Place your bets (literally and figuratively)

Hey everyone! Yb has been quiet for a while, but hey life happens and I’m super excited to share this piece that I’ve been cooking up for a while.

Pot stocks are at all-time lows and truly define “fallen out of favor” in this current market. In my view, now is the time to buy.

Before I could decide what companies to buy within the space, I started doing some research and decided to turn it into a whole ~6,100 word piece on the industry…and that’s just Part 1!

Take a peek below, but more importantly, stay tuned. Next Wednesday, I’ll drop Part 2 which will include my picks along with price targets and a lot more.

Enjoy and let me know what you think!

New piece just released (and much shorter than the usual) on how to stay safe & sane during these trying markets. Let me know what you think!

The time has come.

Not to be overly dramatic, but my portfolio today looks like an absolute cesspool of fluctuating garbage. I began a near total rebalance this morning and I gotta say, it feels great.

Call it the investing version of spring cleaning. Prior, I had >15 positions, some of which were companies I knew nothing about besides the fact that they’re stocks were off ~20-70% when I bought. For a long term investor, that’s no good.

Unfortunately, I have no charts or complex models to back this feeling up, but I think this current moment, for me, is a great time to rebalance and prepare for the long term. I view my brokerage account as a heavily risk-on, essentially venture portion of my investments. I want the risky-ass names that might just hit $100bn or $1tn someday.

Call me crazy, but we’re all about keeping it simple over here. My theses are little more than this: these companies have unbelievably solid management teams, strong financials, large TAMs, compelling narratives, and are heavily discounted in my view.

A few names I entered (in the interest of transparency):

$NVDA $ABNB $SPOT $BABA $SNOW $SOFI

Other names I’m considering:

$SHOP (increasing) $PYPL and $POTX

What names are you looking at? Are you holding off on buying the dip? For what reasons? As always, let me know where I’m wrong.

I'm not sure why I can't link the trade (maybe I'm just a brick), but I'm proud to say I took a small position in Spotify this morning.

Call me crazy (fr, do it, I'm kinda into it), but after this year's ~60% decline in value, I believe Spotify's fundamentals, relationship with users & creators, and much more give it a substantial probability of long-term outperformance.

[for now, I'm going to keep the thesis simple and mostly qualitative. if you guys are into it, I'll publish a full analysis with a price target on my Substack (link in bio) in the coming days, just let me know.]

This part of my thesis is as Lynch-ian as it gets. I'm sure most if not all of us are familiar with Peter Lynch's book "One Up on Wall Street", in which he argues for the validity of an investing style that incorporates what you actually use, do, and observe as a consumer.

I can't stress this enough - I love Spotify. As a broke college student, I'm naturally a cheap f_ck. I won't subscribe to a monthly subscription for anything unless I physically need it to function or can get the bank of Mom & Dad to pay for it. Unfortunately, I have never been able to get approval from the bank in question to perform this acquisition, so I do so with my own capital. Spotify is the only thing I pay a monthly fee for, and you better believe I do it with a smile on my face.

In simple terms, now that I'm a shareholder, I can view my monthly payment as writing a $10 check to myself. Obviously, that's insane, but who cares, it works for me.

Moreover, Spotify's other users also seem to love the service. It carries a massive NPS score of 46 (one point below $AAPL and one above $MSFT), meaning that out of 100 random users, 73 of them will be active promoters of the service.

Yeah, yeah users love Apple Music too, but in my experience (and I might be a little bias) Spotify's service and UX is materially superior to Apple. The App store and Apple's control of distribution is an elephant in the room, but in the long-run, better services tend to win out...and Lina Khan might have something in the works around Apple's App store control.

In sum, I love it, you love it, and the service is only getting bigger and better.

From radio, to LimeWire, to Napster, to Pandora - we've finally developed a way for people to easily stream whatever audio they want in a cheap and efficient way, thanks to Spotify.

I don't think I need to tell you that streaming music is largely preferable to radio. Plus, Spotify and its main competition (hi Tim Cook!) are essentially the same here. Where Spotify wins, however, is podcasting.

Per today's earnings report, Spotify added 400,000 shows to its content catalog, bringing the total to 4 million. According to the most recent data I could find (04/2021), that's double the amount on both Apple Podcasts and Google Podcasts.

