This Week in Barrons: 3-31-2019:
Lyft Off: Lyft is a ride-hailing company that provides taxi services, and has recently expanded into shared bicycles and scooters. Uber is Lyft’s main competitor, and both have lost money forever. In its SEC filing, Lyft lost $911m in 2018, $688m in 2017, and $682m in 2016. But these numbers didn’t put off investors, because on Friday it came out at $72 a share. It’s the 1stmajor gig economy company to hit Wall Street – valued at $25B and trading under the ticker: LYFT. Expecting the public to buy shares in a loss-making company is not unreasonable. Big-name tech firms including Tesla, Snap, and Spotify were unprofitable when they listed on the exchange, and all were eagerly snapped up by investors. But Lyft has entirely different business models, costs, and challenges than companies engaged in car-making or social media. And recently it’s in a price war with Uber (offering customers tempting discounts in order to encourage loyalty) making it even more difficult to make money. Low prices also impact driver wages – and at some point drivers will decide that the job just isn’t worth their time and will force the company to raise prices. But the big bet is on: (a) ride-hailing replacing car ownership, and (b) autonomous driving replacing the need for an expensive ride-hailing driver. Lyft has a relatively small autonomous driving fleet operating in Las Vegas, and has generally fared better than Uber – which was involved in a fatal accident in Phoenix, AZ last year..
But let’s talk IPO (Initial Public Offering). Is it just me or do most of the new firms going public (Uber, Pinterest, Postmates, Robinhood, Zoom, Slack and Airbnb) scare the bejesus out of you? Going public used to mean that an investor could participate in a vision they believed in. Today, buying an IPO means you’re risking a lot to make a little. I personally like Lyft the product, but dislike Lyft the $25B IPO. Granted Lyft will only lose $1B this year so I guess it’s still a ‘growth stock’, but if you’re thinking about buying it now – please be strategic or plan on going down with the other bag-holders. Yes, that may seem harsh, but someone needs say ‘Sell’ because it’s obvious that mainstream financial media thinks ‘Sell’ means ‘Buy Less.’ After all, the company lost $900m last year, has very few assets, and is valued at more than American Airlines.
But let’s talk IPO (Initial Public Offering). Is it just me or do most of the new firms going public (Uber, Pinterest, Postmates, Robinhood, Zoom, Slack and Airbnb) scare the bejesus out of you? Going public used to mean that an investor could participate in a vision they believed in. Today, buying an IPO means you’re risking a lot to make a little. I personally like Lyft the product, but dislike Lyft the $25B IPO. Granted Lyft will only lose $1B this year so I guess it’s still a ‘growth stock’, but if you’re thinking about buying it now – please be strategic or plan on going down with the other bag-holders. Yes, that may seem harsh, but someone needs say ‘Sell’ because it’s obvious that mainstream financial media thinks ‘Sell’ means ‘Buy Less.’ After all, the company lost $900m last year, has very few assets, and is valued at more than American Airlines.
Who’s getting rich on Lyft?
- Rakuten ($2.3B = 4.5X co-founders),
- General Motors ($1.3B = 2.5X co-founders),
- Fidelity ($1.3B = 2.5X co-founders),
- Andreessen Horowitz ($1.1B = 2X co-founders),
- Capital G ($923m = 2X co-founders),
- and of course co-founders Logan Green ($603m) and John Zimmer ($416m).
Who’s in control? After the IPO, Lyft co-founders Logan Green and John Zimmer will own about 7% of the company's stock but will maintain control due to a dual-class stock structure where each of their shares will count as 20 regular voting shares.
Will ‘car cutting’ be the new ‘cord cutting’? Often where ride sharing is available and at low cost – Lyft’ing can make financial sense. However, only 9% of people who sold or traded in a vehicle over the past year even considered using ride-sharing services instead. New research suggests that ride-hailing services may instead be pulling people away from public transit and actually be putting more cars on the road.
Will valuations ever matter? Valuing LYFT at $25B tells me that investors view it as they do cloud computing companies like: Salesforce, Rackspace, and Amazon. I’m not arguing whether Lyft is ‘worth it’ but rather – is it in the same category as Amazon or Google? At $25B, Lyft’s stock price is 14 times last year’s sales (earnings are non-existent).
Lyft is a different bet than Amazon or Google – as both AMZN and GOOGL are heavy into tech equipment that produce a modest net income and a large amount of free cash flow. Amazon’s $871B market value is only 3 times its forecasted sales. Facebook and Google are cheaper still – and always were, even at their IPOs. For Lyft to even remotely grow into its valuation, we need to see a decline in the $1T Americans spend annually on cars, gasoline, and insurance. And there’s no sign that the ride-hailing industry has cut into auto sales one bit.
