Dear Reader,
I want to take a minute to remind readers of our investment summit tomorrow evening. It’s taking place at 8 p.m. ET.
As regular readers know, our world has increasingly moved from “analog” to “digital.”
I’m sure most readers can remember the days when we watched movies at home by popping a tape into the VCR. And we made phone calls by dialing the numbers on our old rotary phone, waiting for it to spin around before picking the next number.
Some may even remember the old ticker tape that tracked stock market activity on little strips of paper. The old stock quotes in the newspaper came directly from this tape.
Of course, today we stream movies directly to our TVs, phones, and tablets through services like Netflix. We make phone calls by tapping a digital keyboard on our smartphone’s touchscreen.
And stock market activity is streamed directly to a host of websites and smartphone apps for everyone to see every second of every trading day.
What happened in each of these instances is what I call a “digital leap.” That’s when an industry jumps from analog to digital technology. It transitions to the newest technology available.
This process dramatically improves the industry and its products, all while improving the consumer experience. That in turn leads to higher profits for companies in the industry. And that results in fantastic returns for investors. Everybody wins.
What I want to talk about tomorrow is the last major industry that’s still largely operating in analog mode today.
It’s an $11.9 trillion industry that hasn’t taken a digital leap… yet. That’s because this industry has been chained down by red tape, bureaucracy, and manual processes.
However, the COVID-19 pandemic has broken those chains almost entirely. And that means this industry is finally ready. This could very well be the last major industry to undergo a digital leap in our lifetimes.
While the efficiencies gained here will improve our lives in so many ways, what we are going to focus on at our event is this incredible investment opportunity.
To illustrate this, think about what would have happened if we had recognized the movie rental industry’s digital leap ahead of time.
Blockbuster Video went bust in 2010. Had we seen the industry’s digital leap coming, we could have purchased Netflix (NFLX) for around $7.30 per share at the start of that year.
Fast forward to today, and NFLX trades around $508 per share. That’s a 6,859% gain – enough to turn every $5,000 invested into $347,945.
And these gains were available to investors who just got on board in 2010. Anyone who invested in Netflix when it went public in 2002 has made more than 43,000%.
That’s the kind of opportunity we’re talking about here. That’s what investing early in a digital leap can do.
So please plan to join me tomorrow evening at 8 p.m. ET. I’m going to pull back the curtain on what I see happening right now, and how we need to position ourselves for it.
What’s at stake here are the kind of gains that can turn a modest nest egg into a retirement account that we will never be able to outlive.
As always, the investment summit is free to readers of The Bleeding Edge. I just ask that you reserve your spot right here.
See you tomorrow night.
Now let’s turn to today’s insights…
Epic Games – creator of the smash hit Fortnite – just raised an incredible $1 billion in a late stage venture capital (VC) round. This puts the company’s valuation at $28 billion, making Epic Games one of the most valuable private companies in the world.
What’s more, this raise makes Epic Games nearly as valuable as long-time gaming giant Electronic Arts (EA), which boasts an enterprise value of about $35 billion. Not bad for a company that’s only recently started to make waves.
Regular readers will remember Epic Games as the company that’s taking on both Apple and Google over their respective app store business models.
We talked last month about how Epic Games’ lawsuit prompted both of the tech giants to reduce their commission structure on app store sales. This primarily benefits small app producers that generate less than $1 million in revenue.
And we shouldn’t forget that, app store battle aside, Epic Games is a fantastic company. Fortnite alone generates over $2 billion in revenue each year.
And Epic Games is also the creator of the Unreal gaming engine. This is the hidden “gem” of Epic Games. We can think of this as the underlying software that Fortnite is built on top of. But this gaming engine isn’t just for Fortnite.
As we discussed last May when the Unreal Engine 5 was announced, Epic Games licenses its software out to other companies. That means outside developers can build games on top of Unreal. And then Epic earns royalties on all games developed using the platform.
It’s worth noting that Epic Games was valued at $15 billion when Unreal Engine 5 was released last summer. At $28 billion today, the company’s valuation has increased by $13 billion in just nine months.
And to put things in perspective, the Unreal gaming engine competes with Unity Software. These are the two biggest players in the industry. Unity recently went public and is now trading at a valuation of nearly $27 billion… all just for a gaming engine company.
Arguably, Unity is grossly overvalued right now. It’s trading at an enterprise value to sales (EV/Sales) of 34. Still, it’s a useful reference point for how much more Epic Games would be worth if it went public in a market like this.
This demonstrates how much the online gaming market has exploded since the COVID-19 pandemic. This is a market that was already on the rise, and the pandemic put it into overdrive. In fact, the entire gaming market generated about $180 billion in revenue last year.
And as I told Glenn Beck recently on his radio show, the total video game market is larger than the motion picture industry. Any serious technology investor would be well served to be paying attention to this market. And the good news is that we might soon have an opportunity to invest.
BlackRock was among the investors in Epic Games’ $1 billion VC raise. That’s a clear sign to me that Epic is gearing up to go public.
