A lot has happened in the last one month. Even though markets haven’t moved much, a number of stocks have been beaten to near death. Netflix has halved, Cathie Wood is not the superstar she was, Zomato is buying businesses on borrowed money and ofcourse, FIIs have sold massively. So I thought it’s time to dwelve a bit on some of these issues and see if we can make sense of the world around us.
The biggest news for me was the pain these neo-tech-fin-consumer companies were subjected to. Most are trading below half of their highs and some are well below IPO prices. The good news is that now more people are calling their bluffs for being what they were- junk, money burning trashes. In markets, as long as the price rises, nobody calls the naked king. The moment it turns and shorts pounce on, a lot of skeletons comes out of the closet. Now everyone can see Paytm is just a capital burning train with no revenue in sight. It was fantastic to see legends like Uday Kotak, Sanjiv Bajaj and Kumar Mangalam Birla voicing their concerns on froth in private markets. End of the day, your market cap depends on net profits you make and not on the projections you make while raising private capital.
Zomato is buying two businesses which is a case of conflict of interest as it’s CEO is already on boards of both the businesses and the transactions are happening at stupid lofty valuations. Google about it for details. My take is that acquisitions are an acceptable form of growth. However, this should be funded by your own cash flows and not by paying other people’s money. Tencent is known to acquire fantastic companies( here’s a link https://youtu.be/_-D3hoftCaY) but Pony Ma puts his own cash. Most of these companies have no revenue if you take funding out of equation. They’re selling a thing worth 100rs for 80 and this 20rs is the venture funding. Now they say call us Decacorn. Well, plain bullshit.
End of the day, a business is worth the cash flow it generates, not the amount of venture funding it burns to death.
In my opinion, a lot of these firms will fall another 50-70% before being sidelined from primetime public discussions and we’ll move on to the new fad. Remember this, Suzlon traded at 2000rs in 2007, Reliance Capital at 2500 and RCom was a Sensex stock. They all trade below 5rs today. So a Paytm falling to 20rs won’t be such a big deal.
Coming to discuss what’s happening in the US with Tech firms. Well I believe what Apple has shown with $125B in quarterly revenue is the true strength of underlying businesses. However, Netflix falling 50% isn’t that big a deal for one reason- you can’t simply extrapolate early lead into everlasting moat. Netflix is in a business which has no entry barriers except money. Now Amazon is on its heels for atleast 7 years, Disney and HBO also have upped the ante. And as far as India is concerned, my bet is Reliance will be the predominant player in five years time. The reason is clear. You want to watch TV, you get jio fibre which offers pre bundled apps like Amazon prime, Liv etc. So instead of paying the Amazons and Sonys, you pay through Reliance. You want to watch Netflix on phone, your data is from Jio. And now with Jio entering content market, you’ll see very quickly Reliance hiring half of Bollywood on its payrolls. I mean how difficult is for Reliance to buy Dharma productions and hiring all A list stars on exclusive contracts.
The next big theme in India will be what happened in the US with Netflix and Prime. With tens of billions of dollars available with Reliance from its oil to chemical business, I am betting in five years time, it will have as big a library as Netflix in India. The game about subscription based model is to buy as much as library and somehow keep delivering new hit content. As the latter is not predictable, you can’t be sure of customers flocking to your app forever. This is where Amazons and Reliances will win because they are not dependent on these models to grow. They’re doing this to deploy their excess cash and gain some extra returns. Even if they get one Spiderman in a year( $400B revenue worldwide), it will suffice. On the other hand, people like Netflix don’t have any other businesses to generate cash and stay in the game.
As we enter the second year of this decade, we will see large companies garnering even larger shares of India’s growth. Lockdown actually helped accelerate this process as the unorganised players had to keep their shops shut while you could order brands online. Come 2030, we’ll have atleast a few companies over $500B market capitalisation.
Coming back to the markets. FII have been relentless in getting out of this market. However, I am feverishly bullish on India growth story and did add whatever little I could to existing positions. The key is to know why you bought what you bought so that it times like these when the world around you is losing its mind,you go out and buy. As JP Morgan famously said- you buy when there’s blood on the street, even if the blood is yours.
I’m lucky that buying on the way down is now natural to me because I entered the markets in 2017 and not in 2020. For the first 3 years, I only saw my portfolio down 20% when everyone made money. I bought Tata Motors all the way down from 435 to 64! That was my test and now looking at the rewards, I know it pays to be bullish on India.
Life is all about Compounding! 