: audience growth. Fubo has handily overcome the challenge of growing its audience year-over-year regardless of the seasonality in sports. The last two quarters could not have gone better in this regard.
Second, FuboTV must execute on launching a sports betting book. This is easier than the public markets think as Fubo has every required ingredient. Most importantly, competitors such as DraftKings do not have all of the essential ingredients that FuboTV has, and we expect Fubo will see a healthy uptake for this product launch.
Financials do matter, of course, and as mentioned Fubo is the ultimate challenge for those who rely on financials alone and ignore product. This is because live sports were canceled last year. Short seller reports that dissect a live sports company following covid are exaggerating the effects of a lagging, one-time event. Forward-looking, we have an ad rebound in digital ad spend from 5% last year to 17% this year. Plus, the World Cup is on deck (and hopefully the Olympics) which bodes well for point #1 – audience growth.
The more popular bet is to go with DraftKings. However, DraftKings is a well-known story that is fully priced. We like the risk/reward of Fubo better due to the fact that this particular company is capturing the live sports OTT trend and will be able to convert high-value users for the sports playbook because they own their audience.
Audience Growth
FuboTV put quite a few triple digits on the scoreboard in the last earnings report, which was the strongest first quarter in company history. Due to the seasonality of sports, Q1 is typically lighter in terms of growth for Fubo, yet the company reported sequential revenue and subscriber growth.
GAAP of -$0.59 missed by $0.03 and included -$0.02 from expenses associated with the launch of sports betting and -$0.02 due to paying off debt related to senior convertible notes.
Prior to the earnings report, we reached out to Apptopia to check the app data on Fubo. Apptopia is a provider of competitive intelligence on mobile applications.
With the information, we issued the following note to our subscribers on April 20th: "Fubo guided to end Q1 with subscribers of 520,000 to 530,000, representing growth of 82% YoY at the midpoint. Data from Apptopia shows that Fubo ended March with approximately 585,000 daily active users (DAU) versus the Q1 guide for 525,000 paid subscribers at the end of Q1Fubo ended March with approximately 585,000 daily active users (DAU) versus the Q1 guide for 525,000 paid subscribers at the end of Q1."
On May 11th, the company went on to report 105% year-over-year growth and 8% sequential growth for 590,430 MAUs with subscription revenue increasing 131% YoY to $107.1M. Therefore, we were within 6K subscribers on the estimate.
Net subscriber additions were approximately 43,000 versus a loss of 28,000 in the same quarter last year, which the company achieved while reducing sales and marketing as a percentage of revenue. Monthly ARPU increased 28% year-over-year and advertising ARPU was up 57%.
Paid and trial users streamed more than 228 million hours, up 113% YoY. MAUs on average watched 129 hours per month, up 8% YoY.
This is the second time we accurately tracked Fubo’s audience growth with Apptopia data. The first was when we pointed out during a flurry of short reports that the audience growth in Q4 was quite healthy.
According to Q2 data from Apptopia, as of May 12th, Fubo’s growth remains strong on a year-over-year basis. We are currently seeing app downloads tracking at 181% YoY against weak Q2 ’20 comps due to the cancellation of sporting events last year.
Please note that we have extrapolated the data through May 12th to the end of Q2 and we were roughly 46% through the quarter as of last week.
Note: this data is not for earnings calls and readers must do their own due diligence. We are simply sharing information from a mobile analytics firm, which is one of the many channel checks we do when looking at tech stocks.
Fubo is tracking for a sequential QoQ decline in downloads in Q2, but it should be noted that Q2 is historically a weaker quarter than Q1 for Fubo, as evidenced by 2019 pre-pandemic data.
We are seeing similar trends in average daily active users (DAUs) thus far through Q2, with Fubo on pace for 172% YoY growth and a modest decline sequentially.
Total time spent in the Fubo app is currently on pace for a large YoY increase of 237%, with another modest decline sequentially from Q1. This helps support how sticky Fubo’s product is to its audience.
Fubo raised guidance and expects Q2 revenue of $121M at the midpoint, up 174% YoY, versus consensus of $98.37M, and FY2021 revenue of $525M at the midpoint, up 101% YoY versus consensus of $472.69M.
The company also raised guidance for subscribers. For Q2 the company expects 600,0000 to 605,000 subscribers, up 111% YoY and for the full year expects 830,000 to 850,000 subscribers, up 53% YoY at the midpoint.
Live Sports OTT
Not surprisingly, we saw the biggest drop ever in households with cable packages this past year with a record 7.5% decline. Tech Crunch recently stated the 2020 pandemic accelerated the projected cord cutting rate to 31.2 million households last year and is expected to reach 46.6 million households by 2024.
