Happy Sunday!
It has been a busy week, but most dominantly politicians are stepping up their regulation game. From price manipulation to monopoly building to tax evasion, governments are starting to shorten the leash for Big Tech.
Have a great rest of the weekend and enjoy the weather! For 1 more week days will continue to get longer on this side of the globe. ☀️
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Regulation of Big Tech: Primenopoly
The Washington, D.C. Attorney General Karl Racine filed an antitrust suit against Amazon. The goal of the suit is to unravel Amazon Prime, which at this point has over 126 million paying members.
The background behind the antitrust suit is that Amazon punishes independent merchants if they list their products for lower prices on their own websites or other platforms. Thereby, Amazon can dictate pricing all over the internet, not just on its own platform, and in doing so makes products more expensive for all of us.
Amazon Prime is the keystone of the company’s dominance over retail. Shipping and logistics are extremely expensive, costing far more than the company earns from Prime membership fees: In 2019, Amazon spent $37.9 billion on shipping and even more in 2020.
The solution is the relationship between Prime and Marketplace. Third party sellers on Amazon are essentially paying for shipping costs, by being forced to pay commissions as high as 45%, only to access Amazon customers. Customers get free shipping so they shop to Amazon. Merchants want to access customers so they accept paying high commissions. Amazon uses the commissions to cover the costs of ‘free’ shipping.
This only works as long as prices are the same on Amazon as they are on the websites of independent merchants.
What happens if Amazon was prohibited from forcing merchants to keep their prices high on their own websites:
Merchants will lower prices of products on their own websites & other platforms
The price for products on Amazon + free shipping may be higher than the lower price on the merchants own website + some shipping costs
Customers will increasingly look somewhere else for shopping
Amazon will need to choose: Match lower prices or lose customers
Prime and its promise of free shipping fall apart
This would be a game changer for Amazon.
Potential consequences stretch to other parts of Prime including Prime Video. Amazon recently announced $8 billion acquisition of MGM. This major investment may not make sense if the company loses this antitrust lawsuit. Great article
Regulation of Big Tech: Google
The Attorney General of Ohio has filed a lawsuit in an effort to declare Google a public utility that should be regulated as such. Therefore, Google should not be able to prioritise placement of its own products, services and websites on its search result pages. The lawsuit is the first of its kind but a fitting piece within the larger movement of increasing efforts to regulate big tech. Link
Regulation of Big Tech: Cross border taxation
The G7 countries are moving closer towards implementing a global agreement for cross-border taxation of corporates. Due to the difficulty of allocating revenues generated in the internet to specific countries, this targets primarily big tech companies. Agreed was:
"Firstly, multinationals will pay at least a 15% global minimum corporate tax rate in each country they operate from. Secondly, taxes would apply to any global company with at least a 10% profit margin. Thereafter, 20% of any profit above that would be allocated and taxed in the countries where they operate from. “ - Jefferies
However, a 15% tax rate isn’t all that high and while the G-7 proposals are international agreements, nations have their own tax laws, which will take years for lawmakers to draft, negotiate, and pass into law. Link
Regulation of Big Tech: M&A
After a lengthy investigation by the US House Judiciary Committee on antitrust, the panel found that Amazon, Apple, Facebook and Google hold monopoly power and that antitrust laws should be revised.
Consequently, on Friday, a group of lawmakers introduced a set of antitrust reforms that could force Amazon, Apple, Facebook and Google to overhaul some their business practices. Specifically, the package of five bills would put significant restrictions on the ability of dominant platforms to complete M&As which present clear conflicts of interest. Link
Return to the office. Or not.
As the pandemic continues to ease, people are returning to the office. But not everyone is happy about that. Some prefer to quit rather than before going back to the office. Link
As of today, 28% of US office workers have returned to their buildings and some big tech companies like Apple require employees to return to the office for 3 days a week starting in September.
The WFH topic divides opinions among business leaders.
Many want their employees physically present in one place, also because it measurably increases overall creativity. Other companies such as Shopify, Coinbase or Pinterest focus on “remote-first” business models and give up the conventional concept of having a “headquarter location” entirely.
It seems unlikely that companies will be able to completely take away the freedom that working from home has given millions during the pandemic. Instead, flexible working arrangements are increasingly becoming the new standard model. Going forward, companies will need to focus on remote work creativity.
Knock, knock. Who’s there? Inflation.
Consumer prices in the US increased at the fastest rate in more than a decade. The Consumer Price Index increased 5% in May compared to one year before. This represents the highest rate of inflation since 2008, when it reached 5.4%. The jump is driven by increases in the cost of flights, cars and apparel as economies reopen, but also by a low reference value from May 2020. Link
WWDC
This week Apple held its popular developer conference, WWDC, where it announced a list of new stuff coming to its several devices. Here is an overview of everything Apple announced at the WWDC 2021 keynote.
Crypto (In-)Security
In the 6 months between Oct. 2020 to Mar. 2021, retail investors in cryptocurrencies lost over $80 million due to cyber scams. Link
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Tel-Aviv based Monday.com is aiming for a valuation of more than $6 billion in its US IPO. The company was valued at $2.7 billion after its last funding round in May 2020. Link
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The Curse of Beating Earnings
Last week, I wrote about 4 examples of cloud software companies who posted revenue and earnings results in Q1-21 that either met or outperformed market expectations but whose share price dropped after the earnings announcement.
I picked Coupa as a potential next candidate.
The company announced its Q1-21 performance on Monday after markets closed. On Monday (before the announcement), the stock ended trading at $236.7.
Q1-21 performance was as follows:
Revenue of $166.9m (+40.0% YoY), beating consensus by $14.4m, or 9.5%
Non-GAAP EPS of $0.07 beats by $0.26 (!)
GAAP EPS of -$1.38 beats by $0.40
Q2 Revenue guidance of $209.1 to $210.4 above consensus of $208.6
Q2 EPS guidance of -$0.09 to -$0.06 above consensus of -$0.12
After the announcement of these very positive surprise and better guidance for next quarter, the share price dropped to $217.6, or -8%, on Tuesday morning. Also, there was no operational update that would have justified this drop.
For some reason, the pattern was confirmed, again.
Q1 earnings rounds are largely over, so we will have to wait for next quarter to see if this will repeat (I have my doubts). But as mentioned last week: Betting on random patterns can be fun, but is gambling, not investing.
Active Investments
Pexip (PEXIP) - Target price: $15 (+61% to current PPS). Analysis
Docebo (DCBO) - Target price: $70 (+26% to current PPS). Analysis
Wix.com (WIX) - Target price: $330 (+18% to current PPS). Analysis
ECOMI (OMI) - Analysis
NEWS | IPO & SPAC | OPPORTUNITIES | BITES
👨🎤 Betting on the popularity of individuals on social media. Naturally, Elon ranks #1.
☠️ 14g of sugar in a 14g serving. Internal company documents show, >60% of Nestlé’s food portfolio is unhealthy
👮 UK Police raids 'Cannabis Farm,' but finds Bitcoin mine instead
🍟 A chicken nugget sells for $99,997 on eBay
🎓 Oxford quants say their AI can predict stock moves
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Disclosure: I am long DCBO, PEXIP, WIX, OMI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it other than from paid subscribers of my newsletter. I have no business relationship with any company whose stock is mentioned in this article.
Disclaimer: I am not a registered investment, legal or tax advisor or a broker / dealer. All investment / financial opinions expressed by me are from personal research and experience and are intended as educational material. Although best efforts are made to ensure that all information is accurate and up to date, occasionally unintended errors and misprints may occur.