At some point, transport-as-a-service may peel away the need for a second car, and even some city dwellers’ first cars. Bet on Lyft if you want, but do so based on the world of transportation as we know it today. In that world, Lyft is a useful supplement to car ownership, and a replacement for a very small number of people. As long as that stays that way, $25B for Lyft is a big lift.
The Market (Apple and Gold):
According to BL and HL, Apple built its business on being late to the party – but improving on the existing products so much that it was always able to own the niche. That started with CD burners and iTunes, and moved into the iPod and iPhone. Furthermore, Apple worked best when it had a monopoly – like with the iPod and in the initial years of the iPhone. But what’s the company’s strategy now? Is it to become a better bank, and entertainment subscription service? Last week they announced that they were adding journalists to an existing $10/month subscription service and calling it News+.
They also announced their long-awaited update for Apple TV. They promised a repository of old shows, along with some new and original content – without a price or launch date. Tim Cook (CEO of Apple) paraded a bunch of celebrities out to show credibility that included: S. Spielberg (who wants to EXCLUDE Netflix from the Oscars) Oprah Winfrey (from the old Oprah / Johnny Carson show), and other baby-boomer favorites. Why would I pay another subscription fee for limited inventory – that’s HBO. And compared to Netflix’s price – Apple’s service is a rip-off. I’m confused. Apple used to be (and still is) a distributor of content. Distributors that want to become producers are often recipes for disaster. Facebook counts on user generated content. Amazon makes the most money distributing and selling other people's stuff. Google’s search is just a vehicle to sell ads. The moment Apple announced that it would stop giving individual product sales numbers, is the moment that the red-flag went up for me on Apple as an investment. Apple is on the verge of failing to deliver on its software and services promise. Without hardware, I think Apple continues to be late to the party, but this time delivers little in return.
I recently purchased a case for my iPhone Air pods – so that I can remember to take them with me. For now they are attached to my keys, but this is causing my keychain to resemble that of a janitor (see above). As I said above, I doubt that Apple can continue to dominate as a software and services company. In fact, I wouldn’t be surprised if they ‘warned and guided lower’ for this quarter’s earnings. There will be no next iPhone, and I don’t think Apple will win the home / living room battle. The only part of their strategy released last week that made sense to me – was them going for your wallet. Apple has partnered with Goldman Sachs to produce a credit card. Apple touted their enhanced privacy by: (a) holding all user’s transactions directly on their individual devices, and (b) by not allowing the physical card to carry an actual number. Apple should find that this is a great way to be in the banking business – without all of the headaches associated withbeing a bank.
Speaking of banking, I will be talking a little about gold in the coming months not because I’m a ‘gold bug’, but because everything is pointing toward the global investing community implementing a digital currency and negative interest rates. For years we gold believers had to fend off people saying: “It’s just a rock. It doesn’t pay any dividends. It doesn’t even pay interest.” Well consider this, if they begin to implement negative interest rates of just minus 1% - holding gold instead of cash in a bank is now ‘paying you’ to own it. It has no 1% fees associated with it – just storage costs. And suddenly that 1% negative yielding banking account – makes holding gold look a lot more profitable – aye?
InfoBits:
- WeDecline: WeWork (the private co-working space cult) saw their year-over-year losses double despite doubling revenue. The company (which is constantly mentioned as a potential IPO) spun this as a sign of growth, and said they could be profitable if they wanted to be – which is corporate for: “No-Way.”
- McData: McDonald’s just got into the AI game. They acquired Dynamic Yield, an artificial intelligence startup focused on personalization and decision logic technology. Now, the fast food chain's drive-thru menus will be able to update instantly. And when McDonald's eventually gets hacked, those drive-thru menus will be as golden as their arches.
- Layoffs: Battle Royale: Electronic Arts is cutting 350 employees, mostly from their marketing and publishing departments. They will also close their Russian and Japanese offices.
- Facebook apologizes: Another day, another lawsuit for Facebook – this one is from the Department of Housing and Urban Development (HUD) after it allowed advertisers to pick and choose who viewed their housing ads based upon race, religion, and other factors that are illegal for everyone other than Facebook.
- FEMA hacked? Last week FEMA acknowledged that an estimated 2.3m people’s personal data had been compromised. The victims included survivors of the 2017 California wildfires as well as hurricanes Harvey, Irma, and Maria. Millions of people who had used FEMA's temporary shelter program had their banking information and personal addresses exposed. FEMA, let’s not cause more national disasters than we’re solving shall we?
