Tech Giants’ Shadows Fall Over Promising Start-Ups; Emerging Market Alternatives; Bitcoin Storms Wall Street
Today is December 3, 2017, and we’re heading into the final stretch of what has been one of the best bull-market years in stocks. What lies ahead in 2018 is anyone’s guess; but, let’s enjoy the rest of this ride into year’s end. There were a couple of articles in this weekend’s (Dec. 4, 2017) Barron’s which may be of interest, which I will try and accurately and adequately re-cap for you.
Tech Giants’ Shadow Fall Over Promising Start-Ups
Tiernan Ray had a full-page article in Barron’s this weekend, with the title above. He begins with this quote: “What every young tech company needs to do, James Barksdale of the early Internet darling Netscape Communications once said is, “find a parade, and jump in front of it.”
“The task is increasingly difficult for young companies, given that tech giants — Amazon.com (ticker: AMZN), Alphabet (GOOGL), and Apple (APPL) –– show no signs of slowing down,” Mr. Ray wrote. “They increasingly call the shots in tech, in a way that limits the scope within which small companies can operate,” and thrive.
“Take initial public offerings,” Mr. Ray wrote. “There have been some strong starts out of the gate, with software tools maker, Appian (APPN), surging 39 percent since its debut in late May; and streaming TV-set appliance maker, Roku (ROKU), up 85 percent in under two months of trading. But, cloud-computing darlings MuleSoft (MULE) and Tintri (TNTR) are down 7 percent and 28 percent respectively, since their March and June debuts. (All IPO returns are from the first trading-day’s close).”
Mr. Ray thus concludes that “the investment returns reflect a world titled toward the giants. You could have bet on Apple, Amazon, and Alphabet, and made returns of 48 percent, 55 percent, and 29 percent respectively, this year. It’s hard for small-caps to carve out a safe place in this market.”
“Many of these small start-ups show promise, but dwell in the shadow of [these] giants,” Mr. Tiernan wrote. “Netscape didn’t survive the onslaught of Microsoft in the dot-com era — proof that the parade can end up flattening you, even when your product is good and your management is astute.”
Mr. Ray goes on to explain how MuleSoft and Tintri have both hitched their respective wagons to Amazon. “To paraphrase Barksdale,” Mr. Ray wrote, “they’ve found a cloud to get on top of. One wonders if Amazon will eventually say — Get off my cloud. That could be both a blessing and a curse,” he added. “Amazon Web Services (AWS) is an expanding empire for MuleSoft to leverage; but, it also raises the risk that Amazon could ultimately make obsolete, some of what MuleSoft is doing with competing offerings — what’s known as “being Amazon’d.”
“MuleSoft has beaten revenue expectations for all three of its quarters as a public company though at $291 million in revenue this year, it’s still early days,” Mr. Ray wrote. “Tintri, another cloud hopeful, is a little different,” he added. “It is seeking to enable companies other than Amazon, to build their own cloud-computing operations. Also a worth endeavor,” he notes, “though it’s possible that Tintri could see its client base evaporate as Amazon sucks the air out of the room. Tintri has stumbled, slightly missing estimates for its first public quarter in September. The company next reports on December 13,” he wrote.
“Another hopeful, that, like Tintri, is selling infrastructure, is Mongo-DB (MDB), which makes database software that it believes is better suited to cloud computing than the offerings of Oracle (ORCL) that have been around for years. The problem is,” Mr. Ray notes, “Amazon has several databases of its own; and, increasingly sees itself as a successor to Oracle. Like Tintri, MongolDB is betting on a cloud-scape, if you will, that is bigger than just Amazon; but, it’s not certain that’s how things will play out.”
“MongoDB shares are down 13 percent since it IPO’d on October 19;” Mr Ray noted; and, “the company is set to report a day ahead of Tintri. At $144 million in revenue projected for the year ending in January, it’s about the same size as Tintri.”
“Somewhat better insulated,” Mr. Ray writes is, “SendGrid (SEND), of Denver, which just went public on November 15. Its shares are up 17 percent since,” their public debut. “Of the companies built on AWS, SendGrid may have a better approach, it clients use it to send over a billion emails per day, as a kind of email service bureau.”
