Headline Developments
Every week there’s a new deal (or regulation) in gaming. The Steam Deck, the Epic vs Apple case, China’s regulatory crackdowns (triggering a Tencent and Netease collapse). Acquisitions ramp up every week (this week alone saw Roblox buy Discord competitor Guilded and Swedish game Holdco Embracer Group snap up three new developers). To try and make sense of this I’ve whipped up an ecosystem map, highlighting with some detail what this all looks like. In it you’ll see the ever-expanding gaming/sports betting landscape, the rise of eSports, a very dominant (for now) Tencent and….in amongst it all…..Google, Amazon, Microsoft and Facebook are quietly building very compelling, vertically integrated gaming divisions. Then there’s the metaverse!
Jeff Bezos is suing NASA. Yes, after being knocked back for the moon landing system (in favour of SpaceX) and subsequently losing a review from the Government Accountability Office (GAO), Bezos has taken the extreme (but hardly surprising step) of going to the Federal Court challenging “NASA’s unlawful and improper evaluation of proposals” submitted for the Moon competition, lawyers for Blue Origin said.
SEC Chairman Gary Gensler has posted a video outlining the risks of investing in US-listed Chinese companies - particularly the risks around the shell structure and China’s avoidance of US audit rules. These more candid comments come weeks after the SEC put a hold on processing further IPOs from Chinese companies in the US.
China’s tech crackdown continues to escalate, with the State Administration for Market Regulation (SAMR) publishing draft rules aimed at tackling unfair competition. Some of the key rules stipulate that operators should not provide false data (such as number of clicks), not conceal negative reviews, platforms should not use data or algorithms to influence user choice and should not use data or algorithms to collect competitor information. Such rules will be devastating for platforms like Tencent (700.HK) and Alibaba (BABA), both off 7% this week (and down 42% and 33% respectively for the last six months). Ouch.
All of this comes in the same week in which the Chinese Government took a stake in Beijing ByteDance Technology - the parent of the most downloaded app in the US - TikTok. Now, despite that stake being a measly 1%, reports indicate the Government has taken one of three board seats in the parent. So economic control of 1%, but 33% control of Governance. This is a huge concern and has already sparked fresh calls to ban TikTok, with Republican Senator Marco Rubio saying “The Biden Administration can no longer pretend that TikTok is not beholden to the Chinese Communist Party” and “even before today, it was clear that TikTok represented a serious threat to personal and U.S. national security”.
Other Developments
Boston Dynamics (private), now owned by Hyundai Motors (005380.KS), has released a video (below) showing its bipedal Atlas robot performing some quite impressive parkour moves, and giving us more than a sneak peek into a (scary) future that may await!
Intel (INTC) is rolling out a high-end graphics card, called ARC, to better compete with Nvidia and AMD in the gaming and creator GPU market. The first generation of these products, called Alchemist, will feature “hardware-based ray tracing and artificial intelligence-driven super sampling, and offer full support for DirectX Ultimate”. What does that mean? Well, game developers and publishers will be able to more seamlessly simulate light rays (ray tracing) and smooth out digital objects (supersampling) more seamlessly. Like what you can do on Nvidia and AMD.
Richard Branson’s Virgin Group has dumped $300m worth of Virgin Galactic (SPCE) shares in order to “support its portfolio of global leisure, holiday and travel businesses that continue to be affected by the impact of the Covid-19 pandemic”. This means Branson has sold ~$955m worth of stock, with his remaining stake (46m shares) worth ~$1.2b.
PayPal (PYPL) will no longer charge customers late fees when they miss payments on their BNPL purchases. The changes, which are live in Australia and Germany, will kick from October in the US, UK and France. According to Greg Lisiewski, VP of Global Pay Later Products, “We think that is appropriate, and we do think late fees will be and have been, part of that discussion, and we think being as customer-friendly as possible puts you in a better place with regulators.”
Cargill (private) is partnering with vertical farming pioneers AeroFarms (SV) to optimise cocoa production. Under a multi-year research agreement, the two companies will test various indoor growing technologies (aeroponics, hydroponics, light, carbon dioxide, irrigation, nutrition, plant space and pruning) to identify the optimal conditions for cocoa tree growth. It is hoped the findings will help maximise tree growth and yields, improve pest and disease resistance and amplify the flavour and colour potential (all in parallel to addressing environmental challenges).
New Listings
Globalfoundries (private) has filed confidentially with US regulators for an IPO in a deal that could value the chip fab at $25b. Not quite the Intel (INTC) tie-up that the WSJ reported last month! It is expected that the IPO filing will be revealed in October, with plans to hit the market at the end of the year (or early next year) depending on market conditions.
Earnings Highlights
Roblox (RBLX): Bookings came in below expectations, rising 35% to $665m (vs a 161% rise in 1Q). However, despite this, the average bookings per DAU climbed to $15.41 whilst DAUs climbed 29% to 43.2m. You can see these numbers quite clearly below, with the company geographical reach expanding, and usage now split fairly evenly between over / under 13’s.
