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@steven_xu
Steven Xu
$32.4M follower assets
Product @ LinkedIn (ex-FP&A) Investments: Long-term: companies w/ strong fundamentals over time (low debt, strong revenue growth, margin expansion) Short-term: individual bets based on earnings trajectory and estimates Reach out for discussions!
90 following315 followers
Product Feature Request for Commonstock - Personalized Risk measure
I was thinking about my portfolio and it occurred to me that Commonstock has a unique position to create a product feature unavailable (to my knowledge) on other platforms. I’d like to make the case for why this should exist :)

There are three problems I see, the first of which Commonstock has already solved (kudos).

  1. There was no leading place on the internet where portfolio consolidation was done well. People had 401Ks, IRAs, and multiple brokerage accounts with no way to see the entirety of what they were invested in.

  1. I have a hard time reading through all the content online and connect the dots in an understandable and productive way to inform my investment strategy. Reframed, there is low signal-to-noise.

  1. Even when I figure it out for myself, I have limited ways to determine if other people think similarly or contrarian to me.

In the same way that LinkedIn became a place on the Internet to house a professional resume (the profile), Commonstock quickly became the way to house my personal portfolio. In my opinion, this is an apt parallel to draw and important to note that the initial network effects of LinkedIn were driven not because they had some differentiable value from the miniscule network they created at first, but rather the network manifested itself around an independent value proposition. This was LinkedIn’s solve for the ‘cold start problem’. I can see a similar optimistic future for Commonstock. By solving (1) above, Commonstock quickly became the way I could very quickly screenshot my % portfolio and share with friends to spur discussion.

Now, I think (2) and (3) are user problems which will quickly become platform problems. Okay, I have my portfolio here, and I can see others, but how do I know who to follow? Whether their investment strategies match mine, and whether I can leverage their shared knowledge to formulate my own? I think there are many solutions to this, but I’m going to advocate for one. A standardized and personalized measure of risk. I’m thinking of a Sharpe ratio or something Sharpe-ratio-esque.

The Sharpe ratio is a commonly used metric for portfolio risk-return, calculated by ((return of portfolio) - (risk-free return)) / (standard deviation of excess returns). Commonstock already has historical price information for all the securities listed on each person’s profile - I think it would be straightforward to calculate metrics based on each users portfolio. This can help users (and Commonstock) in a few ways:
  1. What is my risk-return ‘score’, and how do I compare to popular benchmarks (e.g. indices) or even my friends/followers/following? Depending on my risk tolerance, should I change my holdings? This can lead to lightbulb moments for people.

  1. As I read memos from other users, does this member have a similar risk appetite as me? This may affect the trust I have in them and their investment suggestions, and affect the probability that I actually act on any given memo.

  1. For Commonstock, having a way to standardize and cluster members can be vastly helpful as the network grows. It opens the path to experimentation. You can recommend high-risk/high-reward individuals and their content to like-minded investors to encourage engagement. You can recommend high-risk to low-risk folks to see whether any are interested in ‘broadening their horizons’, or if people prefer to maintain their existing strategy. This can be a much more personalized approach than simply showing the ‘highest voted’ content on the feed (though I’m sure there are plans to get smarter on recommendations already, perhaps I’m just injecting my own wishful thinking).

I’ll digress here, as this is longer than I intended. I skipped a lot of important material, like how we jump from the problem to this specific solution, but I wanted to suggest something for Commonstock to automate something I just did manually :). I’d love to hear what everyone’s thoughts are on this!
Investopedia
Sharpe Ratio: Definition, Formula, and Examples
The Sharpe ratio is used to help investors understand the return of an investment compared to its risk.

Sold $GLD and $GDX, soliciting new ideas!
GLD: +10.6% (March-2020 to Feb 2021)
GDX: -3.9% (May-2020 to Feb 2021)
Total Gold allocation performance: +7.5% in <1 year

I decided to sell most of my gold holdings to free up some cash to re-allocate into equities. Thinking is that I don't need to be so risk-averse, and I'm willing to spend some time to research and find a company at a discount.

