Coinbase is going public sometime today through a direct listing, similar to Roblox, Spotify, and Slack.

This is a big deal, for several reasons

There a few different ways to think about Coinbase [network effects + liquidity]

Also, some key points:

The total estimate worth of crypto companies is ~$500bn with a total crypto market cap of $2T (data from Dan Held). There is a lot of money flowing into the space right now.

I think that the crypto space is just really beginning to get the recognition it likely deserves. For that reason, we will see continued growth of the above. That’s great for crypto, and good for Coinbase if they can hang onto their market share. But in a growing market, nothing is really promised - and Coinbase could fall behind as the smaller, scrappier shops begin to innovate behind the scenes.

Outside of the pure crypto market, there are a lot of publicly traded companies that now own Bitcoin, the most recent one notably being Tesla. The two have begun to trade in tandem - but several other companies (mostly MSTR) have outsized exposure to BTC. This makes these companies somewhat of a proxy trade to BTC.

With Microstrategy, 84% of their market cap is bitcoin - meaning that $0.84 of each $1 goes to Bitcoin when you purchase a MSTR share. It’s a relatively expensive way to own Bitcoin, but gives optionality to investors who might want a more “hedged” way to invest in crypto. A similar trade could happen with Coinbase.

Coinbase had:

Their user base is very large - 56mn users is bigger than most banks, besides JPM. Coinbase is set up to a lot of volume this year - potentially more than the other exchanges. Their revenue is broken out into 3 segments:

Transactional revenue: based off trading volume and driven by a 142% increase this year (this is where ~80-90% of their revenue comes from)

Subscription revenue: custody and staking fees (driven by number of customers and value of crypto) - this grew 126% in 2020, showing some room to the upside (and allowing them to diversify away from transactions)

Other Revenue: selling treasuries of BTC and ETH

But the current issue with Coinbase is the fees. Equity markets are mature and relatively efficient, and pricing reflects that. Once some of the incumbents begin to trade crypto, some of the success that Coinbase is experiencing with its numbers (specifically, transaction revenue) could begin to compress as the race to the bottom begins.

Fees and the Race to the Bottom

Coinbase does currently make most of its money through trading fees. Coinbase is currently an average fee of ~0.5% - for comparison, Binance is ~0.10%. As highlighted above, most of Coinbase’s revenue comes from transactions and a lot of that revenue comes from retail investors. This is volatile exposure, as the retail investor is quite fickle.

Any amount of fee reduction will obviously bite into their profit. But if they have to match the OG exchanges, it could get pretty painful.

That’s a huge difference in profitability. Coinbase likely has more time until that happens (they’ve built themselves quite the moat) but in a price taking market like exchanges, they don’t have a lot of room to keep fees high which is a longer term concern.

I think Coinbase going public could create some security concerns for Bitcoin and other crytos. Coinbase highlights in the S1 that

There is fork risk - “ The effect of such a fork would be the existence of two parallel versions of the Bitcoin, Ethereum or other blockchain protocol network, as applicable, running simultaneously, but with each split network’s crypto asset lacking interchangeability.” This creates two issues:

Valuation: The 100bn Question

Coinbase is expected to debut at a 00bn market cap. That will be higher than most U.S. exchanges, which is interesting. Does that mean the exchanges are undervalued? Or is this just really bullish for crypto?

This 00bn valuation prices it higher than both NDAQ and ICE. This is tough.

Coinbase is tied to the cryptomarket, for better or worse. That means they have tremendous upside, but could also struggle if the cryptomarket struggles. A lot of analysis points to investor sentiment as the most important multiple - and I agree. They are likely to trade well north of any fintech/exchange competitors.

CBSE is pricing them much higher - around a 44bn market value. For many reasons, I struggle with some aspects of valuation in the current market environment.

I think Coinbase is going to price off rocket ships.

Dogecoins movement over the past few days alone (even though Coinbase doesn’t trade it) is enough of a signal of what the market expects out of crypto.

I think Coinbase is just the beginning for crypto. Does that make it a good investment? Maybe not. Is it a signal? Yes. Coinbase allows for accessibility, creates demand, and allows others in the crypto space to build.

As Jill Carlson said, "Coinbase is a growing business, in a growing industry, centered around a growing asset class." The biggest thing about the Coinbase is that it is a signal to the broad market that crypto is real - and that it is here today.

Today is an interesting day because there are bank earnings and Fed chairs are speaking. It feels like a clash of two worlds - although Bitcoin and crypto are increasingly gaining adoption, the rate of adoption isn’t as fast as some would think. Coinbase is likely to change that.

