Grab, Netflix, Peloton: Maybe They Do Have Potential? [TFC 135]
In the world of investing, nothing is constant. Companies are always evolving and sometimes, the ones that we may have written off in the past may surprise and interest you. In this episode, Chief Financial Coconut Reggie will share 3 stocks that he is paying closer attention to even though he used to hate them. Well, sort of.
With his succinct and simple explanation, Reggie talks about why he was not too keen on these 3 stocks initially and what were the observations that made him change his mind. These 3 stocks are household names and everyone will be familiar with them so you should definitely listen to TFC 135 and find out what they are. As with everything else, you should keep an open mind and be prepared to change your views about certain companies if there’s valid reasons to do so, just like what Reggie has done.
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Reggie: Hey Coconuts! I’m sure there are some companies where you look at it and be like, “yeah, not bad. This company (is) quite good. Financials look fine. Everything looks pretty okay. Let’s just get it”. I’m definitely sure that there’s a good mix of early investor’s ignorance and also seasoned investors’ clarity of what they’re looking for.
There will always be some of these companies that you are very clear that you want this. But there’ll be this other big bunch of companies out there that you’ll be like, “I’m not sure if I want this, I can observe and take a look. There are some jarring problems. Maybe when they solve it, I will be able to come in”.
Today, I’m going to share with you three companies that I’ve been observing, some for a lot longer, one or two for a lot shorter and I’m slowly changing my thoughts. (It’s) definitely aligned with the recent crash because it’s cheaper, cheaper… good time to take a look at some of these things.
So welcome back.
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Okay… Recently, there’s been a lot of stock content back to back. Of course, because hey, it’s cheaper now, so my eyes are open. It’s like, “hey, interesting… Some of these things can consider”. But I want to say, as with any other stock episode, it’s for educational and entertainment purposes only, (it) should not be construed as recommendation or solicitation of investments and blah, blah blah. It is in your own risk. I’m not here to give you any stock tips or stock advice. I just want to talk about some of these companies that are in my purview.
To be fair, some of these companies, you may know them already. They’re not exactly (a) small time company. They are hyped up companies for the longest period of time, which is why I hate hyped up companies because there’s a general tendency for all these hyped up companies to be very expensive because they are hyped (up). A lot of people are looking at it, they’re very hyped, evaluations are very high and you’d be like, “wow, you sure these companies can perform at this kind of price point?”, it’s a bit questionable.
But, as with a lot of hyped companies, when the market come down, they tend to come down even craziest. Oh great! Which is why I think there’s an opening for some of these companies for us to take a look. Of course, if you have any companies that you’re looking at, hey, let us know. Come to our Telegram group and we can expand this discussion as we go along.
To be fair, the companies that I’m looking at today are generally well suited in the growth space. As with what we talked about last week, as with any growth companies, what am I looking for? I’m looking for a dominant player with high margins and can create consistent cash flow. In fact, growing cash flow will be great to continue to acquire so that they can extend their growth journey for as long as possible.
I will also assume that you’ve already caught last week’s episode. Don’t just come in for stock tips. Go and check out last week’s episode so that I don’t need to reiterate what I’ve discussed last week.
But for today, we’re going to keep it short and go straight into the companies and I’m going to share with you why I hated them when I first saw it. And also, why am I getting increasingly interested in them as we move along. So the first company… The first company got a lot of hate when they were going for listing and that is Grab.
Broadly speaking, I think Grab had two big issues at that point in time of listing. Number one definitely was the valuation for $40 billion. It looked to me… as it’s quite a clear exit for the private investors. Private investors want to exit, they want to make their money. So $40 billion, we sell the company at that valuation. Okay, so be it. So, that’s that.