Further, Spotify is going hard with acquisitions in the space. In addition to purchasing podcast shows and studios like The Joe Rogan Experience and others, Spotify is going vertical into podcast advertising, production, and analytics. Just last quarter, the firm bought Podsight (pod ad measurement service) and Chartable (pod audience analytics service). But maybe the most exciting aspect of the earnings report as it relates to podcasts was the results from Anchor.

Anchor is a podcast production platform completely free to users and owned by Spotify. As of today, we learned that a massive 85% of new shows on Spotify are produced in-house via Anchor. The firm is slowly growing its control over the entire podcasting landscape, and that's great for advertisers.

Ads embedded within podcasts have repeatedly proven to be the most effective as far as listener retention. According to Super Listeners 2021 Report, podcast ads are the most recalled form of advertisement, with 86% of respondents saying they remember seeing or hearing a certain ad. For comparison, social media ad recall was 80% and website ads were 79%.

And it gets even better. An insane 64% of respondents in the same survey literally said they enjoy podcast ads, reason being, they simply appreciate the brands who support their shows. Still not sold? 76% of respondents report to have engaged with or taken action with companies or products they discovered via a podcast ad.

It's an advertiser's dream. Something about audio makes human beings feel a closer relationship to the content, and Spotify is taking full advantage of this. Podcasts FTW.

We'll keep this part short and sweet.

Management provided underwhelming guidance for the next quarter, detailing lower gross margins and a probably operating loss. However, Wall Street gets far too up in arms about the next quarter, largely forgetting the real question is what will happen over the next decade.

Revenue has consistently grown around 20% per quarter on a YoY basis. The business is relatively capital-light, carries 0 inventory, and has net debt of -1.8bn. Free cash flow has been a struggle, but the firm posted its first profit in just Q1 2021 (when digital ad spending was miserable thanks to COVID). Since then, quarterly profitability has been sporadic at best but appears on track to achieve consistent profitability in the coming years (I'm not a damn oracle, idk exactly when).

Moral of the financial story is this: things aren't looking great right now, but with an elite management team and ultra-strong tailwinds, we can have reasonably high expectations for this to be cleaned up in the future. Financials matter, but you remember that Buffet said to be greedy when others are fearful.

So what do you think? Obviously, this is mostly qualitative, which isn't super useful, so feel free to fight me with some numbers. But whatever you bring, I'm staying long for a long time.

…but you’re not gonna want to miss this!

The latest, greatest, and least profane Markets on Markets officially dropped this morning, and if you haven’t read it yet, what are you even doing with your life? Can you really call yourself an investor? Stop weeping over your brokerage and crypto accounts and get locked in for next week - right here, right now.

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Let me make a few things clear:

But I hate the idea of putting these things together. If that sounds like it lacks any sense whatseover, trust your instincts, but allow me 5 minutes of your time to elaborate:

This might be the coldest take of the year, but I'll say it anyway - I'm not convinced Musk is even gonna be able to buy Twitter. Sure he has around $255bn to his name (per Bloomberg), but it's not that simple.

With that $255bn net worth and $TWTR's $43bn market cap at Musk's bid price, that makes this purchase ~16.9% of his net worth. For the average American, that's the equivalent of taking out a ~$20,455 loan.

Doesn't sound too shabby right? I mean, it's not that hard to get a car loan, but here's the difference.

For the average American, a vast majority of their net worth is tied up in their home. While there is certainly variability, housing prices are generally stable and tend to trend upward in the long term. That makes housing a preferable form of collateral in the event of a default, as banks can come in and take ownership of the house, so it keeps the loan relatively low risk.

On the other hand, most of Musk's wealth is tied up in something that is without question a lot riskier from a lender's perspective than a house: Tesla shares. The absolute only way Musk can get the financing for this transaction is to borrow big against those Tesla shares. Realistically, it would take a consortium of the U.S.'s largest banks to put up the $ for this transaction (which I bet they're already working on), but given the risk of the collateral in question, this will likely be a lot harder than many people think.

