August 20, 2020- Billion-Dollar Software Company MicroStrategy Announces $250 Million Investment in Bitcoin. Will Institutional Investors Follow?
Airbnb Restarts IPO Plans, Could be on the Market by Year End. Will it Pursue a SPAC?
Barry Diller’s IAC Makes $1 Billion Bet on Casino Giant MGM. What’s the Thesis Behind the Investment?
Welcome investors to the Absolute Return Podcast. Your source for stock market analysis, global macro musings and hedge fund investment strategies. Your hosts Julian Klymochko and Michael Kesslering aim to bring you the knowledge and analysis you need to become a more intelligent and wealthier investor. This episode is brought to you by Accelerate Financial Technologies. Accelerate, because performance matters. Find out more at www.Accelerateshares.Com.
Julian Klymochko: Welcome podcast listeners to episode 82 of The Absolute Return Podcast. I am Julian Klymochko.
Michael Kesslering: And I’m Mike Kesslering.
Julian Klymochko: Today is August 17th, 2020, a few interesting things to chat about on the podcast this week, just going over notable events and market insights that we think are really important for investors to take note of, to analyze and really recognize what it means and any potential effect on their investments.
- First off, we wanted to chat about massive, massive news in the Bitcoin space. That is when MicroStrategy, which is a billion dollar technology company. They announced that $250 million dollar investment into Bitcoin. Will other institutional investors follow? We are going to chat about their thesis behind that massive nine-figure allocation to cryptocurrency.
- AIRBNB, they once again are pursuing, going to pursue an IPO such that they could be public by the end of the year. Are they going to pursue potentially a SPAC?
- Lastly, we wanted to talk about Barry Diller’s. His IAC conglomerate made a $1 billion bet on casino, giant MGM and Barry Diller is a guy who has just nailed it in terms of recognizing these developments in whether they be traditional media, internet space. He has been right time, and time again, so we want to chat about his thesis on the online gaming market, which is a rapidly growing space. Wanted to chat about his thesis behind that investment because it’s certainly non-consensus and some people were taken by surprise, but first let’s get to this massive Bitcoin news.
BILLION-DOLLAR SOFTWARE COMPANY MICROSTRATEGY ANNOUNCE $250 MILLION INVESTMENT IN BITCOIN
Julian Klymochko: NASDAQ listed software company, MicroStrategy; they have roughly a $1.4 billion dollar market cap. They announced that they invested $250 million of their balance sheet into Bitcoin. Now at the time their market cap was closer to a billion dollars, so basically 25% of the company they put into the leading cryptocurrency, their shares did rally pretty significantly off of this.
And I just wanted to touch on a number of comments from MicroStrategy CEO, Michael Saylor. He really outlined their thesis with respect to this nine-figure investment into Bitcoin, which is really the first institutional allocation to that asset class, so he said. “Our investment in Bitcoin is part of our new capital allocation strategy, which seeks to maximize long-term value for our shareholders. This investment reflects our belief that Bitcoin, as the world’s most widely adopted cryptocurrency is a dependable store of value and an attractive investment asset with more long-term appreciation, potential than holding cash”. And that quote is important to me basically on one main tenant, and that is cryptocurrency specifically Bitcoin, as an investable asset class, historically it has been well, a dozen years ago. It was not anything. It was invented in 2009, slowly built its reputation, and ever since then, it was really more so known as a speculative asset, more so of a gamble.
Many investors did not understand it, the concern that is some sort of scam scheme going to zero. However, you know, as we see this more and more often, and certainly, MicroStrategy is not going to be the one and only institutional investor that does this. It is going to become more and more recognized as a legitimate asset class as it has on this MicroStrategy investment. I mean, no one allocates $250 million dollars without a very thorough review process and significant thought into it. So the CEO of MicroStrategy continues, he indicated “our decision to invest in Bitcoin at this time was driven in part by a confluence of macro factors affecting the economic and business landscape that we believe it’s creating long-term risks for our corporate treasury program, risks that should be addressed proactively. Those macro factors include among other things, the economic and public health crisis precipitated by COVID-19, unprecedented government financial stimulus measures, including quantitative easing adopted around the world and global political and economic uncertainty”. He continues. “We believe that together, these and other factors may well have significant depreciating effect
On the long-term real value of fiat currencies and many other conventional asset types, including many of the assets traditionally held as part of corporate treasury operations”. End quote; let me translate that for you. He’s looking out, reading the tea leaves, looking at the environment and is obviously concerned with respect to tens of trillions of dollars and basically money printing. Fiscal and monetary stimulus by governments worldwide, central banks worldwide that, you know, each time the money printer’s turned on, you lose some faith in non-asset backed Fiat currencies. I mean the notion of paper money is still very new with respect to how long humans have engaged in commerce, which is, you know, thousands of years, perhaps tens of thousands of years and paper currency. I mean, you know, that is basically a generation or two with respect to currency, not being backed by gold or some other sort of hard assets.
