I’ve already shared the major portfolio change I made this week, adding that IPO to my Real Money Portfolio yesterday, and I have also separately posted my notes and thoughts from the CNBC Delivering Alpha conference for my favorite people (yes, that’s you!)…. but I have a couple other things to note as well, so I’ll post those thoughts separately here, for the sake of clarity and convenience.
Here are the other two pieces Irregulars received from me as we close out this week:
Social Capital Hedosophia SPAC (IPOAU) — I should reiterate that because of the nature of this IPO buy I made yesterday, the Social Capital Hedosophia SPAC (IPOAU), there’s likely to be no real rush — I bought it because it seemed fairly priced at just a 3% premium to the cash in trust that will be used, one hopes, for a good acquisition. But it should be reasonably priced, these kinds of issues do occasionally get to silly and overpriced valuations before there’s real news if they’re connected with a high-profile manager, but more often they just fluctuate around pretty close to their $10 IPO (and redemption) price until an acquisition or merger decision gets announced (or rumored). I do think it’s perfectly reasonable to buy up to $10.50 because of the value of the warrant, and because I’m willing to risk the fact that my money won’t earn anything for two years in exchange for getting access to this particular venture capital investor as he pursues his plan to acquire one of the relatively mature public tech companies (like the billion-dollar plus “Unicorns”), but more than that is tougher to swallow.
Really, I just want to be clear that this IPO shouldn’t change much in price until they decide on an acquisition offer to make. The story was well-covered by CNBC and did make the Wall Street Journal last night, so it’s certainly no “deep secret” that you have to get into before everyone else, and it’s reassuring that the SPAC units haven’t popped too foolishly, but this will be a “sit and wait” story for quite a while unless Chamath Palihapitiya moves a lot more quickly than most SPACs… and it’s quite possible that the shares could drift under $10 if we have a long wait with no news or rumors.
Criteo (CRTO) — I’m a little perplexed at this one, it took a really sharp drop this week on no news, other than the “news we already knew” that the next version of the Apple operating system will make things tougher for ad-tech companies (particularly independent ad tech companies like Criteo who don’t have “captive” daily users like Google or Facebook). But we knew that was coming, and that was why the stock took a hit in June on the announcement… and why I sold half of my position, as the company’s future became riskier to project. But why is it down another 10% this week?
I have absolutely no idea. It seems that it’s just the ad-blocking story returning — mostly because the ad industry got together this week to “blast” Apple for the cookie-blocking settings in the newest version of Safari. I don’t think the actual ad blocking news is particularly different than what Apple announced back in June, but it is at least getting a lot more attention now… and is more imminent. So I’ll reiterate what I said back in June when I took profits on half of my position to reduce my risk exposure:
“I don’t think this will destroy Criteo’s business — but I do think that the increasing focus on anti-tracking regulation and on default cookie-destroying or anti-tracking settings in new browsers is a growing problem, and I think that trend substantially increases the risk to a small company like Criteo that doesn’t have very much leverage over the large players in the industry. Ironically, it may also increase the odds that Criteo gets acquired by someone, since their customers and systems would probably be more valuable in the hands of either a massive ad network or a telecom company.”
And I’ll still hold, at least for now. The risk is higher than it was when I first bought Criteo a few years ago, but the company remains cheap in an industry where most smallish competitors aren’t even profitable (CRTO has a forward PE of about 14), so the reward, if these risks turn out to be less horrible than feared by investors, should be substantial. I’d still put far more of my “internet advertising” investment into Facebook and Alphabet, who are effectively a duopoly in the business, but there’s a bit of space in the corner for our little French friend, too.
And though I’m throwing in my lot with Chamath Palihapitiya in some part, by buying into his Social Capital Hedosophia SPAC this week, I’m also betting against him in some ways.
How so? Well, he had some quotes at the Delivering Alpha conference that were bearish on data centers, and I still own data centers… and bullish on bitcoin, and I sold essentially all my cryptocurrencies this week.
First, the data center REITs.
I still hold CoreSite (COR) and call options on QTS Realty (QTS), both data center REITs, despite the fact that part of his talk at the Delivering Alpha conference included some musing about the fact that data centers are on the verge of becoming extinct.
It’s a measure of how much attention a high-profile and charismatic investor gets when he receives CNBC time, but that sentiment — almost a throwaway in his discussion with Barry Sternlitz — caused many data center REITs to drop 3-4% or more almost instantly, and CoreSite, as the best performer in that group (by a long shot) fell the worst, down almost 9% since the conference.
Part of that’s because Barry Sternlitz is a very widely respected real estate investor, and he agreed with Chamath on the lack of appeal for the data center REITs… and part of it, I expect, is simply the fact that folks look for any reasonable reason to take profits after a run like these stocks, especially COR, have had in recent years.
