Last Week in a Nutshell
The Nasdaq: who leads us up, will lead us down?
From the low in March 2009 (1,265.52) to the Feb 2020 high (9,838.37), the Nasdaq rose 677.42% compared to 357.01% for the DJIA and 408.93% for the S&P 500. From the low the Nasdaq hit on 3/23/20 (COVID-19 crash), to 2/16/21, the Nasdaq rose 113.76% compared to 73.54% for the DJIA and 80.23% for the S&P 500.
Since the Nasdaq hit an all-time high (ATH) of 14,175.11 on 2/16/21, the technology concentrated index has struggled to rally above that high and has come under some noticeable distribution. As defined by William O’Neil, a distribution day is when a major index declines more than .2% on any given day and on greater volume than the previous day. To simplify, distribution = the trend of more selling than buying is occurring in a major index.
From 4/12/21 to 5/7/21 (four-week span), the Nasdaq has seen four distribution days and last Wednesday (5/4/21), it fell 1.88% on 12% above average volume which was the greatest daily trading volume on the Nasdaq since 3/24/21.
I quote William O’Neil quite a bit, but he is one of the most successful traders/investors of all time and has dedicated his life to studying and interpreting markets and their overall direction. O'Neil states that, “after four or five days of definite distribution over any span of 4 to 5 weeks, the general market will almost always turn down.”
Lastly, two weeks ago I pointed out that the Nasdaq had formed a ‘double-bottom’ or a ‘W’ base structure but had some faulty characteristics. So far, the faulty aspect of the base proved to be important as the index has broken down from the base.
Dow Jones and S&P 500: ATHs yet coming under distribution?
While the Nasdaq has struggled to move into new high territory, the other two major indexes continued to hit ATHs last week. Both the DJIA and the S&P 500 closed at their all-time high closing prices last Friday, which is a positive light on the overall markets, right? Unfortunately, I call it how I see it and both the DJIA and the S&P 500 have been coming under distribution during this advancement phase.
Over the last two weeks, the DJIA has seen three (maybe four?) distribution days and over the last three weeks the S&P 500 has seen four distribution days. Being the broken record that I am, this is another major William O’Neil alert that may indicate the general markets are set to turn down.
It is easy/safe for one to take a pessimistic and bearish view, but I am simply listening to what the major indexes are telling me. See below table for DJIA and S&P 500 distribution day detail.
Distribution day = a greater than .2% decline on volume greater than the previous day’s volume
Some Major Q1 Earnings Recaps (4/27 – 5/6)
The tech giant reported a big earnings per share (EPS) beat and massive top- and bottom-line growth year-over-year (yoy)
EPS grew 99% yoy
Revenue grew 34% yoy
The stock broke out into into all-time highs on the earnings report only to reverse hard intraday and close at low of the day
Over the next five days, the stock gave back all of those gains
Huge EPS beat and growth (210% yoy)
Revenue grew 78% yoy and the company guided next quarter revenue to grow 105% yoy
On paper, that seems great, right? Well monthly active users (MAUs) grew 30% but missed estimates by .52% (less than 1%!). On top of that a class action lawsuit was filed against the company claiming it misled investors on user growth
In the stock market world (vs the business world) companies get graded every quarter and the market took the miss on MAUs that Pinterest will not be able to grow users in the future. As a result, the stock fell 14.5% on the report and has since dropped another 9%
Expectations are high for these growth stocks and even the slightest notion of weakness can send these stocks tumbling
Amazon is honestly the most impressive company of all time. In the latest quarter, the multi-faceted behemoth reported $108.5 billion in revenues which is 44% growth yoy -mind-blowing stuff
But remember, the market is irrational - the stock has dropped 5% since their quarterly report
Big EPS and revenue beat
User activity slightly missed estimates but still massive number of users
The stock rose 7+% on the report only to give back almost all of those gains over the next three days
Have you seen a common trend here? Big beats, stock rises and quickly reverses and gives back those gains
After missing EPS and revenue estimates, guiding weak-ish future growth, and the CFO announcing his resignation, FSLY stock fell 27.13% on Thursday (5/6)
The edge computing company has had a wild 12 months:
5/8/20 stock price: $35.64
10/13/20 stock price: $136.50 (283% over 5 months)
10/30/20 stock price: $62.20 (-54.43% over 2 weeks)