There are some long term headwinds - technical risks like forks, fee compression - but Coinbase going public is a good thing for crypto signaling to the world. $COIN $COIN.X $BTC.X

Read More Here:

I’ve been thinking a lot about this thread between Cathie Wood and Elon, and inflation in general. Elon Musk asked Cathie, the CEO of ARK the below question:

Her response thread was pretty interesting.

I respect Cathie and her company, but have mentioned before my worries on the ARK’s risk cluster. I also don’t entirely agree with her thesis on deflation.

Cathie’s thesis seems to be that the stock market isn’t that expensive now (compared to the early 1900s) because of the deflationary impact of technology. Because of that, supports current valuations, and gives the market more room to run.

Click below to read her whole thread if you would like. I don’t have every tweet included.

> GDP statistics evolved during the Industrial Age and do not seem to be keeping up with the digital age.

Cathie is saying that both real GDP growth and inflation are mismeasured. Because of this, things are actually better than they seem to be.

Productivity, which is referenced as a driving force for economic growth, is equal to the ratio between output volume and input volume - so how efficiently labor and capital are used to produce something.

She states that GDP growth is higher than expected and inflation is lower - which doesn’t make a ton of sense (how can you get more for less or less for more, and numbers not capture that?) But if we do have increased productive capacity, she is right - that raises potential GDP and can have a deflationary impact.

So how do we measure productivity - a few different ways:

According to data from BLS, productivity hasn’t increased (on paper).

But Cathie’s thesis is that things are actually different - that all of the above are potentially not the correct way to measure productivity. A big driver behind her argument is that earnings quality has improved - that GDP stats aren’t capturing the fact that companies are better.

You can look at earnings quality from a few different angles:

Does this mean that companies getting more productive? Maybe.

But the flows towards unproductive assets (pre-revenue SPACs, potentially some of the meme stocks, and other stagnant goods) more shows that there is just a lot of money around right now. This isn’t a bad thing - but just because earnings have increased doesn’t mean that they are all going towards productive assets.

This is a big part of the narrative. Good deflation is supported by tech, and tech inherently is deflationary. That is true.

She came back a few days later to explain some of the “good vs bad deflation” and references the S&P / US GDP as a source for anchoring market valuations.

Here is what she is referring to:

The whole thesis is that the market is underpricing growth right now, relative to history. The idea is that the market was more expensive in the late 1800s and early 1900s (2-3x higher) so the market today has more upside. This is bizarre.

I think she means that we are in a similar space now - and that equities have more room to run because of that (go 2-3x higher).

There are some parallels that she draws between now and then - the Roaring 20s was fueled by technology-enabled platforms, primarily:

She cites learning curves (the infamous Wright’s law) as creating the deflationary impact (tech makes things cheaper), coupled with the gold standard.

The idea is that deflation leveled the nominal GDP, with general growth and productivity boosting the quality of earnings. Add in low interest rates = companies have a higher market cap.

Today, we have more tech (the deflationary forces and the learning curve):

She also refers to Bitcoin as today’s gold standard. So things are similar to the 1800s, 1900s - but the stock market is lower now, so there is more room to the upside.

Seems like we are already there.

The theory is that people will not spend, because they expect prices to fall. The only inflation that we would see would be in asset prices. I am not sure if this theory entirely holds up - velocity is already so low.

I don’t think we are in a world where tech allows us to wait. There are so many products, service, etc released instanteously - waiting cost is outweighed by FOMO.

Overall, I see what she is saying. I have immense respect. But I think it’s tough to compare now to the early 1900s, and say that equity markets are cheap relative to then.

It was a completely different time. For 4 main reasons (MarketDog has a good recap):

She highlights at the end that

And she is right. Markets are forward looking, but they have a memory. I think the argument of deflation is interesting - primarily because of all the short-term inflationary pressures that take precedence to the long term deflationary impacts.

I don’t know (a terrific conclusion).

I am writing this because I think we have inflationary pressures - the long end of the curve is pricing in an expectation of inflation and the expectation of tightening. But I also agree with Cathie that there are longer term deflationary forces that will price out some of the short term inflationary pressures.

The CPI is set for today at ~2.5% expected for Headline CPI and 1.5% for Core. A lot of the gap between the two is driven by increased energy prices.

US Producer Price Index climbed 1% on a seasonally adjusted basis in March (~12% annualized)

Stimulus and pent-up demand

Jump in the 10Y: It’s calmed down quite a bit, but the pace of the move upward was concerning. It shows that the market is expecting inflation (or at least doesn’t trust the Fed as much as it used to).

Asset Inflation: The stock market seems expensive. Home prices are on an absolute rip.

