The Newsletter
The Transcript 10.05.20
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Succinct Summary: This has been the most difficult crisis that the US has faced since most people can remember. An economic recovery is underway but the pace of job growth may be slowing. Companies in the hardest-hit industries are asking for more stimulus.
Macro Outlook:
This has been the most difficult crisis in a while
“I’ve been through five crises since I’ve been doing this for 30 years now, I hate to admit it. You know, there was ’87, there was ’90, you know, when we started Apollo, 90 – ’01, ’08, you know, the financial crisis, and now this. And this was by far the most difficult one that I’ve been through in terms of both the health crisis aspect of it where there was enormous suffering” – Apollo Global Management (APO) Co-Founder Josh Harris
Recovery from the Q2 recession slowly underway
“Economic recovery from the sharp recession in calendar Q2 is underway, but the pace has been limited by the continuation of the pandemic. Smartphone, auto and consumer end markets have started to recover, and we see further demand improvements ahead. Cloud and laptop demand continues to be healthy, supported by the work-from-home and shop from home trends.” – Micron Technology (MU) CEO Sanjay Mehrotra
“The economy lost 22 million jobs and 11 million of them are back. But certainly, it’s going to be pretty slow going from here and the COVID-affected industries. Hospitality, aircraft – anything related to travel – events, sporting events in particular, concerts.” – Apollo Global Management (APO) Co-Founder Josh Harris
“The U.S. economy has been greatly affected by the pandemic. Unemployment in the U.S. remains high, the pace of new job growth is decelerating and many U.S. households have limited savings.” – Conagra Brands (CAG) CEO Sean Connolly
Companies are hoping for more pandemic aid to survive
“Our plan is to get Congress and the administration to come together and get a relief bill passed. There is enormous bipartisan support for it.” – American Airlines (AAL) CEO Doug Parker
“The pandemic has been a devastating financial blow to cinemas…69% of small and mid-sized movie theater companies will be forced to file for bankruptcy or to close permanently…Theaters need specific relief targeted to their circumstances” – Letter by National Association of Theatre Owners (NATO), The Motion Picture Association of America (MPAA) and the Director’s Guild
International:
China is a growing part of US companies’ sales
“So really understanding that when you buy any particular company, you have to do a much more sophisticated look-through to what the company is producing and where their revenues are coming from, than just an indice or the beta might unveil itself. So if you’re buying a BMW, are you buying a German company? You’re buying a German-domiciled company, but they sell more cars and more revenues come from China than any other country in the world. If you buy Texas Instruments, very little comes from Texas. Actually, less than 12 percent of their sales are in the U.S. Greater than 50 percent of their revenues come from China. General Motors sells more cars in China than it does in the United States of America” – JP Morgan (JPM) Asset & Wealth Management CEO Mary Callahan Erdoes
Recovery pace of movie and entertainment lags behind in China
“…the recovery pace of movie and entertainment sector and the luxury industry lagged behind overall brand and advertising business rebound as the risk of the sporadic outbreak in China and the coronavirus resurgence in certain global areas still linger, which could further disrupt the business operations and weaken consumer demand.” – Weibo (WB) CEO Gaofei Wang
Financials:
Liquidity is creating distortions in valuations
“…the first thing that happened was when interest rates were reset and you went — you know, and you reduced the ten-year treasury down to a mere 65 basis points which we are at today, you naturally reset earnings because you’re not discounting them back at a high rate. So you’ve got an increase naturally of about 15 percent on most companies, if all else was equal and everything was back to where we were in the February time period. But now you’ve had such runup in so many companies. You know, we were just looking yesterday, the change in market cap in Apple stock is equal to the market cap of the four largest financial institutions in the United States of America. The change is equal to the total market cap. Or if you look at something like Tesla, the Tesla market cap is equal to the market cap of Toyota, Daimler, BMW, VW, Ford and GM altogether. But if you look at the underline — just take Volkswagen as a for instance, which is one of the holdings in our European focus portfolio. It’s got 11 times the R&D and CAPEX of something like Tesla, it’s got 11 times the revenues and it’s got 30 times the number of cars sold. So one of those two things is mispriced and, you know, a lot of liquidity will jettison some of these areas, and you just have to be able to see through and say: Where is it going?…So a lot of liquidity will do very strange distortions to the market.” – JP Morgan (JPM) Asset & Wealth Management CEO Mary Callahan Erdoes
The markets are as speculative as they were in ’99