1/27/21 stock price: $122.75 (97.35% over 3 months)
5/7/21 stock price: $41.88 (-65.88% over 3.5 months)
One positive to take away from their latest earnings report is that they reported an all-time high in new customer adds but that did little to help the overall market's perception of the company's quarter
Prior to the company’s 5/6/21 earnings report, the U.S. Consumer Product Safety Commission reported the death of a child and a pet following an incident with Peloton’s Tread+ treadmill. The stock proceeded to fall 7% the following day
On Wednesday (5/5), Peloton recalled every single one of their treadmills following the negative publicity received after not immediately recalling their deathly treadmills. As expected, the market freaked and the stock fell 14.5% in one day
This is an awful look and the company redeemed itself somewhat when it reported earnings on Friday (5/7), handily beating estimates and growing revenues 141% yoy. The stock advanced as much as 9.8% intraday only to finish .04% up on the day
Killing children with their treadmills will take some time to overcome
To cap off an (extensive) Last Week in a Nutshell…the April’s jobs report
At the beginning of April, I stated that the current unemployment benefits structure disincentivizes unemployed individuals from returning to the workforce. In last week’s jobs report, my belief may have come to fruition.
Consensus for April’s jobs report was that one million net jobs would be added and some even forecasted closer to two million. With only 266k jobs added, this may have been the most disappointing jobs report of all time. The miss was the second biggest miss in history and according to ZeroHedge, if it weren’t for bartenders, card dealers and waiters, it would have been even uglier. In April, the food service and drink industry added 187k jobs and gambling, amusements and recreation (i.e. card dealers) added 72.7k jobs.
Every small business I pass, I see a 'hiring' sign yet we can't add jobs? Clearly these businesses have a need but are unable to hire due to the wage competition the unemployment incentive structure has created.
Despite April’s catastrophic jobs report and the hiring need, President Biden and Treasury Secretary Janet Yellen both insist that the very attractive unemployment benefits structure has nothing to do with people not returning to work. Give me a break!
Continue to watch the major indexes. Maybe the only thing that would inject confidence into my thinking is a big up day on the Nasdaq on way above average volume. We NEED to see institutional accumulation.
Companies reporting this week:
Stock of the Week ** I have a position in that security
Going forward I will be providing a stock pick of the week on a bi-weekly basis. To see the performance of prior stock picks of the week (it hasn't been great..), refer to this link: https://www.tomblogue.com/stock-crypto-picks Disclaimer: tech stocks have been getting throttled as of late and an end might not be in sight. This doesn’t detract from the fact that I believe some of these tech stocks will play an extremely important role in the digital era future. Be very careful when considering investments in tech stocks as the volatility swings and drawdowns can be very tough to stomach.
Unity Software (NYSE:U)**
The software platform of the future.
The world’s leading platform for creating and operating interactive, real-time 3D content.
Unity provides the software necessary for game developers to build highly engaging games meant for the mobile phone, PC and game consoles. Unity also provides the software for companies (not just related to the gaming industry) to create immersive and engaging 3D content. For example, the company partnered with Volkswagen to create a 3D virtual showroom for the car company.
Unity and Gaming
How big is the gaming industry? According to Piers Kicks:
There are over 2.7 billion video game players globally – that is 1 in 3 people globally play video games
Last year, $174.9 billion was spent on video games
In 2020, $73.8 billion in revenue was generated by mobile games
$22.7 billion revenue was generated by free-to-play games (buying in game character skins, weapons, etc.)
$17.8 billion revenue was generated by premium consoles
According to Grand View Research, the global video game market is estimated to grow at a 12.9% compound annual growth rate (CAGR) from 2020 to 2027. Given 2020 generated $174.9 billion in gaming revenue, a 12.9% CAGR would result in over $400 billion in video game revenue being generated by 2027
At the end of quarter four (Q4) 2020, 71% of the top 1,000 games by global monthly active users were made with Unity’s software development kit (SDK). This compares to 65% at end of Q4 2019.
