Some things and ideas: June 2018

Some random thoughts on articles that caught my attention in the last month. Note that I try to write notes on articles immediately after reading them, so there can be a little overlap in themes if an article grabs my attention early in the month and is similar to an article that I like later in the month.

  • How google collapsed
    • I don’t agree with the article for a host of reasons, but it’s certainly thought provoking.
    • One reason I don’t agree- a key piece of the article seems to center on “people don’t want ads.” That’s probably true, but advertisers want to reach people, and websites are incentivized to let them since ads are generally what pay the bills. If enough people install ad blockers, websites are going to take drastic counter measures to make sure the bills still get paid (I’ve already seen sites that won’t let you access them with an adblocker installed).
    • Another piece I don’t agree with- the article leads by citing amazon passing search engines as the first place you start when looking for a product as part of the death of Google story. While Google would certainly prefer product searches starting with them, the vast majority of searches are information based (“what type of tax return should I file if I’m a consultant”) and advertising can often benefit both the advertiser and a searcher in that transaction (in my tax return example, a tax prep company could advertise to the searcher, and the searcher very well might want to hire the tax company).
  • Michael Lewis’s next book is straight to audio
    • “Audible, the biggest player with more than 425,000 titles in its online store, has an enormous advantage in this increasingly crowded arena. Amazon has been pushing audiobooks on its platform, listing them as “free” with a trial Audible membership, which costs $15 a month, and includes a book each month”
    • It is borderline insane how many times I think to myself, “man, that area of the market is going to be huge” and it turns out Amazon is by far the leader in said area. AWS for cloud computing is obviously one, but the list runs on and on: video game streaming (Twitch, which dominates video game streaming), audiobooks (audible), in-home assistants (alexa), etc.
  • Asset managers
    • I’ve been spending a lot of time looking at the asset managers (particularly the private equity / alternative asset managers; I linked to BAM’s (disclosure: long) letter in my Senvest (disclosure: long) post).
    • One of the most difficult things for me to do is value the management fee and incentive fee streams. Most people slap ~5x on a normalized incentive fee stream and a low teen multiple on the management stream (higher valuation for mgmt. fees given they’re  much more consistent; see page 67 of the FIG proxy for an example of this multiples analysis in action). I guess that valuation is fine, but if you think about the benefits of compounding (just say the firm breaks even at fund raising and their current assets compound at ~equity rates), that multiple dramatically undervalues the asset management franchise's growth potential. If you think the managers have any skill / alpha generation ability (or simply think they’ll grow assets faster despite having no skill thanks to their use of leverage), they’ll do even better. If you believe in that “compounding AUM” story, than the multiples these franchises deserve are very high (BAM, for example, discloses in their supplement they think fee revenue should trade for 20x and carried interest for 10x. Of course, they may be speaking their own book!).
    • ONEX’s investor day included an interesting alternative way to value them: treat the asset management stream as a reduction of fees (versus what an LP would pay), and then use that to back into the type of premium you should pay for the company / balance sheet. This valuation only works for asset managers with big balance sheets, but it’s very interesting!