The Dual Mandate: Unemployment and Inflation

Part of the reason that the Fed hasn’t pulled back on QE is because there is still a real economic gap in employment - all the numbers are skewed because of the pandemic.

Things have to normalize (whatever that means) before we can get a true

sense of what things mean. Even if we do have outsized inflation, we still have to reach the Fed’s target - which will take some time. That is a whole other can of worms to unpack.

There are broader macro risks that can send the market into a tailspin - and that will create outsized pressure that the Fed won’t be able to maintain.

Leverage (looking at you, Archegos). Consumers are also trading with incredible margin - which is concerning for if/when the market does pull back

Concentration risk: This is my main problem with ARK (circling back to Cathie). I wrote about it a little bit in my Stonks piece, and I have some quick videos on it (here and here). There is illiquidity, volatility, intercorrelation, just general reflexivity from fund flows. That creates an ARK bubble, which is going to be painful if it pops.

In conclusion, I am uncertain. A lot of market movement is expectations and companies that can play into growth opportunities (tech companies as highlighted by Cathie’s thread) are going to price based off expectations, not so much current fundamentals.

Tech is deflationary. But supply chain risks are inflationary. In the long term, I think we will experience deflation as tech will expedite so many processes and create so many efficiencies - but in the short term, it does seem like that there are inflationary headwinds that the Fed and other policymakers could be underpricing.

What to do? $SPY

Who is Constellation Brands? Constellation Brands is a leader in the alcoholic beverages space. They’ve been around for 75 years and are one of the leading CPG companies. They sell alcohol, mainly beer, wine, and spirits, with a large focus on higher-margin premium products. Their customer base is in the range of LDA (Legal Drinking Age) to DMD (Damn Near Death). They are divesting most of their lower-margin brands to focus on higher margin opportunities, which is creating some short-term volatility in their numbers.

Beer, their main focus, is the most price elastic of all the alcoholic beverages (consumers will switch and it’s not as sticky as spirits).

But their plan is to increasingly pivot into more premium products in both their beer and wine and spirits portfolio. I expect margins to increase due to their new pricing structure here, but they do have incremental headwinds as they transition and divest.

Their investment in Canopy (a cannabis company) was ahead of the curve, but Canopy is poorly executing on growth goals. The cannabis market still has room to run, but the regulatory headwinds haven’t cleared as quickly as expected.

Q4 2021 Earnings: Constellation had a beat on Q4 earnings today, but are getting beat up in the market. Their sales were stronger, margins were higher, and they sold a lot of beer (+15% y/y). Their wine and spirits segment is a drag because of the divestments. However, the retained portfolio has grown, as illustrated below, showing that a lot of this noise is only temporary.

With that being said, I am disappointed with their guidance - especially because a lot of it is coming from an expected slowdown in beer and continued headwinds in wine and spirits. Their Canopy investment is a mess (and Canopy is now acquiring another cannabis company).

But I think that they are positioned for success over the long-term.

Constellation is a solid company with good fundamentals. I expect margins to increase due to premiumization, but headwinds will come in brand recalibration and adjustment. Based on their valuation, they are currently undervalued relatively, with a base case upside of 3.6% into 2024.

There are 3 ways to make money in the alcoholic beverage industry:

Most competitors in the space have a single line business model - alcohol. Alcoholic beverages (AB) are (relatively) inelastic goods that act as a tool of social capital.

The industry has some headwinds and tailwinds. They can have a pretty diverse array of product offerings that can be accessed at several different price points in different locations (creating opportunity for a deep portfolio vs a broad portfolio as shown below). But they do have regulatory headwinds and are exposed to consumer fickleness.

The way that I think about companies is through this framework -

Profitability multiplied growth is compounded by efficiency. That’s a business - and if companies can execute on all three of these variables, that is what creates value for shareholders in the long run.

There are different levers that a business (here, an alcohol business) can pull for all 3 of these variables:

If the company can deliver on all three of those variables, that is going to create an ultimate value prop.

Constellation Brands is positioning themselves across three different avenues:

Constellation is the top seller of imported beer in the U.S., with a large focus on premium beer products. They are increasingly focused on hard seltzer, showing their ability to move quickly on trends.

A lot of Constellation’s appeal is coming from their shift to a premium product portfolio. A premium product is a function of:

What STZ is “premiumizing” in my opinion is more of the lower end of premium. Not finely aged bottles like a Brown Forman (the very premium > $50/bottles), but rather products that command more pricing power across the board, which plays into the breadth of their product portfolio

The below table shows the power of scarcity - there are diminishing returns after 20Y of aging the product. But the older the bottle, the more you can charge - you can command more premium and because of that, it’s a terrific consumer psychology lever.

