Headline Developments
China has likened online computer games to opium, causing shares in Tencent (700.HK) and NetEase (9999.HK) to drop 10% and 15% respectively. The article, which appeared in state-run Economic Information Daily (before being removed), said more than half of China’s children were nearsighted and online games affects their education; adding that gaming addiction is widespread and could negatively impact their growth. This isn’t new, with China currently having a curfew on gaming (for those under 18) between 10 pm and 8 am. But, in the current climate of greater regulatory action, such rhetoric adds to concerns of even tighter controls in the sector which would likely lead to stricter caps on daily use (which they can now do via facial recognition and monitoring).
Payments giant Square (SQ) is buying Australian BNPL leader AfterPay (APT.AU) for US$29b (A$39b) with the company’s platform to be integrated within Square’s Seller (online and in-person check out solutions) and Cash App (consumer payments/wealth) business units. Ultimately this deal sees even more concentration around Square and PayPal (the latter rolling out their own BNPL), with Klarna (private) being the preeminent stand-alone BNPL in the market with ~90m active users. They were valued at $46b a few months ago!
Leading Chinese battery manufacturer Contemporary Amperex Technology (CATL, 300750.CH) has announced a sodium-ion battery (or salt battery). Due to energy density and impurity issues, it’s been challenging to make sodium batteries stack up, but innovation in material technology (carbon and Prussian White) has given the team at CATL a bit of an edge. But don’t expect these in your next EV or mobile phone any time soon - the battery density is still 44% lower than lithium and the most immediate use case is within larger-scale energy storage (i.e. homes, data centres).
Other Developments
Citizen (private), a crowdsourced public safety app, has launched a paid service to give users 24/7 emergency assistance. The app has been shrouded in quite a bit of controversy over the years, as many believe the company, which live streams disasters and crime (and scrapes 911 calls for information), promotes vigilantism and “disaster voyeurism”. The new feature, called Protect, connects users to an Agent via the ‘Get Agent’ mode or allows the enablement of ‘Protect Mode’ which leverages AI to listen for distress (i.e. screaming) and then asks if they’d like to be connected to an agent. Once connected to an agent, they will have access to your camera and audio and will be allowed to call emergency services, friends, family or create a public incident - notifying users nearby to be on the lookout for lost persons etc.
Trevor Milton, the founder and former chairman of hydrogen-fuelled trucking company Nikola Corp (NKLA) has been charged with three counts of criminal fraud relating to the alleged deception of retail investors. According to US Attorney Audrey Strauss, Milton “lied about nearly every aspect of his business” including falsely claiming the company had “billions and billions and billions and billions” of dollars in committed truck orders. Another little trick by Milton was to show the Nikola truck moving, when in fact it was actually rolling downhill! So, to counter this fib, Nikola released a new video showing that, without Milton, they’re kicking goals and even driving that truck uphill!
A very bad week for Zymergen (ZY), dropping a staggering 75% after providing shareholders with some hard truths about their much-hyped technology. Just three months ago, the company hit the market, promising to revolutionise the way we manufacture products (effectively building products from the cell level up). The issue, however, is that their main product - an optical film called Hyaline - is turning into somewhat of a farce. They had expected to see revenues from this in 2H21 but now “several key target customers encountered technical issues in implementing Hyaline” which has pushed commerciality back considerably. Further, they’ve admitted the TAM for the Hyaline market (in particular foldable displays) is smaller than thought and growing slower than initially expected.
Google (GOOG) is following Apple, designing its own SoC (System-on-a-Chip), which will make its first appearance in the new Pixel 6 smartphone. The shift away from Qualcomm (QCOM) comes as the company seeks to differentiate their product from competitors; with an aim to create much greater AI/ML capability (such as computational photography, speech recognition and language learning).
The UK’s second high-speed rail network, HS2 (connecting London, Birmingham, Manchester and Leed), is looking to use 3D printed concrete technology to build concrete slabs on site - an initiative they expect will reduce the project’s carbon footprint by up to fifty per cent (i.e. no lugging around pre-cast slabs). As part of a JV developing the solution are construction firms Costain and Skanska alongside innovators Changemaker3D and CyBe (below).
The Government Accountability Office has sided with NASA over its decision to pick a single lunar lander provider (SpaceX) as opposed to a joint contract including Blue Origin (private). NASA had initially indicated they would opt for multiple providers but rescinded due to budgetary constraints. But, as we saw last week, Bezos has offered to cover $2b of NASA’s costs which it certainly hopes throws it back into contention!