Even more pertinent, according to a survey compiled by Parks Associates, 55% of cable subscribers state that live sports is an important factor in why they are staying with expensive cable packages. That means of the 77.6 million currently subscribing to cable, satellite and telecom packages, 42 million are live sports fans. This is 10 million more than the size of the current cord-cutting audience, which has taken nearly 15 years to amass (circa 2007).
In September of last year, AT&T paid $3.75 billion for the exclusive rights to segments of major league baseball. This is a renewal of prior contracts and is a 65% increase from their prior exclusive price tag. The fact that ATT is willing to pay a 65% premium from their last contract shows the importance placed on live sports.
We can see a similar evidence as to the value placed on live sports with Amazon’s purchase for the exclusive rights to the Thursday night NFL games through 2033 at an astounding $100 billion.
As an investor, I understand FuboTV will not stream every game in every league, and I am aware exclusive rights to various sports may shift through negotiations. In fact, the Tokyo Olympics may be canceled. However, FuboTV is offering me a pure play and the company only needs to corner a percentage of live sports cord-cutters in order to be successful. FuboTV could end up owning 5% of the market or 20% of the market – both look good from this market cap.
When asked about competitors, Anthony Wood of Roku has stated a few times that any cord-cutting is a windfall for their platform. Similarly, I believe that any NFL fans cutting the cord will be a windfall for Fubo.
On that note, Fubo offers comprehensive sports coverage. According to a March 2021 press release, Fubo offers “42 of the top 50 Nielsen-ranked networks across sports, news and entertainment channels,” plus more than 30,000 movies and TV shows on-demand.
It’s also important to note that Fubo has the exclusive streaming rights to the South American Qatar World Cup 2022. When you consider there are 3.5 billion soccer fans globally, suddenly Amazon’s Thursday night NFL deal doesn’t seem so make or break (far from it, Thursday is the least popular night).
Sports Betting
In the United Kingdom, sports betting is a $20 billion industry today. There are projections that sports betting will be a $155 billion industry by 2024. To find an opportunity with exposure to this market at a $3 billion market cap is worth a closer look.
Fubo acquired Balto Sports on December 1st in the company’s first strategic move to launch free-to-play games this year. Balto Sports develops tools and contest automation software for users to organize and play fantasy sports games and is a Y-Combinator graduate.
There was criticism from the short sellers that FuboTV had bought a headline. Yet, there is nothing unusual about a stealth product that needs to attach the technology to an audience. In fact, Fubo plans to beta test its free gaming experience in the next few weeks and this rapid release is likely due to the incubation period that Balto Sports underwent beginning with its time at Y Combinator.
In Q1, Fubo acquired Vigtory, a sports betting and interactive gaming company, for $37.2 million. The company was founded in 2019. The company is co-founded by a former gaming executive at MGM Resorts and has regulatory approval in New Jersey. Notably, the app has not gone live which is reflected in the price.
Fubo Sportsbook is expected to launch in Q4. The company has $400 million cash and is planning to spend less than $50 million to launch sports betting, per the Q1 earnings report. Fubo plans to deliver streaming and gaming in one data analytics platform, offering users a seamless experience. We expect the company will see lower customer acquisition costs as a result of owning the audience. Fubo’s CEO, David Gandler, said during the most recent earnings call that 30% of users are willing to participate in free-to-play, according to surveys done on the platform, while 22% of paid subscribers are willing to place bets on Fubo.
Despite short sellers not seeing how or why a sports betting app could merge with live sports content, we now see DraftKings partnering with Sling/DISH. I guess content and sports betting does go together, after all (yes, I’m being sarcastic!) It’s surprising that the critics said it cannot be done despite Sky Media having the most successful sports betting model globally.
From purely a user acquisition standpoint, in-app ads with your own content is nearly frictionless and you have a mountain of data to effectively target. Fubo’s ability to gather audience data and appropriately market them, with a deep understanding of preferences, is an advantage that is currently understated. Fubo has first-party data and can specifically tailor an experience, which will either result in higher ARPU from betting or higher ARPU from ad spend.
DraftKings, meanwhile, has partnered with the number six over-the-top provider, DISH Network/Sling. We think DraftKings sees the potential threat in Fubo having access to first-party data and a closed-circuit loop for user acquisition in sports betting. Notably, DraftKings faces friction here when introducing a new brand name that is not DISH/Sling. Essentially, whatever DraftKings can do with the #6 partnership, Fubo can do better. For example, Fubo can give free sports content away to high value users who spend over $100 on sports betting and offer other rewards that are not possible unless you own the audience. The CEO talks about this here.
