Dear Reader,
I want to thank all the readers who tuned in for my presentation on America’s Last Digital Leap last night. We are poised to reap incredible investment returns in the coming months and years as this story plays out.
For those who missed it, we talked about the $11.9 trillion industry that’s set to jump from “analog” to “digital.”
This move is analogous to going from VCRs and video tapes to streaming services. And investors who spotted that digital leap coming have made anywhere from 6,859% to over 45,000% on Netflix (NFLX).
We face the same kind of investment opportunity today. And investors who get into the right positions stand to do incredibly well.
This will likely be the last major digital leap of our lifetimes. And it may very well be the difference between a modest nest egg and a massive retirement account that we’ll never be able to outlive.
So I highly encourage those who missed last night’s event to take some time to view the replay. You can find it right here.
This is a trend we don’t want to miss. Please act while there is still time to get ahead of it.
Now let’s turn to today’s insights…
Another major venture capital (VC) round in the blockchain space caught my eye recently. An early stage company called Chainalysis just raised $100 million in its Series D funding round. The company is now valued at an impressive $2.25 billion.
I always track VC rounds in specific industries to get a feel for how the ecosystem is evolving. Keeping tabs on where venture capital is flowing gives us insight into which companies are on the rise in a given space. This helps us gauge when fledgling industries have gained meaningful traction and are beginning to mature.
And that’s exactly what’s happening in the blockchain industry right now.
Chainalysis is a blockchain analytics company. It tracks and analyzes transactions over blockchains. And the company is very good at it.
Chainalysis has developed a method to link specific transactions back to the entities involved – either individuals or institutions. The company pieces various things together like a detective to figure out where transactions came from and where they went. Who sent what to whom, in other words.
Obviously, this makes Chainalysis tremendously valuable to regulators. The company’s technology makes it very difficult for bad actors to go unnoticed.
In fact, the Internal Revenue Service (IRS) works directly with Chainalysis to track down people who attempt to evade taxation using digital assets. It’s a very bad idea to try to launder money over public blockchains.
And now Chainalysis is becoming indispensable to the financial services industry as well.
We have talked before about how hedge funds, pension funds, family offices, corporations, and even life insurance companies are starting to allocate capital to bitcoin and digital assets.
Well, these institutions use Chainalysis to gather data from the blockchain and gauge key liquidity metrics. That’s why the company is generating a lot of buzz in the VC community.
This is a great sign that the blockchain industry is maturing. The breadth of the ecosystem is expanding, and well-developed services like analytics are widely available and in demand. That’s very bullish for the space in the long term.
So we’ll want to keep an eye on Chainalysis going forward. It’s a little too early for the company to go public, but it could make a great investment target at the right valuation in the near future.
2020 marked a major shift in the wireless technology industry. But not for the reasons we would think…
Taiwanese semiconductor company MediaTek surpassed Qualcomm in semiconductor shipments for mobile phones last year. That means it has unseated Qualcomm as the largest supplier of chipsets to the mobile phone industry. That’s never happened before.
This is an amazing inflection point in the industry.
I’m sure Qualcomm is a household name for some readers. But, as we have discussed before, its dominance has been eroding for years now.
Qualcomm supplied much of the foundational intellectual property (IP) for the first generations of wireless technology. This required other companies to license Qualcomm’s technology.
But Qualcomm’s dominant IP position wanes with each successive wireless generation. Other companies have supplied IP for 4G and 5G wireless technology, reducing Qualcomm’s ability to extract rent from the industry. This has been a point of contention in the industry for decades.
So MediaTek overtaking Qualcomm signals the end of an era. It is going to be nearly impossible for Qualcomm to regain its footing.
I competed directly against MediaTek myself when I was an executive at Qualcomm, as well as when I moved into an executive role at NXP Semiconductors. I can say from experience that MediaTek is a fierce competitor.
The company has impressive products. And it does a good job of focusing on semiconductors for midrange and low-end TVs and mobile phones. MediaTek is quick to develop new chipsets for those products.
And the company does a great job making sure it provides the right feature set for the markets it serves. That’s enabled it to keep costs down.