The quote from Sternlitz was that he’s been avoiding (not shorting) the data center space since talking it over with Palihapitiya: “It’s not going to happen overnight, but investing isn’t about overnight, and if you can see the train wrecks coming you can take advantage of them.”
Is that sour grapes for a real estate investor who missed out on a huge run, a bet that doom is coming in the near future for COR and DLR and EQIX and the others, or just a rationale for avoiding an expensive sector that has probably already had it’s biggest move?
There’s nothing wrong with avoiding a sector where you think the tailwinds are going to turn into headwinds. I’d agree that data centers are going to be less needed over time as chips get more and more powerful and intelligent, particularly as the rate of improvement in chips outpaces the rate of growth in cloud services and storage demands and distributed AI services like Alexa and Siri — and most of Chamath’s argument is that Google, in particular, has developed its own proprietary chips, at least for the deep learning/AI processing they depend on, that are far more efficient than standard CPU or GPU chips and require far less data center space than their growth in processing needs would otherwise require. And really “far less” is not an exaggeration, Google was looking forward toward the need to double its datacenter footprint because of the computational demands of “always on” machine learning for core products like search, and this faster Tensor Processing Unit they developed over the past couple years cuts that demand dramatically.
So that’s all true, but I’d argue that it’s not necessarily an imminent catalyst — to me it seems more like a continuation and perhaps acceleration of the trend toward more efficient data centers, which has been meaningful for a decade or more but certainly hasn’t cut into demand for data centers yet (demand has continued to grow, too). Google is still building giant data centers and still buying data center chips from Intel… Amazon and Apple and Microsoft and Facebook are still buying and leasing tons of data center space.
Perhaps these advanced technologies and AI processors will decrease the demand for data center space as they become standardized and take on more of the work, and maybe data centers will overbuild before we get to that point. Absolutely Chamath Palihapitiya knows a lot more about the future of technology than I do, but, as Sternlitz noted, it won’t happen immediately. I wouldn’t tie my fortune to the future of the data center for five years without watching, and CoreSite is richly valued by any metric, but in the here and now we’re still looking at a company in CoreSite that can easily afford its 3% dividend and could perhaps increase that dividend again at the end of this year (they already raised it once this year).
I don’t see a reason to sell a company with strong operating results (and good per-share improvements in operations, particularly now that they’ve absorbed their large share offering from last year) just because the industry might become obsolete eventually… there are a lot more moving parts than you can assess or predict in a three-minute discussion at an investment conference, but the clear rush to take profits in a sector that everyone agrees is pretty expensive is worth watching because it can pretty quickly cascade into a more meaningful revaluation.
So I can see why we’d want to consider using a strict trailing stop for this hugely appreciated holding just in case sentiment shifts meaningfully downward for a longer period of time than one week (the current TradeStops trailing stop trigger for COR is at about $98, so that’s one level you might want to keep an eye on — though the trailing and forward dividend yields and the dividend growth rate will go into any “sell” decision I make in the future), but my guess is that this futurist prognosticating will not mean the death knell of the data center in the next few years. I expect that the fourth quarter wave of dividend increases in the industry will give most of the players another jolt to the upside, but time will tell.
And, in my further distancing from the much wiser Chamath Palihapitiya with my personal accounts, I sold bitcoin, ethereum and litecoin this week and have now sold out of essentially all of my cryptocurrencies because of China’s push to crack down further on bitcoin exchanges, initial coin offerings, and, likely ethereum and other established coins.
I may get back into bitcoin and ethereum in the future, I’ll try to keep an open mind, but I think the technology enthusiasts really understate the power and importance of governments — and if China and the US do meaningful work to regulate, tax and monitor cryptocurrencies, those become a lot less fun for speculators… and the alt-currency markets are dominated by speculators. All we need is a small decrease in the “animal spirits” chasing cryptocurrency trading (at least half of which is done inside China, from estimates I read), and the bottom can fall out of the price quickly.
That’s not because blockchain is unimportant or because it’s not revolutionary — from everything I read I agree that it is important, and it is revolutionary, and it is going to change the financial industry in amazing ways… but the holder of a bitcoin doesn’t own the blockchain technology, buying an ethereum token doesn’t mean you own that blockchain technology. No one owns most of this technology and the important foundations of blockchain, as I understand it, are still open source, with lots of governments and corporations looking into how they can incorporate that technology without giving up all the control to a decentralized community of unpredictable speculators who can make big changes to the blockchain (like the ethereum or bitcoin forks of the past couple years).
