Jeremy Chia, Author at The Good Investors : Page 9 of 20

Shareholders Lose Out In Unfriendly SPH Restructuring

The restructuring of SPH is unfair to shareholders in my opinion. Here’s why I think shareholders should seek a better deal.

Earlier this week, Singapore Press Holdings Limited (SGX: T39) announced a proposal to spin off its media business. The media business involves the publishing of newspapers, magazines, and books and one of the key newspapers is The Straits Times.

I’m not an SPH shareholder. But if I was, I’d be infuriated with SPH’s plan.

Unlike normal spin-offs or sales, SPH shareholders will not get a stake in the media business that is spun off, nor will SPH get cash from the deal. Even worse, SPH is proposing to “donate” cash and shares to the new entity. That’s adding insult to injury for SPH shareholders.

While true that SPH’s media business has been on the decline, its media arm was still profitable up to FY2020 (financial year ended 31 August 2020) and recorded only its first full-year loss that year. More importantly, the media business holds valuable assets that could be sold off instead of “given away” for free.

In its investor presentation on its proposal, SPH said that its net asset value will drop to S$3.36 billion from S$3.60 billion after the restructuring.

Source: SPH presentation on restructuring

Effectively, SPH will be “giving away” S$238 million for free to this spun-off entity and shareholders will get nothing in return. This includes S$80 million in cash, S$20 million in SPH REIT units (23.4 million units), and S$10 million in SPH shares (6.9 million shares) that SPH is proposing to “donate” to the new spin-off.

In fact, of the S$238 million that SPH will lose in net asset value, S$237 million are in the form of tangible assets recorded on the books. Some of the assets that the company wants to “give away” include the SPH Print Center and SPH News Center that still have 13 years and 10 years remaining on their leases, respectively. These are valuable tangible assets that could be sold.

Let’s not forget that The Straits Times and all its other media brands hold intangible brand value that is not reflected on SPH’s balance sheet too. I would assume that a strategic buyer would have to pay a premium over tangible assets to acquire SPH’s media business.

And although the media business made losses in FY2020 and the first half of FY2021, proper management and the right strategies could potentially salvage the business by enhancing its digital revenue streams further. This is best showcased by other major foreign news outlets such as The Washington Post which Jeff Bezos turned around with a digital strategy after acquiring it in 2013.

Yes, I understand that The Straits Times is an important national newspaper that needs to be tightly regulated. But this restructuring deal is completely unfair to SPH shareholders.

Even though SPH is marketing the restructuring as a good thing as it is removing “dead weight” from the business, I’m not sold. And judging by the sell-off after the announcement – a 15% decline in SPH’s share price on the day after the proposal was released – it seems market participants aren’t either. The reality is that SPH’s media business can be sold, instead of given away.

Giving away money and shares for free is just rubbing salt in the wound for SPH shareholders, some of whom are retail investors who have stuck by the company for years.

If I was a shareholder of SPH, I’d definitely be voting against the restructuring deal.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I currently have no vested interest in any companies mentioned. Holdings are subject to change at any time.

FAAMG Earnings Takeaways

The five FAAMG big tech companies released results this week. All five saw tremendous growth from a year ago. Here are the highlights.

It was a busy week of earnings. All members of FAAMG (Facebook, Alphabet/Google, Amazon, Microsoft, and Apple) released their results for the first quarter of 2021 within a few days of each other. I rounded up some of the key figures and management quotes.

For those who want the short version, all five companies reported stellar growth – despite coming off massive revenue bases – and seem well-positioned for growth. And here’s the long version.

Alphabet Inc (NASDAQ: GOOG)

The parent company of search giant, Google kicked things off with another impressive set of results. Revenue jumped 34% to US$41.2 billion, driven by broad-based growth from its advertising businesses, other services, and Google Cloud.

Google Advertising was up 32% from a year ago to US$44.7 billion, as Youtube ad revenue grew by around 50% to US$6.0 billion.

Google Cloud revenue grew 46% to US$4.0 billion and operating losses in the segment narrowed to just US$974 million from US$1.7 billion, demonstrating improving operating leverage.

The tech behemoth is now sitting on US$135 billion in cash and marketable securities. It announced that it would be using US$50 billion to buy back shares in the future. At its current market cap, that would reduce the share count by around 3%.

Sundar Pichai, CEO of Alphabet and Google, said that with the economy rebounding, the company’s product releases are returning to a regular cadence.

For example, Google Maps will be releasing Indoor Live View, which helps users navigate airports, transit stations, and malls using augmented reality. Google News Showcase, which Google is investing US$1 billion in, is also showing some momentum as it added more than 170 publications across 12 countries during the first quarter of 2021.

Management also believes that Google Cloud will eventually become profitable with increasing scale. Ruth Porat, CFO of Alphabet and Google, shared the following during Alphabet’s latest earnings call:

“As for Google Cloud, our approach to building the business has not changed. We remain focused on revenue growth, and we will continue to invest aggressively in products and our go-to-market organization given the opportunity we see. The operating results in Q1 in part reflect some notable items in the quarter, first, the lapping of the unusually high allowances for credit losses recorded in the first quarter of 2020 as I already mentioned; and second, lower depreciation expense due to the change in estimated useful lives, although the dollar benefit will diminish throughout the course of the year across segments. As we have noted previously, operating results should benefit from increased scale over time; however, at this point, we do remain focused on continuing to invest to build the Cloud organization for long-term performance.”

Apple Inc (NASDAQ: AAPL)

The most valuable company in the world reported a whopping 54% increase in revenue to US$89.6 billion compared to a year ago.

There was broad-based growth across Apple’s suite of hardware products of the iPhone, Mac, iPad, and other devices. iPhone sales grew 66% to US$47.9 billion, driven by the strong popularity of the new iPhone 12 series. iPad and Macs continue to see strength as work and study from home have become commonplace globally. Mac sales were up 70% to US$9.1 billion while iPad sales were up 79% to US$7.8 billion. Services revenue also grew, albeit at a slower pace than hardware sales, at 26% to US$16.9 billion.

Apple is now sitting on US$82.6 billion in net cash (total cash & investments minus total debt) after generating US$56.9 billion in free cash flow in the six months ended 31 March 2021.

Despite the run-up in Apple’s share price over the last 12 months, the company’s CFO, Luca Maestri, still feels that buybacks are a good way to allocate some of the company’s excess capital. He said in the latest earnings conference call:

“We continue to believe there is great value in our stock and maintain our target of reaching a net cash neutral position over time. Given the confidence we have in our business today and into the future, our board has authorized an additional 90 billion for share repurchases. We’re also raising our dividend by 7% to $0.22 per share, and we continue to plan for annual increases in the dividend going forward.”