Clearly, my microstrategy, its leadership being very concerned about a potential rapid depreciation in the U.S. dollar, basically high rates of inflation given the dramatic increase in the printing of money. And in my opinion, that’s a valid concern. Not a lot of people are thinking that way, obviously run a huge bond bull market. 10-year bonds, are yielding what? 60 basis points, and so it’s a certainly a non-consensus view that he has. The job as a capital allocator is to notice these risks and be proactive about tackling this potential risk on a balance sheet. And he really nails it here is if you think there’s going to be a rapid and sudden depreciation in the dollar due to substantial money printing, which we’ve seen time and time again, whether it’d be like, like Germany, Zimbabwe, Venezuela, et cetera, et cetera, certainly wont be the first time.
But everyone believes that a stable U.S. dollar is just a rule of law. Meanwhile, with a 10 trillion in stimulus just this year, you know, it is not out of the question to see the sort of doomsday scenario that they are outlining within their thesis here. Not saying it’s guaranteed to happen, but certainly they see it as a risk as should I think other investors and you don’t sort of position your entire portfolio to be ready for that, but you certainly should position some of a portfolio to consider that type of situation. What are your thoughts on this really, really interesting allocation? Not just to Bitcoin, but the underlying thesis behind it.
Michael Kesslering: Yeah, I would agree with your reading of the situation where it’s less of a, like a bullish view of Bitcoin than more a bear stance and the tailored risk that they see.
Julian Klymochko: Yeah, that is a good point.
Michael Kesslering: In their current program.
Julian Klymochko: Yeah, because I don’t foresee this as a speculative bet.
Michael Kesslering: No.
Julian Klymochko: Historically, we have seen many people make speculative bets on cryptocurrency. This is more recognizing Bitcoin potentially as a digital gold, something that can maintain value.
Michael Kesslering: Yeah, certainly and in terms of, I guess there is a few things here. So I thought it was very interesting that the company they chose the direct purchase of BTC as opposed to using a derivative product, say Bitcoin futures contracts or an exchange traded fund like closed-end fund GBTC so they will have to handle their custody on their own which will be interesting. There is a number of great custody solutions in the Bitcoin space by this time, so from a treasury perspective, once they do that upfront work of finding a custody solution and organizing all that from an operational perspective, it likely will be easier operationally than rolling treasuries constantly.
Julian Klymochko: For sure.
Michael Kesslering: So that part is very interesting.
Julian Klymochko: The other thing to comment on that notion is they bought over 21,000 Bitcoins, which is 0.1% of the entire supply. So, I mean, on the future side that is like a massive position to be rolling every month, so I don’t think that’d be like necessarily technically possible given that the futures market isn’t very liquid at this point, especially for that size, I mean, $250 million dollars position, that is fairly sizable.
Michael Kesslering: Yeah, that is a little too large for the futures market, but yeah, as you had mentioned the stock is up on the announcement. Now there was a tender offer that the company put out, but what would like to point out that it is trading above the tender offer terms. So it’s trading through that, so it’s very notable that the market is reacting very favourably to this. You have to think that corporate finance departments and treasury teams in many other companies are looking at this. I mean, I believe it was the blog, “Adventures in Capitalism,” came out with a note about this today as well, and his comment was all of those management teams have options within their company, and seeing price reaction like this. Just the incentive to follow this move now that you have an institutional player who has already stuck their neck out, that leaves a way some of the legal tail risk as a fiduciary. You are going to see tongue fold
Julian Klymochko: As I indicated with respect to additional institutional players getting involved, no one ever wants to be first.
Michael Kesslering: Yeah
Julian Klymochko: Cause that really risks, significant reputational capital. However, if you are the 10th person to do it, then, you know, it is much less so, right? So that’s a really good point.
