Week in Review: 10/29/2021

Updated: Oct 31, 2021

1 Peter Chapter 1 verses 24-25 state, "For, all people are like grass, and all their glory is like the flowers of the field; the grass withers and the flowers fall, but the word of the Lord endures forever. And this is the word that was preached to you."

I like this verse as it keeps me humble. It also helps me to think about what is really important, helping others versus the alternative, my own selfish tendencies. I am comforted that only God's word endures as the imperfections of myself enduring would do more harm than good. God's word is eternal, and offers life everlasting.

For investing, I find it very important to keep similar "truths' in order. It isn't the word of God, but having clear goals, objectives, and management strategies are crucial to support and sustain performance. Without them and solely relying on my emptions (akin to my selfish tendencies) and I'm not going to make it very far.

It's been a very hectic week, so I'm going to simply put out some thoughts organized by company. Here we go.

Bakkt, Inc. (BKKT)

Bakkt got the week started tremendously well with news on partnerships with Mastercard Inc. (MA) and Fiserv, Inc. (FISV). This propelled the SP north of $30 and even above $50 in after-hours on Monday for the common shares. I had a fairly sizeable position in the warrants with an average cost basis at $1.91, so it was a boon for the portfolio. I liquidated the warrants for a 360% return as I felt that Bakkt had gotten too far ahead of itself.

Bakkt had estimated doing $515 million in Net Revenue over the mid-term. This will need to exponentially increase towards $2 billion to justify today's lofty SP at $42. I feel that the SP will simply remain highly volatile, but wouldn't be surprised to see it drop back towards $20, especially once the redemption of the warrants is announced. I will continue to monitor re-entering at a much better risk/reward level as Bakkt is definitely an interesting opportunity, however it remains to be seen how competitive it will end up being.

GlobalFoundries, Inc. (GFS)

I have had mixed results when it has come to the Semiconductor Sector. While mostly positive, I haven't been fortunate to hold any long-term big winners. I've held Nvidia Corporation (NVDA) and Micron Technologies (MU) recently, but sold them far too early.

I have been intrigued with GlobalFoundries as they transition to compete more strongly as an independent foundry. It's going to take a little more time to get a better sense of how their volume growth can equate to financial modeling and SP investment potential. With many IPOs it sometimes takes a couple of quarters to get a firmer sense of business model potential. But my first take at it suggests that my initial cost basis at $45.99 could translate to an annualized return of just over 19% through the mid-term. The key investment thesis is that semiconductors will continue to play an increasingly important role over the future.

Lucid Group (LCID)

Lucid was another major winner during the week. I've written a bit on vertically integrated EV leaders, who I include as Tesla, Inc. (TSLA), Lucid, and Rivian Automotive, Inc. (RIVN). There's a lot of hype surrounding General Motors Company (GM) battery technology and all the vehicles that are forthcoming. There's also renewed hype with Ford Motor Company (F). But I continue to believe that vertically integrated EV leaders will continue to grow brand strength, and outperform their legacy peers looking to catch up.

Lucid has begun production and is now going to be making deliveries at month end which is why the SP popped. I've reviewed the production estimates over the mid-term and I feel that management has been conservative in their estimates. With the EV revolution upon us, Lucid is clearly the early leader with respect to luxury and EV performance. The Gravity will be the tipping point as to whether Lucid can truly claim SUV dominance. If so, the SP will be headed to $200 by 2026. I do expect further volatility, especially as delays, supply chain issues, etc., will always be a factor. My cost basis sits at just over $21, as I got in early on the warrants at $4.97 and averaged the common shares down aggressively.

Rivian Automotive, Inc. (RIVN)

Rivian is going to go public soon and I will be a buyer on day one. The question is, at what valuation? I'm guessing it will hit markets north of $100 billion for an EV. Rivian has yet to file its amended S-1 that will detail the number of shares outstanding and initial IPO SP. I've built my financial model estimating vehicle unit production and corresponding Revenue, but I'll need these last two details before I can begin to assume the company's first day trading price. I subscribe to the Fly on the Wall so I'll get the indication of where Rivian will begin trading as well. If I were to make a highly subjective guess right now, I'd say that at a pre-first trading day valuation near $80 billion, and with a 35% pop, Rivian could still generate annualized returns of 25% through the mid-term. This could lead to a much higher jump on day one, even towards 50% or higher.