SEC Chairman Gary Gensler is cracking the whip on a couple of fronts.
Firstly, he’s demanding greater scrutiny and disclosure of Chinese listings in the US, saying “in light of the recent developments in China and the overall risks with the China-based structure, I have asked staff to seek certain disclosures from offshore issuers associated with China-based operating companies before their registration statements will be declared effective”. The SEC will ask Chinese companies to clearly distinguish the shell company’s management services from the operating company while stating any risk from future actions from the Chinese government.
Secondly, Gary is calling on Congress to help rein in the crypto cowboys. He effectively seeks more authority to better police cryptocurrency trading, lending and platforms - a “wild west” he says is riddled with fraud and investor risk. Specifically, he’s seeking oversight of crypto exchanges (not currently within the SEC’s remit), plus power to oversee crypto lending, and platforms like peer-to-peer decentralised finance (DeFi) sites that allow lenders and borrowers to transact in crypto without traditional banks.
Meanwhile, the Monetary Authority of Singapore (MAS) has taken its first steps towards formalising crypto exchanges, granting Australia’s Independent Reserve “in principle” approval - the first in a queue of around one hundred applications pending. With China’s stringent oversight of the sector, many entrepreneurs are favouring Singapore’s regulatory environment (and political stability) which is likely to see it as the epicentre of blockchain innovation now and into the future.
IPOs | SPACs
There isn’t a lot to report this week re: IPOs, however, there is one notable company that hit the markets this week, and which requires a more thorough write-up.
Robinhood (HOOD) is now a public company, surging an astronomical 85% to an implied market cap of $59b! For perspective, that puts in on a 2022e P/S of 22x vs 11x for Coinbase (COIN) and 2x for Interactive Brokers (IBKR). However, IBKR (which saw 40% YoY growth last quarter) has ~$350b of client equity across 1.4m accounts ($242k/account) - largely due to enterprise/fund clients. By comparison, HOOD has ~$81b of assets for 17.7m users (avg of $4.5k/user) whilst Coinbase has $223b of assets for 56m users ($3.9k/user). There are a lot of things to like about Robinhood, high growth, rapidly rising client equity (and clients), decent improvements in gross margins, product roadmap, and growth of crypto business etc. Those are the pros. However, the risks are also considerable (and likely greater). Firstly, instead of charging trade commission, Robinhood routes trades through third-party trading firms who make a Payment for Order Flow (PFOF). This is where we welcome back SEC Chairman Gary Gensler who said the SEC is reviewing PFOF. A ban of the process (as is the case in the UK) would obviously trigger a massive sell-off (as PFOF is ~80% of HOOD’s revenue). Then there’s the questionability over their responsible investment practices (i.e. allowing vulnerable users to gain high leverage).
Earnings
Another BIG week for earnings, all summarised below. Particularly strong for Atlassian (TEAM), ON Semiconductor (ON), semiconductor innovators Atomera (ATOM) and Coursera (COUR). However, a particularly poor response from Pinterest (PINS) investors due to a slowdown in active user growth (that’s despite surpassing all other expectations)!
M&A | Cap Raise
Marvell Technology (MRVL) has announced the acquisition of Innovium (private) - a developer of networking ethernet switches for the cloud - for $1.1b. According to Marvell’s CEO Matt Murphy, this deal is complementary to last year’s $10bn acquisition of Inphi, and gives the company more ways to work across modern cloud data centres.
Elon Musk’s Neuralink (private), which has allowed monkeys to play pong with their minds, has raised $205m from a dozen investors including Dubai’s Vy Capital, Google’s GV, DFJ and Founders Fund. The funds will help the company progress towards human clinical trials as it sets its sights on developing brain implants for quadriplegics and people with neurological disorders.
Nozomi Networks (private), a cybersecurity company focused on the protection of critical infrastructure, has raised $100m from Telefonica, Porsche, Keysight and Honeywell. The company’s solution is claimed to secure ICS (Industrial Control Systems) devices by detecting threats before they hit - providing real-time visibility to help organisations manage cyber risk and improve resilience. This fundraising also comes at a critical time where such breaches (i.e. Colonial Pipeline and JBS) are having quite devastating effects.
Have a great week.
Charlie
LinkedIn or E-Mail (cnave@granitebaycap.com)
Granite Bay Capital is an innovation focussed investment company with a deep focus on the companies at the leading edge of innovation across major themes such as AI, ubiquitous computing, sustainability, automation and longevity. Any views expressed in this article are those of the author(s) and do not constitute financial advice.