Evolution of Apple, plus a crypto blowup, venture capital, mortgage rates, and what drives stocks
The Sandbox Daily (11.9.2022)
Welcome, Sandbox friends.
Today’s Daily discusses the evolution of Apple from its IPO to current day, another large-scale collapse in the crypto markets, venture capital is sitting on mountains of cash, mortgage rates astronomical rise, and what drives stock returns.
Let’s dig in.
Markets in review
EQUITIES: Dow -1.95% | S&P 500 -2.08% | Nasdaq 100 -2.37% | Russell 2000 -2.68%
FIXED INCOME: Barclays Agg Bond +0.12% | High Yield -1.19% | 2yr UST 4.582% | 10yr UST 4.099%
COMMODITIES: Brent Crude -3.16% to $92.35/barrel. Gold -0.37% to $1,709.7/oz.
BITCOIN: -14.61% to $15,841
US DOLLAR INDEX: +0.74% to 110.447
CBOE EQUITY PUT/CALL RATIO: 1.30 (worst reading since 2008, see chart below)
VIX: +2.15% to 26.09
Apple IPO vs. Apple Now
In today’s fast-paced global marketplace, companies need to adapt if they want to stay relevant. Even the Big Tech giants can’t get too comfortable – to remain competitive, large corporations like Apple are constantly innovating and evolving.
Back in 1998, Apple went by the name “Apple Computer,” because at the time, the company only sold computers and computer hardware kits. However, over the next decade, the company expanded its product offerings and started to sell various consumer tech products like phones, portable music players, and even tablets.
Apple’s consumer tech was so successful that by 2007 the company decided to drop “Computer” from its name. Fast forward to today, and the company also generates revenue through services like Apple TV and Apple Pay. While computers are still a core part of its business, the iPhone has become the biggest revenue driver for the company. In 2021, Apple generated $94.7 billion in profit at a 26% margin.
Today, the company is one of the only Big Tech companies that has been able to withstand the industrywide drop in valuations. Sitting strong with a market capitalization of $2.1 trillion, the company is worth roughly the same as Alphabet ($1.1 trillion), Amazon ($879 billion), and Meta Platforms ($269 billion) combined.
Source: Visual Capitalist
The Emperor has no clothes
Binance, the largest crypto exchange in the world, has tentatively agreed to acquire FTX, the 3rd largest cryptocurrency exchange by volume in the world, for pennies on the dollar after a run of withdrawals caused an insurmountable liquidity crisis. Binance’s offer is non-binding and the deal is pending due diligence – which as of 5pm ET, reports are now suggesting Binance may walk away from the deal due to a major whole between its stated assets and pending liabilities.
On Tuesday, CEO Sam Bankman-Fried said that $6 billion in net withdrawals were taken out of the platform over the prior 72 hours, vastly more than the usual flows that number in the tens of millions. Their net crypto asset holdings fell by 83%.
The classic bank run on FTT over the past few days, the native token of FTX exchange, gained momentum after last week’s CoinDesk report showed that Alameda Research, FTX’s affiliated prop trading arm, was overexposed to FTT and other illiquid altcoins on their balance sheet. A surge of withdrawals of the coin further exposed FTX's liquidity problems. As the cascading liquidations, withdrawal requests, and selling pressure mounted (against $22 and then again $15-17), FTX could no longer defend its FTT token, leading to an immediate and sharp deterioration in both value and confidence.
FTX was previously valued at $32 billion this past January during a financing round, and the crypto exchange counts Sequoia, Tiger Global, SoftBank, Altimeter Capital, BlackRock, and Tom Brady among its long list of equity backers.
This is the latest situation in which decentralized finance has attempted to circumvent the past 150 years of traditional finance’s growing pains and guard rails. Earlier this year saw the downfall of other major crypto players including Voyager Digital, Celsius Network, Terra Luna, and Three Arrows Capital.
FTX founder and CEO Sam Bankman-Fried was hailed as a white knight for the crypto ecosystem, led the regulatory charge to work with Congress for regulation, and as recently as this summer, had been featured on the cover of Fortune magazine receiving the moniker “the next Warren Buffet.”
The over $200 billion decline in crypto market capitalization over the past three days ranks as the 26th worst three-day decline on record.
The failure of one of the leading companies in crypto due to managerial and/or ethical reasons is a stain on the industry and a significant setback. It damages confidence and destroys trust. Crypto winter…
Source: TechCrunch, CoinDesk, All Star Charts, Bespoke Investment Management, The Milk Road, Bitwise
Venture Capital sitting on mountains of cash
The last decade has seen record investments from venture capital investors to startups, but things have changed in 2022. The latest data from PitchBook reveals that venture capital (VC) investment in the 3rd quarter was down ~$90bn, more than 50% versus the same time period last year.
Though investors wrote smaller checks in the third-quarter, VC funds are actually still awash with cash. Data from Preqin, reported on by the WSJ, shows that VCs are sitting on an astounding $500bn+ of raised cash that is not yet invested, known as dry powder in the VC world.
VCs are understandably cautious about future investments. High-profile unicorns like Robinhood, Rivian, and Doordash have been crushed in public markets, and VCs are becoming increasingly selective on the companies they back, as sentiment has pivoted from "growth-at-all-costs" to "stuff-that-makes-money".
The flip side of the coin is that for founders building genuinely innovative companies, with a sustainable business model — or at least a credible path to one — there's still some $500bn of capital sitting on the sidelines, waiting to be put to work.
Mortgage rates meteoric rise
Home loan rates were above 7% for the 3rd consecutive week, sending refinancing volume to its lowest level in more than two decades, according to the Mortgage Bankers Association (MBA) latest report released this morning. The contract rate on a 30-year fixed rate mortgage increased to 7.14%, at the highest levels in two decades! Remember – the 30-year fixed mortgage was sub 3% just 12 months ago.
The housing market – one of the most sensitive areas of the economy to changes in interest rates – has deteriorated rapidly this year as the Federal Reserve tightens monetary policy to help reduce inflation.
Source: Mortgage Bankers Association, Bloomberg, Calculated Risk, Investopedia
Maintain perspective in difficult markets
When markets are reeling the way they are, it is often difficult to maintain discipline and perspective and not get too emotional. After all, we are human beings with real feelings and emotions. Sometimes we need to take a step back and remember what drives stock returns over different time horizons. Corrections come and go; this one too shall pass.
Source: Brian Feroldi
That’s all for today.
Welcome to The Sandbox Daily, a daily curation of relevant research at the intersection of markets, economics, and lifestyle. We are committed to delivering high-quality and timely content to help investors make sense of capital markets.
Blake Millard is the Director of Investments at Sandbox Financial Partners, a Registered Investment Advisor. All opinions expressed here are solely his opinion and do not express or reflect the opinion of Sandbox Financial Partners. This Substack channel is for informational purposes only and should not be construed as investment advice. Clients of Sandbox Financial Partners may maintain positions in the markets, indexes, corporations, and/or securities discussed within The Sandbox Daily.