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010 – Direct Listings and Predictions for 2020

010 – Direct Listings and Predictions for 2020

Doug and Gene look forward to 2020 and talk direct listings, what needs to happen for them to be mainstream, Tesla, and Apple.

Top 3 Takeaways:

  • Creating a mechanism for companies to raise capital as part of a direct listing is key to their adoption.
  • IPO investors and pre-direct listing investors have different expectations but may serve a similar purpose.
  • Companies in new markets with open-ended growth opportunities are often given a pass when it comes to early fundamentals, and this is likely to continue.

Show Notes

  • [1:04] What will it take for direct listings to take off in 2020?
  • [3:35] What kind of return will pre-direct listing investors expect?
  • [4:25] Doug thinks of the rounds ahead of a direct listing as a form of extended underwriting.
  • [7:05] Has anything changed about how private companies think about profitability in the wake of Uber, Lyft, and WeWork?
  • [8:00] Gene on the Tesla story.
  • [11:20] When a company is playing in an open-ended market at the very beginning of their growth curve, the market doesn’t want to miss them, and investors will pay up for access to them.
  • [14:08] Why we think Apple will be the top-performing FAANG stock of the year again.


Liquidity Podcast
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Netflix June Content Slate Outweighs Competitive Impact

Netflix June Content Slate Outweighs Competitive Impact

Netflix’s business is a mixed bag. On one side, the company is seeing the impact of competition in the form of increasing domestic churn. On the other side, international continues to outperform expectations, suggesting that the underlying growth opportunity is intact.

Shares of NFLX were up 2% in the aftermarket following the company’s Q4 earnings report. Netflix guided to a strong Jun-20 quarter, suggesting the company’s spring content release schedule will help combat increasing competition. Factoring in a typical March quarter beat and the June guidance, Netflix is maintaining its outlook for paid sub adds for the first half of 2020. This is a directional positive — a sign that Netflix is successfully navigating increased competition and the associated pricing pressure.

Netflix Will Meet Paid Net Add Expectations

We continue to believe that, despite the threat of increased competition, Netflix will achieve analysts’ paid net add estimates in 2020. The Street is expecting paid net adds of 26.6m in 2020 (2.7m domestic, 23.9m international), exiting the year with a base of 192.5m paid subscribers, up from the reported 167m at the end of 2019.

We Remain Cautious Longer Term

Apple TV+ and Disney+ are essentially free today through various promotions. Netflix has historically increased paid subs despite competition from Amazon’s Prime Video offering, which is also essentially free. Including video offerings with other paid products and services creates a temporary perception of value in the minds of consumers and an opportunity for video providers to hook viewers, but, eventually, that perception changes.

In 2021 consumers will have to make more thoughtful streaming decisions. Promotional pricing from Apple TV+ and Disney+ will come to an end. We believe the increased competition will ultimately weigh on the Street’s paid net add estimates of 26.1m in 2021 (2.5m domestic, 23.6m international) exiting the year at 218.6m.


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AAPL Preview: Another Step Toward a Proper Tech Multiple

AAPL Preview: Another Step Toward a Proper Tech Multiple

  • Apple reports Tuesday, January 28th. We expect the takeaways to be that the iPhone business has stabilized and strength in Services and wearables continues (which combined will approach 30% of revenue in FY20). The guidance for Mar-20 will likely leave investors with increased confidence that overall revenue growth in FY20 will meet Street expectations, rebounding to 4-6% growth, compared to down 2% in FY19. The easier comps this year give us confidence overall growth will finish at the high end of the 4-6% range.
  • We expect an active installed base of 1.5B plus devices, up 8% year over year. The last time Apple updated the metric was in Jun-19 at 1.4B devices.
  • The underlying theme for FY20 will be marking time to iPhone 5G, which we expect to be announced in the fall. While 5G will emerge as a measurable positive for Apple shares, it’s only part of Apple’s long-term story, which deserves a higher multiple inline with other large tech companies.
  • We continue to believe Apple will be the top-performing FANNG stock in 2020. We expect AAPL’s earnings multiple to increase in 2020 as investors increasingly recognize Apple’s combination of hardware and services as a high-visibility and sticky business. While AAPL has made progress towards a proper tech multiple over the past year, a gap remains. To illustrate, applying Google’s forward earnings multiple to Apple’s next 12 months earnings yields a $400 AAPL share price today.

High Level on Dec-19 & Guidance

  • For Dec-19, we expect revenue and earnings slightly ahead of the consensus of $88.3B and GAAP EPS of $4.53, implying revenue up 5%, compared to up 1.8% in Sep-19 and up 1.0% in Jun-19.
  • Dec-19 will be representative of what to expect in FY20 – the overall business growing at 4-6%, comprised of iPhone revenue up 1%, Services up 15%, and wearables up close to 50%.
  • For guidance, we expect the high end of the Mar-20 revenue outlook to be in line with the Street’s $62.3B estimate. We would view this as an inline guide, given Apple typically comes in at the high end of its guidance range. We expect gross margin guidance between 37.5% and 38.5%, setting up for the 16th consecutive quarter of essentially 38% gross margin.

Product Lines

  • Dec-19 will mark a stabilization in the iPhone business after being down in each of the previous four quarters (down 14% in FY19). The stabilization is attributed to the average 3.25-year iPhone upgrade cadence that translates into an FY20 revenue tailwind.
  • Apple is slowly diversifying away from the iPhone, likely accounting for 58% of revenue in Dec-19, down from 62% in Dec-18 and 69% in Dec-17. For FY20 we expect iPhone will be 52% of revenue, down from 55% in FY19 and 62% in FY18.
  • We believe iPhone 5G will take a year to gain traction and will drive a step-up in iPhone revenue as a percentage of sales starting in FY22 through FY24.
  • In Dec-19, Apple needs to grow Services at 16-18%, which would be consistent with the Sep-19 growth of 18% and overall FY19 growth of 16%. Our confidence in this range comes from Apple’s comments related to App Store revenue in this most recent holiday period.
  • We believe, in the past three years, Services growth has outpaced iPhone unit growth by an average of 28%, confirmation that Services growth is benefiting from Apple’s existing users increasing their spend within the Apple ecosystem as well as the company acquiring new Services customers through secondary iPhone sales.
  • Products margin will likely continue its slight declining trend, ending at 33.5% in Dec-19 compared to 34.4% in Dec-18. For Services, we expect a year over year margin increase to 64.5% up from 62.8% in Dec-18. Putting it together, the decrease in Products margin (82% of revenue) is offset by the increase in Services margin (18% of revenue).

Open Questions

  • How to think about Wearables growth in FY20. We estimate the segment’s growth in the Sep-19 quarter was 65% (company reported “greater than 50% growth”), up from 51% in Sep-18 (company also reported “greater than 50% growth”) driven by both AirPods and Apple Watch.
  • Lingering China trade concerns.
  • Thoughts on the 5G rollout. We see the 5G rollout for Apple as one step back, three steps forward.
  • Apple’s privacy-first approach shelters them from most headline risk around consumer data practices, but investors will want to gain a more informed view on how the company would respond to greater government oversight on tech.
  • As for the timing of achieving net cash neutral, the company has not disclosed a timeframe to date.


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