The fundamental error in defaulting to low valuation instead of deep fundamental underwriting work as a top of-funnel screen is best explained if one were to imagine the stock market as a retail store. You speak to the salesperson and they say to you, “OK, we have 1000 different things you can buy. These 800? They’re all the same price. These 100? They’re super nice and very expensive. Finally, we have these 100 that no one wants. They’re very cheap.” Now, imagine after that he told you, “Oh, and a thousand people already picked through the cheap ones.”
Investing is a very difficult and complex game, and many money managers will lose regardless of style. The opportunity lies in expanding one’s skillset from purely fundamentals to understanding how and why other investors lose and using these structural factors to determine how to allocate capital based on fundamental views. In poker terms, one needs to know the quality of a hand (fundamental views), positioning and the texture of the board (flows, pricing views), and how the weaknesses of other players will allow you to profit from that information (structural inefficiencies).
Professional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitor, all of whom are looking at the problem from the same point of view.
Social Cost Arbitrage: Don’t forget the pecking order. Micromanagement: At the firm level, active managers increasingly have to justify individual positions to LPs, meaning investments not only have to be attractive to the manager, but also saleable to the client. Depending on the biases of the clients, managers may be unable to take advantage of insights because they risk losing clients. Boss Bias: Managers may have concerns with or even obsessions about a particular issue (election risk, fed balance sheet, etc.) that put employees in a bad spot because they will get fired if a particular investment does poorly around that same time that the issue manifests. Employees will not escalate ideas that they know go against their boss’s biases. Boy Who Cried Wolf: Individuals inside institutions generally cannot escalate views that have been escalated previously multiple times, even if the conditions for a good investment were not met in prior iterations. Managers scoff at pitches they have heard before.
My colleague Aswath Damodaran says Amazon isn’t an ecommerce company or a cloud company, but a disruption platform that through great execution and unparallelled access to cheap capital, uses the flywheel effect to spin into completely different industries.
The sheer volume of people on Amazon (82% of households in the US) makes the platform more appealing to advertisers. Amazon Media Group is now a $15 billion business, the third-largest advertiser in the world behind Facebook and Google. More advertising results in more products, which leads to more purchases, which leads to greater investment in Amazon Prime Video to continue to increase the stickiness … and the wheel flies.
Apple owns distribution via iOS (the wealthiest 1.4 billion people on the planet). That’s the island all survivors fight on. Apple collects a toll on every SVOD service via the app store. In addition, the Cupertino firm has greased the rails they own, and can remove most of the friction from the 19 steps needed to download and sign up for Netflix on your iPhone (vs. 3 steps for Apple TV+). People will opt for a sh**ty seat in coach on an Airbus A330 vs. a first-class cabin on the Queen Mary 2 to get from London to NYC.
In the context of the streaming wars, SVOD adds momentum to the flywheel. Movies and entertainment evoke powerful emotions. The connective tissue of the flywheel is increasingly emotion. The NPS score (consumers’ emotional connection to a company) is negative to zero for ecommerce and internet companies, but it’s strong for SVOD companies. Loving Fleabag means you’ll buy your next toaster from Amazon, not Target or Williams-Sonoma.
The result? In the last 13 months Apple and Amazon have added Disney, AT&T/Time Warner, Fox, Netflix, Comcast, Viacom, MGM, Discovery, and Lionsgate to their market capitalization. Read the last sentence again.
The case for these deals is obvious. Recorded music revenues have been growing quickly for the past three years, topping $19bn in annual sales. But the industry is dominated by three large companies whose values had not been repriced to match their growing businesses. Universal Music and Sony Music exist within much larger French and Japanese conglomerates — while Warner Music is privately controlled by Mr Blavatnik’s Access Industries.
Both Mr Bolloré and Mr Blavatnik will retain control of their companies while getting a handsome return. Universal’s Tencent deal valued the company at a multiple of 30 times earnings before interest, tax, depreciation and amortisation. A similar multiple would price Warner Music at $19bn, although analysts expect that the valuation could be closer to $12bn to $15bn, given that Universal is the biggest player.
One of my favorite data points ever, courtesy of Nick Maggiulli, is that if you had invested from 1960-1980 and beaten the market by 5% each year, you would have made less money than if you had invested from 1980-2000 and underperformed the market by 5% a year.
Jay Jeon runs Cocomelon, a YouTube channel dedicated to nursery rhymes and original songs, whose animated kids and creatures generate about 2.5 billion views in a typical month. That translates into as much as $11.3 million in monthly ad revenue, according to estimates from industry analyst Social Blade. In terms of viewership, an average Cocomelon video dwarfs the turnout for most of the world’s sports leagues, pop stars, and scripted TV. It’s the second-most-watched YouTube channel, trailing only T-Series, India’s music king.
Now, however, the Jeons and their team of about 20 employees are ready to merchandise. Their first forays beyond YouTube include albums of the channel’s popular songs and, later this year, Cocomelon toys, made by Jazwares, known for its Cabbage Patch Kids and Pokémon dolls. Jeon says he’s also thinking about ways to develop a full-length theatrical movie based on the show. (In a normal week, Cocomelon uploads one original video that’s a few minutes long, plus a longer compilation of old footage.)