This freed up ~5% of my portfolio so taking any and all risky bets, including crypto. Please feel free to make suggestions :)

On my to-research list: NYT, MTCH, more AMAT, more MNST, BTC/ETH

I probably only have time to do 1-2; please give ideas!

Afterthought: I just realized I sold GLD within 1 year so I can't pay long-term capital gains, losing out on tax savings. Don't be like me, folks. Think about the taxes!
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$LYFT Earnings - Positive report, more positive outlook
Brian Roberts (LYFT CFO):“Our Q4 results also outperformed our most recent outlook. And, while the first quarter of 2021 continues to be uncertain primarily due to COVID-19 headwinds, based on current recovery expectations, we should experience a growth inflection beginning in the second quarter that strengthens in the second half of the year.”

It’s been about a week since LYFT reported earnings on February 9th, and I thought I’d do a retrospective on the thoughts I had since writing LYFT – Underpriced and Underestimated. To be clear, I’m very satisfied with performance, up +33% since purchase Jan 27th. Disclosure: I still hold my long LYFT position and a naked call option ($45 dated Jan 2022); I’m considering selling the call.

Summary: Still bullish on LYFT price growth ($58 at time-of-writing), and still see 18%+ upside to the high end of my initial estimate of $59 to $68 by the end of the year (Wall St consensus is now $69, up from $53 pre-earnings). Expect business metrics to improve Q/Q given Brian's optimism quoted above.

Things I got terribly wrong: While I was only -3% off revenue (due to missing Active Riders forecast by -15%, offset by Revenue per Active Rider beating my expectation by +14%), my simplistic OpEx assumptions as a % of revenue were way off at the line item level (to be expected). While costs are indeed declining as a % of revenue, not in the areas I expected (R&D, G&A, COGS) and in variable more controllable costs such as Sales & Marketing. More on margin expansion further down.

edit: oops, the variances are wrong for the negative numbers.

By pure luck, things I got directionally right:
  • <<LYFT is recovering fast(er) in terms of ridesharing (vs. Uber)>>: LYFT reported revenue down 44% y/y, improved from -48% y/y. On the other hand, UBER reported the same y/y performance Q/Q for both Mobility (-51% y/y) and NAMER (-59% y/y)

  • <<If rideshare recovery continues linearly, we might expect a full recovery by August 2021. Distribution of a vaccine is likely to pull this forward in the medium term but mounting COVID cases and slow vaccine distribution could mean short-term recovery may not follow recent trends.>> This proved to be the case as Active Riders remained basically flat Q/Q, a slowing demand attributed to COVID in their financial results: “Recovery trends seen in Q3 2020 continued into Q4 2020, but demand in the latter part of Q4 2020 was negatively affected by the surge in COVID-19 cases and the reintroduction of restrictive measures intended to curb the spread.”

  • <<Revenue per Active Rider was resilient and likely to reach pre-COVID levels quickly>>: In fact, they had the highest revenue per active rider in the last eight quarters. I find this extremely encouraging during a time when ridesharing is down nearly -50% y/y.

  • <<Margin expansion will continue post-recovery and LYFT will reach profitability in 12-18 months>>: LYFT reported beating their own expectations in terms of cost-cutting and margin expansion: “we successfully eliminated $360 million in fixed costs on an annualized basis versus our original 2020 plan, exceeding our target cost reduction by 20%”. It seems that OpEx, as a % of revenue, has passed the worst part of the pandemic. It helps that LYFT has previously maintained a stronger margin profile than it currently has to bolster my confidence that margin expansion can continue. Q/Q, for each $1 of revenue, LYFT earned $1.28 in adjusted EBITDA.

What did Wall St think? A number of groups reiterated their positions from Equal Weight (1), Outperform/Overweight (4), or Buy (6) after the earnings call, increasing consensus price target +31% from $53 to $69.

Concluding Thoughts: The recent price growth is great confirmation bias in the thesis that LYFT price justified upside and continues to instill confidence in reaching profitability at scale. Implied volatility is ~58% at time of writing on my call option, which prompts me to consider whether I should sell or not. +18% upside in one year would be great but I can’t help think I might be able to find another solid trade in the months before LYFT reports profitability, justifying selling early. I’ll likely hold my long position.
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$TSLA and $BTC.X as an intangible asset
A friend pointed out to me Tesla's "Risks" section now that they have announced their purchase of bitcoin. Posting this as an informational on bitcoin as treated in corporate accounting or to start a discussion.