“Tableau Software (DATA), which went public in May 2013, and is up 39 percent since then, but is trailing the S&P’s 58 percent return” is another company Mr. Ray discussed. “Revenue growth has cooled for Tableau,” he wrote, has “cooled, dropping 27 percent last year, from 58 percent in 2015. As the company approaches $1 billion in annual sales, growth is expected to be 5 percent this year.”
Mr. Ray concludes his article, “if they [these companies] can’t ultimately thrive, several may yet end up being acquisitions if one of the giants takes a shine to their innovations and decides to slip them into their pockets.”
I refer you to Mr. Ray’s article for additional details. Like anything else, do you own due diligence, homework, understand your risk tolerance, and willingness to ‘gamble.’ — because, nothing is guaranteed.
Emerging Market Alternatives
Dimitra DeFotis also had an article in Barron’s with the title above. She begins by noting that “after the 30 percent climb in the MSCI Emerging Markets Index this year, investors should expect some bumps in the months ahead.”
“We don’t think they will be too jarring, or too long-lasting, for a lengthy list of reasons,” she notes: Emerging-Markets’ (EM) corporate earnings are healthy, commodity prices are recovering, China seems to have found its footing, the dollar has weakened to reasonable levels, and central bank policies are mostly sound.”
“But, investors should consider ways to diversify beyond the traditional EM indexes, to smooth out the rocky portions,” she adds; and, hedge their bets.
“Institutional investors for instance,” she wrote, “are buying privately-held businesses and alternative assets such as real estate, agriculture, and natural resources — including water.”
“BlackRock, among the biggest providers of all types of Exchange Traded Funds (ETFs), says that alternative-asset exposure, is mostly buried in broader funds, many of which are fairly small: the $353 million iShares Global Timber & Forest (ticker: WOOD), which is up 30 percent this year; the $30 million iShares MSCI Global Agriculture Producers (VEGI), up 15 percent; the $332 million, iShares MSCI Global Metals & Mining Producers (PICK), up more than 22 percent; and the $123 million iShares Global Clean Energy (ICLN), up 13 percent. There is also the $46 million iShares Emerging Markets Infrastructure (EMIF), up 16 percent.”
“For those hunting individual stocks,” Ms. DeFotis wrote that “some of the top holdings from these funds include: Fibria Celulose (FBR), a Brazilian producer of eucalyptus pulp and papers; RusHydro (HYDR), a Russian hydroelectric producer; and, China Shengmu Organic Milk (1432.Hong Kong). Another possibility,” she adds, “is a component of the iShares India 50 ETF (INDY), which holds ITC (500875.India), a conglomerate with agriculture, paper, hotel, consumer products, and infotech businesses.”
Bitcoin Storms Wall Street
The title above filled the front cover of Barron’s this weekend; and, why not. Bitcoin has gone parabolic this year; and, depending on who you listen to — is either in a gigantic bubble that will soon burst; or, you ain’t seen nothing yet. I fall into the former category; but, admittedly, I do not fully understand bitcoin and why it should be valued as high as it is. The article, by Avi Salzman, is the feature article in this weekend’s Barron’s and I will cover some; but, not all of what Mr. Salaman covered and wrote. Some of the material I am leaving out, is consequential; and, I refer you to this weekend’s Barron’s for the full article.
One of Mr. Salzman’s bottom lines up front: “With [Bitcoin] futures contracts set to start trading [this month], the volatile crypto-currency could [soon] be joining the financial establishment.”
Last Friday, “the Commodity Futures Trading Commission (CFTC), green-lighted plans by the Chicago Mercantile Exchange (CME) and the Chicago Board Options Exchange, to introduce Bitcoin futures, [thus] allowing traders to bet on the price of the digital currency on a trusted exchange. NASDAQ [meanwhile] is planning to offer its own futures next year ; while, [investment firm] Cantor Fitzgerald will [soon] introduce a Bitcoin options product.”