The bigger problem that Qualcomm is having is that MediaTek dominates in midrange and low-end smartphones. And it also maintains a dominant position supplying chips to China-based smartphone brands.
On top of that, Samsung, the largest smartphone manufacturer in the world, makes its own semiconductors.
And Apple has been reducing its reliance on Qualcomm for years as it is now designing its own semiconductors as well. Worse, one of Qualcomm’s biggest customers, LG, recently announced that it is shutting down its smartphone business after years of losses.
The key point is that Qualcomm’s addressable market is getting very small. Soon, it will be fighting over scraps.
MediaTek is a Taiwanese company that isn’t traded in the U.S. equity markets via an American Depositary Receipt (ADR). So it’s not a company I can recommend, though it is an impressive company.
Not surprisingly, MediaTek is up 361% since the beginning of January 2019 on the Taiwan Stock Exchange.
What I can suggest is that investors who hold shares of Qualcomm (QCOM) be very diligent here. The legacy incumbent is losing ground. And I expect its growth to fall off once the majority of 3G and 4G wireless phones have been swapped out for 5G-enabled devices.
Anyone who owns QCOM would do well to think about taking profits off the table periodically as the 5G boom plays out.
Rumors are floating around that Microsoft is in discussions to acquire a company called Discord. The price being thrown out there is a cool $10 billion.
Discord is a chat application that’s primarily used by gamers and people working in the blockchain industry. To use a loose analogy, we can think of it like Slack for gamers.
I suspect many readers may not be familiar with it, but Discord is a great product. It’s intuitive. The user interface (UI) is fantastic. And the platform has fantastic potential.
This has prompted the financial media to suggest that Microsoft wants to get ahead of Discord’s massive growth potential with this move. But there’s a problem with this narrative.
Discord now generates about $1 million in revenue each week. That sounds impressive on the surface, but let’s look at this in context.
$1 million a week adds up to $52 million per year. Does that justify a $10 billion price tag?
Even if we are generous and say Discord will soon double its revenue, that’s still only about $100 million per year. At a $10 billion valuation, Microsoft would acquire Discord at an enterprise value-to-sales (EV/sales) ratio of 100.
That’s astronomical, and it would be a silly price for Microsoft to pay. That would be a “more money than sense” move by Microsoft.
For comparison, Slack currently trades at an EV/sales of 25.7. And even that is overvalued. I would like to see Slack fall by about half before its valuation would start to get attractive to me. That would be a level where I could recommend a company like that and know that it would generate compelling returns for my subscribers.
So what in the world is Microsoft thinking here?
Well, there’s a nuance that nobody is talking about. Microsoft has ulterior motives.
Right now, Discord is using Google Cloud as its cloud services provider. Discord hosts its entire software platform on Google’s data center infrastructure. That’s what Microsoft is going after. The conditions of the deal, if accepted, will require Discord to migrate to Microsoft’s Azure cloud platform.
Microsoft is simply buying revenue for its cloud business to beef up the numbers. This is why Microsoft “invested” $1 billion in OpenAI not too long ago. It is hell-bent on buying business for Azure.
And it’s all because Microsoft is struggling to grow its cloud services business organically. Most companies gravitate toward Amazon Web Services (AWS) first and Google Cloud second. Microsoft Azure is a distant third.
For the record, I think this is a silly strategy. Discord won’t move the needle that much – certainly not enough to warrant a $10 billion price tag.
But Microsoft is sitting on $131 billion in cash, and it is only paying out a tiny dividend representing a 0.85% yield. In other words, it wants to spend its cash rather than paying it out in dividends.
And I’ll add that I would hate to see this deal go through. I couldn’t blame Discord for taking the $10 billion check, but I would love to see this company remain independent. Its future success will likely dissipate the moment Microsoft gobbles it up.
Regards,
Jeff Brown
Editor, The Bleeding Edge
P.S. Like I mentioned above, we’re at the start of a massive digital leap in an $11.9 trillion industry… and that’s creating a unique opportunity for investors who get in position now.
If you want to find out my top play for this shift but couldn’t make it to last night’s event, go right here to catch the replay.
Like what you’re reading? Send your thoughts to feedback@brownstoneresearch.com.
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.