Michael Kesslering: Yeah, and basically just that you’re likely to see a few other companies come out and do this as well in the coming months, and it’ll be interesting once some bigger, more household names adopt a similar strategy it. And as well, when you bringing up the tail risk of just USD. I know a lot of the solid rationale there, but as well as short-term treasuries, right. If the U.S. does go to negative rates, I mean, you are effectively just walking in a loss. Whereas with Bitcoin, there is volatility there. It can go down but if you do have a bullish stance, there could be a reason for price appreciation there.
Julian Klymochko: Yeah and at this point, treasuries are yielding negative on a real basis, so inflation adjusted, you lose the purchasing power each, and every year with the poultry yields at this point. But Mike, what’s your thoughts on who’s going to be next?
Michael Kesslering: I really have no estimates. I mean Tesla would be an interesting option. That would be right up Ellon alley.
Julian Klymochko: Or perhaps a Jack Dorsey company? Square or Twitter. I think that could be a good call. He is obviously huge fan of bitcoin.
Michael Kesslering: Especially Square, Twitter. With square, they are already integrated with crypto, so it will be a simple fit.
Julian Klymochko: Sure, that makes sense but my dark horse pick Berkshire Hathaway. I mean, they just announced a large stake in Barrick Gold. So perhaps who knows? I know that Barrick Investment was either Todd or Ted and maybe they got the crypto bug, you never know. Could get Berkshire stock actually performing this year.
Michael Kesslering: Real gold and digital gold. They have all their bases covered then.
Julian Klymochko: Yeah, there you go. Nonetheless, MicroStrategy stock up 18% on the week. And like I said, this is going to be the start of a major trend. We are going to see more and more eight to nine figure bets on Bitcoin, and at the end of the day. There is only 21 million outstanding, and as that supply goes to long-term holders, then basic supply demand economics 101. Indicates world wars, the price likely going to go up. So super, super interesting Bitcoin news.
AIRBNB RESTART IPO PLANS COULD BE ON THE MARKET BY YEAR END
Julian Klymochko: Now let’s get to Airbnb who basically had quite the V-shaped recovery, Didn’t they? A few months ago, we talked about the distressed financing that Airbnb conducted with private equity firm, Silver Lake. Just a few months ago where it slashed their valuation to 18 billion down from an earlier valuation of 31 billion in order to just make it through the COVID crisis, their business absolutely evaporated down significantly. However, business has bounced back dramatically. They did have to lay off a quarter of their staff in May prior to the bounce back, but now they are on much better footing. Businesses looking great, and now an IPO is back on the table for 2020 after they recently shelved these plans. One question that the market has is how are they going to choose to go public? It could be by a traditional IPO, could be by a direct listing, which we saw Spotify did that, and did we see any other sort of high profile names?
Michael Kesslering: Spotify was the highest profile name. There has been a few other smaller tech companies, but definitely Spotify, the highest profile.
Julian Klymochko: But they could also be looking at one of the hottest asset classes out there, the SPAC and for the valuation that Airbnb is likely looking at. I mean, I would not be surprised if it was above 30 billion again, who knows. There is not a lot of SPAC that could handle that. Perhaps it could be the Pershing Square SPAC. Other than that, maybe one of the other ones over a billion, but that could be a stretch. Would be super interesting to see them go public through a special acquisition company. Because that would really, you know, blow the top off the bear market. If we saw the preeminent IPO candidate go public that way, instead of a traditional IPO would be pretty stunning. Nonetheless, Morgan Stanley and Goldman Sachs got the advisory mandate engaged to lead this offering. We’re not sure if it’s going to entail a capital raise as well as we discussed recently, did a financing just a handful of months ago with Silver Lake and other participants
Michael Kesslering: For some stats on IPO. U.S. listed IPOs that have raised more than the $60 billion dollars so far in 2020; obviously, we went through, quite the bear market. Basically that window shut, but it opened wide open shortly after because the 60 billion raised so far in 2020 is the highest level since the middle of the tech boom in 2000. In addition, on average IPO this year have risen 23% in their first day of trading. This is the first or the biggest first day IPO pop since the year 2000, so a lot of comparisons to the year 2000, we got the NASDAQ just going absolute bananas. I saw Donald Trump tweeted noting that it hit a new all-time high on the NASDAQ today, which he seems to be obsessed with the stock market indices, but I digress this Airbnb situation. Super, super interesting. What do you think is going to happen? Are they going the SPAC? Traditional IPO? Or direct listing?