Fubo is already on par with DraftKings in terms of ARPU and has not added sports betting yet. These numbers show that with sports betting, Fubo could potentially see $100 ARPU or greater.
Notably, DraftKings spends an exorbitant amount on sales and marketing at 82% of revenue. This reflects the cost of acquiring users when you don’t own an audience. It’s interesting, of course, that the critics of Fubo do not look at the $1.5 billion in net losses that DraftKings accrues on its bottom line. On a forward basis, DraftKings is estimated to report ($2.82) EPS for fiscal year 2021 compared to Fubo’s estimated ($1.96) EPS.
Notably, despite having 1/3 the revenue and audience size of DraftKings, Fubo is trading at 1/6 the market cap. It’s not hard to see the potential here, and clearly a healthier bottom line isn’t the reason that DraftKings trades at a 300% higher valuation.
Conclusion:
We officially recommended FuboTV in October and did not hesitate to challenge the shorts in January before the last two earnings reports confirmed the company’s strong growth. We specialize in spotting opportunities in tech growth based on product and we were the first analyst (anywhere) to recommend Roku, we were very early to call Nvidia the future for AI during the crypto bust nearly two years before AI drove the data center segment, and we said Zoom’s product would go viral six months before covid.
We are not concerned with broader market weakness that affects short-term price movements. Instead, we look for companies that are executing on a product road map, are capturing a microtrend and are able to scale. Not only do we think Fubo can do this, but we think Fubo will overtake DraftKings in the next 2-5 years.
Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.
I recently joined the Motley Fool podcast with Brian Feroldi and Brian Stoffel where we discussed electric vehicles, artificial intelligence, and whether growth tech investors should rotate into value. Below, we provide a summary of each video and YouTube clips.
As a bonus, I’m also adding my take on Fastly from podcasts with the Motley Fool and Chit Chat Money. While I remain bullish on the future of edge computing, I voiced my doubts about Fastly when the stock was skyrocketing, reaching a peak of $136.30 last October and a lower high of $122.75 early this year. I summarize my view below.
Why I/O Fund Is Not Selling Growth Stocks
For us, the most important question is whether we are in a secular bear market. We believe in long term buy and hold—except in a secular bear market and a long economic recession. This is because the goal is to avoid holding positions at a loss during an extended period of time. Therefore, in any selloff, the question we ask ourselves is whether this is a quick correction or secular bear market. Unless you are a day trader, most investors are better off holding through these quick corrections than trying to time both an exit and an entry.
We are not financial advisors, but based on the indicators we follow for our portfolio, we are positioned for a continuation of the long-term uptrend. We anticipate potential strength into the summer months with a high consumer savings rate, strong GDP, and dovish monetary policy from the Fed. Those are excellent signs for a strong economy. The I/O Fund did some buying in late March and are not letting the news headlines push us to close our long-term positions.
On that note, I only recommend a stock if my conviction can withstand a 30% selloff. This is because most tech growth stocks go through periods of exuberance and fear/doubt a few times.
Why I’m Bullish on Electric Vehicles
Last time I spoke with Motley Fool, we discussed electric vehicles. Although stock prices have come down, we remain long. The personal savings rate in the U.S. has soared, reaching 13.9% in February and 27.6% in March. As a result, we expect the auto sector to be strong. Electric vehicles are also answering multiple problems. For example, in China where there is less access to oil the government incentivizes EVs through subsidies. Manufacturers are also producing EVs with cutting edge technology at close to the price of a traditional vehicle.
The AI Economy Will Be 4x Larger Than the Mobile Economy
We are long Nvidia for the trend of artificial intelligence. The AI economy is projected to be four times larger than the mobile economy, and the mobile economy brought us FAANG stocks like Apple, Facebook, and Google. I expect to see some FAANG-level companies arise from the AI economy.
Fastly: Not a Slam Dunk
Last December, I joined the Motley Fool Podcast and voiced my doubts about Fastly. I later discussed Fastly with Chit Chat money. Fastly is not a slam dunk, and I voiced my doubts when the stock was skyrocketing. Below I summarize both videos.
Content apps are a great market for Fastly, but for the really big problems that edge computing will solve, it will be difficult for Fastly to be a clear leader in that market. That doesn’t mean Fastly can’t pull it off, and I’m always for everyone making gains. But I prefer slam dunks and my point was that Fastly would face serious challenges and investors were not factoring that in by saying “Fastly was an edge computing leader.” In fact, Fastly has not had edge computing revenue for nearly 16 months after the launch of the Edge Compute product.