Microsoft Corporation (NASDAQ: MSFT)

The tech giant reported another outstanding set of results, continuing its strong run from 2020. Revenue was up 19% to US$41.7 billion, operating income surged 31% to US$17.0 billion, and non-GAAP diluted earnings per share spiked 39% to US$1.95.

Microsoft saw broad-based growth across almost all of its products. Its Office Commercial and Office Consumer products, together with their respective cloud services, gew up 14% and 5%, respectively. In terms of revenue growth, Linkedin rose 25%, Windows OEM was up 10%, Xbox content grew 34%, and cloud computing services provider Azure spiked by 50%.

As usual, Microsoft CEO Satya Nadella spent a good chunk of time at the company’s latest earnings conference call discussing Azure. He said:

“As the world’s COGS become more digital, computing will become more ubiquitous and decentralized. We are building Azure to address organizations’ needs in a multi-cloud, multi-edge world.
We have more data centre regions than any other provider, including new regions in China, Indonesia, Malaysia, as well as the United States.
Azure has always been hybrid by design, and we are accelerating our innovation to meet customers where they are. Azure Arc extends the Azure control plane across on-premises, multi-cloud, and the edge, and we’re going further with Arc-enabled machine learning and Arc-enabled Kubernetes.”

He also added that Microsoft is positioned to meet the data analytics demands of its clients. He explained:

“ The next-generation analytics service, Azure Synapse, accelerates time to insight by bringing together data integration, enterprise data warehousing, and big data analytics into one unified service. No other provider offers the limitless scale, price-performance, and deep integrations of Synapse. With Spark integration, for example, organizations can handle large-scale data processing workloads. With Azure Machine Learning, they can build advanced AI models. With Power BI, anyone in the organization can access insights.
We are seeing adoption from thousands of customers, including AB InBev, Dentsu, and Swiss Re. Queries performed using Synapse have increased 105 per cent over the last quarter alone.
We are leading in hyper scale SQL and non-SQL databases to support the increasing volume, variety, and velocity of data. Customers continue to choose Azure for their relational database workloads, with SQL Server on Azure VMs uses up 129 per cent year over year. And Cosmos DB is the database of choice for cloud-native app development – at any scale. Transaction volume increased 170 percent year over year.”

Facebook Inc (NASDAQ: FB)

It was nothing short of an amazing quarter for Facebook. Revenue was up 48% to US$26.2 billio, with advertising revenue jumping 46% to US$25.4 billion. Facebook enjoyed a 30% increase in the average price per ad, and a 12% hike in the number of ads shown.

With monthly active users growing more slowly and ad load reaching optimum levels, Facebook said that ad prices will be its primary driver of growth for the rest of 2021.

The company also lowered its 2021 capital expense outlook from US$21-23 billion to US$19-21 billion.

COO Sheryl Sandberg spent some time in the latest earnings conference call addressing the impact to Facebook’s business stemming from changes to Apple’s privacy policy which lets users opt out of tracking. She said:

“Yes, there are challenges coming to personalized advertising and we’ve been pretty open about that. We’re doing a huge amount of work to prepare. We’re working with our customers to implement Apple’s API and our own Aggregated Events Measurement API to mitigate the impact of the iOS14 changes. We’re rebuilding meaningful elements of our ad tech so that our system continues to perform when we have access to less data in the future. And we’re part of long-term collaborations with industry bodies like the W3C on initiatives like privacy enhancing technologies that provide personalized experiences while limiting access to people’s information.
It’s also on us to keep making the case that personalized advertising is good for people and businesses, and to better explain how it works so that people realize that personalized ads are privacy-protective.
Small businesses don’t have to understand the alphabet soup of acronyms they’ll need to comply with, but they do need to have confidence that they can still use our tools to reach the people who want to buy what they’re selling in a privacy-safe way. We’re confident they can, and that they can continue to get great results as digital advertising evolves.”

The other thing that caught my attention is Facebook’s recent success with Oculus (the company’s AR/VR platform) and the company’s focus on doubling down on AR/VR technology. Facebook CEO Mark Zuckerberg said,

“I believe that augmented and virtual reality are going to enable a deeper sense of presence and social connection than any existing platform, and they’re going to be an important part of how we’ll interact with computers in the future. So we’re going to keep investing heavily in building out the best experiences here, and this accounts for a major part of our overall R&D budget growth.”

He added,

“One interesting trend is that we’re seeing the app ecosystem broaden out beyond games into other categories as well. The most used apps are social, which fits our original theory for why we wanted to build this platform in the first place. We’re also seeing productivity and even fitness apps. For example, we launched a tool so people can subscribe to services like FitXR to do boxing and dancing in VR just like they would for biking on Peloton.
We introduced App Lab so developers can ship early versions of their apps directly to consumers without having to go through the Oculus Store. Between App Lab and streaming from PCs, we’re pioneering a much more open model of app store than what’s currently available on phones today.
Over time, I expect augmented and virtual reality to unlock a massive amount of value both in people’s lives and the economy overall. There’s still a long way to go here, and most of our investments to make this work are ahead of us. But I think the feedback we’re getting from our products is giving us more confidence that our prediction for the future here will happen and that we’re focusing on the right areas.”

Amazon.com Inc (NASDAQ: AMZN)

The e-commerce and cloud computing juggernaut rounded things off on Friday morning (Singapore time) by announcing a spectacular set of results.

Net sales was up 44% to US$108.5 billion. As a result, operating income was up by 122% to US$8.9 billion, and diluted earning per share up 213% to US$15.79. Revenue from AWS – the company’s cloud computing services provider -grew 32% to US$13.5 billion and us now a US$54 billion sales run rate business. Amazon has also breached the 200 million paid Prime members mark worldwide. The company’s business outside of North America reported its 4th consecutive quarter of profitability and generated more than a billion dollars in profit for the first time.

Amazon’s high margin third-party seller services and subscription services businesses increased revenue by 60% and 34% respectively. Brian Olsavsky, CFO of Amazon, sees more growth for AWS even in a post-pandemic world. He shared the following in Amazon’s latest earnings conference call:

“During COVID, we’ve seen many enterprises decide that they no longer want to manage their own technology infrastructure. They see that partnering with AWS and moving to the cloud gives them better cost, better capability and better speed of innovation. We expect this trend to continue as we move into the post pandemic recovery. There’s significant momentum around the world, including broad and deep engagement across major industries.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I currently have a vested interest in the shares of Facebook, Amazon, Alphabet, Microsoft and Apple. Holdings are subject to change at any time.

