Category Archives: Business

Palantir’s Hidden Risk: 20% of Its Commercial Business Is a Single Customer

I came across an incredible stat while doing a little research on Palantir Technologies, Inc today:

The company has only ~125 customers despite being in the business for nearly two decades and as a result, it’s not diversified enough. Right now, the top 20 clients generate 70% of the overall revenues, while one commercial client generates over 20% of the overall commercial revenues. As a result, if a single major organization decides to cut its partnership with Palantir and look for other alternatives to utilize its data, then Palantir’s stock will likely lose significant value and its top-line performance will crumble.

20% of the commercial business is a single customer! And the vast majority of the business, both commercial and governmental, is just a few big customers. That’s a risky proposition. I do see some conflicting figures for what exact percentage of their business is their top 20 customers, but suffice it to say, it’s a very large share.

If anyone has an educated guess who that one giant commercial customer is, do leave it in the comments!

Keep in mind that this company loses $100 million a month and has never made a profit in its 18 years of existence. The common retort is that they’re scaling a business for the long term, like Google or Amazon. But those companies were profitable far sooner.

Palantir’s shares have trended downwards since I first wrote about the company last month despite its popularity with Reddit’s Wallstreetbets. A month later, the company doesn’t look any better.

For more on Palantir, check out these posts:

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Photo: Palantir co-founder Peter Thiel. “Peter Thiel” by jdlasica is licensed under CC BY 2.0

Top GameStop Executive Resigns Suddenly

GameStop’s chief customer officer is resigning from the video-games retailer, per a Tuesday Securities and Exchange Commission filing released hours before the company announced its 2020 earnings.

The filing said that Frank Hamlin, who also serves as executive vice-president, would leave the company on March 31, following a transition period.

GameStop did not disclose the reasons for his departure, but said that he would be entitled to the payments, rights, and benefits associated with a “good reason” resignation.

Hamlin started as CCO in June 2019, and is responsible for initiatives around marketing, customer loyalty, strategy, and innovation.

GameStop and Hamlin entered into a Transition and Separation Agreement on Sunday, the company said.

More here.

It strikes me as odd that someone would resign with just 10 days notice, especially a top executive. Even for rank-and-file employees, at least two weeks is standard. It’s also unusual that he was only at the company for 9 months. This comes shortly after the departure of CFO Jim Bell, who reportedly was forced out by board members including Chewy founder Ryan Cohen.

This makes me wonder if Cohen is finding some resistance to his transformation plan, or if perhaps fourth quarter results, which are coming out in a few hours, are going to be worse than expected.

There’s yet another possibility: the GameStop execs are too rich to care anymore. The run-up in the stock, fueled by traders at Reddit’s Wallstreetbets, has made many of them extremely wealthy. Both Bell and Hamlin hold over $100 million in GameStop stock.

For more on GameStop, check out these posts:

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Photo: “Retail GameStop” by ccPixs.com is licensed under CC BY 2.0

The Best Motivational Speech of 2021

Investor Jason Calacanis was in rare form on the All-in Podcast on Friday:

All of the answers are out there if you want to start a company. All the skills are freely available to you. You can learn anything online. I think the message I really want people to understand is you may believe that the world is filled with inequality and racism and bad actors. And you would be right.

But what’s also right is that every skill can be learned, capital is available now more than ever, and there is a clear path for you if you just stop watching television and learn to be a UX designer, a sales executive, a marketing or growth executive or a developer. You can change the world and change your lot in life and be really fucking rich.

Don’t buy into this victim mentality. It’s complete, utter nonsense that crazy lefties are saying ‘Everybody’s stupid and nobody can learn.’ And I got a bag of red pills here, and I have been pounding them. The world is a giant opportunity for all of you. Go get it! Go get it!

I find this mindset very inspirational, and accurate! Online courses are widely available and free or cheap, making knowledge easier to access than ever. Capital is flowing. The virus is receding. Things are not perfect and never will be, but what a great time to be alive!

For more on investing and the business of life, check out these posts:

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Photo: “Jason Calacanis” by Peter Kaminski is licensed under CC BY 2.0

GameStop Has Failed to Modernize Before. This Is What Happened.

Many investors are excited about Chewy founder Ryan Cohen joining the GameStop Corp. board and helping the company transition to e-commerce. But what isn’t as widely known is that GameStop has tried this before, with abysmal results:

Wall Street and short sellers placed heavy bets against GameStop because of strategic missteps. The company, at one point, latched onto game downloads as well as another trend now gaining momentum known as cloud gaming, or the Netflix-like streaming of games. But products gained with two acquisitions made in 2011 of companies specializing in those areas were abandoned after about two years.

“A lot of the initiatives that we had brought to the table and invested in just died on the vine,” said Chris Petrovic, who joined GameStop in 2009 to spearhead the retailer’s digital ventures, in an interview this month.