Michael Kesslering: Yeah, when looking at the different options, I guess the traditional IPO really good for the roadshow process. Really getting institutional investors on board with the story, but then, you know, like you’re going through that whole roadshow process with the valuation at the end that it’s finally agreed at the end and, it takes a lot of time for the company, and it’s a big process for the management team.
Julian Klymochko: I think that is less so over the past few months, because it was all virtual, right? It is like; they are not travelling from town to town. They are basically just doing an online presentation, but like you said, you’re trying to sell too many, many multiple.
Michael Kesslering: Yeah, negotiating with multiple different parties. We have talked about the IPO pop before as well, so there is the pricing mechanism that some feel is quite broken. Direct listing for them can really work. Really, for me, I think the two most logical options would be the direct listing or a public listing through a SPAC. A direct listing that can work because there is such a household name for the brand. Many people are familiar with the stock, so they could get a lot of retail involvement.
Julian Klymochko: For sure.
Michael Kesslering: But the choice just really comes down to how much capital they need to raise. A SPAC deal really would likely result in, whichever SPAC they chose, as you had mentioned, not too many options, but that SPAC would trade above NAV. I would be very surprised if they announced one and it did not trade above NAV. So the chances that a full trust amount would remain post-close, that seems almost certain. There are a few that are 500 plus, there’s quite a few that are over 500 plus million in their trust, and then only three or four that have over a billion. What really can make the difference is pretty; much every SPAC deal announced lately has had a concurrent private investment in public equity financing, the acronym PIPE. They have had quite large pipes with them, and so in terms of that, you could really increase the capital injection quite easily. By all accounts, it looks like they are going to be raising a decent amount of money. As I believe through the first half of the year, this year. They have lost around over $700 million dollars.
That is not on a cash flow basis. That is just on a gap basis. I believe they are going to be raising a decent amount of capital, so there a number of SPACs are limited, but there is plenty of advantages in terms of the time to actually getting to market. They announced a SPAC deal; it is about three months until deal close, whereas even without the travel of a traditional IPO. You still do have the roadshow process. That is a lot longer than three months, so it will be very interesting to see if they go this route. You know, they have already been delayed once because of the pandemic back in March. So yeah, it will be very interesting to see. I mean I would really like to see them go through the SPAC. It would provide just further proof of concept and legitimacy to the SPAC as a vehicle
Julian Klymochko: Oh, for certain, that would really be a crowning achievement of the asset class, and where the asset class does have a competitive advantage is timing and speed. Obviously, we are in a super-hot market for start-up unicorns, super hot market for IPOs and just an on fire market for SPACS. If they want to be public by 2020, that is perhaps a route to go because I mean, you only have like five months left of the year, so, you know, I think that there is a decent chance that they will pursue that type of structure in order to go public. Such that we could see a listing by the end of 2020. So interesting news for Airbnb.
BARRY DILLER’S IAC MAKES $1 BILLION BET ON CASINO MGM
Julian Klymochko: But one executive that makes a move that I always want to follow is Barry Diller. He is a guy that’s been around forever. He runs internet and media conglomerate IAC. He has had quite the career. He started out in TV, extremely successful, just massive, massive wins. Truly innovative. Went on to the movie business again, hugely successful in a new type of business. Then went on to read the tea leaves, saw the media business changing and the internet as this new growth engine. Transitioned to internet businesses. Massive, massive wins back to back to back, so I take notice when he moves into a new sector, which he did last week, as IAC announced that it bought a nearly $1 billion dollar stake in MGM Resorts, which is a casino company. Some might have thought, you know, what is he doing? It is a bit of a head-scratcher. Thought it was an internet company. Why is IAC going into gambling?
However, MGM does have an online gaming segment and that is really, where he sees the business going, is this transition from offline to online. We saw the success of DraftKings. Really, their stock has just gone absolute bananas. There is keen investor sentiment on this space, and clearly as the States throughout the U.S., each one goes through their own process, of legally legalizing online gambling, which is going to happen. Because I mean, they all need that tax revenue, right? And it’s becoming more and more normalized as no Las Vegas, New Jersey and other jurisdictions do it. That is really, where this business is going to be heading. So IAC trying to get in on the ground floor through this MGM investment, so super notable investment and when Barry Diller makes a move, investors should take note. What are your thoughts on this really interesting and perhaps innovative investment from Berry Diller?
