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Week 10: Earnings roar, Costly "free" tech, Digital "tax", Bold budget, Most important company you haven't heard of
Regular readers (I may be kidding myself) would have noticed a rather long gap between weeks 9 and 10. Suffice to say that work (and life) got unusually busy in the last couple of weeks. I hope to be regular in writing going forward.
Earnings season for corporate India has been great so far, as good as any I remember. Sample these headlines from brokerage reports:
Sun Pharma: All boxes ticked (CLSA)
IndusInd Bank: Accelerating towards normalcy (Kotak)
Steel Authority of India: Strong beat on EBITDA (Morgan Stanley)
ICICI Bank: Big turning Point (CLSA)
Tata Motors: All round beat (Antique)
HDFC: Contained credit cost with strong core buoys earnings (ICICI Sec)
There are many more- Building products, IT, Autos, Pharma, Metals are all doing well. Management commentary also sounds upbeat for the most part. Fundamentals have started showing up more clearly now. The markets had already “predicted” this a few months ago with a relentless rally even as most people were focusing on the bad headlines. We are all hoping for a virtuous cycle of earnings and economic growth. Let’s hope it has started. It’s a powerful force once it gets going.
A lot has been said about the Robinhood and GameStop story in recent weeks. The one thing that stood out for me is that Robinhood (the very popular brokerage app in the US) is really not too different from Facebook (or any other “free” tech product).
They make you think that you are the customer, but in fact you are the product and your data is the asset. The assets are then sold to these companies’ real customers, who pay them for the service.
In this case, Robinhood gets “Payments For Order Flow”, or PFOF from high frequency trading firms (HFT) like Citadel. What does this mean? Robinhood gets fees from HFT firms in return for access to real-time information about which stocks its users are buying and selling, which the HFT firms can use for their own profit (in various ways, read more about it here). It seems Robinhood made $465m from PFOF in the first 9 months of last year… and given the retail trader driven volatility in January 2021, they likely made a lot of money in January from this source.
43% of all venture capital funding goes straight to Facebook and Google according to Clearbanc. Others have also claimed this number to be between 30-50%. It’s quite a stat if you think about it. Google and Facebook are effectively selling shovels to the modern day gold-rush prospectors. If you are a start-up and want to acquire customers quickly, it is difficult to escape these ad behemoths, and you have to pay this “tax” to do business.
India unveiled an unequivocally good budget. No nasty surprises, no sudden policy U-turns, pro-growth, bold, realistic. Most importantly, it didn’t do anything to hurt animal spirits. That’s smart, because the government will need strong markets if it wants to sell down stakes in public sector corporations to raise capital. Well done Ms. Sitharaman!
Chinese incursions in to Taiwanese airspace is increasing. Eight Chinese bomber planes and four fighter jets entered the southwestern corner of Taiwan’s air defence identification zone a couple of weeks ago. Taiwan is important for China for a whole host of reasons. Every day that Taiwan continues as a successful capitalist and democratic country makes the Chinese Communist Party (and all the restrictions on civil liberty in China) look less important and draconian. However, there is also another angle to this: Taiwan Semiconductor Manufacturing Company (TSMC). It is one of the most important companies in the world, and most people don’t know much about it. They have 55% market share in semiconductor chips, and they are the go-to for any advanced semis manufacturing. Competitors are technically distant. They are used by Amazon for cloud computing, Tesla for AI, Qualcomm for mobile and Xilinx for F-35 fighter jet chips. China has hacked TSMC and lured away many of their top employees in years past, but has still not managed to catch-up with it. If China does ever attack Taiwan, it is said that TSMC will be the safest place to be because what they do is so valuable. I don’t think it is any exaggeration to say that TSMC today lies in the middle of one of the great power struggle of the 21st Century (at least until the US and China can replicate its prowess).