“There is certainly what I would call a highly speculative nature to the markets today, a willingness to take on risks, a willingness to get excited about projects that may be five or 10 years in the future, that we haven’t seen since the ’99 time frame. I really can’t speculate or know exactly what it was, or the confluence of events that led to that, but we are living in a more speculative technology market for sure,” – Benchmark Capital GP Bill Gurley
On SPACs
“So the thing with SPACs, generally speaking, is they give you three very important things. Number one is they give you speed. Number two is they give you certainty of price. And number three is they give you sponsorship. That last thing is crucial, because it doesn’t matter who has a SPAC. Ultimately, what matters is what is the judgment of the person that is helping bring these companies forward” – Social Capital CEO Chamath Palihapitiya
“But speaking generally, the SPAC part of the IPO market is a part of the market that’s here to stay. If you go back a number of years, it was about 3% of the market now it’s about 20% of the market. And there’s a real need for quick, confidential capital price certainty and for sponsorship in the markets. And most of the SPACs that have been done have been more emerging growth SPACs, less cash flow, more growth. And what we see is the opportunity for sponsorship” – Apollo Global Management (APO) Co-Founder Josh Harris
Short malls, long warehouses
“…we made an observation and decision years ago that the digital revolution was going to really affect real estate and, as a result of that, we sold almost all of our retail that we owned and we started concentrating in warehouses. Why warehouses? It’s now got a fancy name called “logistics.” It’s because it’s part of the distribution network for the internet and for internet shopping, which is exploding. So what we’ve found is where there’s some softness, for example, in malls, there’s nothing but increases in warehouses. We put a third of all of our money there. We sold all of our hotels. And now that turns out to be — or substantially all of them — turns out to be a great thing” – Blackstone (BX) CEO and Co-Founder Stephen Schwarzman
Consumer:
Consumers getting a bit more comfortable with shopping in-store
“Our real traffic was good. I think we’re still seeing some tentativeness, specifically in certain regions about a return to shopping and we think that, that will grow. And we’re seeing data that suggest customers getting more comfortable with shopping in-store. We’re not back to normal circumstances at all” – Bed Bath & Beyond (BBBY) CEO Mark Tritton
Demand for food at home to stay elevated
“I think that perhaps some people are underestimating the level of demand that can continue even after the pandemic starts to ease and people start to eat out a little bit more..is demand going to be high relative to what it was before COVID for food at home and i think the answer to that is going to be yes because people rediscovered that the kitchen is the heart of the home” – General Mills (GIS) CEO Jeff Harmening
“Data is showing that consumers are tackling more complex mediums. In other words, they’re upgrading their culinary skills. We don’t expect these upgrades to homes, at-home entertainment, kitchens and cooking skills to go away anytime soon. This all leads to one conclusion: more time at home, and, as a result, more consumption of food at home” – Conagra Brands (CAG) CEO Sean Connolly
Digital purchasing is here to stay
“I think the move to digital purchasing on all sorts of products, but especially apparel and footwear, is here to stay and will probably be bigger than we had originally thought,” – Columbia Sportswear (COLM) CEO Tim Boyle
“U.S. grocery purchases have hit ecomm adoption rates that were not expected to be achieved in three years in just three months”- United Natural Foods (UNFI) CEO Steven Spinner
But stores are not going away either
“Brick-and-mortar retail for these kind of products is not going to go away. Our customers like to spend money on products that fit well and make them look good, and there’s no substitute for having something physically on and making that decision,” – Columbia Sportswear (COLM) CEO Tim Boyle
Omnichannel may be the solution
“…what is becoming even more clear to us is that customers, they don’t want to meet us in one channel; they sometimes want to meet us online, they sometimes want to go to a store, they could order something online that they want to pick up in store, or they might want to find something online that they can then go to a store and find their size” – H & M Hennes & Mauritz AB (HNNMY) CEO Helena Helmersson
Sports are one secular growth industry that has been negatively affected by COVID
“..So short run, I would say that sports, financially, it’s a little bit hard financially to be in sports right now. But long run, America loves sports, the world loves sports and the globalization of media content is still there…I think it’s a short run, long run thing and if you have patience and you’re willing to hold for the long run, I think sports is, will and continues to be a great business as content globalizes. And as content is available, people want to watch the best teams in the world on their phone wherever they sit” – Apollo Global Management (APO) Co-Founder Josh Harris
“…the next season is going to be a little bit tricky, because we don’t anticipate having a lot of fans or having full buildings into the arena anytime soon. But guess what? You know, the following season, ’2022-23, we look for a very nice rebound. And the thing is, live sports is a rare commodity. You could tell just during the COVID period when there was no sports on TV, people just were craving for it. And once you put the games on, people have come back to watch sports enthusiastically. So I’m very, very positive, very excited about the future of live sports” – Alibaba (BABA) Co-Founder and Brooklyn Nets Owner Joseph Tsai