Today it was disclosed through Amazon's filing that Amazon through preferred shares, holds a 20% stake. This is very interesting as Amazon has an order for 100,000 delivery vans, and the fine print essentially grants Amazon with exclusivity for a six year period, so Rivian will not be making any delivery vans for FedEx Corporation (FDX) or United Parcel Service, UPS (UPS) anytime soon. This deal with Amazon is lucrative, but Amazon is not wedded to it so it puts Rivian in the more risky position if Amazon were to walk away. Amazon's stake is a positive, as Amazon has had stakes in other companies such as Air Transport Services Group (ATSG), Plug Power, Inc. (PLUG) where business outcomes have been the result.

Aside from Rivian's agreement with Amazon, I see the delivery van market as the most interesting out there on the commercial vehicle side. Companies like GM and Arrival, Inc. (ARVL) are looking to get in with FedEx and UPS, but it remains to be seen as to who will emerge as the true technology leader.

Robinhood, Inc. (HOOD)

To be frank, I was disappointed with Robinhood's Q3 results. They missed Revenue estimates big time, and guided much lower for Q4. That being said, they have no Debt and over $6 billion in Cash. I see the future for Robinhood as a little murky, similar to Square, Inc. (SQ) as both companies look to take advantage of the Cryptocurrency boom. I'm much more confident in Coinbase Global (COIN) when it comes to Crypto, and see Robinhood's larger opportunity to be in expanding financial products and services to diversify, similar to SoFi Technologies (SOFI).

The Fintech space is getting very crowded and following suite to the Cloud, in that there is a "stack" where players are finding their niche. The Fintech stack is tough to crack as payment processors/providers, financial services providers, etc. are all now competing against core legacy companies. Bakkt's recent partnership with Mastercard is very interesting as I view Coinbase to be the eventual mid- and long-term leader for establishing partnerships and/or marketplaces for Crypto's future. I would like to see Robinhood more aggressively pursue banking services, retirement services, direct deposit, etc., versus Crypto. We shall see.

Roku, Inc. (ROKU)

Roku is definitely doing something right. How do we know? They are currently being targeted by Alphabet, Inc. (GOOG), Amazon, Inc. (AMZN), Comcast Corporation (CMCSA), AT&T, Inc. (T), TCL, among others. Big Tech, legacy Big Corporations, TV manufacturers, etc., is a pretty large group of interest. It makes sense as Roku has shown that it has the winning model to outcompete all of these peers.

It's been known for a while now that Google's YouTube is threatening to pull its app from Roku. Google is simply trying to strong-arm Roku into a deal that is lucrative for Google both from a Revenue split and more importantly data agreement to Google's advantage in dictating how Roku's search/advertising functions perform. Roku wisely is fighting this tooth and nail as Roku's platform is truly agnostic and doesn't play favorites when it comes to data, etc. Big Tech is well, too big and no company should be allowed to grow into the trillions of Enterprise Value without being considered to be broken up.

Today, more news was out regarding Amazon's deal with Roku for its free add-supported IMDb TV channel that will be up for renewal early next year. I don't see any substantial impact from losing either YouTube or IMDb in Roku's case, other than the negative perception and opportunity to punish the SP. We all know that politically, if you differ from the current Administration, you will be punished. Investors should be thinking about this, because those same politics are at play for companies like Roku, who do not support Big Tech, rightfully so!

The bottom line, Roku's SP has once again dipped towards the $300 level, when it is worth $450 or so based on next year's potential. I will continue to average my position, likely if it dips below $300, but I will only average up to a $275 level cost basis.

Shopify, Inc. (SHOP)

I love Wallstreet's reaction to Shopify. "It didn't do as bad as thought" so it rallies 7% yesterday, ha! Shopify didn't do so bad, growth remains highly robust, the company is flush with Cash, and the Operating/Free Cash Flow margins continue to inflect. Amazon's news reaction in after-hours was "if its bad for Amazon, it's bad for everyone". I beg to differ with Shopify.