The other one, of course, is the competitors, right? Its predecessors like Uber, Lyft, they all look like they’re financially still struggling. They have not figured out a proper financial model that looks sexy and interesting. It’s a big flywheel, can have big margins, can keep churning cash, blah, blah, blah. (It) doesn’t help that the people that are listed before you haven’t solved it and they look like they’re struggling and right smack in the pandemic. It’s affecting their core business on mobility. At the same time, you are trying to go for a big listing at $40 billion.
But recently, there’s been a sell off, of course, across the board and Grab wasn’t spared. As with any companies that are not cashflow positive, a lot of them are being sold very massively. Grab just happens to be one of them. It’s not a unique case of Grab being very, very jialat (in a dire situation). A lot of the companies that are in a similar financial situation as Grab has came down and Grab is currently at about $18 billion trading.
So this is definitely one big thing, right? $18 billion to buy the South-East Asian’s super app that’s processing gross merchant value at $4 billion per quarter, at least in the recent quarter. It sounds okay. That means, if you, by extension… The whole year gross merchant value, let’s say, about $16 billion… usually there’s some fluctuation, but it’s in the ballpark. Hey, that’s quite an okay price to buy this company. That is one thing.
Of course, gross merchant value is the total amount of goods and services being transacted on the platform. It’s not the revenue that the platform is making. We must be clear. So it’d be better if it can continue to discount.
But at least it is in a situation that I am like, “oh, okay. That’s quite interesting. Something to look at”. And of course, I think we can agree that, they are a dominant player in the space. In fact, they’re probably quite a monopoly already. Of course, nobody wants to admit that they’re a monopoly.
But like I said, what are we looking for when trying to buy growth company? We’re trying to buy dominant players. They’re big enough to be dominant. They can flex and do a lot of interesting things. Grab is a dominant player, no doubt about that.
But at the same time, I think during this whole pandemic period, you see them execute a whole new business function like that, like “boom”. “Oh, nobody wants to travel… pandemic, everybody stuck home. Okay, we do deliveries”. You see their delivery business grow, right? More than 50%, 60, 70%. It’s pretty crazy, pretty wild.
Of course, some will say, “oh, eventually this business will fade out”. Yeah, I think the business will fade out when people start to move out again, we’ll do more things out there then delivery will kind of taper off.
But hey, usually what happens with a lot of these companies or at least a lot of these businesses is, there will be a core following that will continue down with you on this service. We shall see how sticky are their delivery customers. I do think it’s going to be a relatively sticky one. People have found the joy of just ordering, don’t need to change clothes, don’t need to wear your underwear and go down buy food. Just order, just order, right?
Whether you are the kind of person in my stereotypical example, doesn’t matter. You just need to recognize that the business looks like it is doing well in a sense of executing a new business model, just like that. In a short period of time, they managed to do it. By extension, they have acquired Jaya Grocer, which (was) one of my favorite grocer while I was staying in Malaysia. You start to see this kind of possibility because of the ecosystem that they have built.
This meets the second point of what I talked about last week, right? Business optionality with a growing TAM (Total Addressable Market). Instead of you just spending a hundred dollars a month taking Grab rides, now, “oh, okay. Can order groceries. I also can order something else”. Everything becomes on the app, which is the part that I think is extremely interesting. Like “wow, everybody just use one thing on one app”. It’s very powerful.
To be fair, while I was living in China, everything was 微信 (WeChat). Everything was 微信. 你就微信我, 微信支付, 微信买机票, 微信买车票. (Contact with me via WeChat, make payment to me via WeChat Pay, purchase air tickets via WeChat Pay, purchase bus tickets via WeChat Pay). Whatever, everything all 微信. That’s WeChat, by the way. I was channelling my inner China.
Either way… while I was in China, everything you can use WeChat. The power of that super app with a chat function, payment function, ordering function and all of that has already been proven. I will say, (it’s) quite interesting. The kind of possibility and the kind of optionality in Grab is definitely not one to be discounted.
