Weekly TLDR - Overstocked, Under Bought
This week, we talk about the start of a cooling real estate market, Broadcom’s quest to eat guppies, retailer issues with inventory, and the fast evolving situation with the Terra crypto project.
The TLDR
In this week’s TLDR, we write about the start of a cooling real estate market, Broadcom’s quest to eat guppies, retailer issues with inventory, and the fast evolving situation with the Terra crypto project.
Chart of the Week
Growing signs that the Fed’s cooling activities are starting to affect what has been a very resistant asset class, real estate. Powell has been looking to slow down all parts of the US economy but record low housing inventory levels have kept real-estate prices elevated despite dips in stocks, crypto, and bonds. That may be changing now as US pending home sales fell into contraction territory. This may be an early indicator of a cooling market even though some regional housing markets are still showing strong demand.
Stock Market TLDR
Broadcom to Buy VMWare for $61 Billion
The Short: Semiconductor giant Broadcom has agreed to purchase virtual machine staple VMWare for $61 billion. VMWare joins Symantec and CA Technologies in Broadcom’s software division. Broadcom is also looking to transition VMWare revenue into a subscription model. Broadcom has been a consistent consolidator in the semiconductor space.
The Long: Broadcom’s MO has consistently been to buy staple companies with a more or less commoditized product, cut costs and increase execution to improve cash flows, and then move on to the next acquisition. Well, VMWare is that next acquisition and it fits Broadcom’s MO to a tee. For VMWare customers, this probably means less feature updates and less sales attention as Broadcom puts a focus on cash flow. A change to a subscription model may create some short-term pain but offers a more predictable revenue stream longer-term. Just what Broadcom will want before buying the next piece of their empire. Traditionally, empire building runs into challenges with management and valuation. Broadcom’s solution to this is to only buy highly profitable and commoditized companies, thus lowering management complexity risk. Changing acquired companies to a subscription model lowers risk even more and they may get leverage by bundling their other software companies together.
Elon Increases Personal Commitments To Twitter Acquisition Deal
The Short: The Twitter Saga continues as Elon is increasing the amount he’s personally committing in the deal to $33.5 billion. His other funding sources appear to have gotten cold feet and Elon has to increase his share of the $44 billion acquisition as well as looking for additional sources of funding, including ex-Twitter CEO Jack Dorsey.
The Long: Looks like the drop in tech stock prices and uncertainty around real user numbers have given Elon’s potential co-investors in Twitter cold feet. Elon is tapping into other funding sources including Jack Dorsey to roll-over his existing shares of Twitter (~2.4% stake). Tesla’s stock price is down ~35% from peaks and considering most of Elon’s funding is through margin loans from Morgan Stanley, the amount of TSLA shares backing this acquisition is increasing rapidly. If the deal goes through, Twitter will be a huge chunk of Elon’s portfolio and that means he needs to spend more time “fixing” Twitter. It might be time for Twitter employees to dust off that resume if they haven’t already but if you look at Elon’s post-acquisition plans, that may just be what he’s looking for.
Retail Inventories Surge as Shelves Stocked With Wrong Goods
Walmart inventory levels from 2010 to 2022. Source: Macrotrends
The Short: Inventory levels at major US retailers like Walmart and Target have surged in the past few quarters. On earnings calls, company management have attributed the increasing inventories to US consumers adjusting their spending habits due to price increases and inflation. For example, buying half gallons of milk instead of a full gallon…
The Long: Profits for companies like Walmart, Target and Amazon have already been hit due to inflation and wage increases. If they also have an inventory mismatch on their hands, expect profit margins to shrink even further as these goods will have to be written off. Companies with lean inventory management (e.g. Costco) or less product lines will fare better than these larger market places. US consumers downsizing their purchases is also another sign that inflation is having an effect on consumer spending habits. Just something to keep an eye on as the Fed continues to try and strike a balance between lowering inflation and keeping the economy growing.
Crypto TLDR
Former Head of Product for OpenSea Indicted
The Short: Nathaniel Chastain, former Head of Product for OpenSea, was arrested on Wednesday in New York. He is charged with wire fraud and money laundering.
The Long: Chastain was originally investigated for an insider trading scandal. He was accused of using insider information to secretly purchase NFTs that he chose to be featured on OpenSea’s home page. According to a DOJ indictment, between June and September 2021, Chastain sold NFTs at two to five times his initial purchase price after the NFT’s price jumped from a home page feature. This is a good start for law enforcement to reign in crypto’s decentralized chaos and turn it into a more legitimate industry and asset class.
Terra Launches LUNA 2.0
The Short: After the Terra algorithmic stablecoin’s spectacular multibillion-dollar collapse, the Terra team has launched LUNA 2.0, this time without an algorithmic stablecoin and a fixed 1 billion LUNA 2.0 token supply. LUNA 2.0 currently has a market cap of over $6 billion.
The Long: The collapse of Terra wiped out about $40 billion in value. The team quickly proposed and launched a new blockchain called LUNA 2.0, this time without a flimsy and risky algorithmic stablecoin component. The old blockchain is in the process of being rebranded “Terra Classic”. The team will airdrop 700 million LUNA 2.0 tokens to previous LUNA 1.0 and Terra 1.0 holders. 300 million LUNA 2.0 tokens will go to a community pool to fund development activities. So far, several projects that were originally building on LUNA 1.0 have migrated to the new blockchain. LUNA 2.0 is currently trading at about $6.60 per token, implying a market cap of $6.6 billion. At launch, LUNA 2.0 traded up to almost $20 per token.
South Korean Prosecutors Summon All Terraform Labs Staff
The Short: South Korean prosecutors are moving forward with their investigation of the Terra collapse and have summoned Terraform Labs staff to testify. One unnamed employee has already testified.
The Long: It appears South Korea is pulling out all stops to investigate the Terra collapse. There is certainly a factor of a proud national image to uphold and the Terra project, which originated from South Korea, has put a dent in that image that its financial regulators are now seeking to correct as best they can. Prosecutors are looking into, above all else, whether Terra’s executives knew about but neglected the stablecoin’s design flaws, as well as other possible regulatory infractions. One unnamed employee apparently has already testified, claiming that there were early concerns about the stablecoin’s design from within the team.
FTX Prepared to Spend Billions on Acquisitions
The Short: Liquidity has dried up in markets and valuations are pulling back as companies conserve cash. Fast growing crypto exchange FTX is flush with cash and has stated that they’re prepared to deploy billions of dollars on cheap acquisitions.
The Long: Sam Bankman-Fried, FTX’s co-founder, said on Friday that with the $2 billion the company has raised in the last couple years, they’re willing to deploy this capital to make cheap acquisitions in this current liquidity-poor environment to fuel growth. FTX’s latest fundraising round values the company at $32 billion, and it’s one of the fastest growing crypto exchanges out there. Its suite of products expands beyond crypto and the company has ambitions to disrupt the broader financial industry.