But like most things, scarcity value is really a function of consumer perception of premium. That’s what translates into pricing power. So Constellation has a lot of room to run here, especially as they explore the spirits and wine segment more. They can use age as a leverage in their selling process.

If they are able to premiumize, they are able to expand margins. Pricing optimization has a positive impact on margins - on the conservative end, we can assume that a 1% increase in price will lead to a ~50bps expansion in margins.

STZ jumped on Canopy back in 2018. It hasn’t been a great investment so far, but it is a signal of a management team that is open to these opportunities.

But Canopy is a sore spot for STZ. STZ doesn’t control the company, but they do exert influence. I think its a sign of the lengths that STZ is willing to go to execute on new things in the market. They went after Canopy early, back when cannabis was pretty taboo. As regulation becomes more lax, this mindset will be beneficial for them, and they have leverage from being a relative first mover in the space.

They have a lot of opportunity to optimize distribution, which will compound both growth and profitability. There are a lot of things to think about in the distribution chain, from the product creation, to product distribution and delivery. They currently have wholesale distribution with separate networks for their beer and wine and spirits portfolio. It’s important that they are considering more inventory management methods and other synergies, especially as the PMI continues to tick up.

If they can optimize distribution, that will translate to a meaningful increase in gross margins. This all takes time to scale effectively, but will be beneficial to the bottom line if done correctly.

Speaking of the PMI, they do have raw material inputs that need to be watched closely.

Below are some rough numbers. Their current valuation places them at a $44bn market cap or ~$224/share. Using a ~6% CAGR (roughly in line with the expected growth of the beer market), I can pencil in a 3.6% return into 2024 as a base estimate. If they rate up with DEO and SAM in the bull case scenario, they have even more upside opportunity.

As always, I want to flush these numbers out more, but I think that there is upside to Constellation, especially if Canopy is realized. They are a company that prices in growth and moves quickly.

These are some quick thoughts around Constellation and how they are positioned to capture some of the growth opportunities in the market. I think that Constellation is in a good spot right now - they are trading below what they are worth due to momentary headwinds. I think that they are fast movers in a pretty slow space, and they are taking advantage of opportunities (even if the success doesn’t manifest right away).

I think that alcoholic beverages are an interesting reopening play - people will return to bars, celebrate, hang out, and I am making the assumption that alcohol will play a part in that. I think that we are going to explore different “recreational activities” moving forward (psychedelics, etc) and Constellation could be one of the first to recognize and move on that. $STZ $STZ.B

A pretty long piece on my thoughts on the market at large!

What is a meme? A meme is an idea, behavior, or style that becomes a fad, spreading by means of imitation from person to person within a culture. They drive how we interact and serve as visual news sources, and ultimately are tools of navigation. We use them as methods to process the massive amount of information thrown at us every single day.

This broader meme movement is reflected in something important -

The stock market is a reflection of memes, notably magnified through SPACs, NFTs and GME. The memefication has displaced reality from valuation, as fundamentals grow less and less useful as each new flying helicopter company hits the market.

It’s not a bad thing – it just reshapes how we think about investing and the decisions that we make around portfolios. This is a hype cycle in a bull market. It’s to be expected. The core drivers are some of the financial tools (SPACs), but it’s also the broader market environment – memes are no longer a metaphor, but a living structure, called the stonk market.

The perfect meme storm has been created through a combination of 4 factors:

The markets are currently driven by a core memetic thread resulting in the disconnect of reality from fundamentals. This can be looked at from a few different angles – SPACs, NFTs, r/wallstreetbets, and the general frothiness that information access creates. There are several people who have built incredible systems around this (most notably, Alex Good – linking his checklist here). As Alex states in one of his weekly recaps –

> “Equity markets are becoming delegitimized by SPACs and meme stocks… the free markets themselves, are largely a meme.”

There are 6 parts to the memefication of the markets, fueled by the 4 factors above.

SPACs have gotten a lot of attention recently, with a lot of investors getting into the SPAC game. SPACs have an interesting structure, because they are basically a shell company with a dream. Investors invest with the SPAC with the hope that the SPAC will take a company public. SPACs have looser regulations relative to IPOs (the more traditional path to going public).

IPOs are normally conducted through a middleman, with underwriters interpreting the growth for investors. SPACs can circumnavigate that with softer regulatory constraints and tell the whole story (however outlandish that story ends up being).

Here’s how the structure works (at a very high level):

SPACs are fascinating because they are a mystery box IPO – it could be anything, ranging from EV, AI, Robots, terraforming, and vertical farming – and that’s new and exciting. And that excitement is reflected in the market movement.

