Tremendous

An angel investor's take on life and business

  • A Giant Hedge Fund Is Imploding, Taking Stocks with It

    Ten billion dollar hedge fund Archegos Capital Management is imploding, causing banks to frantically sell its portfolio to stem further losses:

    One mystery in a dramatic year on Wall Street has been the identity of a trader whose persistent purchases have sent shares in ViacomCBS Inc., Discovery Inc. and a handful of other companies surging even when the broader market was down.

    People familiar with the transactions say the answer is former Tiger Asia manager Bill Hwang. Late last week Morgan Stanley, Goldman Sachs Group Inc. and Deutsche Bank AG swiftly unloaded large blocks of shares in those companies and others, part of the liquidation of positions at Mr. Hwang’s Archegos Capital Management.

    The sales approached $30 billion in value, some of the people said, and fueled a 27% plunge Friday in shares of ViacomCBS—an unusually large decline in a widely held, large-capitalization stock on a day with no significant company-specific news. Billions of market value in other companies were wiped out as the sales continued, surprising market participants who called the size and speed of these stock sales unprecedented.

    Hwang had placed giant bets on several stocks funded with borrowed money, and his fund suffered major losses when the stocks moved against him:

    …a major actor in supporting companies’ share prices appears to have been undone by his continuing to add to leveraged bets as markets soared. The strategy fell apart when some of those bets started to reverse on him.

    There were serious warning signs about Hwang’s conduct, which his banks, including Nomura and Credit Suisse, did not heed:

    U.S. securities filings show Credit Suisse was prime broker in 2011 and 2012 to Mr. Hwang’s former firm, Tiger Asia Management LLC. Tiger Asia handed money back to investors after Mr. Hwang admitted in December 2012 that the hedge fund criminally used inside information from investment banks at least three times to profit on securities trades.

    This is the latest in a string of problems for Credit Suisse:

    Credit Suisse is still digesting the collapse earlier this month of Greensill, a British supply-chain finance company that declared bankruptcy shortly after the Swiss bank froze funds that provided it with liquidity. The double hit could be an extraordinary run of bad luck; there were other banks caught up in both failures. Alternatively, it could point to endemic problems of risk management at Credit Suisse. The Swiss company carried on working with Greensill despite internal concerns.

    So if you see volatility in stocks like Viacom, Discovery, Credit Suisse, etc. in the coming days, you’ll know where it’s coming from. I do wonder if other stocks may be impacted by this forced selling of Archegos’ positions.

    For more on what’s moving markets, check out these posts:

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    Photo: “Boom-goes-the-dynamite” by Aaron & Alli is licensed under CC BY-ND 2.0

  • Palantir’s CEO Is Spending Time Critizing Wall Street, Rather Than Making Money

    Palantir Technologies, Inc. CEO Alex Karp had some sharp words for Wall Street recently:

    “We told the Wall Streeters that we will focus on building the long-term health of our company, that we are going to invest in our product development and in our clients, and you just have to battle it out with them,” said Karp, also a Palantir co-founder. The developer of data analysis software went public via a direct listing in September after nearly two decades as a private company.

    Not everyone on Wall Street has such a short-term focus, Karp acknowledged. Nevertheless, he said it remains “one of the most destructive, corrosive attributes of an otherwise interesting and largely functioning system.”

    Is 18 years short term? That’s how long Palantir has been in business, and it’s never made a profit. Google and Amazon built businesses for the long term as well, but they reached profitability far sooner. Amazon took seven years and Google took just three.

    I suggest that Karp stop wasting time criticizing Wall Street and start focusing on making his company spit out some cash for shareholders.

    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

  • Has GameStop’s Business Peaked?

    GameStop’s 2020 results, released this week, were disappointing, with losses over $200 million last year.

    These weak results may be the best GameStop is likely to do for some time. The reason is something called the “video game console cycle.”

    Video game consoles are a huge part of GameStop’s business, especially with the games themselves increasingly moving to digital downloads. New consoles sell like crazy when they’re first released. Gamers line up outside stores, sometimes even overnight, eager to get their hands on the latest tech.

    And then…the enthusiasm fades. Sales of the console drop, and another doesn’t come out for 4-7 years. The lines outside GameStop disappear, and business gets tougher.

    There are three major video game console makers: Microsoft, Sony and Nintendo. Microsoft and Sony just released new consoles in November 2020, right in time for the Christmas rush. Nintendo’s latest console came out in 2017, and they may have a new one ready within a few months.

    Where does that leave GameStop in the later months of 2021 and in the next several years? All the major companies will have recently introduced new consoles, and their sales will have started to drop off. Physical game sales are likely to continue to be supplanted by digital downloads. And whatever rent abatement they were able to get from landlords due to COVID will have likely ended.

    This could lead GameStop to much bigger losses in the future. Indeed, before COVID, losses were significantly larger, coming in at $500 million and $700 million for 2019 and 2018 respectively.

    If Chewy founder Ryan Cohen and the team he’s putting in place can turn GameStop into a viable e-commerce business quickly, they may escape this fate. But they have 5,000 stores with long term leases and limited cash reserves to fund this transition.