- $270 million: is what Purdue Pharma (the maker of OxyContin) will pay Oklahoma to settle a lawsuit that accused the drug maker of aggressively marketing the painkiller and helping fuel the opioid epidemic
- March Consumer Confidence Fell: for the 4thmonth out of 5 – as Americans grapple with a stalling labor market, volatility in stocks, and softer economic growth. Because consumer spending accounts for 70% of U.S. economic activity, the confidence gauge is an important indicator of economic health.
- Germany sells Negative Yield Bunds: for the 1sttime since 2016. German people are so confused as to where to put money, they're buying Bunds that actually cost them money to hold. WORSE – it’s coming here soon.
- European Recession ahead: Per SF, the EurozoneManufacturing PMI fell further to 47.6 in March (below 50 denotes contraction). This reading pointed to the steepest pace of contraction in the manufacturing sector since April 2013, and the most new orders dropped since December 2012. Specifically, German manufacturing output fell at the sharpest rate since August 2012, and French factory activity fell back into contraction territory.
- Avengers Endgame: When you go see the movie next month – you may want to get the extra-large popcorn. The movie’s run time is reportedly over 3 hours.
- UBER: Uber is buying its Middle East competitor Careem for more than $3B. Think of it as Uber becoming the ‘careem’ of the global ride-sharing crop.
- $10T: is the amount of global debt that comes with a NEGATIVE yield. In 6,000 years, there have never been negative interest rates – and banks are just getting started.
- Yale rescinds admission for a $1.2m student: as they became the first university to reset their admitted student class roster – as part of the ongoing college admissions scandal.
- Getting your Old Brain to think Young: It seems that older animals start to produce inhibitory chemicals that actually keep their brains from accepting new ideas and changing. The process may reflect the different agendas of adults and children. Caffeine seems to counteract this inhibition – keeping our brains more accessible, accepting, and willing to learn. It helps to keep us young.
- What disrupts a business? Organizations often blame technology as being the reason for their business’s decline. Statements like: “Mobile phones are disrupting our business because people are showrooming in our stores”resonated in boardrooms. According to Wharton, if you believe a technology is disrupting your business, the natural course of corporate action is to acquire the technology. But if you allow yourself to understand that it’s your customers who disrupt your businesses – then you need to: “Find the activity where the customer is not fully satisfied and repair that link in the value chain. Everything should come down to reducing 1 of 3 costs: money, effort and / or time.”
Crypto-Bytes:
- Luxury Blockchain: LVMH, the luxury brand conglomerate which owns Louis Vuitton and other high-end labels, is preparing to launch (in May or June) a blockchain to verify the authenticity of its goods.
- Bitcoin is #1: fastest and highest rising valued asset ever – according to Weiss Ratings.
- Nataliya Manina Esq. sez: "When it comes to crypto applications, smart contracts on the blockchain can create an opportunity for the legal industry to become more inventive." Nataliya also mentioned the enormous amount of time and resources that financial institutions spend on the Know Your Customer (KYC) process. “All of that customer data can be added to the blockchain, validated, and exchanged – thereby reducing time and costs. It can also provide greater transparency and reduce errors associated with any partially-automated / manual processes – even those with internal controls."
- What exchanges really do KYC / AML? A global study of 216 exchanges found that 69% do not have “complete and transparent” know-your-customer (KYC) procedures. And only 26% had a high level of anti-money laundering (AML) procedures in place. Binance was identified as being a ‘high-risk’ platform, while others including: Coinbase, Gemini and Circle-owned Poloniex – were labelled ‘low-risk’ due to their licensing and strict KYC/AML policies.
- How is Wells still a bank? One major U.S. bank that has made investments in blockchain technology is now having doubts that it will live up to its potential. On Wednesday Wells Fargo CEO Tim Sloan said: “Blockchain has been way oversold. The tech should have brought in a big shift within the industry by now – yet that’s not what is happening.” Guess he doesn’t like the BILLIONS in savings that Signet, JPM, and XRP are providing their customers in international money transfers. And by the way, Tim Sloan quit being CEO of Wells on Thursday of last week – effective immediately.
- Best Crypto-Education: Try Crypto HedgeHog: https://stage.cryptohedgehog.io By far the best crypto-education under one umbrella that money can buy.
Last Week:
Everyone was talking about the 1stQuarter of 2019 being one of the best 1stquarters in a decade. What’s not being talked about is that the 4thQuarter of 2018 was one of the worst, and ‘net-net’ we’re still down. Last week we bounced between two gravity points on the S&P: 2,811 and 2,842. Use these gravity points to guide you on how markets are moving, and to give you another mechanism for controlling your risk.