This is my understanding, welcome corrections and other thoughts.
  • If the value of Bitcoin held falls below the purchase value then Tesla has to recognize an impairment expense which will reduce Net Income on the Income Statement.
  • Impairment expenses are generally not tax deductible without a taxable event (i.e. a sale), similar to how the unrealized gain or loss of other security investments are treated.
  • This is unfavorable as impairment expenses will lower Net Income, artificially deflating TSLA earnings with no tax advantages. In the opposite scenario where BTC appreciates, financial statements are unaffected (because you do not adjust for increases in such intangible assets)

The implication I see is that Tesla multiples (e.g. P/E, P/B) will inflate if Bitcoin falls below their purchase price, as their earnings and book value will look artificially lower as they have to recognize unrealized losses in BTC. This is probably not super impactful as Tesla multiples are already sky high.

According to Amy Park, a Deloitte Audit partner previously w/ the Financial Accounting Standards Board ('FASB'), FASB met last Fall but voted unanimously not to add a project to address this standard. It is likely this will be addressed eventually but generally speaking accounting tends to be very thorough when changing standards.

Happy to be corrected if anyone has a better understanding of indefinite-lived intangible assets and Tesla's intentions or practical implications with holding BTC. I learned a lot from this Microstrategy segment on Bitcoin finance considerations: https://www.microstrategy.com/en/bitcoin/videos/bitcoin-finance-considerations

As a tangent, I'll also leave these two slides from Ark Investment Management's "Big Ideas 2021" as food for thought as to where the price of BTC might go given the announcements of more cash allocating into BTC.

edit: I don't have a crypto position but am considering adding one or re-allocating my position in gold into crypto.
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MicroStrategy
Bitcoin Finance Considerations with Deloitte
An overview of key finance, accounting, tax, and audit considerations for corporations integrating Bitcoin into a treasury reserve strategy.

Wow, really enjoyed the discussion about the accounting implications of adding Bitcoin to a company's balance sheet. Thanks for posting this!
+ 3 comments
$LYFT - Underpriced and Underestimated
Sharing research I’ve started on $LYFT and my hypothesis that it is currently underpriced at ~$44. I’ve read through their filings since September 2019 and made my own rudimentary forecast for what I think their P&L could look like in 2021. My price target range is $59 to $68 by the start of 2022 and I look forward to seeing how Lyft recovery is pacing when they announce their results on February 9th.

I was drawn by curiosity to understand why LYFT Price/Sales was at a multiple of ~5 (and has been practically since IPO) while UBER is currently trading at a 7-7.5 multiple. But let’s ignore this for now. LYFT is a ~$14B market cap company with ~30% ridesharing market share in North America. In CY20Q1 (ending March 31) they had an adjusted EBITDA of -$85M, within striking distance of profitability had the last two weeks of the quarter not begun a worldwide pandemic.

Pre-COVID (end of CY19), LYFT had many all-time bests: 22.9M Active Riders, $44.4 revenue per rider, lowest expense as a % of revenue for two categories in the trailing 4 quarters: Ops & Support (‘Ops’) and Research & Development (‘R&D’) expanding margin Q/Q.

COVID travel restrictions and related responses materially decreased demand for the platform. In response, Lyft paused Shared Rides, distributed thousands of masks, hand sanitizers, and partitions to drivers, and required face masks for all drivers and passengers. Lyft also took internal action, laying off 17% of their workforce, furloughing 300, and reducing compensation 10-30% for employees, the senior leadership team, and members of their board. Ridesharing decreased by -75% y/y in April 2020, decreasing Active Riders to a mere 8.7M; surprisingly, revenue per active rider of the few that remained only fell -2% to $39/rider the following quarter. But what a devastating blow to any industry.