We are only 3.5 months into the year, and SPACs have already outpaced all of 2020 numbers. If we continue at this pace, we will see $275bn of SPAC flows, across more than 900 SPACs. Considering the structure of SPACs, this will make hedge funds and SPAC sponsors happy, but investors are likely getting the short end of the SPAC stick.

The important thing to remember is that SPACs are tools. They are financially engineered products. They can be multipurposed – sometimes they are an investment opportunity, but sometimes, they can be used to simply shift risk:

SPACs are shells. They raise money with the intention to buy a company - whether that be a good or bad company is uncertain. Investors are truly investing on hope, in a way that transcends the usual pre-revenue tech investment.

SPACs sell because they have a story. They have narrative.

Memes are visual narratives. SPACs are investable memes.

SPACs are connected into Elon Musk and Tesla. Most EV companies that are hitting the market are doing it through SPACs, and Tesla sets an interesting precedent for the EVs to match. This part of the meme market is compounded by two things:

Some of the Tesla Effect (>50% most likely) comes from having Elon Musk as the CEO.

Elon is an embodiment of the meme market. He is remarkably successful at it – renaming himself Technoking of Tesla, his association with Doge, his $420 share price target for Tesla, randomly tweeting company names, his involvement with GameStop (Gamestonk) and so much more – he has created billions of dollars in value from tweets.

Knowing that you can tweet things to move markets is immensely powerful. He is very good at what he does, both in creating value for Tesla and pumping random cryptocurrencies. That power carries across the industry, fueling the Tesla Effect, and subsequently, the valuation of the EV SPACs.

Tesla is a golden-child stock. It has defied expectations, achieved S&P 500 status, and got very close to a T market cap. Elon Musk created Tesla into what it is – and that success has manifested additional multiple onto any other EV company.

The EV companies are bold in their vision. There’s an article in the WSJ that discusses the big plans of the companies relative to Google. The fastest growing startup ever, Google took 8 years to reach 0b in sales.

5 Electric Vehicle companies think that they are going to beat that record (despite some having $0 sales at the moment). They’ve executed on deals with SPACs despite producing no revenue. Zero-revenue companies are not new, and lofty goals are always appreciated.

But these valuations are fueled by the coattails of Tesla, the general hype market, the froth of the SPAC environment, and the broader easy money atmosphere. This leads to mispricing.

There’s a research paper that analyzes the underperformance of the EV SPACs through the lens of the “Tesla Effect” (and subsequently, the Elon Effect). With the EV SPACs:

EV SPACs are more mispriced relative to other SPACs.

Investors were associating these EV companies with Tesla and Elon, and assigning an arbitrary dollar sign to that, simply by association. A relative valuation, but a misplaced conclusion.

The EV industry has a significant amount to navigate over the next few years.

Investors seem to be ignoring all that. There is a significant amount of money flowing towards EV companies. The thesis is not on fundamentals, but on hope and optimism yet again. Once again, not an inherently bad thing.

But memefication implies understanding. If we know enough to meme it, that means that we can distill it down and process it. But with SPACs, they aren’t understood – especially the dilution impact as illustrated by Nikola. Money flows are fine in a high growth environment, but as soon as the market pulls back, EV SPACs are going to be hit pretty hard. They are an incredibly elastic good in a competitive market fueled by association to one of the biggest companies in the world.

SPACs and Tesla are driven by meme markets. Tesla itself is fueled by Cathie Wood and ARK.

ARK owns a lot of Tesla. The funds have a ~10% exposure to Tesla. Tesla owns a lot of Bitcoin. And through Square and Grayscale, ARK has even more exposure to Bitcoin. So when Bitcoin’s price drops, there is this potentially ugly forced selling dynamic, which causes pain not only in Tesla, Bitcoin, and the ARK funds, but also in the Biotech stocks that ARK is a whale in.

ARK is then caught in a feedback loop with Bitcoin and Tesla. ARK also has a lot of inter-stock correlation too, with most of their top holdings (SQ, TLSA, TDOC, ROKU) mimicking each other’s performance.

ARK itself now owns > 10% of ~30 companies, according to Bloomberg. On top of that, there is an affiliate fund, Nikko Asset Management – and when combined, they control 20% or more of an additional 10 companies. The two own more than 25% of at least 3 businesses: Compugen Ltd., Organovo Holdings Inc. and Intellia Therapeutics Inc. Those are hefty positions in volatile companies.

This concentration works now because of the four market drivers: enthusiasm, risk-on, liquidity, and memes. But, as seen recently, moving yields will put pressure on tech valuations, which ARK has significant exposure to. These high-fliers that are based on cash flows 10-20 years in the future are vulnerable to rising rates – and if their valuations compress, that could be very bad for ARK.

