Weekly Market Summary: “Silicon Valley’s Deal Machine Is Cranking, Wall Street Starts to See Weakness Emerge in Bitcoin Charts, Stocks Drop on Biden Plan to Lift Capital-Gain Tax, Netflix Subscriber Growth Slows as Economies Reopen. Apple Unveils Subscription Podcasts, Latest iPad Pro.
Note from author - "Hello everybody, after a unexpected manic week of returning to my part time role and university I will have to delay the next equity deep dive, I will also be prioritising a JP Morgan focused post, as mentioned in my LinkedIn post found here."
1. Stocks Drop on Biden Plan to Lift Capital-Gain Tax
After news emerged of President Biden’s proposed capital-gains tax, U.S. stocks had their biggest decline in roughly five weeks, Bloomberg reports.
Why It Matters:
The proposed plan would make those who earn $1 million or more, “coupled with an existing surtax on investment income,” could pay as much as 43.4% in federal taxes. “Speculation arose that some traders may sell shares before any change is made to capture the lower rate.”
Numbers To Consider:
My prediction is that it will end up being pushed through at a 25-30% capital gains tax rate. And I hope that it is not retroactive or based on income levels. It should at least be based on the amount of the capital gains or the amount of wealth the family has invested.
Area of concern:
My base case prediction is that this does not pass and that it’s a negotiating tactic. It will be extremely hard to get support from wealthy cap gains states, where a 43% federal capital gains rate would make the top capital gains brackets in those states over 50%.
Matthew's Mentions:
Regardless, investment assets across the board are owned in substantial part by wealthy families. The fear about overtaxing investment assets is driving all markets down right now.
2. Bitcoin Plunges Below $50,000 With Market Technicals in Focus
Why It Matters:
Bitcoin has fallen below its 100-day moving average as a “proposed capital-gains tax increase for wealthy Americans intensified the volatility whiplashing the world’s largest cryptocurrency,” Bloomberg reports.
Investors are on edge as Bitcoin has yet to recover from its latest drop, Bloomberg reports.
Numbers To Consider:
The leading digital currency fell as low as $47,525 and the 20% drop “marks the worst period for Bitcoin since March 2020.” Ether and Dogecoin have declined as well. As of 8:00 a.m. on Friday, Bitcoin was $50,177.45.
Area of concern:
One company’s technical analysis of the digital currency’s trading patterns, looking at its relative strength index, didn’t support its recent highs. It’s a possible indicator, among other things, that Bitcoin’s upward momentum is fading. Either way, Bitcoin has become too big to ignore and everyone from institutional outlets to retail investors are paying attention.
Not only does a higher capital gains tax affect stock investors, it also affects the newly rich crypto whales as well. Bitcoin was already pulling back, but this capital gains tax news put some fear in crypto investors that are sitting on massive amounts of capital gains.
Matthew's Mentions:
If this marks the Bitcoin cycle top, then it will have looked very different from the 2017 one.
- Last cycle, Bitcoin skyrocketed and crashed within the span of 10 weeks, spending only about 1-2 weeks at the “top”.
- This time, Bitcoin has been rising for about 19 weeks, and has already been trading sideways at the “top” for 5 weeks now.
The more concerning thing for me is the increasing frequency of “altcoins” skyrocketing. This is behavior that I remember marked the top of 2017.
But on the other hand, legitimate projects like Ethereum have not risen nearly as much as they did last cycle, so we still may have room to grow.
I don’t believe that we are done with the crypto bull cycle, but I would also be lying if I wasn’t more fearful about it today than I was a week ago. But my 10-year view on Bitcoin is unchanged, which gives me the confidence to ignore the price movements and hold through the turbulence.
3. Silicon Valley’s Deal Machine Is Cranking: ‘I’ve Never Seen It This Frenzied!’
Why It Matters:
“Deal flow and valuations are reaching new heights in technology startups, as a flood of cheap cash fuels efforts to find the industry’s next big winners, from software to social media,” WSJ writes.
Numbers To Consider:
U.S. startups netted an astonishing $69 billion in funds raised during Q1 of this year, a 41% improvement on the previous record (via Pitchbook data). Average startup valuations reached a record level across all companies, and late-stage outfits more than tripled to an average value of $1.6 billion.
Area of concern:
What used to be monthslong negotiations are closing in days, and companies are raising new funds in monthly cycles as opposed to years. “I’ve never seen it this frenzied,” said Larry Albukerk, founder of investment fund EB exchange.
Matthew's Mentions:
There is so much capital sloshing around because yields, and prospective returns, are lower across the board.
When all asset classes are at high valuations and bond yields are unattractive, money tries to go up the risk spectrum to hunt for returns. Venture capital and private equity are two established ways of doing so.