I will say that a lot of bear case out there for Grab or Uber or Lyft still stems from this idea that mobility is a hard business to be in. There is no money to be made in this space but you see all of them… All of them, including Uber also, has moved into this whole Uber Money, payments, delivery, freight. All of them are recognizing that “okay, in this business, it’s hard. We are a dominant player in this space. We have everybody in our hands because hey, everybody has a Grab app in their phones”.
With push notification, with all these things, a lot of these companies start to recognize “we can do other things”. So delivery, Grab app, Mart, whatever, all the things they’re are doing… hey, it’s sticking. It’s crazy, it’s sticking. So yeah, I would say, the optionality of this business is wow-ing me and I want to see that they can continue to execute and grow in other spaces that they say they want to be in like merchant solutions or like payments systems. I want to see some of their things.
If the prices can keep coming down, I will be very interested to open a position. I may have already opened a position by the time I talked to you guys. Maybe a small one, just to keep observing and see what’s happening. I may trickle in as we are all uncertain as to how crazy this market will be. I think there may be (an) even better entry price into some of these companies.
During this holiday, while all of you are having fun, CNY (Chinese New Year) and I was having coffee in Turkey and I really looked at Grab as a company and I was like okay, it fits the description as a dominant player. Definitely dominant, no discussion. They don’t have high margin. Their business is struggling in that margin space but they’re trying to enter into higher margin spaces so that is great… to continue to grow cashflow, hopefully they can… we can see that cashflow. With that cashflow, they are trying to acquire. So they try… They are slowly meeting that golden, growth stock kind of thing.
Like it or not, they are a dominant player. Everybody has a Grab app and you see them increasing the ARPU (Average Revenue Per User) amongst all their participants. All your Grab… Everybody’s buying more.
So, hey… Interesting company to look at, especially as prices come down. (It’s) definitely not an easy write-off like a lot of the bear cases that are floating around. I think it’s getting increasingly interesting so yes, if you want us (to) talk a little bit more about Grab, tag us. Let me know you want us to talk a little bit more about Grab, especially on Geekout. I’ll tell the team on Geekout to talk about Grab.
Oh, you know what’s even better? You can tag the Grab people, @GrabSingapore or something, whatever Instagram account they have and get their founder on to talk. Tan Chong Motor, right? That’s the son of Tan Chong Motor, which is also an interesting thing because… For all of you that don’t know Tan Chong Motor, they sell cars. They are one of the largest car distributors in Singapore and Grab is helmed by his son.
I will say, unlike the average peasants like you and I, if you are born into such a family, your goal is not to make money. You want dominance, you want glory. You want legacy, you want to build all these big things so it’s not too bad to be on a ride with someone like that, especially that they have proven out to be able to execute from a small company to get to where they are. Interesting background of the founder which we will not talk about today by extension. Let us know and tag Grab Singapore.
Which brings me to the second company. It’s not a small company by any chance. It is Netflix and for a long time, I hated it. I’m going to tell you a little bit more about it and why I have changed my thoughts after a word from our sponsor.
Okay, so I don’t think I need to explain to you what is Netflix. You should have a Netflix (account), I assume. I may come from the Mars and what have you but I think everybody knows what is Netflix.
If you don’t know Netflix business model, please go and check out the Geekout (episode) that I did with Ser Jing on TFC Stock Geekout. I think he did a great job trying to explain Netflix and the future of Netflix. But for the longest time, I hated this company because they were racking up a lot, a lot, a lot of debt for content. Like it or not, I felt like, “oh, there’s no way out. They’re just going to keep racking up debt, more and more and more debt”.
But, little did I know that this company will be able to execute globally so well. They have a lot of users over the world. 222 million subscribers, to be exact. As they expand on this user subscriber base, the cost per content becomes cheaper and cheaper because it’s amortized over a bigger audience. They’ve successfully acquired a lot of customers all over the world. About 60% of these customers are not US natives so they are all around the world and that makes it very interesting, right?