Technology:
We’re still in the early stage of the global cloud era
“It’s the kind of opportunity that comes only once in a generation. We still regard ourselves to be in the nascent stage of the global cloud era.” – Alibaba (BABA) Chief Executive Officer Daniel Zhang
Working from home is increasing productivity but there are things you can’t do remotely
“…what we’re seeing, in many cases, productivity increases with people working from home. You know, you’re losing less in the friction of commuting, but it’s really the team orientation. If you get that right, you can get some of that productivity. But I can see already across our portfolio, there’s a longing for more contact” – Vista Equity Partners CEO Robert Smith
“I’m not a pessimist in terms of people being in offices. It’s very hard in certain businesses to train the people who join you. You can operate at a distance with people you know well in certain businesses and industries, but as people enter an organization, they must learn the culture of your company, and it’s hard to do that virtually” – Blackstone (BX) CEO and Co-Founder Stephen Schwarzman
Gaming continues to grow
“…macro sectors like gaming and education continued to grow very strongly with triple-digit growth year-over-year” – Weibo (WB) CEO Gaofei Wang
“Gaming demand is robust” – Micron Technology (MU) CEO Sanjay Mehrotra
Smartphone demand that has been meaningfully impacted by the pandemic expected to rebound
“The smartphone market has been impacted by the pandemic in a meaningful way in calendar 2020, but as we look ahead to calendar 2021, we expect a rebound in smartphone unit volumes, coupled with robust average capacity growth across both DRAM and NAND solutions.” – Micron Technology (MU) CEO Sanjay Mehrotra
The main challenge in building Autonomous vehicles is the lack of collaboration
“The problem that I see is there is not enough collaboration between different companies when it comes to the autonomous vehicles. Different strategies, different science, different methodologies, and that’s why it’s like going back, it’s not going forward. I think once you have the autonomous vehicle companies work together, share their information, open up, I think you will have it even sooner than anyone would have expected. But the problem is everybody is working with different tech: laser, radar, infrared, LeddarOne, AI. So, we just need to put those guys together and then you will have it” – Aramco Chairman H.E Yasir Al-Rumayyan
Industrials:
Freight charges are up
“…there have been increases in spot rates for freight. Freight’s about 10% of our overall cost of goods sold\” – Conagra Brands (CAG) CFO Dave Marberger
Some business spending will not return
“…some of the variable costs with respect to travel and entertainment that have come out this year, we would expect some of those to return but not all of them and maybe less than we had originally thought. So, we see a continued reduction there in terms of that overall spend.” – IHS Markit (INFO) CEO Lance Uggla
Miscellaneous Nuggets of Wisdom:
People with more of their own money on the line tend to make better decisions
“And at the end of the day…what I will tell you more than anything else that I’ve realized in 44 years, of which 20 I’ve been investing in some way, shape or form, is those people who put more of their own money on the line tend to make better decisions than those people that are riding other people’s money. And at the end of the day, if you look back on the single greatest investor of our generation, the most important thing that you would have done by backing Warren Buffett, you know, the best thing you would have done by backing a John Malone, the best thing you would have done by backing Jim Simons, is allowing them to compound their own money and going along for the ride with them. I think that’s a really important point. And so, at the most basic level, my advice to everybody is read the disclosures, read the diligence, and then ask one primary question: How much of your own money are you putting on the line. Yours. Not other people’s, not your fund’s, none of that garage. How much of your own?” – Social Capital CEO Chamath Palihapitiya
Interesting: A leading indicator of product to market fit for start-ups
“I came across this guy, Sean Ellis. Now, Sean ran growth in the early days at Dropbox, LogMeIn, and Eventbrite. He even coined the term “growth hacker.” Now Sean found a leading indicator of product to market fit, one that is benchmarked and predictive. Just ask your users this. How would you feel if you could no longer use the product? And measure the percent who answer, very disappointed. After benchmarking hundreds of startups, Sean found that the companies that struggle to grow always get less than 40% very disappointed. The companies that grow most easily almost always get more than 40%, very disappointed. In other words, if more than 40% of your users would be very disappointed without your product, you have initial product to market fit. Now, this metric turns out to be more objective than a feeling. It predicts success better than net promoter score, and it’s not only the best way to measure product to market fit” – Superhuman Founder & CEO Rahul Vohra
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