“If it works, you are witnessing the early stages of the birth of a new asset class,” says Bill Miller, the Chairman of Miller Value Partners; and, a longtime value investor, who holds about $75 million worth of Bitcoin in his hedge fund,” Mr. Salzman wrote. And, “banks like Goldman Sachs are considering helping clients execute Bitcoin trades.”
“New money and talent have already flooded into the crypto-market. The cumulative value of cryptocurrencies like Bitcoin has skyrocketed to more than $300 billion, from $18 billion at the start of the [this] year,” Mr. Salzman wrote. “Bitcoin has mostly been on a one-way ride, rising 1000 nearly percent since the start of the year, to $10,500 on Friday.”
“Coinbase, the largest crypto-currency exchange in the U.S., surpassed 10,000 accounts this year, adding 100,000 new accounts in just three days over Thanksgiving week,” Mr. Salzman noted. And “unofficial count puts the number at more than 13 million, and ahead of Charles Schwab accounts at 10.6 million. Exchanges and trading houses are reporting soaring institutional volume too, from five — to ten times last year’s activity. Over the past 50 days,” Mr. Salzman wrote, “a daily average of more than $1 billion in Bitcoin has been traded globally, according to Chris Burniske, co-author of the book, Crypto Assets.”
“Like gold, Bitcoin is not correlated to most other assets; and, there’s a limited supply. Only 21 million will be made,” Mr. Salzman wrote. Thomas Lee, the Managing Partner of Fundstrat Global Advisors, estimates that Bitcoin could account for 5 percent of the $7.5 trillion alternative currency market, which is now mostly made up of gold. His 2022 price target for Bitcoin is $25,000,” per digital coin.
“Skeptics like Goldman Sachs analyst Michael Hinds note that Bitcoin has several disadvantages compared with gold. Bitcoin is vulnerable to hacking, disruptions to the Internet, and competition from other crypto-coins.”
“There are no [Bitcoin] ETF funds available yet,” for Bitcoins; but, “investors could buy a security called the Bitcoin Investment Trust (ticker: GBTC), but it trades at a significant premium to the underlying Bitcoin that it holds; and, the premium rises and falls in unpredictable patterns,” Mr. Salzman wrote.
“The introduction of futures products will add liquidity to the system; but, the most noticeable impact could be to the downside,” Mr. Salzman. “What the exchanges are creating here is a wonderful tool to be able to fully short Bitcoin,” says Mark Williams, a former trading floor executive who now teaches finance at Boston University’s Questrom School of Business.
“Trading futures entails using leverage, a factor that may accentuate Bitcoin’s violent price swings,” Mr. Salzman wrote. Thomas Peterfly, Chairman of Interactive Brokers, took out a full-page ad on November 15, in the Wall Street Journal, imploring CME to rethink its plans, because, “margining such a product in a reasonable manner is impossible.”
“In response,” Mr. Salzman wrote, “the CME said that while there are “issues to work through,” added security tools will allow the exchange to “appropriately manage the risk.”
Meanwhile, “new kinds of [digital] coins are increasingly stealing Bitcoin’s thunder,” Mr. Salzman writes. “While Bitcoin accounted for 87 percent of the total market cap of digital tokens at the start of 2017, it makes up about 55 percent now,” according to CoinMarlketCap.com.
“A danger is that Bitcoin could end up being the Friend-ster of the crypto-world, while the FaceBook — the real winner — may still be in development somewhere. “Aside from Bitcoin, the other tokens with a recognizable — though nascent — business case are Ethereum, which can execute more sophisticated operations like contracts, and Ripple, which banks can use to speed money transfers,” Mr. Salzman wrote. “There are more than 1200 other tokens too, launched through “initial coin offerings,” or ICOs that have drawn increasing capital in recent months. Investors have plunged $3.6 billion into them this year, up from $96 million in 2016,” according to Coinschedule.com.”
“Even people who think the token [digital currency] economy will be as important as the Internet itself, say it’s a minefield,” Mr. Salzman wrote. “Ninety-nine percent of it is junk,” says Olaf Carlson-Wee, the 28 year-old founder of crypto hedge-fund, Polychain Capital, which has more than $400 million in assets.”