Because as they keep spending more money, they are acquiring more customers. By extension, the acquisition of more customers make it even cheaper for them to produce content, even though they’re racking up more debt with content, right? Because now, rather than showing to 5 million people, you are showing to 220 million people. With that 220 million subscribers and they’re paid subscribers… these guys pay to stay in the Netflix, not some free service.
So 220 million subscribers… If I am a purchaser for Netflix, I am buying content, compared to buying for Mediacorp… if I buy for Mediacorp, my budget is going to be very small because I’m only catering for like what, 3 million or 2 million (subscribers)… I don’t know how many million people they have on meWatch. Maybe they got Malaysia audience, I don’t know. Assuming only a fraction of the Singapore audience is on meWatch, how much money can I spend to buy content for meWatch, compared to the 220 million paid subscribers on Netflix?
As a purchaser, as a producer for Netflix, I can buy blockbuster content that other people cannot. So it continuously become a flywheel, right? As I buy better and better content, more and more subscribers come in. Yes, I do spend more, but eventually it reaches a point where my increase in costs of content amortized across increasing audience size becomes negligible. That is what I’m seeing now with Netflix. I’m like, “I should have bought it earlier”. But to be fair, different people come in at different times and now Netflix is trading at $180 billion during the time of recording. So yeah, I think it’s becoming an interesting business to look at.
Also, I would say, there’s a lot of concern about, “oh, what if Disney comes into the game and blah, blah, blah”. You already see, right? Disney comes into the game and Disney as with every attempt to monetize their content so far in history, they’ve done decently well. I think Disney+ will continue to do well, but I don’t think it’s an end-all, be-all. There would probably be multiple subscription which is why Roku is also an interesting business, which we talked about previously.
But yes… Just for Netflix alone, I also see another interesting phenomenon with them. I actually watched my first Brazilian film on Netflix. It’s called 3%. I don’t know if you guys watched it, I’m not promoting the film, but yeah. It’s a Brazilian film. The whole… It’s not like… It’s a series, to be more exact, it’s a series. The whole thing is in Brazilian. I just watched it because it’s dubbed and it’s very well dbbped and I could understand the whole discussion. I could understand the whole thing and I just watched it.
I’m sure a lot of people watch Squid Game and you’re seeing this interesting phenomenon. In other words, it looks like Netflix is able to create blockbuster films or at least good films or good TV series without Hollywood which is interesting because the cost of producing in Korea and in Brazil is definitely going to be way cheaper than in Hollywood.
If that is happening and if I am the executive producer in Netflix, I will be hunting down all these interesting new producers all over the world. It is showing that the audience that I’ve collected so far and the data that I’ve collected based on their consumption is helping me create content at more affordable places.
Wow… so I will be very excited to see if Netflix can continue to increase their content spend globally to try to push some of this content dollar to other countries so that they can create more interesting content but at the same time, bring down their net content costs. They are trying to pay down their debt, which is very interesting.
With them paying down their debt, it’s going to bring them to a much better cashflow position, financial position. I would say, at today’s price point with Netflix, hey… Interesting… Interesting to look at. I feel that they have solved one of the biggest problem that I had with them for a long time which is content. Very expensive… Hollywood control everything but hey, it looks like it’s not the case anymore. They can work with other films, I don’t know. Jack Neo, maybe? Very sensitive… Jack Neo’s recent movie.
But yes, you get the idea, right? So Netflix is something that I feel… I’m getting interested in and I’ve already opened a small position in them as we develop. I feel their moats are strong and they’re showing signs that they are able to offset some of these high costs and potentially continue to grow their audience as they grow vernacular content and all these other things that they’re doing. Of course, the whole gaming… All (of) that, (I) will not discuss here. Ser Jing did a little bit more discussion. Follow TFC Stock Geekout.