Sea Limited (SE): The South-East Asian e-commerce/finance and gaming conglomerate’s earnings topped estimates, with revenue up 159% YoY to $2.28b (a 13% beat). The company also raised its full-year guidance for games and e-commerce. For the gaming unit, Garena, quarterly paying users rose to 92m (up 15% Q-Q), whilst e-commerce (Shopee) GMV rose 19% Q-Q to $15b. Meanwhile, in its finance division (Sea Money) the number of quarterly paying users rose to 32.7m (up 109% YoY).
Nvidia (NVDA): Earnings have beaten on the top and bottom line, due largely to strong graphics card sales…..and a surge in demand from gaming (with sales up 85% to $3.06b) and data centres (up 35% YoY to $2.37b). On the flip side, CMP (its crypto chip) reported $266m in sales - well below the $400m target the company had set back in May.
Palantir (PLTR): Smashed past all earnings expectations, beating revenue (by 4%), EBITDA (by 35%) and Net Income (by 25%). Adding to the optimism, the company also said it expects full-year adjusted free cash flow to exceed $300m (double prior forecasts!). Furthermore, the company outlined revenue growth of 30%+ for this year and the next five years.
Monday. com (MNDY): Surged over 40% post-earnings, after revenue beat forecasts and loss per share came in at 26c/share vs a $1/share loss expected. Revenue grew 94% YoY to $70.6m, Net Dollar Retention (for more than 10 users) was 125% and next quarter’s guidance was raised by 13%.
M&A | Cap Raise
Facebook’s (FB) $400m acquisition of GIF marketplace Giphy (private) has hit a big roadblock, with the UK’s Competition and Markets Authority (CMA), wanting the deal unwound. In its findings, the CMA said the deal should be unwound because it will “negatively impact competition between social media platforms” and may lead to Facebook pulling in more user data from Giphy customers such as TikTok, Twitter and Snapchat.
Roblox (RBLX) has acquired gaming chat platform, and Discord competitor, Guilded (private) - a platform supporting hundreds of games (LoL, Fortnite, Counterstrike and….Roblox). The platform also allows users to organise online communities around events and calendars, and build chat functionality directly into games via an API (great again for Roblox given their games are built by the community - not the studio).
Swedish video game holding company Embracer Group (EMBRAC B:OM) has announced three new acquisitions (in parallel to a largely in-line earnings report), adding Estonia’s Fractured Byte (private), US-based Demiurge Studios (private) and Russian developer Smartphone Labs (private). As you can probably see in the map below, Embracer (in the bottom left quadrant) owns Gearbox (the guys behind Borderlands). One notable benefit of the first two deals is that both acquiree teams have deep experience working on Borderlands; and will add immediate incremental value to the business.
Chime (private), a digital bank serving 12m Americans, has raised a whopping $750m from a group of investors comprising Softbank, Sequoia, General Atlantic, Tiger Global and Dragoneer - valuing the company at $25bn. This comes just a month after Softbank and Tiger Global tipped $800m into Neobank Revolut, valuing that company (with 14.5m personal customers and 500k business customers) at $33b. Back of the envelope, that’s ~$2k/user for Chime and $2.2k/user for Revolut (but not including Revolut’s business customers). So, bang for buck, Revolut looks like the better investment here. Final thought, Revolut is available in the US but is mostly EU-focussed. Given the rise of Square’s Cash App (amplified by AfterPay) and PayPal’s Venmo….there may be some logic in a Chime/Revolut merger (certainly given they share common investors).
Singaporean edtech Emeritus (private) has raised $650m from Accel and Softbank, in a deal valuing the business at $3.2bn. The company is a little like the $5.2b Coursera (COUR), but with smaller class sizes and more interactivity according to co-founder and CEO Ashwin Damera. Part of the proceeds will go towards the $200m acquisition of STEM platform iD Tech, with the remainder utilised to grow the geographic footprint and offering. It points to growing interest in the edtech space, with Australia’s Go1 recently closing a $200m round from Salesforce, Airtree and Softbank.
Korean defence group Hanwha Systems (272210.KS) is investing $300m in UK-satellite company OneWeb (private), in exchange for an 8.8% stake in the company. This brings the total investment into OneWeb to $2.7bn, following a bail-out by the UK Government and Indian conglomerate Bharti last year. OneWeb currently has 254 satellites in low-earth-orbit (LEO) of a targeted 648. For Hanwha, this gets them one-third of the way towards their 2030 target of 2,000 LEO satellites - all outlined earlier in the year.
Furthermore, Loral Space (LORL) subsidiary Telesat (private) has picked up $1.44b in funding from the Canadian Government as it looks to secure the future of its planned 298-strong LEO satellite constellation. The project codenamed Lightspeed (bottom right of below diagram) is expected to start operating in 2024, ultimately connecting 40,000 Canadian households in rural and remote communities.
Reddit (private) has raised $410m of a $700m cap raise, led by Fidelity - putting the company’s valuation at $10bn. This comes off it’s first $100m ad revenue quarter, marking a 192% YoY increase, off the back of 50m DAUs and over 100k subreddits (like r/WallStreetBets which catalysed the company’s recent resurgence). Co-founder Steve Huffman highlighted that the funding will factor into upcoming IPO plans.
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.