Hello everybody and welcome back to Hughes Invest, Brought to you by Matthew Hughes, an aspiring Investment bankers and active retail investor, sharing with you intel to attack the investing day alongside learning finance concepts and stories.
Global Markets Daily Overlook
Global markets are flat today, with the S&P 500 gaining 0.03% and Nasdaq gaining +0.15% (Intra Day High).
10-Year US Treasury Yields are down slightly to 1.356%.
European markets are mixed, with the FTSE 100 losing -0.40% and Stoxx 600 gaining 0.31%.
Asian markets were up, with the Nikkei 225 gaining 2.25%, Hang Seng gaining 0.62%, and Shanghai gaining 0.67%.
Economic Headlines
WSJ - 'The good news: Economists expect a robust post-pandemic economic recovery. The bad news: They also expect elevated inflation to remain for several years.'
WSJ - 'Democrats have made competition policy and antitrust enforcement a key part of their agenda. Critics say their plan could hurt the U.S. economy and hobble thriving companies'
Crypto Markets
The crypto markets are mostly flat, with bitcoin flowing around $33,500 and Ether at $2,100, both of which are down over 1%. We are still in a consolidation period where everyone is expecting a big move from Bitcoin. But is it a big move up… or down?
The theories I’ve read that I like predict pushing towards $100-200k some time in 2022/2023 due to lengthening cycles. We should reset our expectations (and patience) as such.
CD - 'Greater risk, greater reward? When it comes to USDC deposits, customers might prefer lower risk, lower reward.'
CD - Jeremy Allaire made the promise at a time when investors have been demanding more transparency around USDC.
Earnings This Week
Monday: None
Tuesday: JPMorgan Chase, Goldman Sachs, PepsiCo
Wednesday: Bank of America, BlackRock, Wells Fargo, Citigroup, Delta Air Lines
Thursday: TSMC, Morgan Stanley, Progressive
Friday: Charles Schwab, State Street
Business News & Analysis
WSJ - Billionaire entrepreneur Richard Branson reached the edge of space and landed successfully after a flight that traveled more than 50 miles above Earth, in a venture expected to spur development of a space-tourism industry
Matthew First Take - Sell
Virgin Galactic ($SPCE) is down today in a seemingly “buy the rumor, sell the news” type of move, although the stock is still up 31% over the last month.
I am more bullish on the company now that they have proved they have a real product and operations that they are bringing to market for sale. Even SpaceX founder Elon Musk has a ticket to visit space!
Still, $49 values the pre-revenue company at $11.2B, which is a huge valuation for a space tourism company. They have to sell a lot of $250,000 tickets and operate perfectly for the valuation to makes sense.
I think there are much better speculative bets you can make, with greater risk-adjusted upside potential.
WSJ - ByteDance Shelved IPO Intentions After Chinese Regulators Warned About Data Security
B - Private equity giant KKR is aggressively buying apartments in a bet that residents who left fast-growing cities during the pandemic are returning and eager to rent
Matthew First Take - Buy!
Nice! I like to agree with this thesis.
B - Microsoft has agreed to buy security software maker RiskIQ, a provider of threat intelligence, as the software giant looks to bolster protections for customers with hack threats rising
Revisiting Peloton ($PTON)
In general, I generally work with abundant conservatism in my assumptions, especially early on. Many of the assumptions I made initially proved conservative, which is why a increased target prices is now set.
What’s changed?
- Network effects: while I don’t believe Peloton’s network effects are impenetrable, I definitely underestimated them initially - group rides, tracking, and social signaling, especially among females, prove to be a big driver for Pelotons over other brands. This is something I’ve witnessed again and again over the past year.
- Better performance: Peloton earned 35% more revenue in FY2021 than my conservative Base Case and 16% ahead of my upside case. This is also taking into account that Peloton couldn’t make enough to keep up with demand. Starting with this base, even if Peloton just grows at ~20% over the next 5-10 years, we can believe in my upside case of $150 per share or higher.
- Acquisition of Precor: This brings the upside TAM into play, with the ability to expand into gyms, hotels, office and apartment buildings, and more.
Fear of Post-Pandemic?
- Gradual reopening: It is clear that the reopening is not one where everyone snaps back to their behavior in 2019. Return to gyms and shopping is gradual, and many employment and housing trends are proving to be sticky (many have a lasting preference for remote or part-time work). So even as the reopening will be a short-term headwind, its gradual nature should help smooth out quarterly performance.
- Fitness vs recreation: Fitness is stickier than recreation, especially in a pandemic setting. I’ve been mostly bearish on video games and at-home child activities. Peloton makes the same amount of money each month if their customer uses it 3 times or 20 times. But video game revenues directly correlate with utilization, especially Roblox’s. Furthermore, Roblox will have school time that will return as a catalyst.
- Unpenetrated markets: Peloton still hasn’t entered different geographies outside of four markets or other verticals like gyms, hotels, etc. There’s so much more room to run.
Especially after the Precor acquisition, it comes down to this:
- If you believe that exercise equipment will mostly remain “dumb” with clunky software, then Peloton may run into limitations after they expand globally.
- If you believe that exercise equipment in the future will be “smart” and “connected”, Peloton has pole position to dominate that world. In this world, Peloton’s economic profitability is so much higher than the previous one, given the software subscription component.
I believe in future #2 and have the ability to own $PTON at a 14.6x forward Gross Profit multiple despite having a 30%+ expected growth rate and attractive software economics. My DCF shows that if they can 5x revenues in 10 years, this should be a $150-200 stock.
