Closing thoughts for the week.

The following write-up reflects only the authors opinions and should not be taken as investment advice. The piece is solely meant to be read for it’s entertainment value. Note, most of this post was written on wednesday before the massive crashes in the weed stocks had taken place. The author may own, buy and sell equities mentioned in this post.

(5 minute read)

Market

Generally the market seems a bit overheated. Record equity inflows, strong earnings, a solid fiscal support and a very strong rise in crypto assets makes me believe that the rally might continue. I believe that some individual sectors and stocks have rallied far beyond what their fundamentals can realistically support. I will mention some of them below.

Weed stocks

Since Biden’s election into office the cannabis sector has been on a complete tear. Anything remotely related to cannabis has doubled, then doubled again with seemingly little if any thought behind the moves. The market remains in buy first, ask questions later mode. As has been said many times, cannabis is more or less a commodity product, and as soon as a nationwide legalization happens there might be a brief period of undersupply which might sustain the high prices, followed by a lengthy period of overssupply which will bring prices down to their break even price. High cost producers will again come under serious pressure, and bankrupcies will be back on the table. Technological advancements in cultivation methods such as hydroponics and vertical farming will only excerberate this, as growers will be able to harvest multiple times a year. That leads me to the more sustainable winners in the sector. These will not be your customer facing brands, Tilray, Canopy Growth, Aphria, Aurora etc. they will rather be the ones supplying the picks and shovels for the sector. Your GRWG, IIPR, HYFM, AGFY, APPH etc.

Futu / Tigr

Futu and Tigr has been picked up by Chinese investors trading on the platforms. Here are some snippets from the Chinese social media site Weibo, Chinas equivalent of Twitter.

Weibo Source

I think the stocks have gone to far. As I’m typing this Futu is trading at around 200 dollars a share having gone up almost 20x in less than a year.

Teradata

Some might have noticed that Teradata stock went on a tear in the past week following their surprise earnings report revealing a nascent attempt at restructuring their legacy on premise data warehousing business as a cloud first business. Teradata has been around for 40 years. They practically invented the idea of a Data Warehouse. But has since been vastly outinnovated by the likes of Google, Amazon, Microsoft as well as newer startups such as Snowflake and Databricks.

To me it seems like they have basically copied Snowflakes pitch, but their product looks more like trying to retrofit their legacy Teradata database into a cloud setting. While this approach might be “good enough” or even preferrable for older companies that are already Teradata customers and perhaps strapped for cash (TDC claims it has won Hertz, Airlines). It is likely not something that any modern company would want.

On the positive side, the stock is extremely cheap compared to $SNOW and even when compared with $CLDR ,they have thousand of patents, which i’m not quite sure how important that is? But it has to be worth something.

Here is a list of a current customer list for Teradata, note that these are all customers that are currently using Teradata’s legacy on premise solution. If all of these switch to their cloud solution, the stock could be a multibagger. I doubt that will happen though, as the solutions offered by their competitors are more modern and they were built with cloud first in mind. But if they do manage to retain a good portion of those customers, watch out. This could slow down Snowflakes growth rates in the future, and the stock of Teradata will no doubt be re-rated much higher.

Here are the Q4 numbers no doubt impressive. But whether they will be repeatable is far from a sure thing. I have a small speculative position in Teradata.

Earnings reports

Ayx

Alteryx came out with their earnings report and it was a sad read. The earnings call reads like an endless string of excuses and that’s always a bad sign. The bear case is still the same. Alteryx is not a transferrable skill, alteryx is a luxury product that costs a fortune pr. seat, alteryx is not a cloud based product. Data analysts are very analytically minded people and forcing them into using a no code tool was never a good idea to begin with. A “citizen data scientist”, a term coined by Alteryx CEO Dean Stoecker, is not a data scientist in my opinion. Any good data scientist will quickly run into limitations when using any GUI based tool, and loading a tool up with buttons and menus will make it extremely bloated so its a catch 22 situation.