If I were a founder of a good technology startup with product/market fit, I’d consider using the current “seller’s market” (to use a real estate term) to raise capital at favorable terms with good VC funds. But picking the right VCs is the utmost importance.
If I owned a small-to-medium-sized business and wanted to sell, now is probably a good time to explore the private equity acquiror route. But if I wanted to stay in the business, I would be very wary about letting any fund into the capital structure with any semblance of power.
A general rule of thumb for life: Despite how beautiful, friendly, interesting, or awesome people seem when you meet them, you won’t see their true colors until they hit times of distress or adversity. The importance of truly collaborative partners really shows itself when times are tough.
4. Private-Equity Firms Regain Taste for Giant Buyouts
Leveraged buyout bids, which have significantly slowed since the 2008 financial crisis, are rising in popularity once again as companies look to deploy $1.6 trillion in unspent cash, WSJ reports.
Numbers To Consider:
“Between 2005 and 2007, private-equity firms inked 18 deals worth $10 billion or more, according to Dealogic. Since then, they have struck only 10, mindful that many of the pre-crisis deals didn’t work out as planned.” Toshiba, Royal KPN and Medline Industries are all exploring potential sales to private equity outlets.
Matthew's Mentions:
See commentary on the first story. There is too much money chasing too few companies and deals, leading to riskier and riskier behavior in the search for returns.
5. Netflix Subscriber Growth Slows as Economies Reopen
Why It Matters:
Netflix failed to meet expectations on subscriber growth for the first quarter, WSJ reports.
Numbers To Consider:
The company forecasted adding six million subscriptions on a net basis worldwide from January to March. Instead, they pulled only four million. It's a steep drop from last year -- Netflix added 15.8 million subscriptions when lockdowns started forcing people to stay home -- and it could be “a potential warning sign for the company as consumers in many countries start to emerge from pandemic-related lockdowns and as streaming competition increases.”
Area of concern:
What used to be monthslong negotiations are closing in days, and companies are raising new funds in monthly cycles as opposed to years. “I’ve never seen it this frenzied,” said Larry Albukerk, founder of investment fund EB exchange.
Matthew's Mentions:
Netflix ($NFLX) is one that has looked too expensive for my tastes throughout the past year. Even after the steep drop in price to $550 per share, it’s trading at 20x forward Gross Profit and expected to grow only 15-20% going forward.
There are a plethora of other growth stocks, including some in the Hughes Fund, that offer higher growth at a lower valuation. In this market, if I’m buying any growth stock for more than 20x forward Gross Profit, I had better be confident in some 30%+ growth numbers.
6. Consumer Agency Warns Against Peloton Tread+ Use, As Company Pushes Back
Why It Matters:
The U.S. Consumer Product Safety Commission has issued a warning telling users not to use Peloton’s Tread+ after 39 incidents, one of which included a death, TechCrunch reports.
Area of concern:
The warning is based on “multiple injuries involving small children and a pet.” Peloton has pushed back saying the warning is “inaccurate and misleading.” The Peloton Tread+ costs $4,295.
Matthew's Mentions:
This is an event that, although tragic, doesn’t deter me from investing in the stock.
- Having heavy machinery in the home is dangerous for children in general. There were 22,500 injuries in 2019 and 17 fatalities between 2018-2020 related to treadmill usage in the U.S.
- Most of Peloton’s revenues come from its Bike product.
- A lot of Peloton’s future involves replacing existing treadmills in non-home settings with connected ones (gyms, hotels, apartments, etc).
7. Squarespace Files To Go Public
Why It Matters:
Website development and hosting platform Squarespace has filed to go public, TechCrunch reports.
Numbers To Consider:
Squarespace boasts impressive growth, with a 28% year-over-year revenue gain from $484.8 million in 2019 to $621.1 million in 2020. It also had a $30.6 million net income last year. It will trade on the New York Stock Exchange under the ticker “SQSP.”
Matthew's Mentions:
Squarespace ($SQSP) carries 82% Gross Margins and 19% EBITDA margins. It’s an amazing business with great product design/fit and high retention rates of over 83%.
Depending on the valuation, it would be a great long-term investment in the growth of the internet and democratization of ecommerce.
Two things that I would want to look into are:
- How inflated was 2020 growth because of the stay-at-home boom to website creation?
- Squarespace states that 48% of small-to-medium-sized (SMB) businesses aren’t online today, but how much more online adoption do we expect to happen here? Surely not every neighborhood taco stand needs a website.
- How is Squarespace’s market share trending versus competitors like Wix.com and Wordpress?
That's it for this busy week! Stay tuned for a JP Morgan iconic deals report coming soon!
