Dear Reader,
Before we get to our insights, readers might be interested to know that today is “Singles’ Day” in China. 11/11 – four ones, or “singles” – is the largest online shopping event of the year. It’s so big, the sales are greater than Black Friday and Cyber Monday in the U.S. combined.
Alibaba, China’s own version of Amazon, started the event back in 2009 and has held it on November 11 every year thereafter. Sales have already topped last year’s record of $30.8 billion. This year, Alibaba sold $12 billion in just the first hour. Incredible.
As I write this, the sales are already at $36 billion, and there are still a few hours to go.
For comparison, $36 billion is about what Amazon’s online sales were in the third quarter of this year. And Alibaba did that in less than 24 hours. How’s that for scale?
We have talked about SoftBank’s Vision Fund before. This is a venture capital (VC) fund dedicated to investing in tech startups. It was founded in 2016 by SoftBank CEO Masayoshi Son. And it raised $100 billion… making it the largest venture capital fund in history.
The fact that SoftBank raised $100 billion to invest in tech startups is impressive. But this incredible amount of capital drove SoftBank to aggressively buy large stakes in late stage tech companies at absurd valuations.
In other words, SoftBank became the dumb money. The name of the game is to buy low and sell high. SoftBank bought high, hoping to sell higher… simply because it could.
This distorted the market. It drove up valuations for late stage tech companies. This squeezed out smaller venture capitalists who couldn’t write billion-dollar checks. It also prevented public tech companies from acquiring the best startups to improve their businesses because the valuations were just too high. And it kept these companies private longer, denying public investors the chance to invest early.
That’s one reason why Uber went public with a massive $75.7 billion valuation back in May. SoftBank poured about $7.6 billion into Uber last year.
And no surprise, the stock is down about 40% from its IPO price. That’s why I told readers of The Bleeding Edge to steer clear of Uber for at least six months after its IPO.
SoftBank’s aggressive strategy is now blowing up in its face. And SoftBank’s bad investment in shared workspace company WeWork is the catalyst.
WeWork had planned to go public at a $47 billion valuation back in August. But when its financials came out, the market saw what a bad position WeWork was in.
Plus, there were some suspicious leasing deals in place between WeWork and its CEO, Adam Neumann… a clear conflict of interest. It became clear that the company was poorly managed.
Well, SoftBank had stupidly invested nearly $12 billion into WeWork in several late stage VC rounds. And just last week, SoftBank had to write down its position by $9.2 billion. The nearly $12 billion investment turned into about $2 billion overnight.
The Vision Fund is going to be one of the worst-performing VC firms of the last decade. Fortunately, that will seriously hamper SoftBank’s ability to raise capital for the fund. That’s a good thing. The sooner SoftBank’s VC ambitions go away, the better for the entire industry.
As I often tell my readers, investing is all about context. It’s not enough to buy the right company. Investors must buy it at a reasonable valuation.
That’s a lesson SoftBank should have understood…
In a few years’ time, I wouldn’t be surprised if there will be a new joke floating around Silicon Valley. “How do you make $20 billion in venture capital?” one asks. “Simple! You start with $100 billion and give the money to SoftBank to invest,” chortles another…
Here’s an unusual story that caught my eye…
News came out last week that Xerox wants to acquire HP (HPQ). This is the computer and printer company that spun out of Hewlett-Packard in 2015.
This is a funny situation. For one, did anyone know Xerox was even still around? I say that tongue-in-cheek, of course, but this is a company that completely missed the digital revolution.
Xerox completely missed the transition from analog to digital. It hasn’t been relevant in two decades. And not surprisingly, its stock is down 77% from its high in 1999.
And here’s the funny part… HP is three times bigger than Xerox. How do you buy a company that’s three times your size?
What’s more, Xerox has $4 billion in net debt. And its annual sales have declined every year since 2011… which is a trend that will continue. Xerox simply doesn’t have the money to make the acquisition. That is why it is trying to sell its stake in Fujifilm for $2.3 billion. If successful, that sale will amount to just about 10% of the capital Xerox would need to make the HPQ acquisition.