Highlights, Insights and Trends From The Week’s Earnings Results

Here’s what I learnt from the earnings reports and management insights from some of the companies in the portfolio of the investment fund I co-founded.

Last week, many US-listed companies started reported results for the first quarter of 2021. Here are highlights from some of the companies I have a vested interest in, through the investment fund I co-founded, that reported this week.

Tractor Supply Company (NASDAQ: TSCO)

The US retail chain focusing on the “out here” lifestyle started the year on a strong footing. Comparable sales increased by a staggering 38.6%, the result of traffic growth of 21% and average ticket size growth of 17.6%. The latter was driven by sales of big-ticket items such as safes, fencing, and utility vehicles. Diluted earnings per share (EPS) was up by 118% to US$1.55. And the company is now projecting full-year diluted EPS for 2021 of between US$7.05 and US$7.40, a step up from previous guidance of US$6.5o-US$6.90, and from US$6.38 in 2020.

During Tractor Supply’s earnings call for the latest results, CEO Hal Lawton highlighted increasing millennial home-ownership, migration to urban areas, and greater pet adoption as long-term trends that will benefit Tractor Supply. He said:

“Over the last 12 months, we’ve seen a 400 basis point shift in the customer age cohorts of 18 to 45 years old. This demographic has long resisted many of the traditional generational norms, things like household formation and homeownership. But the pandemic has shocked this generation and accelerated their embracement of these types of activities. There continues to be a net migration out of urban areas largely driven by the millennial segment.
The most robust homeownership growth is in the millennial cohort, with the growth coming in suburban and rural areas. We believe growth in this customer segment has staying power and could be a structural game changer for us.
Another structural customer trend that is working to our advantage is the significant increase in pet-owning households and number of pets adopted. Compared to the overall U.S. household pet ownership of approximately 2/3, our customers over-index in pet ownership by about 10 points. And our current survey work with our customers indicate 25% have recently acquired and adopted a new pet. New companion animal ownership acts as an annuity for our business as these puppies and kittens grow up and have growing life cycle needs. We’re also uniquely positioned to offer a growing menu of services such as pet wash, vet clinics, prescriptions and tele-vet services.
Whether it’s more food, treats, toys, containment and more, the humanization of pet provides us with future opportunities for growth. These customer trends are an indication that we continue to benefit from the numerous tailwinds such as pet ownership, the millennial urban exodus, backyard poultry, homesteading and home as an oasis. We believe many of these consumer trends will be enduring shifts well into the future. Our brand momentum is stronger than ever, and we’re investing to ensure we continue to play offence in the context of these trends. We are making excellent progress on our Life Out Here strategy and initiatives.”

Intuitive Surgical Inc (NASDAQ: ISRG)

The robotic surgery company which manufactures and sells the da Vinci brand of robotic surgical systems also had a strong start to 2021.

New system placements increased by 26% year on year from 237 to 298 and the installed base of da Vinci systems grew by 8% from the first quarter of 2020 to 6,142. Worldwide da Vinci procedures grew by 16%. Revenue was up 18% to US$1.29 billion and net income surged 36% to US$426 million, with diluted EPS up 34% to US$3.51. With 2020 procedure growth coming in at just 1% due to the COVID-19 pandemic, the company anticipates a swift rebound in 2021 with full-year procedure growth of between 22 and 26%.

As COVID-19 infections begin to subside in parts of the world, more non-emergency surgeries which were postponed due to the pandemic will eventually have to be performed.

Gary Guthart, Intuitive Surgical’s CEO, is bullish on the impact of the company’s two new platforms (Da Vinci SP and Ion), and the rebound in business as COVID numbers decline. He said the following in Intuitive Surgical’s 2021 first-quarter earnings call:

“We’re in the early innings of commercialization of two new platforms for Intuitive while advancing digital enablement of our ecosystem. Our teams are making good progress in all three areas. Overall, we’re seeing some pandemic recovery, but improvement has been uneven with significant regional variation. Our experience shows that our business rebounds as COVID drops…
…Overall, capital strength indicates anticipation of future procedure opportunity by our customers. A significant number of systems were part of multisystem deals by hospitals and integrated delivery networks, supporting a theme in which customers who know robotic-assisted surgery well continue to invest with us.”

Chipotle Mexican Grill, Inc (NYSE: CMG)

The Mexican fast-casual food chain was off to a promising start in 2021. Revenue was up 23.4% to US$1.7 billion, driven by staggering comparable restaurants sales growth of 17.2%. The company’s restaurant-level operating margins improved by 4.7 percentage points from a year ago to 22.3%. Digital sales were up 133.9% and the company opened 40 new restaurants during the quarter, bringing its total to 2,764. All these helped bring adjusted diluted EPS to US$5.36, up 74% from a year ago.

As Chipotle laps pandemic-induced closures last year in the second quarter of 2021, it expects comparable restaurant sales to be high in the range of high-20s to 30%.

The long-term outlook for Chipotle looks promising too. During Chipotle’s 2021 first-quarter earnings call, Brian Niccol, who became the company’s CEO in 2018, described some of the company’s strategies to achieve its long-term goals of having more than 6,000 restaurants, average unit volume (revenue per restaurant) of more than US$2.5 million, and a restaurant-level operating margin of more than 25%. He commented:

“These are one, making the brand visible, relevant and loved. Two, utilizing a disciplined approach to creativity and innovation. Three, leveraging digital capabilities to drive productivity and expand access, convenience and engagement. Four, engaging with customers through our loyalty program. And five, running successful restaurants with a strong culture that provides delicious food with integrity while delivering exceptional in-restaurant and digital experiences.”

Netflix Inc (NASDAQ: NFLX)

It was a mixed bag of results in the first quarter of 2021 for global streaming giant Netflix. Although revenue was up 24% from a year ago to US$7.16 billion, the company only added 4 million global net new subscribers during the quarter – 2 million below analyst expectations – bringing the total to 208 million. The company also forecasts just 1 million net new subscribers in the second quarter. According to Netflix’s management, there were two reasons for this. First, there was pull-forward of new subscribers in 2020 due to COVID-induced shelter-in-place measures, and second, there was the delays in the release of hit programs due to production pauses (again because of COVID-19). Nevertheless, I think the long-term growth story remains intact.

And on a bright note, the company was free cash flow positive in the quarter, producing US$692 million, up significantly from US$162 million a year ago. Netflix also announced that it will be buying back shares and said it is on track to be free-cash-flow neutral this year and positive in the years ahead.