The article is referring to the acquisitions of Impulse and Spawn Labs. GameStop bought them just one month a part in 2011. Impulse was a system to digitally download games, and Spawn Labs allowed people to stream games.

But rather than seize the future with these two acquisitions, GameStop wound up shuttering both within just 3 years. It replaced Impulse with its own download software and shut down Spawn Labs claiming that the customer wasn’t yet ready for cloud-based gaming.

How many millions of investor dollars did GameStop pay to buy these companies, only to shut them down shortly therafter? They also bought mobile phone retailer Spring Mobile to try to get into smartphones. That business drastically underperformed and GameStop sold it a few years later, having little but debt to show for it.

In all, each time GameStop has tried to reinvent itself, it has quickly failed and abandoned the program. Will this change under Mr. Cohen’s leadership? Perhaps. But I wouldn’t want to bet $195 a share on it.

For more on GameStop, check out these posts:

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Photo: “GameStop” by JeepersMedia is licensed under CC BY 2.0

Video Game Sales Going Digital Could Make GameStop a Dinosaur

I came across an incredible stat on the video game industry this morning. In just nine years, it’s gone from almost entirely physical to almost 100% digital:

Physical video game sales from computers & consoles have made a dramatic shift since 2009. In 2009 physical sales still accounted for 80% of the market and decreased to 17% a decade later in 2018. Video game consoles such as Xbox come with a 512GB or 1TB drive in addition to an optical drive. Profits and efficiency will continue to drive this market and I believe physical games will be a thing of the past. This presents a huge problem for GME over the next decade. Eventually the new consoles will come without an optical drive and the older systems will lose most of their allure causing the secondary market to dry up. Without the secondary market for games to trade and sell their used games GME will lose foot traffic in addition to a large business segment.

GameStop Corp. relies on secondhand game sales for a substantial portion of its business. There are no secondhand sales of digitally downloaded video games.

GameStop also has 5,000 physical stores that have little purpose in a world where almost all games are sold via digital download. And they’re locked into those leases for years, in many cases. This will drain capital and attention from their ambition to become an e-commerce leader.

In all, the industry has passed GameStop by and companies like Microsoft or other game publishers are in a much better position to benefit from these changes.

For more on GameStop, check out these posts:

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Photo: “Dinosaur” by shvmoz is licensed under CC BY-SA 2.0

Is GameStop the Next Blockbuster?

I came across an interesting article today. It drew a parallel between a dominant brick and mortar retailer of entertainment of today, GameStop, and one of yesteryear: Blockbuster:

It’s 100% obvious that over time all game software is going to be downloaded. This is the same or worse than with movies. Already, 100% of the game content on smartphones is downloaded, and the same will quickly happen to consoles and to PCs. It’s just more convenient to download something that’s 100% digital versus going out to a store to buy it.

It’s also nearly 100% obvious that the digital content channel will be controlled by specific parties. There are Apple (AAPL) and Google (GOOG) (NASDAQ:GOOGL) when it comes to smartphones, through the Apple Store and Google Play. There are the console makers when it comes to consoles. And then only in PC gaming is there something of an open market, where for now Steam is the leader, with individual publishers and Microsoft also trying to be in the running.

Given the above, GameStop’s slide into oblivion selling gaming software is a near certainty, much like Blockbuster’s was. Gaming hardware is generally amenable to being sold online (standardized, bought on price), too, and is lower margin than software. Used game trading ends with digital sales.

Hence, GameStop has this permabearish thesis on it, and this thesis is real. Even before COVID-19 hit, GameStop already was reporting near 30% declines in revenues.

More here.

So online, GameStop leads in no part of the market. One area where they do lead, re-sale of used games, is probably going away because the games will be 100% digital. Ouch.

If they want to muscle their way into the online market, they’ll have to contend with giants like Microsoft, Tencent, and Apple that can crush them for a tiny fraction of their massive profits.

Their e-commerce business is growing rapidly, but it’s hard to imagine such a financially strapped and marginal company taking on so many wealthy and digitally native competitors.

What’s more, I would expect Amazon and Netflix to make major pushes in this area to compete with Google and Apple. Both are big players in entertainment and are unlikely to neglect the vast video game market.

For more on GameStop, check out these posts:

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Photo: “Blockbuster Closing Store Front Sign Taken Down” by Dave Dugdale is licensed under CC BY-SA 2.0

Is Robinhood Screwing You On Your Trades?

An interesting detail surfaced in this week’s Congressional hearing on GameStop shares and Robinhood, the platform where they’re often frenetically traded:

In his statement, Themis Trading Partner Sal Arnuk went right for that last issue, calling attention to the fact that payment for order flow (PFOF) causes a disconnect between a broker and his customer — especially in the case of Robinhood.

“They recently changed their PFOF method from one giving them a set payment per share to one giving them a percentage of the spread instead,” he said. “Think about this: A Robinhood trader wants the spread in the stocks he/she is trading to be as narrow as possible. The HFT [high frequency trading] market maker buying those orders benefit most when that spread is as wide as possible. And now Robinhood benefits most when the spread is as wide as possible as well! This is an amazing misalignment of interests.”

