Oct 21, 2021

Axios Capital

Situational awareness: Donald Trump announced his new social network by way of a press release declaring that it was going public via SPAC. Shares of the SPAC were trading at about $13.80 on Thursday morning, a premium to the $10 net asset value.

  • In this week's newsletter: Companies that do badly before they do well; the fall of stonk mania; Netflix gets caught by surprise; the Texas two-step; and much more. All in 1,538 words, a 6-minute read.
1 big thing: Lazarus companies rise

Illustration: Sarah Grillo/Axios

WeWork today became a public company worth more than $9 billion — a vindication of the expensive turnaround strategy employed after it spectacularly imploded in 2019. Like many companies that find themselves at death's door, that which didn't kill them made them stronger.

Why it matters: Hertz, Alamo Drafthouse, and Airbnb are among the currently-thriving companies that were shaken to the core in the early days of the pandemic — providing further evidence for the theory that, in the words of former Fast Company editor Bill Taylor, "companies can't be great unless they've almost failed."

The big picture: Companies that have returned more than 10,000% over 30 years — "superstocks," as they were christened by fund manager William Bernstein of Efficient Frontier Advisors — all tend to crash at least once along the way.

  • Buying Apple stock 30 years ago would have been a fantastic investment, for instance: A $100 investment in October 1991 would be worth some $40,000 today.
  • It was a very bumpy ride, however: The same $100 would have been worth just $26.75 at the end of 1997.

Where it stands: The pandemic dealt a near-fatal blow to many companies, especially in the services sector, which were then forced to retrench and rationalize.

  • Airbnb was forced to lay off a quarter of its workforce when the pandemic hit, after "everything stopped working at the same time," according to its CEO. It then went public at the end of 2020, and is now worth more than $100 billion.
  • Hertz and Alamo Drafthouse both went through cleansing bankruptcies before emerging as stronger versions of their former selves, no longer burdened with legacy debts and unwanted properties.

Be smart: The "Lazarus strategy" of rising from the dead isn't something that can simply be willed into existence, as Ozy CEO Carlos Watson would like to do. For every company that rebounds spectacularly from a near-death experience, there are dozens more that simply die and then stay dead.

The bottom line: If great success comes out of abject failure, then most of the time it arrives after idiosyncratic disaster — think the Qwikster debacle at Netflix, for instance, which caused its stock price to fall 77% in four months.

  • The pandemic, by contrast, was systemic, hitting thousands of companies simultaneously. That's caused a rare event: Many companies (think Toast) are now soaring up the stock charts as part of a broad-based post-pandemic rebound from deep crisis lows.
2. Stonks lose their appeal
Data: Cardify; Chart: Axios Visuals

That sucking sound you hear is the outflow of meme-chasing dollars from the stock market.

  • Small investors have taken money out of stocks for four successive months, per data shared exclusively with Axios, after putting in unprecedented sums during the meme winter of early 2021.

Why it matters: The caravan has moved on. The dream of getting rich quick still lives, but today it's more often found in the world of crypto, NFTs or even sports betting than it is in the stock market.

By the numbers: Market research firm Cardify has a panel of roughly 500,000 users who let it see the monies flowing in and out of their bank account. Out of those users, 30% have put money into places like Robinhood or Fidelity that facilitate stock-market investing, while 4.6% have put money into crypto companies like Coinbase.

  • In meme-heavy January, those investors put $37 million into the stock market, while withdrawing just $19 million. In September, by contrast, investments totaled $16 million but withdrawals reached a record $26 million.
  • Crypto investments peaked at $10 million in May, when there were $3 million of withdrawals. Money continues to pour into the asset class, with $5 million of inflows against $2 million of outflows in September.
  • Caveat: Not everything is being counted perfectly. Robinhood, for instance, is tagged as a way of investing in traditional markets even though it also offers crypto. And Cash App isn't counted in either category, even though it offers investments in both.

The big picture: The "boredom markets hypothesis" holds that a lot of stock-market activity at the beginning of this year was a function of small investors being stuck at home and not having anything better to do with their time (or their money).

