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What you need to know this week

market & industry analysis Sep 20, 2021

This week we're bringing you all the news you need to know for this week. This report contains news on the most important IPO this week, the crypto world, earnings news & economic events. We've highlighted the most important topics in each section!


Now Introducing Crypto News:

If you've been following Moby for awhile then you know the typical format of this post was key IPO's, earnings & economic events. But due to popular request, we're going to be adding more crypto news & analysis going forward!

If you also want access to our free crypto trading channel on Discord just click here: Crypto Discord Channel

So with that context, let's jump into it. The major news this week is around the regulation of Stablecoins.

If you're not familiar with this term, Stablecoins are cryptocurrencies where the price is designed to be pegged to a cryptocurrency, fiat money, or to exchange-traded commodities. For example, the cryptocurrency Tether is pegged to the US dollar so that the price of the coin is as close as possible to 1 USD.

While the nature of the coin makes sense for the crypto community, the stability and backing of these coins often comes into question by regulators. And because stablecoins act as the bridge between the crypto world and fiat world, regulation here could be a large change to the interoperability of the two systems. While the effects of that change are still unknown, it'll likely both add comfort to many investors while also making the coins less appealing to some. Whatever the outcome is, if regulation finally gets put in place, this will have massive implications for the crypto markets. There are a few different paths this can go down in terms of the rules. They are:

  1. Designate the coins as fraud/risk. While we do not think the SEC and other regulators would do this, this could immedaility pose a serious threat to the stability of these coins and send verberations through the market.
  2. Designate the coins are securities. While the designation of securities could send the coins into several classifications this will likely be a net positive to the overall system. With an actual governing body over the system, it will add legitimacy to a lot of investors. While it will continue to be decentralized, this would likely be taken well over the long term.
  3. Treat them like banks. This option likely comes with the most regulation but would add a lot of comfort for many investors as having the OCC oversee stablecoins makes it significantly more likely to actually be stable.

The key takeaway here is that we think regulation is a good thing for crypto. We believe it is long overdue and while it'll likely cause volatility in the short term, it'll be a net win in the long term. We will continue to monitor this news as it is likely the number one news event to watch in crypto over the remainder of this year.


Most Important IPO This Week:

Toast (TOST): The number one IPO we we're watching this week is Toast. Toast is a restaurant point of sale and management system that helps restaurants improve operations, increase sales and create a better guest experience. While they took a massive hit during COVID, they're starting to resurge and continue on their path of strong growth. Looking more closely into the numbers of the IPO, we see that:

  • Toast’s updated IPO prospectus indicated that the company could be valued at more than $16 billion in their debut. If you annualize their revenue from the first half of this year, they anticipate to make $1.4B in 2021. Trading at 11x revenue, this valuation looks fairly justified. While last year is an anomaly and should be disregarded because growth will be overstated, the growth rate is still impressive at over 100% YoY. Showing that sort of resiliency for their business is very telling, and we're excited about their growth opportunities going forward.
  • As of June 30th, Toast worked with over 48,000 restaurants and helped process over $38B in total payments. Even with a massive shut down and a 50% layoff across their staff, Toast was able to maintain impressive numbers. Before the pandemic they were valued at $5 billion and a 2-3x jump isn't crazy even with all the turns over the last two years.
  • The bulk of Toast’s revenue comes from their technology solutions arm. This consists mostly fees paid by customers for payment transactions. Only ~10% of their revenue comes from their subscription service. This is something that we don't love to see. While many SaaS companies make most of their money from services, this is a wide split between the two. This is something we're going to monitor and are hoping the gap starts to shrink. The reason is because services businesses have low margins and don't scale that well whereas subscription businesses have high margins and, in theory, scale very well! 

The key takeaway here is that we like Toast from what we've seen so far. However, like any new IPO, the initial few weeks/months of trading will likely be very volatile. If you're a long term investor, this could be a good time to get in but if you're trading it, we'd likely stay away! 


Most Important Companies Reporting Earnings This Week:

Nike (NKE), September 23rd: 

Last we wrote about Nike (see it here: Nike Analysis), we were advocating for their business. We did note the risks given their operations in China, but thought over the long term that they would be fine. Therefore during this earnings report we're hoping to get some clarity on the ongoing situation in China to see whether the cotton controversy is getting any better.

  • The gist of it is that there is a massive controversy going on with cotton production in China and sales in the country. We wrote about this in detail during our last analysis but we're anticipating most of the controversy to bypass Nike. The reason is because Nike, supposedly, has no workings here but China is extremely volatile. While Nike has strong relations with the country, China is slowly letting less and less foreign businesses operate freely within their walls. Given a large portion of Nike's revenue comes from China, this is something we need to be extremely conscious of. We therefore are hoping to get more clarity here in order to asses the viability of the stock going forward.
  • We do anticipate for them to beat earnings. But the outcome of the stock price will largely be dependent on the China cotton outlook going forward. We, again, think they'll be fine in the long-term but in the short term it is a toss up for everyone.


Costco (COST), September 23rd:

Costco is a business that most investors foolishly pass on. Yes, they're not an exciting growth play but they're an extremely stable business with still growing operations. The stock is up 200% in the last 5 years and we think they'll continue to expand. We've been investors in the wholesale giant for years and this earnings report should not change anything. Some things we're watching for however is:

  • Gross profit margins: Wholesale giants like Costco, usually win on pricing. Therefore we're looking at their gross margins to understand if they still have pricing power or are losing their edge to their competitors.
  • Membership renewal rate: We're anticipating for their total members to be at an all time high. If the rate is higher than people expect, there's a good chance that this happens. The key to the higher overall members will be more-so based on renewals rather than net new sign ups. With a large shift of people out of cities, we think there is a good chance this beats expectations.

Even if these two numbers miss expectations, we still love Costco over the long term. It has been a bit since they last hiked their fee's and any increase in membership costs, could also be the catalyst needed for a large earnings beat going forward. It isn't the most exciting stock, but there's not many companies out there with a better risk/return profile.



The Key Economic Event in Focus This Week:

Fed Chair Jerome Powell News Conference, September 22nd:

Always a sought after recurring event, the Fed chairman's press conference is a great way for investors & economists to peer inside of the mind of the governmental entity that sets our entire monetary policy. Often nitpicking every word that is said, this event is an amazing way to see what the Fed is planning on doing. Last we wrote about this monthly event we were watching his comments around inflation. This time around we're going to continue watching for the same thing as well as keeping an eye out on any interest rate talks. Any substantial changes here should have overreaching effects for the rest of the markets and economy. 

This is the biggest event to watch this week and is a can't miss for investors. We'll keep you posted on the updates but we're anticipating a similar stance on his tone. And that is that inflation will be transitory in the long term and that interest rates will likely be raised next year!