As for HP… its printing segment has fared a little better. Annual sales aren’t declining yet. But they aren’t going up either. HP’s revenues will be flat all the way out to 2022 and probably beyond.
So this is clearly an act of desperation. And it’s one of the stupidest ideas I’ve ever seen in the tech world, though I am curious to see if Xerox can raise the capital it needs to get the deal done.
After all, HP has an enterprise value of $29 billion. And Xerox is $4 billion in debt. It’s going to need a whole lot of money to pull this off.
And suppose Xerox gets this done… what really changes? It will be two dinosaurs living under one roof until they go extinct. They won’t attract any serious talent capable of innovating and turning the business around.
The combined entity will go through years of painful restructuring trying to cut costs and “drive synergies” between the two businesses. Imagine all the infighting between the two stodgy, highly bureaucratic cultures.
If Xerox had some vision, this might have been a different story. The company could have positioned itself decades ago to be a leader in electronic signatures or file sharing. Both areas would have been in-line with Xerox’s core business and incredibly important and valuable in today’s world.
So this is Xerox’s last stand. In some ways, it’s sad to see old icons struggling for survival like this.
I think it should go without saying, but investors should steer clear of these companies.
Let’s end on a piece of good news…
Vertex Pharmaceuticals recently celebrated a big victory. Its new cystic fibrosis therapy Trikafta was approved early by the FDA. This is great news for the company and for cystic fibrosis patients.
And it is great news for Near Future Report readers as well. We have been invested in Vertex Pharmaceuticals (VRTX) since January 2018… largely because we saw that cystic fibrosis was vastly underserved by existing therapies on the market. And Vertex had the market cornered with incredible potential for new therapies.
Cystic fibrosis is a hereditary disease of the lungs and mucous glands. It affects about 75,000 people around the world. And it’s an awful disease that leads to premature death. Without treatment, most patients die in their thirties.
With only 75,000 patients globally, cystic fibrosis is considered an orphan disease. These are diseases that desperately need cures but don’t have a large market size. And that’s why the FDA approved Trikafta five months early… It incentivizes companies to tackle orphan diseases despite the relatively small market opportunity.
Vertex already had three cystic fibrosis therapies on the market. But the first three did not work for a segment of the cystic fibrosis population.
With Trikafta, Vertex can now treat about 90% of cystic fibrosis patients worldwide. And these therapies treat the underlying cause… They are not Band-Aids.
So this is a big story in biotech right now. It’s wonderful news for the cystic fibrosis community. And it’s great news for Vertex Pharmaceuticals as well.
Vertex is now the go-to company for cystic fibrosis. And Near Future Report subscribers are now up 32% on the position. That’s a fantastic gain given Vertex Pharmaceuticals is a massive company with an enterprise value of $48 billion. This company has a bright future ahead of it.
Regards,
Jeff Brown
Editor, The Bleeding Edge
P.S. Near Future Report subscribers have made solid gains in Vertex Pharmaceuticals (VRTX), but biotech isn’t the hottest area of tech right now. As regular readers know, the 5G boom is driving massive investment opportunities right now.
Simply put, 5G will power the technology of tomorrow. That’s because 5G speeds will be exponentially faster – at least 100 times faster than the current 4G networks. We demonstrated this out in the field with our live 5G test.
And with that type of speed, some very remarkable technologies become possible. We are going to see fleets of self-driving vehicles, mass-market augmented reality, holographic telepresence, and some massive advancements in health care.
Thanks to 5G, our world is about to become unrecognizable.
And I’ve found the company that produces the one component that will go into every 5G wireless device manufactured. I consider this my No. 1 5G stock to buy today. It should be in every tech investor’s portfolio. To get more details, just go here.
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The Bleeding Edge is the only free newsletter that delivers daily insights and information from the high-tech world as well as topics and trends relevant to investments.
The Bleeding Edge is the only free newsletter that delivers daily insights and information from the high-tech world as well as topics and trends relevant to investments.