Splunk, New Relic and Alteryx all have the same problems and they should all be viewed as turnaround stories. Unlike New Relic and Splunk, Alteryx stock is not attractively priced. Making for a very risky investment.

Net

Great earnings but didn’t live up to the high expectations. Based on Cloudflares past history of beating their estimates. I think that the yearly estimate might come in 30m higher, which would imply a 44-45% growth rate once the year is over. This seems pretty realistic to me. If Cloudflare can keep growing at around 40% this could be a 100B company before 2025.

Unreal Engine metahuman demo

So Epic games released an amazing demo of an upcoming tool called Metahuman. It allows users to create realistic looking human characters. I found it facinating and retweeted Tim Sweeney on my twitter. Unsurprisingly, Epic’s main competitor Unity (Nasdaq: U) saw a ton of negative posts in response.

For the long term bull case on Unity nothing changed. Epic games was always a very strong competitor, and I view competition as healthy it keeps companies on their toes. If Epic Games can keep spreading the usage of game engines for all kinds of use cases beyond just gaming, thats great for both Unity and Epic. The real competitor for both is custom game engines built by individual game studios in house. Both Unreal and Unity have low market shares with AAA studios, Unreal is far ahead of Unity on this front mainly because of their longer history and their more photorealistic graphics.

I think my next post will include a comparison of Unreal vs Unity since a lot of investors seem to be confused about the strengths and weaknesses of each product.

A quick comparison of the pro’s of each engine:

Unity

+Easier, +Faster, +Community, +Indie Focus, +Mobile, +2D

Unreal

+ Graphics, +(out of the box) Tools, +Visual Scripting, +Console, +FPS

Both engines “suffer” from being extremely complex tools with a lot of tech debt. This is obviously both a strength and a weakness.

Some games made with each engine:

Unity:

-Rust, Among Us, Genshin Impact, Heatstone, League of Legends Wild Rift, Free Fire, Tarkov, Fall Guys, Iron Man VR, Phasmophobia, Doom (nintendo switch)

Unreal:

Valorant, Fortnite, Pubg, Tom Raider, Final Fantasy VII Remake, Gears 5, Spyro Reignited Trilogy, Kingdom Hearts, Tony Hawk's Pro Skater 1 + 2, Star Wars Jedi: Fallen Order

In short, both have seen immense success in recent years but Unity seems to have stronger momentum as the shift towards mobile and indie games is a trend that is not set to stop any time soon in my opinion. Unlike Gen X and Millenials, I believe there are many reasons to believe that Gen Z does not value important graphics as highly as previous generations. I base this on the notion that Minecraft and Roblox are some of the most successfull titles among Gen Z, two titles where storytelling and gameplay takes precendence over graphics.

Furthermore gaming has taken a shift towards less powerful devices without discrete GPU’s. On chip GPU’s such as tegra (Nintendo Switch) or adreno (Qualcomm snapdragon) are better suited for games made with Unity’s universal render pipeline, as it is not as demanding on the GPU. This is a big reason as to why Unity has a 71% market share in the top 1000 mobile games, and why 30% of all Switch games were made with Unity.

One legitimate criticism of Unity the company that I have seen posted is their lack of marketing with a broad appeal. Most of the marketing from Unity seems to be developer focused and often of very technical nature. Making some “Epic” marketing material should be high on the priority list, marketing works it gets people talking and helps spread awareness of the product.

Valuation making a comeback?

I’m seeing some signs that stocks with actual earnings power are leading the market higher. While the extremely highly valued stocks on a p/s basis are running out of gas. Valuations in some of the most popular stocks might have gotten a little bit ahead of themselves. Without room for multiple expansion or money to do buybacks, the only source of upward momentum is revenue growth. Therefore I’m taking a pause on +40 ev/s names and buying some cheaper valued stocks for the foreseable future. My recent buys have all been less agressively valued stocks. $UI $FFIV and $ESTC