Ted Sarandos, Netflix’s co-CEO and chief content officer, explained in the latest earnings call why he thinks subscriber growth should return in the latter half of the year. He said:

“And we think we’ll get back to a much steadier state in the back half of the year and certainly in Q4 where we’ve got the returning seasons of some of our most popular shows like The Witcher, You, and Cobra Kai as well as a big temple movie that came to market a little slower than we’d hope like Red Notice with The Rock and Ryan Reynolds and Gal Gadot and Escape from Spiderhead with Chris Hemsworth, a big event content. Now, all that being said, in every quarter of the year, we release more content than we did in the previous quarter and in the previous year quarter by quarter and every — in every region. It’s just that I think the shape of the mix of the content is, you know, become a little more uncertain, and then the long-term impacts of the corporate shutdown are also becoming a little more uncertain in that — in that timeframe in the first half of this year.”

Reed Hastings, co-CEO and co-founder, added that despite the slowing net adds, Netflix still has a long runway to grow into. He mentioned:

“So outside of China, I think, pay television peaked about 800 million households. So you know, lots of room, and that was several years ago that at peak, lots of room to grow.”

ASML Holding NV (NASDAQ: ASML)

The supplier of lithography machines to semiconductor manufacturers extended its recent run of fine results.

During the first quarter of 2021, revenue was up 78% to €4.4 billion. Net income growth was even more impressive at 240% to €1.1 billion. In the quarter, ASML also repurchased 3.5 million shares. The undisputed leader in lithography expects overall revenue in 2021 to be 30% higher compared to 2020, when there was already healthy growth of 18%.

ASML CEO Peter Wennink believes that the company is benefiting from cyclical semiconductor demand in 2021 due to COVID-disruptions in 2020. At the same time, there is a long-term secular trend that should benefit ASML too. He shared the following in a video interview on the company’s 2021 first-quarter results:

“I would like to separate the growth profile into three trends. One trend is more a cyclical trend. 2020 – the COVID year- was really a year where also customers were cautious. Looking back, too cautious. So that underspend you could call is now translating into demand for 2021. Of course, that will take some time before we have our output done. So second half will be indeed higher and that trend you could argue should go away or should taper off in 2022.
There is a second trend. That’s a secular trend, the underlying trend. I think it is the continuous innovation and the drive for innovation driven by the rollout of 5G, its artificial intelligence, its High-Performance Computing. That underlying trend is the digital transformation. We see it everywhere. Leading to distributed computing. That will be there for years to come. That trend will also lead to higher demand for semiconductors and for our equipment. Which is one of the reasons why we’re stepping up our capacity.

He also mentioned a third long-term driver which is governments wanting their own countries to be able to produce semiconductors independently. This could be a blow to major foundries such as Taiwan Semiconductor Manufacturing Company, but will open the door for other companies to manufacture for their country’s needs. Wennink explained:

“The third trend is driven by the geopolitical situation which actually leads to major regions looking for technological sovereignty. Basically being able to be self-sufficient when it comes to electronics and semiconductors. We’ve seen announcements, governments, but also companies, focusing on expanding capacity. In the US, there are significant talks in Europe, in Asia. Well, that will lead to higher capital intensity because it’s decoupling as a worldwide eco-system. But it also leads to some capital inefficiency. Well there is a beneficiary of that capital inefficiency and that’s us.“

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I currently have a vested interest in the shares of ASML, Chipotle Mexican Grill, Intuitive Surgical, Netflix, and Tractor Supply. Holdings are subject to change at any time.

Quick Thoughts on Coinbase

Coinbase is set to begin trading on the 14th of April. Here are my list of reasons for and against investing in the crypto exchange.

Coinbase is the talk of Wallstreet. It will begin trading on the NASDAQ through a direct listing tonight. Coinbase allows users to buy and sell crypto assets such as Bitcoin and Ethereum and its business has been on a tear of late. Revenue doubled in 2020 and then surged over 900% in the first quarter of 2021.

Its shares have recently traded privately at a company-valuation of close to US$100 billion, making it even more valuable than traditional stock exchanges like NASDAQ Inc (NASDAQ: NDAQ) and Intercontinental Exchange Inc (NYSE: ICE), which is the parent company of the New York Stock Exchange.

Coinbase’s high valuation and strong business performance come as interest in cryptocurrencies spiked in 2020 and early 2021.

With the hype around Coinbase, I decided to take a quick look at its prospectus and note down some reasons for and against investing in it. Here’s my list.

Reasons to invest

Rocketing recent growth: Coinbase’s business has catapulted recently with the surge in demand and interest in crypto assets. Investors use recent growth as a proxy for what is to come in the future.

Profitable business: Unlike most tech companies seeking to go public, Coinbase is already a profitable business. In fact, it is very profitable. In 2020, Coinbase generated US$322.3 million in net income from US$1.3 billion in revenue, giving it an impressive net income margin of 24.8%. In the first quarter of 2021, Coinbase announced that it made between US$730 million to US$800 million in net income from US$1.8 billion in revenue.

Operating leverage: Coinbase can improve its margins further with operating leverage. As demonstrated in the first quarter of 2021 , its net income margin improved to around 41%, compared to 24.8% for the whole of 2020. If Coinbase’s take rates remain steady, its margin can improve due to the low marginal cost for servicing each additional transaction.

Big addressable market(?): Crypto bulls will argue that Bitcoin and other crypto-assets will become must-own financial instruments. Coinbase has gone as far as to say: “Our objective is to bring crypto-based financial services to anyone with a smartphone, a population of approximately 3.5 billion people today.” For perspective, Coinbase had 56 million users at the end of March 2021.

Secure platform and trusted brand: With a crypto-exchange playing the role of custodian of crypto-assets, users need to trust that the platform is secure and reliable. Coinbase CEO, Brian Armstrong explained in his Founder letter: “Trust is critical when it comes to storing money. From the early days, we decided to focus on compliance, reaching out to regulators proactively to be an educational resource, and pursuing licenses even before they were needed. We invested heavily in cybersecurity, built novel key storage mechanisms, and obtained a cybercrime insurance policy. We even developed ways for customers to custody their own cryptocurrency safely, so they didn’t need to trust us at all. Most importantly, we built a culture that doesn’t take shortcuts or try to make a quick buck.” While building security is expensive and a gruelling task, it should put Coinbase in a good position to win costumers looking to start their crypto journey.

Network effect and scale provide liquidity: As one of the biggest crypto exchanges in the world, Coinbase boasts scale and can hence provide better liquidity which gives users better prices on their trades.