The Value Case For Bitcoin
Mr. Salzman reminds us that “Bitcoin is among the most volatile investments in the world, sometimes jumping, or plunging more than 10 percent in a single day. Its price can fluctuate, based on actions of far off actors, be they miners in China, or coders in California,” he writes. Bitcoin investing…..isn’t for the faint of heart, as the saying goes.
But, that volatility hasn’t stopped a growing number of hedge-fund managers, among others, from getting into the digital currency ‘game.’ Mr. Salzman notes that “Murray Stahl, Managing Director of the New York-based hedge fund, Horizon Kinetics, for 23 years, investing in more traditional value investments, like beaten down stocks,” is a prime example. “Horizon now manages $5.5 billion in assets, including $100 billion in Bitcoin. Mr. Stahl told Barron’s that Bitcoin “is the ultimate value investment.”
“For Stahl,” Mr. Salzman wrote, “the appeal of the investment is that there are a limited number of Bitcoins. There will be only 21 million created, and no central banker can change that. Plain-vanilla investments that depend on the strength of fiat currency for their value, invariably become worth less as inflation rises. That makes them questionable”value” investments,” he told Mr. Salzman. “If your money is being debased, what good is buying a bond that yields 2 percent?,” he asks. “Let’s say it has a very high creditworthiness. You are going to get paid, but inflation is at least 2 percent, and then you have to pay taxes. It is a guaranteed negative., real rate of return.”
Bill Miller, “a long time Legg Mason value fund manager whose strategies led his fund to beat the market for 15 consecutive years before trailing during the financial crisis [2008-2009], got interested in Bitcoin about three years ago,” Mr. Salzman wrote. “Miller, who left Legg Mason in 2016, and started Miller Value Partners, eventually amassed a five percent Bitcoin position in his hedge fund, MVP1, buying in at an average price of $350. Bitcoin now makes up 30 percent of the fund.” Mr. Miller “acknowledges “it [Bitcoin] may well be in a bubble,” Mr. Salzman wrote.
“I consider it an experiment; and, it’s an experiment that might work,” Mr. Miller told Barron’s. “But he warned, “there is a non-trivial chance it goes to zero.” Mr. Miller “sees Bitcoin as a store of value, rather than a currency,” Mr. Salzman wrote. “Yes, Bitcoin doesn’t have any intrinsic value; and, it is not backed by anybody,” Mr. Miller said. “But, what’s the intrinsic value of the painting, The Scream that Leon Black bought for $20 million? It’s just paint, and canvas,” Mr. Miller said.
“For now, Miller isn’t looking to buy anymore [Bitcoin], given that it makes up such a huge portion of his hedge fund,” Mr. Salzman wrote. “I’m thinking more about what’s the proper way to size it, given it has risen so much,” so fast he told Barron’s. “But, if I didn’t own it, I would buy it today. I would buy at least a one percent position, if not more.”
But, “David Dietze, President of Point View Wealth Management in Summit, New Jersey, told Barron’s he “would steer clear of Bitcoin,” and then rattled off a half a dozen reasons: “It’s not backed by any government; it”s not clear that it can’t be hacked; and, it has no intrinsic value. Sentiment is frenzied; and, the run-up seems to have no fundamental basis. That is scary. This will end in tears,” he told Mr. Salzman.
Who knows how this is all going to end. I do not presently own any Bitcoin; and, of course I wish I had bought some in the early days. I do believe, like self-driving cars, that the world will inexorably move towards digital currency. Whether or not the ultimate winner will be Bitcoin, I have my doubts. Like currency today, I suspect there will be multiple winners; and, if Bitcoin survives — it will be one among several, or many. Maybe the mathematicians and digital gurus would argue otherwise from a technical standpoint — but, politics is likely to trump math — somehow, someway.
If I had sufficient funds in the portfolio to take at least a one to five percent position, that had any meaning, I would do so. But, since I can’t afford to get any kind of meaningful position/stake, I will wait till Bitcoin is available for trading; and, can be shorted — like gold or any other currency. Then, we’ll have a much better understanding of Bitcoin’s true value. RCP, fortunascorner.com