Michael Kesslering: Yeah, it certainly was because typically the playbook for IAC was taking majority stakes in private companies that were already pure plays in the online space. Looking at the headlines, investors immediately were saying, you know, what are you doing? This is outside of your typical playbook. But when looking back really, it’s all about just taking businesses off that were successful business models offline to the online space, so as you had mentioned with his past successes for some of the folks that aren’t aware. For industry, such as dating, they had Mach Group, which has Tinder, Hinge as well as Match. I think Plenty of Fish; they have Ticketmaster, which he built up. Travel, they had Expedia, Home Services, they had Angie. As you had mentioned, just a great track record of doing this.
And so they mentioned that this was a once in a decade opportunity for them, and so this was what they decided to do with a billion dollars of their cash. They still do have $3 billion dollars of cash to allocate, but going into their thesis. They did say that they had been looking at the online gaming space for a while and that this was the best way for them to get their exposure and in their shareholder letter, they gave a little bit more rationale into this. First being that to operate in sports betting and digital gaming, a provider is required to partner with a local casino operator, and so MGM is currently in seven States. And by the end of the year, they’re going to be an 11, so they already have a little bit of a scale advantage in terms of the number of States that they are already operational in. One thing that they did focus on was the MGM brand advantage and they likened it to the advantage that Disney has in streaming, where the brand has multiple avenues to monetize the IP. And so that’s where I think he’s taking a lot of optionalities here. They still have their core hospitality and gaming business in the physical realm that this is just another way to monetize their IP, which is just their brand.
Julian Klymochko: Yeah, you got to think, say 10 years down the line, say if online gaming is legalized everywhere, that will sprout, you know, tremendous amount of competitors. How do you differentiate yourself as the preeminent place to gamble on your phone, on an app? Well, certainly, if you have the brand name that MGM as, that is truly a differentiating factor.
Michael Kesslering: Everybody knows that brand, right?
Julian Klymochko: For sure.
Michael Kesslering: And so that is where he also likened MGM core business with their free cash flow yield of 10%. As you mentioned in 10 years, if it is free cash flow yield is 10% by their calculations. That is going to be a good investment in 10 years. Assuming that it is not just a melting ice cube, but they really likened the investment thesis that they have for MGM with the own thesis of IAC, where it is a sum of the parts of the story where the stub trades at an implied value of effectively zero.
Julian Klymochko: So the stub means your net off its cash and investments, and now analyze it on a sort of, some of the parts basis.
Michael Kesslering: Exactly. Yeah, and so they’re really comparing it to IAC itself. People need to remember that they still have $3 billion of cash to deploy and no debt and historically. A cash pile in front of Barry Diller has been a very successful proposition for investors and they do have a variety of ways that they can play it. They could put more money into the MGM investment in terms of building out a roll up strategy within MGM. I view that as somewhat unlikely though. He does like to keep a diversified basket of investments, which is quite prudent to on his behalf. But I would like to point out MGM being up since the announcement, I believe over 10% and IAC is actually down 5% since the announcement. So, very interesting to follow here, and just as Julian had mentioned, Barry Diller is someone that I very much look up to, and so whatever he’s taking a look at a space. It is good to take note,
Julian Klymochko: Certainly, one of these stories, the executives John Malone or Warren Buffet, you know, whenever they make a big deal, investors should take note. You should analyse what they are doing, understand the thesis behind it. Because Berry Diller is the type of guy that has a tremendous track record of success, shareholder value generation. And he just has back to back to back wins, and so he makes a huge billion dollar bet like this. You got to think that his thesis is pretty strong and he has conviction in it. When a guy like that as conviction, you know, my ears sort of perk up and investors should definitely take notice. So that about wraps it up ladies and gents for episode 82 of The Absolute Return Podcast. Hope you enjoyed it. If you did, you can check out more episodes on absolutereturnpodcasts.com, definitely check us out on the Twitter universe. Mike, what is your handle on that social media network?
Michael Kesslering: It is M_Kesslering.
Julian Klymochko: And you can find me on Twitter at Julian Klymochko, K-L-Y-M-O-C-H-K-O and until next week folks. Wish you all the best in your trading and speculating and we will chat with you soon, cheers.
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