Last week the smell of desperation was in the air. They were desperate to keep the S&P over that 2,800 level. Below that level, they know that enough shorts could fire off and that would start an unstoppable landslide lower. So, every time we dipped below the 2,800 level, the ‘Plunge Patrol Team’ would rush in and save the market. Now, some will say that the longer this sort of chop lasts, the more chances for a downside fall. Others will say this is building a base, in order to move higher. I say it's too darn close to call – but I’m expecting it to be resolved to the upside. I'm long a few positions, but not terribly anxious to add to them unless we can get past 2,854 – a high that was set 9 sessions ago. We’ll know soon enough.
Weed & BioTech:
- CVS & CBD are alive and well: CVS announced that it hasstarted to sell cannabis based products such as creams, sprays, roll-ons, lotions, and salves in 8 states: Alabama, California, Colorado, Illinois, Indiana, Kentucky, Maryland and Tennessee. Per AR, Jim Cramer even said that marijuana products are providing non-addictive pain relief for people’s ailments.
- Walgreens – #MeAlso: Walgreens is jumping on the bandwagon and joining their rival drugstore (CVS) in the selling of CBD creams, patches and sprays. Look for aHouse committee to shortly pass a bill bringing the cannabis industry cash ‘off the streets’ and into legitimate bank accounts.
Next Week – 1stQuarter is in the books…
Bonds: are firmly in control of this market place, and as long as the bonds are rallying – they will continue to put pressure on the financials. Volume this week (except in the financials) was weak across the board. The XLF (the ETF for the financials) was doing about 2.3X more volume than normal – and some institutions are positioning themselves very long inside the April 5thand April 18th$26 call options.
IPOs: Lyft represents a roadmap for all of the other marquis unicorn IPOs to come. But because the S&P is already up 13% YTD, this could become a challenging IPO market for the remainder of the year.
Yield Curve: The market place knows that the yield curve is inverted, and could turn at any time against the FED. Politics is supporting this market place. We’re even having our own FED officials tweet about cutting interest rates by a half-a-point.
TLT: I am currently not inclined to short the bonds (TLT), but it wouldn’t surprise me if next week the bonds backed off a bit. This would allow the financials and the S&P to explode higher in lock-step and potentially into all-time high territory.
A potential scenario could very easily be:
- Bonds (TLT) pull back a little (minimal but just enough)
- To propel the XLF higher and push the S&Ps into all-time highs.
- That would explain the tremendous volume of call buying in the April 5 and April 18th$26 XLF.
- Then I would think that the bonds (TLT) would regain their footing, march higher, with the markets turning lower in response.
Tips:
Top Equity Recommendations:
HODL’s:
- Aurora (ACB = $9.06 / in @ $3.07),
- Canntrust Holdings (CTST = $7.78 / in @ $3.12) – missed earnings,
- Canopy Growth Corp (CGC = $43.37 / in @ $22.17),
- HEXO (HEXO = $6.63 / in @ $6.37),
- Nova Vax (NVAX = $0.55 / in @ $1.59)
Crypto:
- Bitcoin (BTC = $4,105)
- Ethereum (ETH = $142.00)
- Bitcoin Cash (BCH = $168.00)
Options:
- HYG (85.84): Buy Apr 18, +77 Put for $0.03 DB,
- JD (30.21): Buy Apr 5, +30.5 / -31.5 / +32.5 Call BFly for $0.15 DB,
- SPY (279.27): Buy May 17, (-1) 268 / (3) 258 / (-1) 256 Put BFly for $0.44 DB
Thoughts:
- IWM: It’s been a struggle for the Russell Small Cap Index (IWM) to keep up with its two big ETF cousins: SPY and QQQ in the last month. SPY and QQQ share a majority of their big component symbols (MSFT, AMZN, GOOGL and AAPL) and have been rallying together. IWM is still up over 13% on the year, which is what’s keeping its implied volatility rank at a low 26% - and points to debit spreads for speculative trades. If you think that IWM might continue to be weak and are bearish on it, the long PUT vertical that’s short the 151 PUT and long the 153 PUT in the May monthly series is a bearish strategy that has a 62% probability of making 50% of its max profit before expiration.
- SPY: I don’t know if the inverted yield curve has any predictive powers, but as bonds keep rising, it seems like the market is thinking that the economy could start slowing down any day now. Assuming the inversion signals recession, when will the SPY get the hint and drop – because it’s still up 11.8% for the year? Does this mean that the market could be getting tired and in need of a sell-off to recuperate? SPY’s 22% implied volatility rank would suggest debit spreads might be the trade to consider. That’s why if you’re bearish, the long PUT vertical that’s short the 280 PUT and long the 282 PUT in the May monthly series is a bearish strategy that has a 61% probability of making 50% of its max profit before expiration.
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Please be safe out there!
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Until next week – be safe.
R.F. Culbertson