Chamath noted in his talk at the conference that he had been “massively long” bitcoin early on and that it absolutely was here to stay, in contrast to the old guard like Jamie Dimon, who repeated his opinion that bitcoin is a fraud that would likely be tamped down by governments once it got past the realm of being a “novelty” (though he also said that the price could go to $10,000 or $100,000 first).
And this is the risk of speculations in things that don’t have any connection to some rational estimate of asset value — the excitement is palpable as they grow, and bubbles can form in part because there’s no particular anchor holding the valuation down or tying the asset to any particular number… but when excitement fades, there’s also not a number that makes any particular sense as the “bottom”. If you feel confident in any kind of speculative investments like these, it’s important to occasionally think about why a particular price makes sense or doesn’t make sense. If there’s no price that has rational meaning for you, then it’s a speculation… and speculations go up because they’re going up, and go down because they’re going down.
Jim Grant is, of course, extremely skeptical of cryptocurrencies and wrote again about them in Grant’s Interest Rate Observer last week, and he refers to the new wave of ICO’s as “craft currencies,” which is a turn of phrase that I wish I’d invented. Here are a few quotes that stood out to me:
“Money is not a tech stock or a casino chip. Craft currencies are tech stocks and casino chips doing business as money….
“Argument holds no power against the locomotive force of a speculative mania. The craze will end in its own sweet time. Meantime, we are bearish on bitcoin and its imitators….”
And he tries to imagine what it would be like if bitcoin becomes widely accepted as a real alternative currency…
“A world in which bitcoin served a parallel monetary function would likewise be a world in which bitcoin served a parallel credit function. There would be bitcoin banks, bitcoin deposits, bitcoin credit and — sooner or later — a bitcoin bank run, complete with the probably resulting political pressure to create a bitcoin-denomoniated lender of last resort. Then where would be we be? Back at square one, probably, again confronted by the truth, often asserted here, that the trouble with money is credit and the trouble with credit is people.”
Grant has been a fan of gold as money for as long as I’ve been alive, so none of this is a surprise, of course, and he’s not necessarily right and he’s certainly not cutting-edge, but I like to read his stuff for perspective.
What it really comes down to is that I’m completely confident that China can make bitcoin and cryptocurrency trading completely unattractive for its citizens, despite all the “cat out of the bag” comments and the belief that technology, once advanced, cannot be retracted. They can’t destroy it entirely, of course, folks can download their bitcoins and trade them on the dark web, but bitcoin mass adoption relies on connections to infrastructure (connections to banks, trading exchanges and the like) — without that, it’s as inconvenient as a gold coin sewn into your jacket lining, and probably substantially less psychologically reassuring. They can make it expensive or inconvenient or punishable by severe response, and that takes away the vast majority of the market even if some trading always remains in the more dedicated or revolutionary corners of the population.
And if we lose Chinese speculative pressure in the cryptocurrencies altogether, I’m not clear about who takes their place as the “greater fool” who will pay more for your coins or tokens in the future, particularly if the SEC is sniffing around and making it more inconvenient for US speculators, too. So I’ll take my profits, pay my taxes, and sit it out for a while and watch the regulatory landscape. That cash goes back in to my cash position, where I’m happy to have it, and I’ll let you know if that changes.
And yes, you may absolutely feel free to call me an old fogey, or a fool, or a fossil or whatever other “f” words you like — you may be right, and I may miss the next fortune. I’ve changed my mind about bitcoin and the cryptocurrencies several times over the years, so I wouldn’t urge you to follow me with any conviction — think for yourself, as always, invest in things that you understand, and take risks that you can handle when your understanding turns out to be wrong.
P.S. Meanwhile, NVIDIA (NVDA), which depends in part on bitcoin miners buying up its GPU chips, and in part on datacenters using its advanced processing chips, is at yet another all-time high because optimistic analysts keep upping the targets… this latest one is a $250 price target from Evercore ISI because of NVIDIA’s opportunity in AI chips. Couple that with Jim Cramer yelling about a “breakout” on CNBC, and who knows where this one goes. I had a hard time buying it at $120 when the trailing PE was 40 or so, and the valuation is even wackier now (trailing PE of 50, though earnings growth should be 30% next year), but I’m enjoying the ride. NVIDIA is now a $100 billion company for the first time — operational performance is stunningly spectacular, but the stock performance is even more powerful as investors have bid it up… and being “expensive” hasn’t slowed it down one bit, despite the trepidations of grumblers like me. Just a year and a half ago it didn’t seem particularly cheap when it was a $15 billion company, and it has returned 500% since then. Closing my eyes and holding on tight.
Disclosure: As noted in my Real Money Portfolio, I own pretty much all the companies noted above, and won’t trade in them for three days from publication.