Arnuk took a dim view of Robinhood’s motivations:

“This tells you Robinhood knows full well the value of its herded and gamified product base; they knew to educate their users just enough to incentivize trading and maximize their own revenue as a result of it.”

Let’s back up a bit. A spread is the difference between the price you can buy a share at and the price you can sell it at. Let’s say you can buy GameStop at $190 a share and sell it at $189 a share. The company that executes the trade gets that dollar for their trouble.

You want that spread as low as possible so you can make more money. If Robinhood is paid a percentage of the spread, their incentive is to get that spread as high as possible. Nice for them, not so nice for you.

I don’t think Robinhood has publicized this change, and it seems sneaky and not in the best interest of investors. I’d like to see them come out and explain why this is good for investors. But I’m not sure they can do that.

For more on GameStop, check out these posts:

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Photo: Robinhood Co-CEO Vladimir Tenev “TechCrunch Disrupt NY 2016 – Day 2” by TechCrunch is licensed under CC BY 2.0

The Stimulus is Headed into Bitcoin

Even as Bitcoin sits near record highs, a new survey by Mizuho Securities finds that many Americans plan to put their stimulus check into the hot cryptocurrency:

…the Mizuho survey found around 20% of check recipients expected to allocate as much as 20% of their checks to bitcoin and/or stocks, while 13% expected to allocate 20% to 80%, and 2% expected to put 80% or more into the markets.

Bitcoin even outranked stocks, another popular choice:

“Bitcoin is the preferred investment choice among check recipients. It comprises nearly 60% of the incremental spend, which may imply $25 billion of incremental spend on bitcoin from stimulus checks,” wrote Mizuho analysts Dan Dolev and Ryan Coyne, in a Monday note (see chart above). “This represents 2-3% of Bitcoin’s current $1.1 trillion market cap.”

The graph below shows the extent to which bitcoin is favored over stocks as a home for stimulus funds:

This survey was small, so we shouldn’t put too much stock into it, but this could be a major shot in the arm for the cryptocurrency. I also expect a pop in other cryptocurrencies like Ethereum and Dogecoin, along with meme stocks like GameStop and AMC. But I’d advise my fellow Americans to buy stock/bond index funds instead.

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Photo: “Bitcoin, bitcoin coin, physical bitcoin, bitcoin photo” by antanacoins is licensed under CC BY-SA 2.0

Almost All SPACs Lose Money and They’ve Never Been More Popular

I came across an incredible stat today:

Citing data from Dealogic, Barron’s notes that there have been 302 domestic initial public offerings (80% of which are blank-check outfits) raising an aggregate $102.3 billion, so far this year through March 10. For context, the 2020 full-year tally registered at 457 IPOs raising $167.8 billion, while the tech bubble-era high-water mark of 547 IPOs and $108 billion in proceeds was set in 1999.

These newly minted public companies have distinguished themselves beyond simple size and number. According to data from Robert W. Baird, 81% of last year’s vintage were loss making, compared to a previous cyclical high water marks of 68% and 73% in 1999 and 2000, respectively.

More here (see the March 15 post).

So almost all IPOs are SPACs, they’re raising more funds than ever before, and almost none of these companies makes a profit. Even recently, money losers like WeWork were shunned by public markets. But the market seems to have thrown all standards aside.

For now.

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Photo: Major SPAC sponsor “Chamath Palihapitiya” by jdlasica is licensed under CC BY 2.0

Big Investors Are on Zoom and They’re Not Going Back

I’ve been listening to an interesting podcast this morning with two major investors in early stage start-ups: Jason Calacanis and Paul Judge of Panoramic VC. They discussed meeting founders purely through Zoom, rather than in person, and how that’s changed the way they invest.

Both said they found it far more efficient to meet people remotely. Each remote meeting might take only half an hour, while an in person meeting might take several hours of commute time, chit-chat, etc.

The bottom line is they can meet way more founders and expand their “deal funnel,” or the number of companies they can pick from to invest in. Neither plans to return to in person meetings when this ends, given the huge efficiency jump they’ve experienced.

As a much smaller investor, I can relate. I’m meeting with an advisor in a couple of weeks, and it’s going to be remote. Even if COVID didn’t exist, I’d keep it remote, since he’s near Philadelphia and I’m in the NYC area. An in person meeting is a day trip, whereas a phone meeting is an hour tops. In terms of productivity per hour, the choice is clear.

Expect to see a continuation of virtual meetings after COVID. Many are finding the efficiency gains over in-person can’t be beat. People may still wish to get together from time to time and socialize, but I think much more business will be conducted remotely in the future, and we’ll be better off for it.

For more on start-ups and business, check out these posts:

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Photo: “Jason Calacanis” by Joi is licensed under CC BY 2.0