Reasons not to invest

Revenue impacted by prices of crypto assets: Coinbase acknowledges on its prospectus that the prices of crypto assets can impact demand for buying, selling, and trading them. There was a steep decline in crypto asset prices in 2018 which Coinbase said adversely affected its net revenue and operating results. Should similar price declines in crypto assets occur in the future, Coinbase’s revenue may again fall sharply.

Highly dependent on Bitcoin and Ethereum: Although Coinbase supports the exchange of other cryptoassets, the bulk of its transaction volume and revenue comes from Bitcoin and Ethereum. In 2020, these two cryptocurrencies drove over 56% of Coinbase’s total trading volume on its platform. As such, a sudden fall in transaction volume in these two crypto assets can have a big impact on Coinbase’s revenue.

Competition: Unlike stock exchanges, the barriers to entry to become a crypto exchange is much smaller. Although Coinbase has built up a solid reputation, margins can be easily eroded if more aggressive brokers come up with innovative ways to eat market share. In an article for Fortune, Shaun Tully argues that Coinbase’s high transaction fees will not last. At the moment, Coinbase charges an average fee of around 0.46%. In comparison, stock exchanges such as ICE and NASDAQ each make 0.01% on each dollar of securities traded. Tully writes:

“It can’t last, says Trainer. He predicts that fees for trading cryptocurrencies will follow a similar downward trajectory as those in stocks, possibly all the way to zero. Coinbase’s slice of each transaction is so big, and its profits so gigantic, that rivals can slash what they’re charging and still mint huge profits. “Competitors such as Gemini, Bitstamp, Kraken, Binance, and others will likely lower or zero trading fees to take market share,” he says. “If margins are that good, you invite competition.” That will start a “race to the bottom” similar to the contest for market share that triggered the collapse, then virtual elimination, of stock commissions in 2019. Trainer also expects traditional brokerages to soon offer trading in cryptocurrencies, further pressuring Coinbase’s rich fees.”

High valuation: As mentioned earlier, Coinbase could start trading at a valuation of around US$100 billion. This translates to around 14 and 32 times its annualised first-quarter revenue and net profit, respectively. Although those numbers may not seem that high (compared to other tech firms) at first glance, the possibly volatile nature of Coinbase’s business, and possible impending margin compression, might suggest otherwise.

Final words

If Coinbase’s US$100 billion valuation comes to fruition, it can begin life as a public company as one of the 100 biggest companies in the world, even ahead of established names such as Postal Savings Bank of China (SHA: 601658), Softbank Group Corp (TYO :9984), and Starbucks (NASDAQ: SBUX).

This is a staggering achievement for a company that was founded only around 10 years ago. This does not mean Coinbase is a good investment going forward though. Investors need to consider the host of factors that could impact its eventual return for shareholders. Hopefully, this list provides a good starting point for investors who are thinking of investing in Coinbase.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I currently have a vested interest in the shares of Starbucks are subject to change at any time.

Singapore Stock Market: Fertile Hunting Ground For Privatisations?

With Singapore stocks generally trading at low valuations, we could see more privatisation deals being offered. Here are some things to consider.

Recently, there has been a flurry of activity in the Singapore stock market.

In early March, Jardine Matheson Holdings Ltd (SGX: J36) announced that it would acquire the remaining 15% of Jardine Strategic Holdings Ltd (SGX: J37) it did not already own at a proposed acquisition value of US$5.5 billion.

And just a few weeks later, local property giant CapitaLand Limited (SGX: C31) announced that it was proposing to restructure itself by privatising its development arm while keeping its investment management arm public.

Although both deals were offered at a premium to their respective “last trading prices”, shareholders of the acquired companies will still receive less than the net asset value of their respective companies.

Jardine Strategic is being acquired at a 19% discount to the value of its listed assets while shareholders of CapitaLand are receiving 0.08 units of CapitaLand Integrated Commercial Trust (SGX: C38U) and S$0.951 in cash for the development arm of CapitaLand, which translates to a 5% discount to its actual net asset value.

Fertile hunting ground?

These bring us to the question- is there likely going to be more privatisation offers in Singapore?

The two companies being acquired/restructured are just two of numerous companies in Singapore that are trading at discounts to their book value.

With Singapore stocks trading at depressed valuations, even if acquirers offer a premium to a stock’s last trading prices, they may still be able to obtain their target assets at a hefty discount to book value.

This could make the Singapore stock market the perfect hunting ground for acquirers who are looking to buy companies at a cheap price.

This is exacerbated by the Singapore stock market’s failure to recover to pre-COVID levels. The Business Times reported that there was a 70% increase in deal value in 2020 compared to 2019.

With no catalyst in sight to lead Singapore stocks to more reasonable valuations, it is very likely that these low valuations will persist, leaving room for acquirers to swoop in.

Taking advantage?

This could open the door to a potential strategy for investors who want to take advantage of the flurry of privatisation deals. Companies that are most likely to be privatised usually trade at a relatively cheap valuation to earnings or assets and have a large shareholder who can easily consolidate their position.

But that does not mean that investing in potential privatisation targets is a fool-proof strategy.

Predicting which companies could be acquired is a shot in the dark. What may seem like a potential privatisation deal may never materialise, leaving investors holding on to a chronically undervalued stock with no catalyst for rerating the stock.

Although holding on to dividend-paying stocks will provide income while you wait, the limited capital gain could end up hindering investment returns- an expensive price to pay when stock markets in other parts of the world are rising considerably.

Final thoughts

Many investors may consider Singapore a boring stock market with few companies offering attractive business growth, but the low valuations of some companies may throw up unique opportunities for acquirers and investors alike.

Nevertheless, investors who are looking to speculate on privatisation targets should proceed with caution. If a deal does not materialise as you had hoped for, the stock may trade sideways for years, becoming an expensive opportunity cost in a rising market.

Cheap SaaS Stocks and Other Factors to Consider

Valuations of SaaS stocks have fallen to more palatable levels in the past few weeks.Here are the cheapest SaaS stocks and other factors to consider.

Software-as-a-service (SaaS) companies are one of the more exciting groups of growth companies in the market today. Many SaaS companies are growing their businesses at lightning speed, boast giant addressable markets, fat gross margins, and have sticky user bases.

With the recent drop in SaaS valuations, it may be a good time now to take a look at which SaaS companies are offering the best valuations and growth.

Scatterplot of SAAS companies

In his recent weekly update on SaaS stocks, venture capitalist Jamin Ball provided a scatterplot of US-listed SaaS companies based on their growth and enterprise-value-to-next-12-months (EV-NTM) revenue multiple.

