Samsung and Airbnb – Day of rescue

Samsung Electronics Q1 20 – Cloud rescue. 

• Samsung has reported good Q1 2020 results where the clear indication is that demand for memory, storage and other silicon chips for the cloud has offset weakness in consumer.
• Q1 2020 revenues / EBIT were approximately KRW55tn / KRW6.4tn below the revenue forecast of KRW56tn but above the EBIT forecast of KRW6.2tn.
• Samsung’s semiconductor business is typically significantly more profitable than its consumer electronic business which fits this picture.
• It looks like semiconductors have not quite offset the weakness from consumer at the revenue level but its’ higher profitability has allowed EBIT to beat expectations.
• This fits with my view that certain parts of the tech sector are going to benefit from the great home working and home-schooling experiment that has been forced upon hundreds of millions of people.
• Demand for servers, storage, cloud capacity, laptops, webcams and video conferencing equipment appears to be very robust and Samsung’s initial results are the first sign of this.
• Microsoft, Amazon, Intel, AMD, Western Digital and Seagate all look they are in a good position for a sudden uptick in demand triggered by parts of the economy being transferred to the home.
• These companies are purer plays on this trend than Samsung and I am surprised with the degree to which this trend has impacted Samsung given the size of its consumer business.
• Hence, I would continue to prefer them over consumer plays as economic forecasts from many banks for Q2 are truly apocalyptic.
• It is these forecasts that lead me to worry that the recent recovery in the stock market may be a false dawn.

Airbnb – The ratchet. 

• Airbnb has managed to raise a further $1bn in a deal that I am pretty certain will contain a ratchet in return for paying a higher valuation.
• Airbnb had recently decreased its internal valuation to $26bn, which in the current environment, I have argued (see here) is still too high.
• However, there are plenty of other mechanisms that Airbnb’s existing investors Silver Lake and Sixth Street Partners can use in order to safeguard their investment.
• At a valuation of $26bn and with large declines in revenues expected in 2020 and continuing into 2021, this is a very rich valuation.
• However, through the use of a ratchet mechanism, investors can pay a valuation of $26bn and have downside protection.
• In the eventuality of further fundraisings at lower valuations, more shares are automatically issued to investors who have a ratchet in their share class to compensate them for the lower valuation.
• For example, if the valuation of the next round is at $16bn, investors with a ratchet are issued more shares so that the nominal value of their investment does not fall despite the fact that the overall valuation is lower.
• This dilutes other investors but it is one way to ensure that the nominal valuation at which the company raises money does not fall too much.
• I still think that the intrinsic value at the moment is below this level, given the uncertainty, but the extra cash gives Airbnb time to weather this crisis.
• Clearly some people have greater faith in the resilience in the sharing economy than I do in light of the current pandemic.