With ARK, there is (broken out really well here):

ARK benefits from the concept of reflexivity too, as reflected by their inflows over the past year – rising prices attract more investors, and that’s a cycle within itself. Reflexivity, and investors chasing moving prices, shows up in another meme byproduct - NFTs.

NFTs are non-fungible tokens. With money, each dollar bill is the same, but with art, no painting is exactly like another – same with writing pieces, books etc. NFTs are meant to capture that uniqueness. They are digital assets, a cryptographic key to a particular address on the blockchain that points to the asset that you have NFTed.

The value to NFTs comes in three parts (highlighted in Santiago’s tweet thread):

Broadly, it’s a mix of FOMO and memefication, with people NFTing ridiculous things (like a fart) but also beautiful works of art. That’s the hard part about memes – they are inherently clever and valuable in disseminating information to people, whatever we choose the information to be. Perhaps a fart is art.

There are worries of sustainability – proof of stake would be more efficient than proof of work. In order for this to scale, it does need to be contained. The current environmental concerns that crypto in general causes needs to be capped in order for them to be scaled.

If the environmental concerns do get worked out, it seems that NFTs will likely be around in some iteration as we rethink online property rights and move more into the digital age. But the current frothiness and heat in the NFT market is unsustainable – a situation that is also reflected in GME.

GameStop.

GameStop is the collective power of the meme market in its prime state. r/wallstreetbets has been around for a while, moving other companies before GME. When Hertz declared bankruptcy in May, 140k Robinhood traders added it to their portfolio, causing the share price to spike by > 1,000%. They did the same thing with Kodak.

GameStop was a combination of market forces. It was Hertz and Kodak but amplified.

There were 3 main drivers here:

Keynes said it best when he said “markets can remain irrational longer than you can stay solvent”. With GameStop, that’s the exact situation. It was 4 main players:

The Set-up: DFV has been posting his GameStop trades for a while and has been bullish on the company back when it was ~$2/share. trades way way back, he’s been doing this forever. And Michael Burry of the Big Short announced he was long GameStop. And then in 2021, Ryan Cohen joined the board. r/wallstreetbets is a place for people to post memes and talk about trading. They keep a close eye on hedge funds – and they noticed that the hedge funds were short GameStop. And a perfect storm was created:

Hedge funds have a strategy of short selling – making a trade expecting the price of a company to go down. More specifically:

Short interest in GameStop was almost comically short - 140% of free float, meaning they were short more shares than were even available. r/wallstreetbets decided to take advantage of that, and engaged in a coordinated move to push the price higher.

Short Squeeze: Hedge funds were short GameStop, so r/wallstreetbets began to buy shares and options to put upward pressure on GME

This short squeeze bled into a gamma squeeze, as dealers tried to hedge against the increase in the price of stock.

Robinhood and the other brokerages halted trading. There were potential liquidity, solvency concerns. The brokerages had to protect their financial positions. The DTCC (Depository Trust & Clearing Corporation), the main clearinghouse for U.S. stock markets, demanded collateral from brokerages including Robinhood.

But people thought the brokers were shutting down to protect the shorts.

Some of the reasoning came from the brokerage revenue model: payment for order flow.

Market makers, such as Citadel Securities or Virtu, pay Robinhood for the right to execute customer trades – so people thought trading was halted to help them, which only fueled the anti-establishment narrative even more.

Public figures (Elon, the Meme King) posted about GME. The rise of GameStop is the manifestation of the meme markets. It’s not going up on fundamentals – it’s going up because it can. Because bubbles can be created. Because the markets are abstract and divorced from reality.

GME was the peak of memefication. It was the memefying of the entire financial industry.

GameStop is still going up. The system hasn’t been debased entirely, but there are real structural cracks that bubbled to the surface. It’s uncertain of what the “final” outcome will be – and retail investors are still entering the market in droves.

r/wallstreetbets is primarily retail investors. Retail investors are a big part of the memeficiation story. As a retail investor and a staunch advocate for investor education, I don’t think this is a bad thing. But I do think that some people are treating the market as a casino, not as a place for long-term wealth creation. And I can’t say I blame them.

Retail investors account for ~20-25% of all value traded in the market, up from 10-15% a year ago. GME put investors at the forefront of this conversation, giving them the power to actually move markets. Robinhood, a key part in providing access to investors, has added 6mn users over the past 2 months. Call option volume is at all-time highs. People are trying to figure out what money actually means.

Several market factors gave investors the tools to start exploring trading:

Crypto was a leading indicator here, where retail has been more prominent and active relative to institutions. Even in the crypto space, investors are primarily concentrated in speculative assets. I am sure that a percentage of investors are bullish on the core part of these companies, but there is a lot of money chasing returns too – which is not inherently bad (money is money) but does underscore the continued move away from fundamentals.