    Investors may be expecting a brighter future for GameStop with Mr. Cohen’s changes and the end of COVID, but I suspect the mediocre results we saw in 2020 may be a best case scenario.

    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

  • Are GameStop Shareholders About to Be Diluted to Oblivion?

    It’s no secret that GameStop shares are way up this year, despite recent struggles:

    This could be an opportune time for the company to sell more shares to fund its transformation from a brick-and-mortar to a digital business. Indeed, the company hints at this in their latest annual report, just released after Tuesday’s market close:

    Since January 2021, we have been evaluating whether to increase the size of the ATM Program and whether to potentially sell shares of our Class A Common Stock under the increased ATM Program during the course of fiscal 2021, primarily to fund the acceleration of our future transformation initiatives and general working capital needs. The timing and amount of sales under the ATM Program would depend on, among other factors, our capital needs and alternative sources and costs of capital available to us, market perceptions about us, and the then current trading price of our Class A Common Stock.

    When a company issues more shares, that means each existing share is less valuable because it represents a smaller slice of the company. You’re slicing the pizza into thinner slices, so to speak.

    To get an idea of what such a dilution could mean, consider AMC Entertainment Holdings, Inc., another darling of the Reddit crowd that has experienced a huge run up in price this year. They sold so much stock that each share only owned 20% as much of the company as before! That’s an enormous haircut for investors.

    GameStop has just $635 million in cash on hand. That’s enough to avoid bankruptcy for the forseeable future, but is it enough to fund a transformation into the Chewy of video games, outcompeting the likes of Amazon and Microsoft? I doubt it. So they could go for a huge capital raise, severely diluting shareholders.

    The flip side of this is if they raise a lot of money and successfully transform the business, you may not care. You own a smaller slice of the company, but the company is worth more.

    However, if the transformation fails, you’re left with less ownership in a company that’s still struggling. GameStop has the drag of 5,000 money losing stores. And in a video game sales market that’s increasingly digital, with giant competitors with way more tech expertise and capital, I think dilution and a failed transformation is the more likely scenario.

    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

  • You Won’t Believe Just How Volatile GameStop Is

    The volatility in shares of GameStop Corp. has been widely reported, but just how volatile they’ve been this year truly boggles the mind. I found this gem in their annual report, which was just released this week:

    …from January 11, 2021 to March 17, 2021, the closing price of our Class A Common Stock on the NYSE ranged from as low as $19.94 to as high as $347.51 and daily trading volume ranged from approximately 7,060,000 to 197,200,000 shares. During this time, we have not experienced any material changes in our financial condition or results of operations that would explain such price volatility or trading volume.

    In just two months, shares varied by a factor of 17 and volume by a factor of 28, all with no news from the actual business!

    Any shares that volatile are best avoided, in my opinion. Maybe you time it right, but very probably you don’t.

    For more on GameStop, check out these posts:

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    Photo: “Huge Wave” by Duncan Rawlinson – Duncan.co is licensed under CC BY-NC 2.0

  • GameStop Sales Down 40% in 2 Years

    Digging into GameStop Corp.’s annual report today, which just came out after yesterday’s market close, a couple numbers really stuck out to me:

    • Sales are down 40% in 2 years
    • Shareholder equity is down 80% in 2 years

    And lest we blame COVID for all of this, note that the percentage sales decrease from 2018 to 2019 was slightly larger than that from 2019 to 2020. In all, the business shrunk a bit more than 20% both years.

    These losses are taking a serious toll on shareholders’ investment. $2.2 billion in shareholders’ equity in 2018 was reduced to just $400 million by the end of 2020.

    GameStop shares have reacted quite negatively to this report, dropping over 30% today so far. Speculation has driven the stock up a great deal this year, but this business is shrinking fast. How much longer can speculation support it? You can’t shrink by 20% a year for very long until your business ceases to exist.

    There were a few bright spots in the report. Losses, inventories, and long term debt are all down. Losses have also dropped as a percentage of revenue. And most of the board is expected to resign soon, perhaps giving Chewy founder and board member Ryan Cohen a freer hand to transform the company into an e-commerce business.

    But he will face an enormous drag from 5,000 money losing stores, many of which have long term leases that will saddle the company with losses for the forseeable future. His competitors, like Amazon, Microsoft and Sony, don’t face that drag on their performance.

    The video game business is increasingly based on downloads. Microsoft and Sony have even released diskless consoles, removing any need or even possibility of buying games for them at GameStop.

    There were a few positives in this report, but the overall picture is of a dying business that will be difficult to turn around due to its existing obligations and weak competitive and financial position. I’ll be staying away from this one.

    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

  • 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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    Check out the Stuff I Use page for some great deals on products and services I use to improve my health and productivity. They just might help you too! 

    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:

    If you found this post interesting, please share it on Twitter/LinkedIn/email using the buttons below. This helps more people find the blog! And please leave a comment at the bottom of the page letting me know what you think and what other information you’re interested in!

    Check out the Stuff I Use page for some great deals on products and services I use to improve my health and productivity. They just might help you too! 

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