And now, for the third company. Probably the most contentious one out there and that is Peloton. Yes, Peloton. Max did a Geekout with us. Macam (It’s like) I’m marketing for all of them. But yes, Max did a Geekout with us, Max Koh. You should check out on TFC Stock Geekout. I think he spent a great time and great deal, trying to explain this company for all of us. So he did a great job and I was definitely all like, pretty intrigued by it.
Currently trading at $8 billion, it has come down a lot to a point where Nike is looking to acquire it. If I was Nike, I would acquire it. So that is amazing. Of course, given the recent problem with their supply chain, it’s affecting their ability to grow. I will not repeat all the things that people are talking about out there.
Essentially, they sell these kind of bikes with a subscription model. You know, those kind of apps, they’re trying to get you to exercise and all that but they have a whole suite of content team trying to make it the most engaging and most exciting. They make it very cheap for you to onboard to their subscription because they made the subscription cheap. They also make the on-boarding cost cheap for the vehicle because you can (pay) installment over time, blah, blah, blah.
But also because of that, the supply chain is stalling their growth and also, because the stock price come down now, it’s going to be very for them to finance through equity. It’s got to be very expensive for them to finance through debt so they will be going to a lot of problems at least in the next year or so. Like it or not, a lot of companies will die at this juncture.
There are a lot of companies in this space or in the peripheral space of sports, active wear. And all these. They have died as a result of all these problems. With the predecessors like Under Armour, GoPro, Fitbit, they all died in a situation like that, similar to where Peloton is. They were growing, very exciting, valuations were very high. And then… They form… some sort of supply chain problem, they couldn’t continue to grow and they all came crashing and they never got back to where they were. Because like I said, the share price come down, it’s very hard for them to finance through equity and it’s very expensive for them to finance through debt so they struggled for growth after that.
But okay… Peloton, I think has a little bit of a different situation where I think it is a little bit closer to Roku’s strategy. Like I said… Let’s say, we just talk about Fitbit and GoPro. Fitbit and GoPro are one of the few failures of our time. (They were) very hyped up and they died. They started out as doing very small wearables or like small devices. Like GoPro, everyone knows what is a GoPro, right? Small camera. Fitbit is essentially the watch. So, Garmin, Fitbit… They are one company now. They sell these kind of watches.
As with any company that are entering the space, it tends to be that they found a small little part of the market that the big guys were not interested and they grew, grew, grew. Eventually, they became a terminal growth. They need to find new strategies and they struggled to break through from there.
Roku was also in a similar situation but I think the beauty of Roku is they have innovated their product quite a few big rounds. First, it was a hardware then it became an operating system. Now it’s a TV channel or at least they have their own channel, their own content and now, they’re moving into the ads business. They have successfully moved into the higher margin business and it looks like they have grown an ecosystem which Fitbit and GoPro also tried.
They also try to move into the whole software operating system kind of business, but no, it didn’t work. The value proposition was not high enough and yeah, it didn’t work as a… From… Even from a consumer, I own GoPros. I think the software sucks. The operating software is not… The UI (user interface) is not great, the value proposition is not strong.
But Peloton looks like there is a chance that it can move into this higher value business with the subscribers, with the content business, with the advertising business and its ability to keep selling more things to the same audience. That is what I want to see.
Of course, they did some apparel move, trying to sell Peloton apparel. It’s like, “waolau (oh my god)”. I was like, “whoever that came out with this idea should just go and perish”. Why (do) you want to compete in this space with Lululemon, with Under Armour, with Nike, Adidas? It’s… Don’t, don’t, don’t.
But I want to see them be able to shift into this growth of their subscription business, even premium subscription, or show me something in the advertisement space. Show me some of these increased distribution that they can provide for all these other people. Rather than just doing their own content, can they provide the operating system for other content creators to come in? Other fitness content creators who come in, into their ecosystem. Of course, this is a little bit of a… Either you do the whole walled garden strategy like Apple or you want to do the mass strategy like Android where you can sync with everybody and you become a bigger platform.
