Aramco

Aramco, the state-owned oil giant is seeking to raise between $24B and $25.6B by selling a 1.5% stake.

Valuation is an art and not a science…how does a valuation estimate have a $1 trillion range! Bank of America put the valuation of Aramco at $1.22 trillion as a low case scenario and $2.27 trillion as a high case…a huge gap that’s more than enough to fit the combined market capitalizations of Exxon Mobil, Royal Dutch Shell and Chevron, the world’s three largest publicly listed energy companies. French bank BNP Paribas said it’s worth exactly $1.424394 trillion…

I see what’s going on here. Saudi Crown Prince Mohammed bin Salman strongly believes that it is worth $2 trillion and it’s generally not a good idea to disagree with him. You can without sacrificing too much of your integrity say “we think it is worth between $1.22 trillion and $2.27 trillion” or whatever. Then if it turns out to be worth $1.22 trillion you can say you were right (it was in your range!), while you can also tell the prince that you agreed with and supported his valuation (also in your range!).

I’m also wondering where is the upside? How do you go from $2 trillion to $4 trillion? I see a lot of risk in this investment. They are having a hard time getting foreign institutions on board. Aramco has struggled to attract a major cornerstone or anchor investor. It has been written they are getting local billionaires to back it. The fact that they are getting listed on the local stock exchange instead of New-York or London is not helping. I can list a laundry list of issues they have to address before submitting any paperwork in the U.S.

You can read the prospectus here.

WeWork – “If something can’t go on forever, it won’t.”

WeWork became the butt of jokes, a dramatic fall from grace for the company. In a matter of weeks WeWork went from a *$47 billion valuation to possible bankruptcy to being bailout. There was no lack of criticizing during the IPO process. All you need is one red flag to stop you from investing. WeWork’s S1 IPO document was printed on red flags. You know the rest of the story; the IPO never went through and Softbank came to the rescue. WeWork founder Adam Neumann received $1.7b payoff to leave company he tanked. How much do you hate the guy to pay him $1.7 billion to leave?

*$47 billion valuation: I disagree with that $47b valuation. Not because somebody paid the last price it is worth that price. There’s a difference between price and value.  I’m myself guilty of saying it’s was worth $47b but it wasn’t and never was. It was priced at $47b. What you had there is not price discovery. Price discovery is when you have a bunch of sophisticated investors knowing all the facts trade among themselves. WeWork’s price should have never been this high in the first place. WeWork is a testimony of our current investing climate.

Because investors have so much money to invest and because of past success stories of stocks of revolutionary technology companies doing so well, a lot of these unicorn companies don’t have to make profits. Investors are chasing dreams and throwing money at anything. The WeWork fiasco has shaken the industry. Some VCs are not asking for a clear plan to profitability. Eventually the tide will turn and people will see this emperor has no clothes.

Renaissance Medallion Fee Structure

I wrote a previous post on Renaissance Technology here. You can get the book The Man Who Solved the Market here.

“Today, Mr. Simons is considered the most successful money maker in the history of modern finance. Since 1988, his flagship Medallion fund has generated average annual returns of 66% before charging hefty investor fees—39% after fees—racking up trading gains of more than $100 billion. No one in the investment world comes close. Warren Buffett, George Soros, Peter Lynch, Steve Cohen, and Ray Dalio all fall short.”

Five and Thirty

5% management fee and 30% performance fee, that’s the fee structure of the Medallion fund.  Is that the world’s most expensive hedge fund? Relatively speaking, the standard fee structure is two and twenty and there’s a war on driving those fees down. We can safely say that Renaissance has earned their fees.

Of course the book doesn’t reveal the secret sauce. However we know that Renaissance is using very complex algorithms, fancy computers and a lot of leverage.

And no you can’t invest with Renaissance.

Amazon Quebec??

When Quebec PM Legault talked about a ‘Quebec Amazon’, I brushed it off as just another remark to please the Quebec nationalists listening. Most of these remarks are politician hyperbole that can easily be disregarded.  Then the news became headline in the ROC (Rest of Canada) and then I realized they are serious. Premier Legault is open to the creation of a Quebec version of Amazon, which his economy minister Fitzgibbon described as a way to serve nationalist customers. Fitzgibbon went further than the premier, saying the province could “absolutely” invest in a Quebec platform, as long as it was sustainable. So they definitely discuss it. It’s interesting to note that the announcement comes only a couple days after Amazon announced a new $1 billion investment in Montreal.

What does a Quebec Amazon even mean? Whatever they are thinking it kind of sort of exists and it’s absolutely brutal: it’s called shooopping.ca and it’s really bad. I will spare you the link and your time. Shoooping.ca was founded by tech columnists François Charron, his version of David taking on Goliath. I can’t help to notice that it’s full of made in China goods.

I don’t know where to start on how ridiculous the idea of Amazon Quebec is.  I get it; you want to help Quebec retailers against the online threat. Wrapping yourself in a flag might be a noble thing to do, but if the widget you are selling is $50 more than on Amazon, you are not helping yourself or anybody. What will help Quebec retailers is reviewing their business model, their brandings, marketing, their performance and strategy. Online shopping shouldn’t be a threat but a tool to thrive. Maybe the government can offer assistance on helping them make the transition online. There are things the government can do but creating a Quebec Amazon is ludicrous.