Retail and Institutions

The Fed has a communication problem now, as do institutions. The Fed is ignoring the collective asset bubble in favor of transient inflation and easy policy, and institutions are moving far too slow in our hypergrowth world.

This gives retail investors a lot of power. From The Equity Market Implications of the Retail Investment Boom:

> "Despite their negligible market share of 0.2%, we find that Robinhood traders account for over 10% of the cross-sectional variation in stock returns during the second quarter of 2020. The inelasticity of equity markets, which is potentially driven by investment mandates and the rise of passive investing... It is the inelastic demand response of institutional investors, that allows retail traders’ demand shocks to have sizeable price effects… Robinhood traders also boosted the recovery in Q2 by adding 1% to the aggregate stock market valuation."

We have so much information about so many things that the gatekeeping doesn’t make sense anymore. Institutions still have a lot of power – Bill Ackman’s CDS trade is a great example of the power of the institutional voice carries. But there is a change in tone. GME was more than just a meme of a stock or posting something in a Reddit forum – this was a collective knock on the door of the ivory institutional walls.

What is beyond the meme markets? There are several things that I am keeping a close eye on (my attempt to integrate the fundamental into the meme!)

Earnings Numbers: There is a big gap between non-GAAP and GAAP (median difference between non-GAAP EPS and GAAP EPS was ~30% in Q42020) profits as the “adjusted for the pandemic numbers” begin to shake out. It will be important to discern what non-GAAP actually means, especially in context of memefluences.

Energy market: The five supermajors—ExxonMobil, Chevron BP, Total and Shell—generated $20.5 billion in free cash flow, defined as the amount earned from their core business operations minus capital expenditures. Meanwhile, they rewarded shareholders with $49.9 billion in dividends and share buybacks in 2020. This itself isn’t surprising – but industry shifts could make this unsustainable.

The Fed: Fed and Foreign buyers can keep long-end Treasury yields from moving too high (if yields keep moving, that could put a quick pin in the current asset bubble).

Treasury Movement: The Treasury is planning to reduce the very large balance of Treasury General Account (a liability for the Fed).Yellen recently laid out plans to reduce it from $1.6trillion to $800 billion by the end of March, and then further to $500 billion by June, which would be ~$1.1 trillion of liquidity hitting the system

The 10Y: We're in an interesting situation where markets are pricing much more rate hikes than the Fed's latest forecast. Powell has done his best to calm the markets, but the 10Y is still ticking up persistently. If it continues, that could put a lot of pressure on tech.

SPACs, NFTs, and GameStop are all people testing the limits – memefying things in a way to reimagine how we make money. I am very bullish on the creator economy –giving people the tools to create their own future. People are increasingly wanting to work for themselves and “be their own boss”, and I think the market memefication is an iteration of that. The idea that the financial industry is the gatekeeper to the ivory tower of money isn’t as accurate as it used to be.

Memefication is a function of information access, and subsequently, the market is fueled by this meme access. This is a broader sociological phenomenon, but meme markets show the growing power of the retail investor, as well as the structural cracks in the current market.

Borrowing from Dawkins:

The meme complexes of the financial system are going strong. The market is no longer driven by fundamentals - it’s driven by memes. No longer a metaphor, but a living structure – the stonk market.

$SPY $TSLA $DIA $QQQ

My first post here! Let me know if this isn't the right way to do this!! Wanna provide some thoughts on Roblox!

What is Roblox? Roblox is not just a game but rather a “human co-experience platform”. It is currently the most popular game in the world, specializing in UGC (user generated content). Founded by David Baszucki and Erik Cassel in 2004 (and launching in 2006), the game is a multiplayer platform that allows users to 1) build games and 2) play games (with potential and access to much more). Their mission is to “bring the world together through play”.

Roblox launched on PC in 2006, mobile in 2011, and Xbox in 2016. This multiplatform access led to its explosion in popularity. The company has remained focused on curating the in-game community. Roblox is still free-to-play, monetizing through Robux (an in-game virtual currency), in a series of microtransactions (that could evolve into a full economy (NFTs, creator stock market, etc)).

The game has always had creators at the core of its mission, focused on giving developers and creators the tools to build, rather than aesthetics and flash of the games, with the world remaining pretty blocky until 2015. Most people still view it as a game for kids, but they have a huge opportunity to age up their user base.

They also have the opportunity to break outside of just the game industry (which they have taken steps towards). Roblox wants to expand its platform to encompass all parts of virtual life - the avatars will be used across all facets of existence, from gaming to social media, to education, and to business.