Source: Clouded Judgement Substack by Jamin Ball

The horizontal axis shows the companies’ NTM consensus growth rate, while the vertical axis shows their EV-NTM revenue multiples.

Companies that are further right on the scatterplot are growing the fastest and the companies that are higher up have the highest valuation multiples.

The companies that are expected to grow the fastest in the next 12 months tend to also sport the highest valuation multiples. This is why we see that companies that are further right on the scatter plot tend to be higher up too.

For example, at the most top right of the chart, we see Snowflake Inc (NYSE: SNOW) which is, by some distance, the company that is expected to grow the fastest among US public-listed SaaS companies. It also has the highest EV-NTM revenue multiple at more than 50.

The cheapest SaaS companies today

As investors, the companies that may be the most attractive are those that are further to the right and to the bottom.

The blue line running across the scatterplot is what is statistically called the fitted regression line. This line shows where the companies tend to place in the scatterplot. Anything under the line can, therefore, be considered cheaper than average and vice versa.

From the chart, there are a few notable companies that are trading below the fitted regression line.

These include companies such as Zoom Video Communications Inc (NASDAQ: ZM), Crowdstrike Holdings Inc (NASDAQ: CRWD), Twilio Inc (NYSE: TWLO) and even Snowflake inc.

Notable companies that are above the line are Bill.com Holdings Inc (NYSE: Bill), Cloudfare Inc (NYSE: NET) and Shopify Inc (NYSE: SHOP).

Other things to consider?

While the scatterplot does give us a good comparison of the growth and valuation of SaaS companies, investors have to consider other factors too.

Some important things to consider include:

Sustainability of growth: The chart only shows the consensus growth estimate for the next 12 months. Companies that can sustain growth at a high rate for a long time, or accelerate their growth beyond the 12 months consensus, should warrant a higher multiple. Factors that can affect sustainability are balance sheet strength, management capability, size of the addressable market etc.
Margins: Investors tend to use revenue multiples to value non-profitable SaaS companies. This makes sense due to the absence of profit but as revenue is a high-level metric, it tells us little about the company’s eventual profitability which is what counts in the end. As such, companies that boast higher gross margins and the ability to increase operating leverage warrant being priced at a higher multiple
Organic vs inorganic growth: Related to the sustainability of growth, the type of revenue growth is also important. If the growth is coming from the consolidation of revenue due to an acquisition, then this revenue growth will be a one-off.

An exciting place to invest…

Thanks to the ease and affordability of SaaS products, they have increasingly become part and parcel of not just everyday business dealings, but everyday life. From customer relations management to human capital resource management to video communication, SaaS has become something we can’t live without.

With the scalability of the cloud and the relatively tiny incremental cost of deploying the product to each new customer, SaaS companies enjoy operating leverage and immense growth potential. Gartner predicts that SaaS revenue will grow from US$104 billion in 2020 to US$140 billion in 2022.

Investors who are keen to invest in the space should consider valuations, growth, sustainability of the growth, and profit margins.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I currently have a vested interest in the shares of Shopify, Twilio, and Zoom. Holdings are subject to change at any time.

Are SaaS Companies Cheap Now?

Even after the recent sell-off, SaaS companies still trade at higher valuations than they did in the past. Does that mean they are expensive?

The share prices of SaaS (software-as-a-service) companies have risen massively over the past year. Even after the sharp pullback many of them experienced in late-February and March this year, the share prices of SaaS companies still trade at relatively higher multiples than they did in the recent past.

The chart below by venture capitalist Jamin Ball shows current SaaS company valuations:

Source: Jamin Ball’s newsletter, Clouded Judgement

The blue line on the chart shows that the median EV-to-NTM revenue (median enterprise value to next twelve months revenue) multiple for SaaS companies has risen sharply in the last two years. And despite the sell-off over the last couple of weeks, SaaS companies still trade at a higher multiple than they did at any other time before mid-2020.

This has led to some investors assuming that SaaS company valuations are still too high.

On the surface, that may seem the case but it could also be that valuations for SaaS companies were simply way too low in the past.

Justified?

Venture capital firm Bessemer Venture Partners (BVP) has an index of emerging cloud-computing companies – many of which are SaaS companies – that are listed in the US stock market. The chart below shows the performance of the BVP cloud index (EM Cloud) relative to other major US stock market indexes.

The blue line shows the BVP cloud index. Since tracking began, the BVP cloud index has significantly outperformed the rest of the market. It has even outperformed the tech-heavy NASDAQ by 3.6 times.

Part of the cloud index’s growth was undoubtedly fueled by an expansion in the aforementioned EV-to-NTM revenue multiples that SaaS companies have experienced. But a big part of the growth is also due to the relatively faster revenue growth in SaaS companies.

Doing some quick math and assuming that revenue multiples contract from 14 to 5 times (what they were in 2015), the BVP cloud index would still be outperforming the NASDAQ – the BVP cloud index outperformed the NASDAQ by 3.6 times while the multiple expansion in SaaS companies included in Jamin Ball’s graph was just 2.8 times*.

Given all of this, rather than assuming that current valuations of SaaS are too high, it could be that historical valuations were actually too low.

Market participants in the past may have underestimated SaaS companies’ growth potential and the sustainability of that growth.

Today, the market may have wisened up to the immense addressable market opportunity of cloud companies and are beginning to better price in their immense potential.

Conclusion

SaaS companies are currently still trading at higher EV-NTM revenue multiples than they were in the past. Just taking this fact alone, one may assume that valuations are stretched now.

But if we take a step back, we can see that SaaS companies may have been mispriced in the past. The pace and sustainability of revenue growth should have warranted a higher valuation back then.

The market may now be smartening up to the wonderful economics that SaaS companies offer. Not only do best-in-class SaaS companies offer a long growth runway, but they also address a huge and growing market.

If their revenues continue to grow as fast it has in the past, SaaS stocks will likely keep going higher.

*Jamin Ball’s universe of SAAS companies and those in the BVP cloud index may not be exactly the same but there is a significant overlap

What Should Big Tech Do With All Their Cash?

Tencent reportedly made US$120 billion from gains from investments in publicly-listed entities in 2020. Can other tech giants follow in Tencents footprints?

This week, The Information reported that Chinese tech conglomerate, Tencent Holdings Ltd (HKG: 0700), has made a killing from its investment portfolio.

In 2020 alone, the tech giant made US$120 billion in unrealised gains from its minority stakes in about 100 publicly listed companies. That’s around six times as much as Tencent’s own projected operating profit for the whole of 2020.

Tencent, which began life as a messaging company, has grown to become a diversified tech behemoth, with operations spanning cloud computing, social networks, enterprise software, mobile payments, and much more.