$TSLA has boomed over 1,100% just since COVID began. But, along with that came an ungodly amount of volatility. The stock already has a 5yr monthly beta of over 2, meaning it is a helluva lot more volatile than most (every) other large-cap S&P 500 name. The stock has lost more than 20% in a single trading day previously, and could easily do so again.

So, let's just assume Musk is able to get the financing and acquire Twitter. What happens when $TSLA shares go through a sharp or protracted downturn? Those money-grubbers at Morgan Stanley and Goldman Sachs will demand Elon put up $ or increase the value of collateral through adding assets. The only way that occurs is by putting up more Tesla shares against the loan, or more realistically, by selling shares outright and putting up $.

This transaction would carry a large probability that Musk could eventually become a forced seller of $TSLA shares. Obviously in this scenario, if Elon is selling, $TSLA is going to continue to tank, and a vicious cycle is born. That's an L for Elon, an L for the banks, an L for $TSLA shareholders, and almost definitely an L for Twitter. Anyone out there a fan of lose-lose-lose-lose situations?

A few more caveats. It is undeniable that Musk is a Top 2 CEO of the 21st century (shoutout Bezos). He is a brilliant engineer, product manager, executive, and marketer and the world is an unimaginably better place because he exists.

But he will be terrible for Twitter shareholders.

There are really two perspectives to look at this - a societal lens and a shareholder lens.

For society, I think it would be great to have Musk running the show at Twitter. As I said, I'm all for maximizing free speech, especially on this global platform that is, whether we like it or not, the de facto town square. An edit button and long-form posts (two ideas Musk has already proposed) would be great for the promotion of public discourse.

But despite how abysmal Twitter's board has been in this regard, they have a legal, fiduciary duty to drive shareholder returns. As $FB well knows and I'm sure you've all heard this before, engagement = engagement, which in turn = $$$. They are incentivized to promote emotionally charged content, which in my view, is terrible for discourse but great for shareholder value. This is the unfortunate reality for the platform.

Musk, if handed the reigns, would no doubt clean up the rage, bots, and other deteriorating aspects of Twitter. This would be great for society, but horrific for shareholders.

Sure, $TWTR has traded sideways its whole life, but that's much better than the sharp downturn it'll take once Musk is in charge. Everything I can imagine that Musk would want to do to promote free speech goes directly against effective monetization of the platform, and as value is derived from earnings, shares would soon fall off a cliff.

Oh yeah, and Musk has literally come out and said he does not care about the money in this endeavor whatsoever. He has absolutely no incentive to drive Twitter towards a higher degree of financial success (see the $255bn he already has) and thus would act solely in the interest of public discourse.

Great for society, but a nightmare for shareholders.

With all that said, I really don't see any realistic way Musk goes through with the purchase.

The poison pill aside (because that's a whole different topic that isn't receiving the nuance it deserves) Twitter's board has a fiduciary duty to maximize shareholder value.

That very well could be achieved by selling to Musk for $54.20/sh. But, shares were trading close to $80 just over a year ago. Sure that was during the COVID boom, but that absolutely gives the Twitter board legal grounds to make the case that it is not in shareholder's interest to sell at $54.20.

Further, the stock was running up for more reasons than just general tech frothiness. The market gets real excited whenever Jack or Parag say the word "subscription", so the board could easily say "this is our product and monetization roadmap and given historical performance as well as reasonable assumptions, we believe Twitter is (or could be) worth more than $54.20/sh."

Lastly, does Musk really want to do this? It seems like there are a few changes he wants to make, like those aforementioned as well as things like open sourcing the algorithm (great idea), but that wouldn't take too much or too long. The guy is already running several companies, one of which holds a ~$1tn market cap and one that is literally attempting to get us to Mars. He's got bigger and better things to worry about long-term.

So what do you think? As always, let me know where I'm wrong!

You know them, you love them, but actually - you probably hate them. It’s earnings szn again and banks, as usual, are first up to bat.

No need to spend hours trying to compile everything from net interest margins to fund flows on your own. DYD has got you, below 👇

Check out my first real post on Due Your Diligence, the newsletter / research outlet run by yours truly and @strat.

Pour yourself some wine, tell the kids to shut up, and dig in. You’re gonna need plenty of time for this one! (will try to be shorter in the future but…no promises)