Roblox is priming itself to become a place for work and play, allowing collaboration and socialization. Roblox combines everything in its ecosystem – providing fertile soil for creators to grow, while also providing infrastructure to facilitate broader social interaction.

There are 3 main growth opportunities for Roblox:

I am incredibly bullish on the creator economy, the evolution of social, and the potential of blockchain integration in our daily lives. And I think Roblox is a steppingstone in this path.

Roblox is a trio of products that interact to form an ecosystem: the Roblox client, Roblox Studio, and Roblox Cloud Services.

The Four Roblox Differentiators. Roblox owns everything. The production of games, the distribution of games on the platform, and the eventual monetization. This gives them a lot of space to build out a strong ecosystem (outside of games and into the metaverse!)

These are some of the main levers that I could see Roblox using:

Roblox exists in a fixed economy. They control the exchange rate of Robux to USD which they can use as a point of leverage. Controlling currency rates is a powerful tool.

The Roblox marketplace interfaces between players and developers. Players buy Robux (RS) with real money which can purchase in-game items. The exchange rate is roughly $1 USD = ~R$0.01, which are usually bought in bulk or through a monthly subscription (Roblox Premium). Developers get paid at a rate of R$1 = $0.0035.

If Roblox can spin up their DAUs (primarily through aging up users and getting more developers on the platform) that is a huge lever for growth. There are a couple of ways that Roblox can continue to spin this faster, two main ones being 1) growth abroad and 2) actively shifting their demographics.

Right now, Roblox primarily generates revenue from the US/Canada and Europe (~90% of bookings) but almost 70% of the DAUs come from non-US/Canada. This is huge potential to monetize abroad – they already have the presence, just have to capture the dollars. There’s room for another Considering 30% of the base drives ~$2bn in bookings, there is easily another >$4bn to capture. There are more than 2.7bn gamers in the world – the biggest areas of growth are in Latin America and APAC, expected to grow by 10.3% and 9.9%

As of 2020, about 40% of Roblox users are older than 13 years old – a demographic that they want to continue to age-up. A lot of this will surround getting developers into the platform to build “older people” experiences, which comes from two angles:

Roblox has to age up users to avoid going the path of Wii and Guitar Hero. The network effects are powerful, but there is a lot that the company could do to make this execute faster.

Roblox is spending close to 20% of 2020 bookings on R&D to enhance features and create new functionality. This is pretty low relative to other developers - they have room to spend out here (perhaps in the AR/VR space to entice older users). Aging up users is an important step in monetization because older users can pay more - and their strategy has been working, as the 17-24 year old is the fastest growing category on the platform.

COVID has definitely accelerated their growth, with easily 3-4 years growth in a 1 year time span. With 37.1mn DAUs now playing ~2.5 hours of content a day, the company has a solid base to work from. Roblox is guiding towards lower growth in 2021, but I still decent expansion in their user base over the next several years.

The market is growing. The video game industry is now estimated to be worth 60bn in 2020, expecting to grow to $300bn by 2025, and the VR market is roughly ~S10b, with expected growth to ~$50b by 2027.

Unity, Epic, and Microsoft are other players in the space. The industry has done well in the public market, with Unity IPOing at a $13.6bn valuation in September 2020, trading at all the way up to a $47.8bn market cap at its peak in December.

Below are some rough numbers. Their current valuation placed them at a $29.5bn valuation or ~$45 /share. However, they are set to price north of $65/share most likely. Using $67 a share, this is ~22x 2020 bookings and ~20.5x 2021 bookings. Using a ~25% revenue CAGR (roughly in line with Roku, Spotify, and Unity) and a 10x EV / Sales exit multiple based on a ~$43bn valuation, I can pencil in a 7% TSR CAGR into 2024.

I want to revisit these numbers, but I think that there is upside to Roblox. They are a mature company, with mature margins, and aren’t (too much) of a hyper-growth, flying taxi company.

Roblox saw that the market was frothy with recent tech IPOs. It raised a Series H and has decided to go public via DPO. They are primarily going public to attract more talent (~80% of their workforce are engineers). They will list on March 10th.

I plan to update this as I learn more about Roblox and their future plans. I am really excited about the future of the creator economy, and I think Roblox is an iteration of that growth path. They need to pay close attention to their developers and creators (pay them!), and create a space for their players to truly socialize and grow together.

I am bullish on their goals. I want to revisit this post-DPO, but am excited about this mature, creator-focused, multi-functional platform. I am incredibly bullish on the creator economy, the evolution of social, and the potential of blockchain integration in our daily lives.

And I think Roblox is potentially one step in that direction.