Either way, both strategies show that they work. I will say, for me, it’s not about which strategy you take. It’s really about whether you can successfully move into a higher margin business. That is where I think Peloton is at this point in time.
Why am I getting increasingly interested in them? Of course, number one, it’s cheap. $8 billion to buy a company that has so many users… 5.9 million Peloton subscribers. If they all sweat on you, you drown. But yes, they have a lot of users and there’s some sort of cult following around it. I think Max did a better description around it. With that, I want to see that sticky customer… I want to see them move into a higher margin business. Whether can they do it or not, that is the question mark.
But at today’s price point, given their issue, their situation, I am… eyes wide open to see how is it going to happen. But like it or not, it is at the price point where some of these big boys are looking at acquiring them. If Nike buys them out, then too bad. Nike buys them out, you can own Nike now.
But yes, I never understood how people would spend so much time in front of a cycling machine and spend so much money on it but it’s proven that people are doing it. There are a lot of subscribers, they’re very sticky, they love it. Of course recently, the reviews (are) not so great, but mostly because of after-service support and the supply chain problems.
At today’s price point, I think it is a worthy experimentation or worthy to explore which is why I think I’m getting increasingly interested but this is probably the least interested one that I have. I’m observing to see if they can go through this process because a lot of their predecessors failed.
So, yes… As with any other companies, as you explore, as you see, you’ll learn more about it. You see how the management execute and you start to see parallels with other companies that are out there. Sometimes, you start with not liking this business, but don’t be afraid to take a change. Don’t be afraid to say, “maybe it’s not too bad now”. Or maybe you start loving the business, but after that they decided to go Meta, then you’ll be like, “I don’t really like anymore”. You know what I’m saying?
So yes… What is important is know what you are buying, what’s your investment strategy, what are you looking out for and don’t look in isolation. Try to look at the whole market rather than individual company.
So yes, these are the three companies that I hated for a long period of time or at least an extended period of time as I first saw them but now, I’m getting interested because they are getting cheaper, looks like they are solving some of the problems or, it looks like the problems are not that difficult to solve relative to where they are.
So yes, these are the three companies: Grab, Netflix, Peloton. I’ll keep looking at other companies as the market become cheaper and cheaper. Just a word of caution, nobody knows how long is this route going to be. Don’t rush to buy anything. Make sure it fits your investment palate, make sure you know what you are doing. At least have a clear head, don’t rush to it.
Chill… There will always be good times to enter the market. As I’ve said before, please go and look at the earlier episode about investor mindset. You learn investing not to keep attacking, it’s to increase your probability when you make your move.
With that, I hope you learnt something useful today. See ya.
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With that, have a great day ahead. Stay tuned next week and always remember: personal finance can be chill, clear and sustainable for all.
Okay. So enough stock content, three episodes back to back. Next week is the last one. Next week, we’re going to talk about REIT (Real Estate Investment Trust) yields. Actually, it’s a very simple episode that I wanted to put forth because Ernie asked me… One of our producers, Ernie, he asked me, “hey, why are the REIT yield so high?”
It’s like, double… Like high double digit, or even like hundred percent. I was like, “yeah. There’s a more complicated read to this thing. It’s not just reading the yield”. So I’m going to share with you how some of these companies engineer their yield and how you should look at REIT yields in general. Hopefully, it gives you a bit more clarity as to what a lot of these companies are doing.
I definitely did an earlier episode around REITs: How To Up Your REIT Game. I talked about capital recycling and some of those things. I think you should go and check out that episode also. Yeah, with that, I’ll leave you to it.
After next week’s episode, we’re going to take a break from investing. I have some other thoughts around personal finance that I’ve collected over time and I want to share that with you. So yes, I hope you’re off to a good start. Like I said again, don’t gan chiong (panic), don’t rush. The market may continue the route, very likely actually. We will find better and better opportunities to enter the space. Take care.
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