In Q4 2020, monthly active users (MAUs) totaled an average of 2.7 billion per month. This measurement captures the number of unique devices that have started an application made with the Unity software, or that have requested an ad from Unity Ads.
Unity, Non-Gaming and Unity Forma
In the company’s latest earnings call, management stated that, “…we believe we’re in the early phases of a once-in-a-generation technology transition, in this case, a world in which the majority of digital content is two-dimensional and moving to real-time 3D.”
Unity believes that they are at the center for a future where the content around the world will be in real-time 3D (i.e. Volkswagen use case mentioned earlier). See more detail on Unity and Volkswagen’s partnership here.
The company launched Unity Forma late last year empowering, “…marketing professionals to quickly create and publish marketing content and interactive experiences from 3D product data – without needing to learn the intricacies of Unity or how to code.”
Over the last 6 months, Unity has added names such as Newell Brands, Walgreens, Liberte Productions, SHOWstudio and Nick Knight.
More Engagement = More Money
Unity Forma will be the platform that all companies will need to leverage going forward if they want to take market share and keep their current customers highly engaged.
Living in a digital era, where everyone under the age of thirty grew up on smart computer, phone, etc., the need for companies to create highly engaging content and experiences is unmatched and the higher engaged a company’s user base is, the higher the sales output.
What do I mean by sales rising as engagement rises?
More time spent on the Amazon website should translate to more sales
More time spent on the Lululemon website or in the Lululemon store = more sales accumulated
More time spent on Pinterest = more ad conversions which translates to higher sales for Pinterest
The number of verticals and global themes that Unity has the possibility to entering and penetrating is vast. ‘Engagement’ encapsulates AR/VR, advertising, gaming, e-commerce and essentially everything digital.
The company generated $772.445 million in revenue in 2020 for 42.58% yoy growth. In it's latest earnings call, management stated, "...we benefited from some COVID-related tailwinds and estimate this contributed a net of around $25 million to our total revenues in 2020."
Ex-revenue related to COVID, the company would have produced 40% yoy growth and for 2021, management is guiding only 23% to 26% yoy revenue growth. Clearly the company expects to have some headwinds this year as we come out of COVID but it has also reiterated their, "...long-term goal to grow revenue by an annualized rate of 30%."
The market hates technology and growth stocks right now. Since going public in Q3 of 2020, Unity has seen its stock skyrocket 161% as well as fall 47%. The volatility for a stock like this is very extreme.
Unity is extremely far from being profitable and spending at a rapid rate.
Unity is trading at expensive multiples -> EV/S is 30.52x
Crypto of the Week
** I have a position in that token
To see the performance of prior crypto picks of the week, refer to this link: https://www.tomblogue.com/stock-crypto-picks
I wrote an article on Ethereum which was published by Investorplace.com on 4/30/21. I do my best to highlight the incredible opportunity that Ethereum presents as a move from centralized finance to decentralized finance.
“Taking the power away from the banks and giving it back to the people”
As defined by Investopedia, “securities lending is the practice of loaning of shares of a stock, commodities, derivative contracts and other securities to other investors or firms. Securities lending requires the borrower to put up collateral, whether cash, other securities, or a letter of credit.” On top of providing collateral, the borrowers will pay an interest rate to the lender.
Hedge Funds are big participants in the securities lending market as instead of outright owning shares, they will borrow shares of a specific stock to take advantage of arbitrage opportunities in the market, borrow shares to short sell it, etc.
In 2019, $10.8 billion in revenue was generated in the global security lending industry. This illustrates just how massive this market is.
With the rise of cryptocurrencies, there has been a huge rise in the number of crypto hedge funds and crypto trading desks. For example, in March 2021, Goldman Sachs relaunched their cryptocurrency trading desk.
Enter Celsius…Securities Lending for Crypto
Founded by Alex Mashinsky in the Summer of 2017, he set out to disrupt the traditional banking industry. One specific area he found to be outrageous with the traditional banking industry was that if you deposit your money with J.P. Morgan or Citi Bank, and pay you .01%for your deposit. All the while, these banks are taking your deposits and making double digit returns on those same deposits only to give it back to their shareholders via buybacks and dividends.