This is a critical point as Amazon had a very bad quarter with Free Cash Flow turning negative over the last twelve-month period. Additionally, Amazon's Revenue slowed, which will be a very important thing for investors to think about when it comes to FAANG-M. All of these companies were headed for much slower growth pre-pandemic. The pandemic essentially re-accelerated their performance in a non-sustainable fashion, and they will all revert back to much slower growth over the next couple of years. This is why Facebook, Inc. (FB) has changed the name to Meta to focus on the metaverse, and Netflix, Inc. (NFLX) is going to pivot into online gaming.

Shopify, meanwhile, will continue to grow and grow with further Cash Flow inflection on the horizon.

Teladoc Health (TDOC)

I was prepared to put a limit order on Teladoc after its earnings result. In hindsight, I should have although I was thinking $130, so I would have missed it by $0.25. Teladoc continues to execute well each quarter. The company is nearly back to positive Operating Cash Flow, which I am expecting to inflect back towards 20% over the next couple years. The company is poised to approach $5 billion in Revenue over the mid-term. It is a massive growth opportunity, even at today's SP.

So what gives? Teladoc will require some patience as the post-pandemic transition (if government every lets it happen), is deemed as a headwind for future prospects. This is simply not true and the company will continue to grow. The real battle and reason why the pandemic is still thwarting a return to more normalcy, is the reality that companies like Roku, Teladoc, Shopify, and Zoom Video Communications (ZM) among others will all benefit greatly for the simple reason, that people have learned through the pandemic that time is valuable and spending it at an office (work, doctor, etc.), is not the ideal situation. In one simple word, control is at stake.

Tesla, Inc. (TSLA)

Tesla's execution continues to place more and more pressure on the naysayers. The company is a monster as it's Operating Cash Flow continues to inflect (currently north of 21%), while traditional automotive OEMs like Ford and GM have witnessed a decline back towards the pre-peak pandemic inflated results. There's a lot of misconceptions out there with respect to demand. While pundits try to act like the economy is overheated, the fact of the matter is that global government shutdowns have created a very imbalanced supply chain and situation with respect to consumption.

Many companies have witnessed masked performance seemingly showing strong results, but as time goes by, are seeing a waning and inability to sustain it. Tesla, like many other aggressive growth winners will continue to outperform peers, and frustrate the naysayers. I'm not as bullish as Cathie Wood from a valuation perspective, so I don't think Tesla has strong upside from today's SP, but I do believe in their future long-term dominance.

Twilio, Inc. (TWLO)

Let's revisit Twilio's post-earnings performance - ouch! While I do feel that Twilio needed a modest correction, yesterday's beat down was uncalled for. Twilio exceed Revenue estimates and revised guidance for Q4 beyond analyst estimates. So what gives? Personally, I think that many analysts have simply had far too high PTs, and used this quarter as an opportunity to cut them back.

Twilio continues to execute as expected. For me, I'm slightly disappointed in the company's inability to generate sustainable positive Cash Flow. I am looking for Cash Flow inflection next year towards a 10% margin, but I've been looking for inflection towards this the past year or so now. The best the company has been able to do is 2-3%. I averaged a little bit yesterday, but I'm not going to exceed a cost basis of $225 per share, so I won't likely be adding too much more, unless the SP drops towards $260.

Vroom, Inc. (VRM)

Vroom continues to weigh on the portfolio and remain a very challenging position to manage. I am confident that patience will pay off. Vroom remains the solid number two behind Carvana, Inc. (CVNA) with very strong upside potential for both Revenue and investment returns.

I feel compelled to review the chart with a very short-lived correlation between Carvana and Vroom from May through July 2020. Since then, it's been a stark contrast with Carvana yielding huge investor returns versus Vroom's demise. I have averaged Vroom down to below $27 per share. Vroom is trading 1 times EV to Revenue, I believe that this metric can double. The company has $1.5 billion Cash and less than $1 billion in debt, a stronger position than Carvana, and is poised to track towards $12 billion in Revenue through the mid-term. I think that iBuying will continue to generate some of the strongest mid- and long-term investment opportunities. Rivian's IPO will be important to monitor as the company is taking an interesting approach looking to also capture used vehicle sales as part of its overall Revenue model.

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