Content app developers will say that Fastly is delivering content in under 20 milliseconds and therefore it is edge. However, Fastly’s core competency is a CDN, which is a space that has been highly competitive for 25 years. CDNs saw major tailwinds from streaming and usage last year, however, this was revenue was not due to edge computing.
As a tech analyst, I stuck my neck out to make sure people knew the real story. It was bold, as this was a favorite stock on social media, and there was a flood of negative responses after I simply pointed out that edge computing was not contributing to the current growth.
There are big problems that can be solved with edge computing and I outline this in the video. There also still seems to be an absence of discussion in the retail community around AWS, Azure and GCP moving into this space with telecom partnerships. Projections show that 75% of data will come from the edge. That will be mainly answered by the companies who own the cloud computing market—Amazon, Microsoft and Google.
In the past, I was also asked what company I would choose between Cloudflare and Fastly; I said Cloudflare due to their strategic approach to capture SMBs. This is a market where Cloudflare performs well.
We have a new name, new website and audited 2020 results.
This week we’ve got big news to share.
First off, my team has released audited performance results that outperformed $ARKK since the Fund was founded on May 9th, 2020 and we are currently beating the Nasdaq across roughly 34 positions. You can view the press release here.
How does a team of four dedicated people beat a team of 38 at Ark Invest or a team of hundreds at Goldman Sachs and Morgan Stanley? I discuss this below.
As you are aware, I’ve been publishing under Beth.Technology, but this name no longer fits the services we provide. I’ve evolved from a tech insider with a blog to an actively managed tech fund that offers in-depth research and real-time trades.
I can no longer run a site with my name only as this is a team effort. We are rebranding Beth.Technology as I/O Fund.
I/O stands for input-output and is used across all computing (cloud, AI, ML, etc). We specialize in tech growth, and this name symbolizes our singular focus on this niche.
As you’ll see, we outperform some of the best funds on Wall Street.
With audited returns of 115.5% from May 9, 2020 to Dec. 31, 2020, I/O Fund narrowly outperformed ARKK within the same timeframe. Our actively managed fund was founded on May 9th, 2020 following the launch of the premium service on July 15, 2019.
One reason a small team of four can achieve this performance is that individual investors have more tools they can use, including hedges, small caps and allocation to crypto.
The second reason is that we believe in each other and know our respective positions very well. By combining our specialized strengths, we outperform the major indexes and larger teams.
I’m amazed at how collected my team is under pressure and how humble they are during rallies. I’ll introduce you to Knox Ridley, David Marlin and Jessica Ablamsky below. First, I want to tell you about myself and how I’ve come to analyze tech companies day-in and day-out.
An Edge on Wall Street
Ten years ago, I started a blog on startups and tech companies for the private sector called CitizenTEKK.
I worked with more than 300 startups to help communicate the importance of their products to wider audiences. I also wrote white papers and analyst reports for deals in the private sector for about 5 years.
These reports simplified complex technical concepts so busy executives could make big decisions quickly on venture investment rounds and strategic partnerships, or decide whether their company should be an early adopter.
Due to high switching costs, adopting technology is often a costly investment. My research reports helped guide these big decisions.
About three years ago, I took this experience and brought it to public markets. The reason is simple. I saw lots of errors being made when retail investors attempted to understand tech products. Even worse, financial analysts with no experience in tech were feigning expertise.
Because I was trained specifically to communicate at the highest level on the importance of complex tech products and their strategic value, I saw an area where I could help.
I’m not an engineer—and that is a good thing. Engineers built products. I was trained to communicate the purpose of those products and their strategic value.
That experience provides an edge you can’t find anywhere else. Stock screeners, algorithms, quant models, etc—these are plentiful and therefore erode competitive edge. Meanwhile, having experience in communicating the strategic value of hundreds of complex tech products is the edge that institutions seek.
This is demonstrated by my results. I predicted the biggest stock drop in history in Q2 2018 with Facebook's miss and the biggest IPO loss in history with Uber in Q2 2019. I break down company strategies and product roadmaps before they become apparent to the market, which is why invested in Zoom and Roku from the IPOs and have been holding for a more than 1,000% gain.
My free newsletter is consistent and full of original research. In a world where research is ripped off and recirculated, you can rest assured everything I publish is original—and has been dating back to 2011.
This is extremely important, because borrowed research can’t stand the test of a steep selloff. I held Roku through two pullbacks of 60% or more.