  • Today, those investors are vaxxed and enjoying a much fuller social life; there are also many new suitors for their gambling dollar.
3. Nobody knows anything, Netflix edition

Illustration: Rebecca Zisser/Axios

Netflix reported blockbuster earnings this week, and revealed that "a mind-boggling 142 million member households globally" watched Squid Game in its first four weeks.

  • The company also suffered an employee walkout and its most sustained period of negative press in years, thanks to the company's handling of anti-transgender comments made by Dave Chappelle in his latest Netflix comedy special.

Why it matters: The Netflix narrative is that its data-heavy operation has turned Hollywood into more of a science than an art. But the two storylines this week show that the company can still be surprised — to its benefit and also to its cost.

  • Netflix's ultra-sophisticated show valuation algorithms don't include an adjustment for walkouts and bad press.
  • The other side: Netflix's global reach means that a truly big hit can reach unprecedented — indeed, formerly unimaginable — magnitudes.

The bottom line: Netflix is possibly closer to book publishing than its technologist executive suite might like to admit.

  • So long as it puts out a huge amount of content, there's a good chance that one series might become a truly global hit — thereby helping to pay for any number of megabudget disasters.
4. Johnson & Johnson pulls the trigger on Texas talc gambit

Illustration: Aïda Amer/Axios

It's official: Johnson & Johnson has invoked a Texas legal loophole in an attempt to protect the bulk of its corporate assets from claims that its baby powder caused ovarian cancer and mesothelioma.

Why it matters: It's the biggest and boldest invocation yet of the so-called Texas two-step defense.

How it works: J&J has now split into two companies, one of which — LTL Management LLC — holds all the baby-powder liabilities. LTL has filed for bankruptcy, which means that all existing cases and trials against the company are halted, pending a bankruptcy settlement.

  • J&J has promised to fund LTL with at least $2 billion to be spread across the 34,600 claimants. That's less than it already owes in just one case with 22 plaintiffs.
  • J&J is attempting to cap its liabilities at the value of its consumer arm, Johnson & Johnson Consumer Inc. (JJCI) — the parent company of such brands as Neutrogena, Band-Aid, Listerine, Splenda, Visine and Tylenol.

The other side: Plaintiffs calculate that while JJCI is certainly very valuable, J&J's total talc-related liabilities could be much larger. So they want to be able to sue J&J itself — a company worth over $400 billion.

Between the lines: J&J seems to have the legal upper hand for the time being. LTL filed for bankruptcy in Charlotte, North Carolina, where the Fourth Circuit places the burden of proof on challengers, rather than on the debtor (which would be the case in Delaware).

What's next: J&J wants to negotiate a global settlement with all of the plaintiffs — one that guarantees them money and, crucially, that releases J&J itself from any further liability. If the two sides can't find a sum that's mutually acceptable, the bankruptcy could drag on for many years.

The bottom line: J&J is happy to see the bankruptcy case drag on indefinitely, especially if the tort cases are stayed while that happens. But unless and until it can persuade the claimants that it's offering a good deal, the parent company won't be formally released from talc-related liability.

5. Coming up: Udemy goes public

Illustration: Sarah Grillo/Axios

Shares of Udemy, an online learning platform, are set to start trading on the Nasdaq next week, Axios’ Hope King writes.

Why it matters: The still-unprofitable company saw an influx of new learners, particularly from its enterprise customers, during the pandemic. That helped grow revenue to $251 million in the first half of this year, up 25% over the same period in 2020.

  • The firm will raise about $400 million through its IPO, targeting a valuation around $4 billion. The indicated IPO price range of $27 to $29 per share is modestly higher than the $24.13 per share at which Udemy last raised money at the end of 2020.
6. Building of the week: Al Thumama Stadium, Qatar

Photo: Matthew Ashton - AMA / Getty Images

Al Thumama Stadium, in southern Doha, was designed for the upcoming World Cup by a team of local architects led by Ibrahim Jaidah.

  • The white exterior, patterned after the traditional gahfiya hat, helps to keep the stadium cool, as does a solar-powered system that first purifies the air and then releases it under spectators' seats.

Qatar's original plan was to build this stadium underground, but FIFA insisted on a capacity of 40,000, far too big for such an undertaking.

  • Once the World Cup is over, the top ring of seats will be removed, and replaced with a boutique hotel.