So this is absolutely a company to watch going forward. I expect Epic Games will go public at an inflated level, but this company would make a fantastic investment target at the right valuation.
I was happy to see NASA run a successful hot fire test with its Space Launch System (SLS) a few days ago.
The SLS is NASA’s in-house heavy launch program for launching payloads into orbit. This includes the spacecraft that will ultimately carry astronauts and cargo to the Moon.
For the test to be successful, the SLS engines need to run perfectly for eight minutes straight. That’s how long it takes to get a heavy payload into orbit in a real launch.
The SLS Hot Fire Test
Source: NASA
This was a great improvement over NASA’s last test back in January. In that test, the SLS rockets had to be shut down after just one minute. A lot of progress has been made since then.
So this is something we’ll continue to watch closely in the coming months as NASA gears up for a return trip to the Moon in 2024. The first real test launch of the rocket, its boosters, and the Orion capsule is scheduled for November. That will be the maiden flight of the SLS.
What I find interesting, however, is the fact that NASA is still doing things the old way. It’s managing the project with a long list of subcontractors that are delivering subsystems and components.
Aerospace giant Boeing builds the core stages in Huntsville, AL. A smaller company called Aerojet Rocketdyne provides the engines for propulsion. Northrop Grumman supplies the booster technology. And several other subcontractors are involved in the process as well.
That makes for a lot of moving parts – and often a project that suffers from unnecessary complexity and regular delays. And that is exactly what we have seen with the SLS program.
We can contrast this with the projects SpaceX has done for NASA. SpaceX runs the show and delivers. It manages the integration of the components of its launch system and optimizes everything to reduce costs and improve speed to market. It’s a streamlined approach. Plus, SpaceX employs reusable rockets where the SLS will not.
Put it all together, and SpaceX is able to launch payloads that are faster and cheaper than NASA’s SLS.
We’ll certainly root for NASA and its upcoming SLS launch. That said, I suspect SpaceX will be far more successful in its ambitions to get astronauts to the Moon and beyond.
In this way, SpaceX is essentially the backup plan for NASA in the event of further delays and problems with the SLS. My bet is that SpaceX is going to come out in front and be the company that returns us to the Moon… This time, to stay.
We talked about the rise of non-fungible tokens (NFTs) and decentralized finance (DeFi) a few weeks ago. That was when a single NFT piece of artwork sold for $69 million.
Well, the Financial Action Task Force (FATF) is taking notice. It didn’t take long at all. This is a global regulatory body that concerns itself with money laundering, especially when it involves cross-border transactions.
The FATF just put out updated guidance to expand its scope of regulatory authority into DeFi.
Specifically, the FATF said that Virtual Asset Service Providers (VASPs) – a term it must have made up – have to meet the same anti-money laundering requirements as traditional financial services companies. This directly targets decentralized exchanges that facilitate peer-to-peer transactions in the digital asset space.
And this is a clear sign that the regulators are scrambling to keep up with all the advancements being made in the blockchain industry right now. They see this as an area that’s ripe for future taxation and, obviously, money laundering.
This is a challenging area for regulators. The industry structure is quite different than traditional financial services. That’s because there are no middlemen in between transactions. There is no need or desire to have a “trusted” party to facilitate a transaction. Two entities are simply able to transact with one another in a liquid market exchange.
What’s somewhat ironic about the concerns of regulators around money laundering using blockchain technology is that the problems are far greater in the “analog” world.
The asset that is used most widely around the world for illicit transactions is in fact the U.S. dollar. Yet the FATF still struggles to control global money laundering. Estimates are that there is somewhere between $800 billion and $2 trillion dollars’ worth of money laundering a year.
The ironic part is that anyone working in the blockchain space knows that all transactions are recorded in a public ledger. There is an actual record left after every transaction.
Someone would have to be pretty stupid to try and launder money that way.
Yet with this new focus, anyone involved in DeFi needs to be aware of this heightened scrutiny. It will likely end up adding unnecessary restrictions and costs to the industry when it really should be focused on the money laundering that is happening in the world of fiat currencies.
All that said, I remain bullish on decentralized finance and NFTs in particular going forward.
DeFi is the next generation of financial services. And NFTs represent the “democratization” of an asset class that has traditionally been off-limits to regular investors – collectibles and artwork.
We are in the early stages of what will become a multitrillion dollar industry for DeFi and a multibillion market for NFTs. Many investors don’t understand non-fungible tokens, just like they didn’t fully understand bitcoin when I wrote about it in 2015.
But give it time. Here at The Bleeding Edge, we’ll be ahead of the curve.
Regards,
Jeff Brown
Editor, The Bleeding Edge
P.S. And I’ll see you Wednesday night for my America’s Last Digital Leap Summit. As I’ve said before, digital leaps don’t happen often. But when they do, they present some of the best investing opportunities in high technology.
We’ll want to be paying attention as the world’s last major industry takes its “digital leap.” I’ll see you tomorrow at 8 p.m. ET. Sign up 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.
