2021.

Looking Forward.

Here, I write my thoughts about each of the five stonks (Meta, Alphabet, Amazon, Carvana, Opendoor) I hold going into 2022 and Ethereum. To the reader, this is only useful as a starting point for further investigation or confirmation bias.

Meta Platforms

Last year, I said: “Facebook is the most undervalued large-cap tech company with the brightest future.”

After a 30% return since I entered 18 months ago and a huge uncertain bet on Metaverse, the superlatives don’t hold anymore. Still, Meta is a solid bet despite lower EBIT and higher CapEx guidance.

Marketplace, Shops, and WhatsApp will be new avenues of growth as the ad business expands inventory and earnings. IDFA is now incorporated into projections and is no longer an overhang on the stock price. Furthermore, the antitrust lawsuit I believed would be a “non-starter” last year has been just that. Together, this makes Meta a stable investment even as it bets big on Metaverse.

Meta Napkin Math

Assuming full Metaverse spend, no Metaverse revenue contribution, and buybacks (net of SBC), Meta can generate $30 EPS in 2026. At a 22.5x P/E multiple, we’d have a share price of $675, or about 15% IRR from here.

Alphabet

I bought Meta instead of Alphabet last year because 1) it was cheaper with similar growth and 2) its capital allocation was questionable. These are no longer true.

Today, the valuation difference given Alphabet's accelerated growth is negligible. Additionally, there is no massive bet that shareholders must wait to resolve, and there are two growth verticals (Cloud and Youtube) with foreseeable runway.

As late as mid-2020, Alphabet was a black box. We couldn’t assess GCP’s unit economics and had no clear capital allocation policy. The company’s actions over the last 18 months have shifted my view. Ruth Porat has stopped binge spending in favor of capital returns and investor transparency. Margins have expanded and shares outstanding are decreasing. Commensurately, the multiple has not risen.

The things that made me hesitant about Alphabet no longer hold.

Alphabet Napkin Math

“Other Bets” burns through $4b as operating losses. Assuming a proportional relationship between CapEx and revenue, it’s incinerating an extra $1b/yr. So, Other Bets sets aflame $5b of free cash flow.

Alphabet ex. Other Bets will generate $79b net income in 2022. At the end of 2021, Alphabet is worth $1.8T net of cash. If we capitalize the value of Other Bets at 20x FCF, it would be worth about -$100b. So, Alphabet is trading at $1.9T/$79b NTM P/E, or a little over 24x P/E for the core + cloud businesses, net of cash, and Other Bets losses. This is a modest price for a quality asset.

Amazon

I didn't invest in Amazon last year because the price incorporated a COVID uplift. After lapping “tough comps,” Amazon returned to its pre-COVID multiples. That’s when I decided to finally enter.

The future looks bright for Amazon’s various businesses.

AWS is finally reaching an inflection point. It has stemmed market share losses, allowing us to have more confidence in its run-rate cash flows.

The low-margin retail business has ample opportunity for above-cost-of-capital reinvestment. As it rolls out one-day and same-day delivery nationwide, it is poised to gain total retail market share.

Insufficient capacity constrained Amazon’s already-stellar 3P growth. As the enormous 2020/2021 CapEx flows through the business, I expect continued high growth in 3P.

The ads business is self-explanatory. Still young relative to other digital ad offerings, Amazon Ads has immense inventory and CPM runway.

2022 will be a great year for Amazon as investors reevaluate the company in a post-COVID world. The valuation is such that continued execution will result in good shareholder returns.

Amazon Napkin Math

Four businesses: 1P/Stores, 3P, Subscriptions, AWS.

1P/Stores = $200b revenue x 5% net margin x 25 P/E = $250b

3P = $100b revenue x 5 = $500B

AWS = $70b revenue x 15 = $1T

Subscriptions = $30b revenue x 5 = $150b

Ads Revenue = $30b revenue x 10 = $300B

Total = $2.2T Enterprise Value

Carvana

Fraud pays.

Opendoor

Opendoor’s thesis is simple: replace the home buying/selling process both at a lower cost and in a shorter timeline. Opendoor will eventually add insurance, smart-home upgrades, loan origination, moving services, etc. to each sale. Together, add-on services will increase revenue and run-rate margins.

Bears believe that Opendoor can only survive in booming markets. But, I believe Opendoor will perform as well in a down market as it has in an upmarket. Historically, housing prices have crashed month-to-month, not day-to-day. During the Financial Crisis, prices in “hot” markets fell on average 2% per month, not 50% overnight. Because Opendoor turns over inventory quickly and has diversified holdings, near-term losses due to decreasing prices are not as great of a risk as some may think.

Indeed, Opendoor may perform better in poor housing markets. Its model is that of a market-maker, charging a spread on each transaction. In downtimes, liquidity decreases, resulting in wider spreads and higher take rates. This increased spread will counteract q/q price declines.

OPEN Napkin Math

OPEN is growing top line at over 100%. By 2023, it can reach $20b revenue. At a 5% net margin x 25 P/E, the company should be worth $25b, almost a 3x from today with a likely high growth runway to $50b revenue thereafter.

Ethereum

I was a crypto hater most of 2020. A skeptic for most of 2021.

I won't be summarizing the hundreds of pages written on gas fees, use cases, proof of work/stake, and protocol mechanics. Many people have explained these in detail. But, here’s my high-level take.

In General

First Premise: Outsiders engage with the insider group’s most visible narrative.

Second Premise: The median insider promulgates the insider group’s most visible narrative.

Third Premise: When a new group explodes off of a small base, the median insider is “along for the ride.” Quick riches, cult principles, or quixotic objectives drive him.

Sub-Conclusion: Therefore, there is a disconnect between the real narratives that should be used to evaluate the insider group and the most visible narratives.

Conclusion: Therefore, the outsider will erroneously debunk the insider group based on the median insider's visible, straw-man narratives.

This is why it took me so long to take crypto seriously. It’s also why I believe there is still a massive opportunity, despite the run-up over the past year.

Ethereum Specifically

NFTs, gas fees, and philosophical discussions about web3/decentralization dominate the ETH narrative. The same experimentation and conjecture took place in the early days of the internet. Outsiders dismiss this visible narrative (I've been guilty of this) and are not engaging with the real ones.

ETH is the foremost L1 protocol with use cases beyond store-of-value. It has a multi-year first-mover advantage and benefits from network effects. As the largest smart-contract protocol, it will disproportionately draw in incremental participants. On the other side it also draws disproportionate focus from L2 developers/backers. Together, ETH resembles the “rails” of whatever the web3 ecosystem becomes. (As a side note for crypto purists, “rails” and “network effects” are being used here as highly imperfect analogies).

History shows us that, at some point, actors will converge on the same rails. ETH today is at that inflection point. Given that it is the horse with the best combination of track position and speed, future value will accrue to its holders.

The above is a starting point. It neither fully captures the complexity of the narrative it summarizes, nor addresses other ones. That’s beyond the scope of this writing.

But, I hope the thoughts above start more-nuanced discussions of crypto for others who find themselves in the skeptic camp.

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Thank you for reading!