But all is not lost! In addition to restructuring, LYFT decreased Sales and Marketing (‘S&M’) spend to the lowest it’s been as a % of revenue (15% CY20Q2), which helped offset revenue loss. Recovery of ridesharing is slowly starting to come back as lockdowns ease, with the most recent datapoint in October showing ridesharing being down only -47% y/y. Similarly, CY20Q2 was the worst quarter for revenue and it’s been recovering since. See this comparison of LYFT revenue vs. UBER revenue broken out by their Rides/Mobility segment and their NAMER region (couldn’t find Segment+Geo combination data). LYFT is visibly recovering faster in terms of ridesharing while Uber revenue is being offset by food delivery. While good for Uber in the short-term, this suggests that Lyft is going to exit the pandemic with a larger share of the ridesharing market.

If rideshare recovery continues linearly, we might expect a full recovery by August 2021. Distribution of a vaccine is likely to pull this forward in the medium term but mounting COVID cases and slow vaccine distribution could mean short-term recovery may not follow recent trends. As mentioned, Revenue per Active Rider was resilient and likely to reach pre-COVID levels quickly. I think LYFT will continue its diligent margin expansion in the long-term, and reach EBITDA profitability by the end of 2021 or in the first half of 2022.

In summary:
  1. LYFT is taking US market share in ridesharing from UBER as it recovers revenue faster
  2. Margin expansion will continue post-recovery and LYFT will reach profitability in 12-18 months

Given this, I believe that LYFT is underpriced relative to UBER. In 2021, I expect LYFT to recover back to CY19 revenue levels ($3.5B), which at current P/S multiple (~5.2) I expect the share price to be $59. If investor sentiment improves given profitability and using Ubers P/S multiple (~7.6) I would expect share price to increase to $68. I’ve taken a position in LYFT and am considering more.

Caveats:
  • I didn’t consider balance sheet concerns as LYFT has $2.5B in cash which I currently consider enough liquidity to reach this price target via recovery on the P&L.
  • I didn’t consider regulatory risk increasing pressure on margin.
  • I made what I felt were reasonable assumptions about OpEx as a % of revenue as I modeled margin expansion, ridershare recovery, and Revenue per Active Rider.
  • I briefly considered whether LYFT P/S was valued fairly and UBER was overvalued. However, it just doesn’t make sense to me that UBER market cap is ~$100B globally (60% US and 85% Rides/Mobility) and LYFT is ~$14B w/ 30% (and increasing) US market share. So I think LYFT is being underestimated.

Next steps for me: Monitor LYFT earnings on Feb 9th to see how recovery is pacing. My model will 100% be wrong but directionally I want to see whether any trends are accelerating or decelerating, or whether the LYFT leadership team changes priorities or launches new products.

I am super open to feedback or discussion - do you agree or disagree with the thesis? Please DM or comment!
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I love the analytical approach you took and the discussion of the caveats. Very thorough. Thanks for sharing! This is good stuff.
+ 9 comments
Semiconductors ($AMAT, $LRCX)
Looking into well-capitalized companies with positive revenue growth, healthy margins, positive EPS growth, and "buy or better" expectations from the Street and I found $AMAT. Seems like a slam-dunk industry bet, and would love opinions.

Industry quick thoughts:
  1. Consumer demand drove electronics demand (e.g. OLED) for years but digital transformation and commercial investment into IoT edges and AI should spur growth. AMAT Semiconductor Systems segment revenue at all-time high in FY20, +33% y/y.
  2. Samsung, TSMC, Intel, Micron, make up >50% of sales; TSMC recently announced plans to commit half their projected 2021 revenue to capital spending (+40-50% y/y), 80% of which is expected to be used for advanced processor technology.

Company quick thoughts:
  1. AMAT has an excellent financial profile: ~0.5 debt/equity, 12% revenue CAGR L5Y, 28% EPS CAGR L5Y, ~20% profit margin

Given this I would think $AMAT is an excellent candidate for investment. In a similar vein, $LRCX should benefit from industry tailwinds as well, does not directly compete with AMAT in some subsets, and has healthy margins (but slightly worse debt/equity). I plan to read more and buy into a long position over the next few weeks but would love thoughts from others.
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@outlet901/31/2021
This is great! I’ve been looking for a semiconductor play.

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