99 Problems but a Profit Ain’t One | The Daily Peel | 1/19/22

 Market Snapshot

Blood in the streets. Okay, maybe that's a bit dramatic, but still, markets got rocked yesterday. Traders woke up on the wrong side of the bed Tuesday morning and sent U.S. indexes tumbling, with the Nasdaq plummeting 2.60%, the S&P losing 1.84% and the Dow following with a loss of 1.51%.

Let's get into it.

 

Macro Monkey Says

99 Problems but a Profit Ain't One - Companies are generally supposed to make money, as much as they can. At least, that was the prevailing wisdom for hundreds of years before the turn of the millennium when suddenly being unprofitable became cool (looking at you, Bezos). Now, however, the tables may have turned once again as those firms who are not making a profit are instead taking a punishment.  

That punishment is coming in the form of stock price returns. According to a WSJ analysis, unprofitable companies listed on the Nasdaq have sold off an average of 25% just between September 30th and this past Friday. Meanwhile, profitable Nasdaq names are up a tad, returning an average of 1.4%.

Who else could you blame but the Fed. As JPow and the gang have hinted relentlessly at rate hikes, investors have started dumping assets that don't actually make any money in favor of those that do. Yield starved investors no longer have to sell their soul to money-losing dumpster fires in order to get an above-market return. Instead, dividend yields are reliable earnings are becoming cool again. And the returns don't lie. Taking a step back, we can see that the S&P and broader indices have beat up on high-tech/growth names in recent months with the Nasdaq's Internet Index losing 16% since the end of September while the Nasdaq Composite is up 3.1% and the S&P returned 8.2% over the same period.

For those of you who just started investing during the pandemic, this is gonna be a big change. Non-zero rates are a big change. I understand, however, that it's hard to believe the man who once said "f*ck your puts" is now saying "raise those rates."

Play CoD in Excel - You can't (yet), but what you can do is take a look at the first truly enormous acquisition of 2022. Yesterday morning, reports announced that Microsoft will be acquiring video game production and holding company Activision Blizzard for a grand total of $68.7bn ($95/sh) in an all-cash deal. Wow, and to think Take-Two really thought they were hot sh*t dropping only a measly $13bn on Zynga.

I know, I couldn't believe it either. I'm not sure what's more surprising, the acquisition itself or the fact that Microsoft doesn't need debt financing to drop almost $70bn. In fact, Microsoft investors have been waiting for a massive acquisition or some other event to start unloading the over $130bn cash pile the firm has carried for several years. While having some cash is far better than no cash, too much cash isn't exactly the savior as inflation eats away at its purchasing power and drags on returns. Luckily for Microsoft, recent controversies at Activision Blizzard hammered the firm's value, so even the premium they're paying could be seen as a discount. 

So Microsoft investors, whether they hate it or love it, can at least be pleased that about half of the company's cash balance is being put to work in a productive asset. And boy does that productive asset fit in Microsoft's wheelhouse! CEO Satya Nadella and the team have been leaning hard into gaming for years, completing the purchase of ZeniMax Media (Bethesda) in late 2020 and a slew of other gaming studio acquisitions in the years prior. This one, however, just happens to be a lot bigger.

Furthermore, you may have heard of a little thing called the metaverse. Sure, Zuckerberg has tried to make the digital universe(s) his own poster child, but many experts believe gaming will be the first unlock the metaverse has to offer. With the purchase of Activision Blizzard, who makes/owns games even we non-gamers have heard of including Call of Duty, World of Warcraft, Overwatch, CandyCrush, and many more, Microsoft becomes the world's third-largest video game company behind only Tencent and Sony. Sounds like a good start to me.

This is a wild one and a great way to kick off big dog M&A activity for the year. Stay tuned to find out when Excel gets a CoD function. 

 

 

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What's Ripe

Activision Blizzard ($ATVI) - I think you already know what I'm gonna say. Shares in the soon-to-be Microsoft game studio popped on the $95/sh all-cash acquisition announcement to $82.31, a 25.9% daily increase. Honestly, this looks like a big save for Activision. The company was becoming rippled with controversies around sexual assault allegations, delayed games, a falling share price, and a whole lot more. Plus, with employees almost unanimously calling for his resignation, it's no wonder CEO Bobby Kotick wanted out. Good luck with that, Microsoft.

Citrix Systems ($CTXS) - If you use Bloomberg Anywhere, you know Citrix all too well. The finicky and surprisingly inconvenient software maker saw its shares take off on a 5.4% ride today, a very welcome result after shares had done little more than sh*t the bed since mid-2020. It turns out activist investors Elliott Management and Vista Equity Partners are very interested in buying out Citrix and in (hopefully) making opening new tabs on Bloomberg a little easier. Investors, needless to say, loved it.

 

What's Rotten

Goldman Sachs ($GS) - Sam Bankman-Fried's goal of buying Goldman Sachs just got a little easier. Shares in the banking giant plummeted 7.0% yesterday on a nightmare-inducing earnings call in which Goldman reported earnings of $10.81/sh vs $11.76 expected despite beating sizably on revenue estimates. The 13% YoY drop in profits is largely the fault of a 23% jump in operating expenses. Basically, the firm paid its bankers and traders way more than the usual obscene amount of money they expect, along with jumps in technology and (of course) litigation expenses. 

Unilever ($UL) - Third try's the charm? Or three strikes, you're out? That's the pressing question facing Unilever now as the consumer goods company's third attempt to purchase a joint venture between GlaxoSmithKline and Pfizer has floundered once again. Microsoft isn't the only one tossing around hoards of money, as Unilever too offered $68bn for their own acquisition, except unlike Microsoft, their's wasn't accepted. Knowing the company will have to pay even more, traders sent shares down 14.4%. 

Thought Banana:

DAOs Need to DYOR - Yeah, this a dumb one. Nothing else, just plain human stupidity on full display for the rest of us to launch at. With that, enjoy.

Spice DAO, inspired by the Dune sci-fi series, had an admirable goal. The collective sought to purchase an original copy of one of twenty 1974 books that contained the art, script, and much more of an early adaptation of Frank Herbert's Star Wars-like series. So, to do so, the DAO raised a ton of money and ended up purchasing one of these rare copies for $3mm. With the book in hand, Spice DAO intended to do three things as laid out on Twitter: 1) Make the book public, 2) Release an animated series on a popular streaming service, and 3) Build and support communities and projects related to the series.

Unfortunately, the members of Spice DAO failed to realize a few, somewhat important facts. 1) The book was already in the public domain (google it), 2) Simply buying a copy of the book did not grant the DAO the rights to the book's IP, so no animated series could be made and 3) They bought the book for ~100x its expected sale price. Way to go guys.

Yeah, not much you can say to save this one. Spice DAO was (rightfully) ridiculed mercilessly on Twitter following the purchase and subsequent Tweet announcement. Look, I get it, assets everywhere are overvalued, but please, oh, please know what you're buying. DYOR.

Wise Investor Says

"Survival is the only road to riches. You should try to maximize return only if losses would not threaten your survival and if you have a compelling future need for the extra gains you might earn." - Peter L. Bernstein 

 

Happy Investing,

Patrick & The Daily Peel Team

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Comments (1)

Jan 19, 2022 - 6:15am
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