But outside of its operational businesses is where all the fun truly begins. China’s largest tech company has minority stakes in companies ranging from electric vehicle manufacturers to e-commerce, music streaming to ride-hailing and payments and much more.

Without exaggeration, Tencent’s investments in publicly-listed companies look like a who’s who of tech companies. Tencent owns stakes in Meituan (HKG: 3690), Sea Ltd (NYSE: SE), JD.com Inc (HKG: 9618), Pinduoduo Inc (NASDAQ: PDD), Tesla Inc (NASDAQ: TSLA), Spotify (NYSE: SPOT), Nio Inc (NYSE: NIO), Afterpay Ltd (ASX: APT), Snapchat (NYSE: SNAP), and many more.

But that’s just the tip of the iceberg.

Tencent also owns significant stakes in up and coming privately-held companies such as Gojek, Ola, Reddit, Epic Games, Webank ,and many others.

Should other tech giants follow in Tencent’s footsteps?

The apparent success of Tencent’s investment arm has led to the question: Should other big tech companies follow in Tencent’s footsteps?

US-based tech giants such as Alphabet Inc (NASDAQ: GOOGL), Facebook Inc (NASDAQ: FB), Apple Inc (NASDAQ: AAPL), and Microsoft Corporation (NASDAQ: MSFT) boast tens – sometimes hundreds – of billions of dollars on their balance sheets and generate billions more in cash each year.

With so much cash lying around, their shareholders may be asking if these tech giants are doing enough with their heaps of cash.

Tencent’s strategy to put its excess cash to use through investments in public equities and young startups are starting to pay off and seems to be the perfect blueprint for other cash-rich companies to follow.

Why minority investments may make sense

Tech giants are usually not known to make minority investments in companies but rather prefer buying up whole companies to reap the benefits of synergies.

But, arguably, minority investments may actually be an even more cost-efficient way to put their capital to use. Acquiring whole companies is a more tedious process, which regulators scrutinise. In addition, the acquirer tends to have to pay a big premium to purchase a company outright.

On the other hand, minority investments can be made much less publicly and usually at relatively better valuations.

Taking minority stakes also offers the US tech giants the ability to dip their toes in a range of different companies that would not be possible if they wanted to make whole acquisitions. Moreover, the US tech giants also have a significant advantage as they can provide portfolio companies with expertise, networks, and partnerships.

It therefore would not be surprising to find that young companies may want to have these tech giants as investors to leverage their technology and expertise. This could open the door for the US tech giants to get in on some of the most sought after companies in the world.

Maybe the US tech giant that is most akin to Tencent is Alphabet. The parent company of Google has two investment arms, one of which is called GV, formerly known as Google Ventures. GV’s current assets under management is only around US$5 billion, less than 5% the size of Tencent’s portfolio but it is a good start. GV has investments in companies such as Medium, Uber, Stripe, Impossible Foods and many more.

Expertise required…

Despite the apparent upside, making minority investments in companies is by no means an easy task.

Investing in early-stage companies, or even publicly-listed entities, requires patience and expertise. Tencent, though, seems to have found a winning formula with many of its investments working out extremely well so far. But other big tech companies, with their access to talent, should be able to replicate Tencent’s success should they choose to follow a similar path.

They will need time and money to bring the best talent to manage their vast amounts of capital but, if successful, the fruits of these investments could be substantial.

The bottom line

Tencent is a great example of how companies that generate billions of dollars in cash every year can put their excess capital to use. Tencent has created a tech behemoth that spans numerous businesses and has diversified its investment portfolio to an extent that is unmatched by any company in the world.

Other tech giants could potentially follow suit.

Rather than letting their cash build up, or simply returning cash to shareholders through buybacks or dividends, investing the capital through minority-stake investments could be an even better use of cash.

While the market’s bull run in tech companies in 2020 may never be replicated, there is still value being created by tech companies around the globe today. With billions of dollars in their banks, the Apples and Facebooks of this world can certainly look to capitalise on that.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I currently have a vested interest in the shares of Afterpay, Alphabet, Apple, Facebook, Meituan, Microsoft, Tencent, and Tesla. Holdings are subject to change at any time.

Management Insights From The Earnings Season So Far

Here are some insights from leaders of tech firms on how technologies and trends are shaping the world for 2021 and beyond.

A company’s earnings conference call can be extremely informative. Not only does it provide information on how a company has done in the last quarter, but management also gives investors a glimpse into the early trends shaping the company’s future.

With many companies having reported their full-year earnings results for 2020, here are some of the key management insights on what to expect in the year ahead.

Video conferencing is here to stay…

Leading video conferencing company, Zoom Video Communications Inc (NASDAQ: ZM) capped off a truly remarkable year as it reported a 369% year-over-year increase in revenue for the fourth quarter of its fiscal year ended 31 January 2021 (FY2021).

On a full-year basis, Zoom saw revenue increase by 326%. More impressively, the company expects to build on that solid performance as management forecasts a further 42% increase in revenue for FY2022.

Zoom’s founder-CEO, Eric Yuan, said:

“As the world emerges from the pandemic, our work has only begun. The future is here with the rise of remote and work-from-anywhere trends.”

With employers getting used to remote working conditions, many are starting to embrace the convenience, efficiencies, and cost-savings associated with it. In addition, employees prefer the flexibility of working remotely.

We have already seen companies such as Shopify (NYSE: SHOP) announcing a permanent shift toward remote working. As forward-looking employers pave the way, the shift towards permanent remote work is only just beginning.

E-commerce growth to normalise but upward trend to persist

There was an interesting chart put up by Shawspring Partners earlier this year showing the e-commerce penetration growth that took place in early 2020 as countries around the world began lockdowns to combat COVID-19.

As the chart shows, e-commerce penetration in the USA grew as much as it did in the eight weeks leading up to April 2020 as it did in the 10 years before then.

Consequently, the leading e-commerce marketplace for entrepreneurs and DIYers, Etsy (NASDAQ: ETSY) saw a 107% increase in annual gross merchandise sold on its platform in 2020. Meanwhile, e-commerce enabler Shopify experienced 96% year-on-year growth in the gross merchandise volume (GMV) facilitated by its platform during the year.

Although e-commerce growth rates are expected to normalise, the overall upward trend should persist.

Shopify CFO, Amy Shapero, said in the company’s 2020 fourth-quarter earnings conference call:

“Our outlook coming into 2021 assumes that as countries roll out vaccines in 2021 and populations are able to move about more freely, the overall economic environment will likely improve, some consumer spending will likely rotate back to offline retail and services and the ongoing shift to e-commerce, which accelerated in 2020, will likely resume a more normalized pace of growth.”