Amazon is a behemoth. It’s the global leader in online retail. It has infinite amount of things to sell at great prices and they deliver really fast. All of this cost billions to create and Amazon is not that profitable. You can’t just create a new “Amazon”. How do you create a nationalist website for a few million people? Retail is extremely tough, competitive, and the margins are low. If you end up with good margins, a competitor will take them from you. Amazon spends billions each year in new warehouses, enhancing delivery and customer experience. It’s very difficult. The Canadian retail landscape hasn’t adapted well to online shopping. To play the “Canadian nationalist” card, we have the Canadian Tire stores. Canadian Tire only recently started shipping at home but with a catch. It will cost you a lot in shipping and it will take a while to get your stuff. As a test, buying a snow blower on Canadian Tire would have cost me $100 in shipping while Amazon ships for me with Prime.  The reality is that the cost in distributing, IT, and logistics is massive for such a small population to serve. Amazon can scale.

The premier told reporters he is concerned about the lack of Quebec-made products available on Amazon and wants to make sure the company isn’t just selling American products to Quebecers. Amazon is also a platform that invites third-party brands to sell their own products on its website. Quebec retailers can participate on Amazon “marketplace” and have access to the millions of Amazon clients. Walmart also operate marketplaces including third-party sellers. In Canada Loblaw is launching its own third-party marketplace which is an indication of the growing competition.

If it was that that easy everybody would just have their own Amazon, iPhone, and Google search engine.

Disney+

Being a parent just cost $8.99CDN more per month.  Disney is joining the streaming wars. Netflix used to be the only game in town. Now everybody is going over the top. AppleTV, HBO Max, NBC’s Peacock etc…How many streaming services do you need? I’m not sure if cutting the cord makes financial sense anymore. You end up spending $200/month to save $100/month.

Is going direct to consumer the right decision for Disney? I think so but this is a multi-year plan. We will know in five years. Disney+ signed 10 million users the first day. Some analysts estimated that it would have taken a year to get there. They aim for 90m in by 2024. Netflix has 150m users. By entering the streaming war, Disney is giving up on a lot of easy licensing money. Companies are paying the big bucks for content.  With 90m users, Disney+ will rack in ~$630m (90m*$7) a month, ~$7.5 billion a year.  I wonder what the margins are on that and the multiples the market would warrant.  By ending the studio’s output deal with Netflix, Disney forgone $150m annual income (easy licensing money). That deal was signed a long time ago and would have to be substantially renegotiated upward.

Disney is now they are entering the tech war arena. Amazon, Google, Apple spends a lot on capital expenditure (CAPEX). Disney spends around $5 billion annually on CAPEX. Compared to Amazon $15b, Google $25b, and Apple$10b. This year, Netflix content budget is expected to reach $15b.

This is a different game for Disney.  Disney spends large sums of money on studios and rides that last decades. By entering the streaming services war, it will require constant spending just to stay in the game. The Mandalorian reportedly costs $15 million per episode, while The Falcon and the Winter Soldier, WandaVision and Hawkeye could run as much as $25 million per episode. Disney is now on “technology treadmill”. Companies on the tech treadmill have to run harder and harder just to stay in place. It is a treadmill that is difficult to get off of. If new content helps gain subscribers, then logically cutting spending, and content, risks losing them too. There’s a saying in the investment business: “Never invest in anything that eats or needs repainting.” The question is does your potential investment have the margin structure to afford the yearly cost? Technology can provide a competitive advantage, but you have to have the right margin structure to maintain that advantage – to afford the food and paint.

I believe Disney is successfully transforming its business to deal with the ongoing evolution within the

media industry. I think Disney has the muscles to grind their way for market share but not everybody in the space is going to be a winner. They have terrific content, a great global brand, and technology with Disney streaming (ex BamTech).

While on the topic of subscription, how many is worth subscribing to? Everybody is switching to a subscription model. Everybody wants $5 from you. $5 is a good number. There’s no psychological pain is losing $5. Everybody has $5. Mario Kart Tour is $5 a month. Apple Arcade is $5 a month. Even Burger King has a $5 a month coffee service. If you are not careful eventually those things add up.

The Man Who Solved the Market – Jim Simons

A new book about the most successful money maker in the history of modern finance is out and it’s not about Warren Buffett. It’s about a guy named Jim Simons and his firm Renaissance Technologies. He started investing in his 40s and didn’t anything about the topic.

The book The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution by Gregory Zuckerman is released today. It’s one of those books that is highly anticipated. You can read and except from The Wall Street Journal here.

The book is a coup because Simons shuns the limelight and rarely gives interviews. It’s great that Gregory Zuckerman succeeded in getting Jim to talk. Rumors about his performance has swirl around for years but the real numbers are much higher than anyone anticipated.

Today, Mr. Simons is considered the most successful money maker in the history of modern finance. Since 1988, his flagship Medallion fund has generated average annual returns of 66% before charging hefty investor fees—39% after fees—racking up trading gains of more than $100 billion. No one in the investment world comes close. Warren Buffett, George Soros, Peter Lynch, Steve Cohen, and Ray Dalio all fall short.

Simons ranked second on Institutional Investor’s list of top-earning hedge fund managers in the world last year, and first the year before and the year before that, despite the fact that he  retired in 2010.

For the occasion, I updated my links about Jim Simons and Renaissance Technologies in the resource section. I plan to read the book and post my notes when I get to it.

Jim Simons (Renaissance Technologies Corp.)