Don’t guess with your hard-earned money. Seek out experience and find someone who offers more than the dime-a-dozen algorithms and trading software. I won’t always be right, but I’m able to outperform analysts at institutions because they haven’t spent a day inside of a tech company or a day working with a product.
Cathie Wood is a great example. She’s an excellent money manager but hasn’t worked with tech products or analyzed hundreds of startups and companies. I’m probably into the thousands by now.
Experience in tech is one reason why we beat Ark in our first year and why we are beating the Nasdaq right now.
It’s been a thrilling experience to bring my skills to retailers and I have no plans of slowing down. For fun, I thought I’d give you some throwback videos on when I presented to audiences on tech products.
Portfolio Manager Knox Ridley uses technical analysis to predict tops, call bottoms and help our readers navigate major market moves. We tested a quant with algorithms against Knox and Knox beat the machine every time.
He looks at dozens of charts every day, and the ability to connect dots across multiple charts is not a match for a machine. (This is good news for anyone who thinks machines will permanently replace humans).
He also cares deeply about helping individual investors realize the highest returns and offers his entries, exits and hedges in real-time.
His dedication to our readers is unparalleled. He posts daily on our private subscriber forum and analyzes key charts during bimonthly webinars to share what actions he is taking and why.
The results speak for themselves. Knox is the I/O Fund portfolio manager who competes with hedge funds. I can’t claim the performance as that is actually Knox’s performance results as the PM.
It would be easier if we simply recommended stocks and did not disclose our activity. But this wouldn't help our readers who have to weather steep sell-offs in volatile growth tech stocks. Knox is right alongside our readers in the trenches—with full disclosure about what he is buying, when and at what price.
Our goal of beating Ark on the upside and the Nasdaq in down markets has been achieved since our inception on May 9th. This is largely due to Knox Ridley’s expertise. Details on audited results were released to our subscribers last month and are available in our recent press release.
In a recent webinar, Knox provided a general market update and levels to watch for the Nasdaq 100. For his most recent analysis of NDX, you can click here.
Taking Advantage of Momentum
Tech growth moves fast. Last year, we realized that we need a nimble and smart equity analyst to help us track small caps, SPACs, earnings revisions and adjustments to valuations. Last August, we added David Marlin to our team. A former prop trader in Manhattan, David has a keen eye for momentum stocks.
There are thousands of equity analysts working at various investment banks, but very few of them understand tech growth like David. The unique space I/O Fund specializes in requires someone who can look at high valuations and determine which stocks deserve the valuations and which do not.
We believe we are invested in the two best SPACs thanks to David’s dedication to organizing this trend for our premium subscribers. We also believe we are positioned well for tough Covid comps, with specific picks from David, due to his maniacal focus on fundamentals, forward growth estimates and valuation.
David contributes regularly to our forum, webinars and the I/O Fund portfolio of about 30 positions. He is also a weekly contributor to the in-depth research our service provides and works alongside Knox on a proprietary hot list.
When David first came on, we wanted him to help expand our coverage on stocks that we didn't previously cover. In David's first article for us, he outlined his top nine momentum stocks.
An equal weighted portfolio of David's top 9 picks since the date of the article (9/24/20) would have returned 62.23%, good for an annualized gain of 145.09%. David's top picks significantly outperformed Ark Innovation ETF ARKK, the QQQ, and the S&P 500 during the same time frame.
Holding for Big Gains
Jessica Ablamsky is a savvy tech investor who helps our team stay social and active even when we are heads-down with research. Jessica keeps track of details for the I/O Fund and is on our forum daily to help moderate important discussions.
As we have all seen over the past year, growth tech stocks are more volatile than the overall market. If you want to hold on for big gains, it’s important to maintain a strong thesis on long term holds and not get scared out of them during pullbacks.
Jessica keeps a cool head during corrections and is always there to remind investors that volatility is normal and to be expected. She is dedicated to helping retail investors outperform the Nasdaq and is always on the lookout for good opportunities to add to long term holds.
She recently covered Poshmark and has in-depth analysis coming out on Pinterest, a stock she owns and knows well. Jessica’s attention to detail and keen sense around investments is something that benefits our community.
Earnings Coverage to Resume Next Week
If you made it this far, we thank you for your support. We are incredibly excited for this new rebrand and grateful you let us share this with you. My free analysis will remain the same while the premium site offers the following:
Research
Portfolio with 30+/- positions
Real-time trades and audit
Forum
Webinars
Thanks again! We will resume coverage of earnings next week.
