The Buy Scan | August 16th, 2022

Published on 08/16/22 | Saurav Sen | 1,216 Words

The BuyGist:

  • The Buy Scan is a weekly overview of markets, investing, and anything we find noteworthy in the investing zeitgeist.
  • A lot of the discussion revolves around our holdings and our Watch List.

WTF of the week: WeBack!

If you haven’t watched WeCrashed on Apple TV+, we strongly recommend it (between WeCrashed and Ted Lasso, Apple TV+ is totally worth the subscription price). WeCrashed is strangely addictive. Who knew a show where the ending is known could be gripping? The main protagonist – Adam Neumann, founder of WeWork – was impeccably portrayed by actor Jared Leto, who somehow made us love and hate the character simultaneously. We loved the character for his sheer tenacity in evangelizing the concept of co-working. In a post-pandemic world, his vision seems almost prescient. WFA (work from anywhere) is a real thing now. But we really disliked Neumann’s character for all the smoke-and-mirrors salesmanship and a seemingly nauseating messiah complex. But that’s what make shows watchable – complex characters.

The real Neumann is back with another real estate concept – rental management with a community feeling about it. So, it’s like (the now defunct) WeLive – these rental properties will now have a big community angle to them. Maybe there will be Friday Beers, Networking Sessions, and Intranet for tenants. Not a bad idea. People crave connection, and they’ll pay a premium for it (we hope the beers are free). But is this concept worth $1 billion? Famed VC firm Andreesen Horowitz thinks so – they recently backed Neumann’s latest project based on that valuation. If we use our 20X FCF rule, Neumann’s new business should, at some point, be able to generate $50 million in Free Cash Flow to justify that valuation. What do you think?

Maybe Andreesen Horowitz thinks that this time Neumann’s tenacity and salesmanship won’t get quashed by a business-killing pandemic. And maybe it’s better to invest in someone who has actually built and scaled a business rather than a total newbie (even though it never turned a profit). The other thing most of us forget about VC or PE funding is that the returns they realize at the end of 5 to 10 years is significantly dependent on timing market sentiment. WeWork could have got away with a that obscene $43 billon valuation in the public markets if they IPOd at a better time. OK, maybe at $20 billion. 10? The market says it’s WeWork is worth about $4 billion now.

Nvidia: WeShocked!

Nvidia recently shocked the world – not with a cool new AI chip but with a significantly deflated revenue growth outlook for the next earnings report coming up on August 24th (they have a weird reporting schedule). Well, check this out:

Ouch! What happened? Apparently, gaming chip wholesalers built up too much inventory and then got caught off guard with the general macro slowdown. That’s the official explanation. How could they get it so wrong? Ben Thompson of Stratechery (one of the leading commentators on tech companies) brought up an interesting point. He believes that the crash in cryptocurrencies and, consequently, a slowdown in mining, is to blame. There are some types of cryptocurrencies that use Nvidia’s GPUs for all the heavy computation needed to mine coins. Ben says that Ethereum, for example, is in the process of changing the way they mine coins, which has directly impacted GPU sales; hence the unprecedented inventory buildup.

At first, we found this analysis strange because Nvidia does break out its crypto revenue in a separate line item. It’s under OEM and Other (see table above). But then we remembered that they don’t directly sell GPUs to crypto miners. The sell to wholesalers. So, there could be an attribution problem – Nvidia probably underestimates the number of their GPUs being used in Crypto Mining instead of Gaming.

Anyway, we intend to do a deep dive on Nvidia before they report earnings next week. Nvidia is still a global dominator. It’s been our most successful holding ever (we’ve held the stock since late 2018). We’re in no hurry to sell, but we’re more trigger happy than we used to be. That’s not because of this latest womp-womp report but because of the general risks in the semiconductor industry.  As of yesterday, we believe Nvidia is still reasonably priced.

The chart below compares our usual WNTH (what needs to happen for us to hold) estimate against the actual historical revenue growth of the company. WNTH is “revenue growth we need to believe”, which is back solved from our “desired” stock price, which is about 50% higher than the current price. Here is Nvidia against its main competitors (we recently started selling our AMD position). We took this chart from our recent deep dive on the semiconductor industry.

Disney: WeOnTrack!

Disney’s latest quarterly earnings report was a blockbuster. The big piece of news was that Disney DTC finally surpassed Netflix in subscriber count. They now have about 221 million streaming subscribers. If you’ve been following our research for a while, you’ll recall that the thrust of our recent Disney thesis update was Disney’s streaming business – DTC (direct to consumer). We either factored in very little growth in the other business segments or outright declines. Here’s a picture from our May 2022 thesis update of “what we believe can easily happen” in less than 5 years:

In the latest earnings call, Disney’s management gave us some more detailed color on their expectations of the streaming business. Here’s what they said:

  1. Core Disney+ subscriber count will end up at 135-165 million by Fiscal Year 2024
  2. Disney+ Hotstar subscriber count will end up at around 80 million by Fiscal Year 2024

If we take the midpoint of that guidance, the total Disney+ subscriber base should reach around 230 million by fiscal year 2024. Add that to whatever Hulu and ESPN+ will be by then, the total Disney DTC subscriber count should be well above 300 million. Management says Disney+ will be profitable by then.

In our thesis, we estimated that a total Disney DTC subscriber count of 400 million is a rationally exuberant expectation. If that happens, Disney stock is still underpriced by the market. So far, so good.

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