Similar to how remote work is advantageous over traditional office set-ups, e-commerce holds many advantages over traditional retail.

Online purchasing is more convenient, offers shoppers a wider selection of products, and tends to be cheaper. It is inevitable that these advantages will result in an eventual migration of more purchases from offline to online over the longer term.

The rise of BNPL (buy now, pay later)

Consumers are increasingly looking for smarter ways to pay for their purchases.

Enter buy now, pay later services. As the name suggests, buy now, pay later – or BNPL – allows customers to buy a product or service and pay for it in instalments, often interest-free, over a few weeks after the purchase is made.

Millennials increasingly prefer this option as it provides greater cash flow flexibility. And unlike credit cards, BNPL does not result in expensive interest expenses snowballing should they miss any payments.

This year, Shopify teamed up with Affirm (NASDAQ: AFRM) to offer its merchants the ability to accept BNPL functions from customers.

Meanwhile, digital payments giant, Paypal (NASDAQ: PYPL), has also gotten in on the act, as it launched its BNPL service late in 2020. The take up was so good that Paypal CEO Dan Schulman said in the 2020 fourth-quarter earnings conference call:

“I would also highlight the rapid growth of our buy now, pay later functionality. We saw tremendous and growing demand throughout the quarter and witnessed the fastest start to any product we have ever launched.”

Afterpay (ASX: APT), a leading BNPL provider, also reported a staggering 106% increase in underlying sales in the six months ended 31 December 2020.

With the rise of e-commerce and millennials increasingly looking for better ways to manage their cash flow and expenses, it seems that BNPL companies are set for a bright future.

Final thoughts

Covid-19 accelerated the digitalisation of the world.

Although economies will eventually reopen, the way we live, work and play will have changed. As the world adapts, companies that embrace these changes stand to gain the most.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I currently have a vested interest in the shares of Afterpay, PayPal, Shopify, and Zoom. Holdings are subject to change at any time.

Will Bitcoin’s Price Continue To Rise?

Bitcoin’s price has risen by close to 400% in the last 12 months. Here are my thoughts on the crypotocurrency.

We are in the middle of earnings season, yet it seems like the main thing investors are talking about these days is not the stock market, but Bitcoin.

This is understandable, given that Bitcoin’s price has increased by around 400% in the last 12 months.

The cryptocurrency has been gaining steam with companies, with Square and Tesla being two examples of companies that recently announced large purchases of Bitcoin.

Even the popular online investment advisory portal, The Motley Fool, announced last week that it will be buying US$5 million of Bitcoin with its own balance sheet.

But is it really a good investment?

First off, how much is Bitcoin actually worth?

Assets are usually valued based on a discount to the future cash flow it can produce.

For example, a property’s value is based on its future rental income, while stocks are valued on their future free cash flows to shareholders. Although stock and real estate prices may fluctuate (sometimes irrationally), they eventually tend to gravitate towards their intrinsic value that is based on their future cash flows.

Bitcoin, however, does not produce any cash flow. And despite the revolutionary blockchain technology backing Bitcoin, it also offers very little utility to most people (unless you are trying to make illegal purchases or live in a country with an unstable currency). This is unlike actual useful things like real estate or even commodities which can be valued based on their utility. As such, valuing Bitcoin is a lot more tricky.

Unsurprisingly, there are numerous opinions on how much Bitcoin should be worth. Some believe that the total value of Bitcoin should be similar to that of gold, while others argue that Bitcoin should be valued based on the value of transactions made using Bitcoin.

But as we have seen since its founding, Bitcoin’s price has not been based on either of these. Instead, Bitcoin’s price is based solely on speculation and has no anchoring toward any form of valuation method.

Lacking any fundamental way to value Bitcoin, the price of Bitcoin at any point in time will simply be how much the average market buyer is willing to pay for a Bitcoin and how much a seller is willing to sell it at.

All of which is based purely on overall market sentiment at the time.

So.. what is driving the price now?

The influx in demand for Bitcoin, and ultimately the price of Bitcoin has been fueled by more investors believing it will go up in price.

This is possibly in some part due to endorsements from influential people in the business and investing world, such as Cathie Wood from Ark Investments, Elon Musk of Tesla, Jack Dorsey of Square, and The Motley Fool.

These influential figures have put their support behind Bitcoin, leading to other investors scrambling to get in on the act, thinking that it will continue to rise in price.

Can it continue?

The question now is whether Bitcoin’s price will continue to rise or will we see it fall back down to pre-2020 levels. We’ve already seen how a swing in sentiment in 2017 led to a massive decline in Bitcoin’s price.

To answer this, we will need to assess current and possible future investor sentiment.

From what I am reading online, it seems that the positive sentiment toward Bitcoin is still going strong.

The endorsement of Bitcoin by so many respected investors and entrepreneurs have resulted in Bitcoin investors having even greater conviction.

As such, many Bitcoin owners are increasingly willing to see out the innate price volatility associated with the cryptocurrency market and continue to hold on to their stake in Bitcoin (They call it Hodl- hold on for dear life).

In addition, investors who have yet to buy may be increasingly getting FOMO (fear of missing out) and may be willing to pay a higher price simply to get in on the action.

But that’s not to say that Bitcoin is without risk. As Bitcoin’s price seems to be based almost solely on sentiment, its price can fall as quickly as it rose.

One event that can crush sentiment toward Bitcoin is regulation. Regulators were quick to respond when Facebook announced that it planned on launching an asset-back cryptocurrency called Libra in 2019 (the cryptocurrency’s name has since been changed to Diem).

If regulators do come in to control the way Bitcoin is transacted, Bitcoin investors may get cold feet.

Similarly, if a new “shinier” cryptocurrency enters the market that is more energy-efficient or transaction friendly, Bitcoin’s popularity may wane.

We should also not underestimate the influence that respected figures such as Elon Musk has over Bitcoin’s price. Should Musk decide to sell Tesla’s Bitcoins, the feel-good factor towards Bitcoin may fall just as fast as it rose.

Bottom line

The bottom line is that Bitcoin has very limited utility currently, and produces no cash flow to holders. Given the absence of a true intrinsic value anchor, Bitcoin’s price will fluctuate based only on market sentiment.

Investing in Bitcoin can be rewarding if more investors hop onto the bandwagon, driving the price up. But if sentiment wanes, investors left holding the bag may end up with big losses.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I currently have a vested interest in the shares of Square and Tesla. Holdings are subject to change at any time.