What is even more wild is that the banks will take your cash deposits, lend it out to your neighbor and then charge that individual 20%+ on their credit card. Yet you get .01% interest on your cash. Can you spell highway robbery?
By creating Celsius, Alex did two things:
He created a securities lending business for the crypto industry which is very important from a liquidity perspective
He took the power from the banks and gave it to the people – the people just don’t know it yet
If you own BTC, ETH or any one of the many tokens covered by Celsius, you could lend your tokens to the Celsius platform/pool and earn up to 17.78% annual percentage yield (APY). If you contribute your BTC to the pool, you will earn 6.20% APY and if you contribute your ETH then you will earn 6.35% APY. Lastly for stablecoin USDC, which is pegged to the USD, you can earn 12.65% APY!! Remember, with the big banks you are earning a measly .01% with your USD.
To add, Celsius was built on the Ethereum blockchain, further highlighting the incredible utility that the Ethereum blockchain provides.
How do you earn?
As mentioned earlier, in the traditional securities lending, hedge funds and other borrowers will put up collateral and pay interest for borrowing securities, etc. In the crypto markets, crypto hedge funds, crypto traders, etc. need to borrow BTC and ETH regularly as well as a digital stablecoin currency (i.e. USDC or USDT) to take advantages of the large price gaps between crypto exchanges (i.e. buying in Coinbase and selling in Binance).
One of the biggest reasons these hedge funds need to borrow these tokens is because if you are a major trading firm, then your compliance department is most likely not going to let you buy the necessary tokens to take advantage of the highly profitable arbitrage opportunities. Institutions also prefer to borrow these assets than to have substantial direct exposure to them considering the extreme volatile nature of cryptocurrencies.
Given the velocity of money in the crypto markets as well as extreme volatility (some tokens can swing intraday about 30%), hedge funds and traders can make some serious money via arbitrage. With the alpha opportunities being so attractive, these firms are willing to pay high rates to borrow these specific tokens.
In turn, the interest made from the borrowers is paid out to the pool of lenders (aka you).
Currently the lending pool sits at over $17 billion in AUM with over 650k users. Of that $17billion, Mashinsky has $100 million of his own capital in the pool which further incentivizes to have a high payout structure that favors the community members (the lenders).
Alex Mashinsky is one of the truest pioneers and most successful entrepreneurs in history:
He was a pioneer of Voice over IP (VOIP) – VOIP is, “a method and group of technologies for the delivery of voice communications and multimedia sessions over Internet Protocol (IP) networks, such as the Internet.”
He founded GroundLink in 2004 which was a service to book an on-demand limo from a computer or smartphone. For reference, Uber was founded in 2009
Having a CEO and founder with this type of history and credential has and will continue to pay massive dividends for the Celsius protocol.
What are the risks and a little more on how it works
Celsius doesn’t provide any naked loans – all of the loans they make to institutions are (almost) fully collateralized.
If BTC were to fall to $4k during the period the loan, the institution simply returns the share quantity amount regardless of the price change and it is a community loss. But remember, the community is loan only and the reason individuals become a part of the Celsius community is to get access to yield that is unavailable to traditional banking.
There is always a risk to fully decentralization and the admittance of KYC/AML. Mashinsky is one who likes to follow the rules and registered CEL with the SEC. He also requires each lender/community member to perform KYC/AML when signing up, eliminating the risk of bad actors.
The information contained in this newsletter and website should NOT be seen as investment advice or recommendations. The materials are not a substitute for obtaining professional advice from a qualified person, firm or corporation. Tom Logue is not paid by any company to recommend any stocks or cryptocurrencies to readers and all research done is independent. Tom Logue does not guarantee that any of the companies listed in this newsletter or on the website will out-perform the stock market nor does Tom Logue guarantee the accuracy or completeness of the information contained herein. The information provided in the newsletter and the website should not be relied upon as the sole factor in determining whether to buy, sell or hold a stock. Past performance is not a guarantee of future performance. All investments involve risk, including the loss of all of the original capital invested. One should perform their own due diligence and understand the associated risks before making investments.