- This Elon Musk tweet confirms my suspicions…
- You won’t see this COVID-19 story on CNN
- A reader is ready to ditch Robinhood
Dear Reader,
Welcome to our weekly mailbag edition of The Bleeding Edge. All week, you submitted your questions about the biggest trends in technology. Today, I’ll do my best to answer them.
If you have a question you’d like answered next week, be sure you submit it right here.
But first, let’s look at the markets…
I’m always keeping a close eye on the underlying factors that are moving markets. And over the last four months, record low interest rates and multitrillion-dollar stimulus packages have been the two major catalysts for the sharp rebound since the March stock market lows.
But there is something else interesting going on behind closed doors…
More private capital has been raised than ever before. The private equity (PE) and venture capital (VC) industry like to call this “dry powder” – money sitting on the sidelines, ready to be invested.
In North America and Europe alone, PE holds about $1.2 trillion of dry powder. And most of these funds will be used for private equity buyouts and, to a lesser extent, to support the growth of proven, promising companies that need to scale (growth equity).
Because of this, it is an exciting market to invest in. Public companies are being acquired for premiums and taken private by PE firms left and right.
We can expect those companies to go public again in two or three years or else get sold to another public company. Private companies are also getting acquired for the same reasons.
And it is happening more quickly than it used to. During the last five years, PE firms have taken companies private about six years after an IPO (initial public offering). Ten years ago, that number used to be around 11 years.
And about 55% of the total deal value of these buyouts has been in the technology sector. High tech is where the largest growth is happening. It’s natural for private equity to be attracted to this space.
And private equity has aggressively moved into the venture capital space. We can see this easily in the chart below.
The angel and seed rounds, which is where I tend to invest the most, have remained largely unchanged. The “early VC” rounds like Series A and Series B have seen a slight uptick in the last few quarters. But the big change is taking place in the “later VC” rounds: the Series C round and beyond.
We are seeing PE racing into technology and biotechnology companies that are benefiting from the shift in behavior caused by the COVID-19 pandemic. The median pre-money valuation of Series C+ round financing has jumped above $200 million this quarter.
It’s natural to see private equity invest in these later rounds. By the time a tech or biotech company gets to that stage, the future success of the company is far easier to predict and much of the risk has been taken off the table.
This trend isn’t changing anytime soon. And it will only accelerate technological development and bring about the next class of multibillion-dollar companies to the public markets.
I’ve never seen a pipeline of future IPOs like I see today. We’re in for an incredible run over the next four or five years.
Now let’s get to our questions…
Elon Musk confirmed my suspicions…
Recently, we discussed why satellite internet is not a threat to 5G wireless technology. Today, a reader agrees and shares his experience with satellite internet…
I have satellite internet (DISHNET), the “best” package they offer. I have no other internet options. I bought a cell booster because of the quarantine and poor signal… back up in the valley – no line of sight. I now have decent LTE, which is way better as a hot spot than the satellite. 5G has nothing to worry about.
– Todd S.
Thanks for writing in, Todd. And thanks for sharing your experience with this technology. I really appreciate hearing about this kind of practical experience from the field. It sounds like you have a great spot to be settled down during a pandemic.
To catch readers up, satellite internet technology is delivered via satellite and beamed down to some kind of receiver – in Todd’s case, a satellite dish – in order to provide internet connectivity.
One interesting project that we’ve been following in The Bleeding Edge has been SpaceX’s Starlink project. In fact, around the time The Bleeding Edge goes out today, the next Starlink launch will take place (4:18 p.m. ET) – weather permitting.
Another 57 Starlink satellites will join the satellite constellation. Ultimately, SpaceX wants to launch 42,000 satellites into space to provide internet connectivity around the world.
But as Todd pointed out, satellite internet technology has its downside. Yes, theoretically, the system is capable of delivering 1 gigabit per second (Gbps) to one internet subscriber, but Starlink’s business model wouldn’t work at all. One subscriber per one satellite? The cost to deliver that kind of service to a single subscriber would be astronomical.
So what happens in the real world? Thousands of subscribers are fed off the same satellite and the same available spectrum. The satellite company has to split up any available bandwidth in order to make the business work and provide some kind of service affordable to consumers.
That’s why consumers won’t experience 100 megabits per second to the home over a satellite service when the system is fully deployed.
And here’s the “secret” that DISHNET won’t highlight in its advertising. You’ll only see it in the fine print.
When consumers sign up for the “best” package offer, as Todd did, there is always a cap on utilization. Usually, that number is somewhere between 10–50 GB (gigabytes) a month. Once a consumer hits the data plan cap, he or she is throttled down to something like 128 Kbps (kilobits per second) – that’s the speed that we’d get 20 years ago over a phone line.
Compare that to 5G wireless technology. 5G will have latency of only 1 millisecond. A millisecond is a thousandth of one second. And 5G speeds, with a fully built out network, can average 1 Gbps. I experienced almost 1.7 Gbps myself when I recently tested Verizon’s network in Washington, D.C.
For this reason, satellite internet is really only intended for remote locations where there are no other connectivity options available.
And if we still have any doubt, take a look at this interesting Twitter exchange with none other than SpaceX CEO Elon Musk.
Elon Musk on Starlink
Source: Twitter
There we have it. Starlink technology is designed to “serve the least-served” and “works best for low population density situations.” But for areas where 5G connectivity is available, 5G will always win out. So will land-based internet service providers like internet through a CATV network.
This is a really hot topic among Bleeding Edge readers, so I’m on the waitlist for Starlink’s beta program. I’m planning on signing up and testing it myself. And, of course, I’ll be sharing anything I learn with my readers.
And for anybody wondering, 5G is still an incredible investment opportunity.
The 5G rollouts continue as planned. And the best 5G stocks are primed to skyrocket.
For investors who aren’t positioned for 5G, now is the time. I’ve released a presentation from the Shubert Theatre, a stone’s throw from Yale, where I am an alumnus. There, I revealed my No. 1 large-cap 5G stock for 2020. See the full presentation for yourself right here.
Why I always rely on data, not headlines, when it comes to COVID-19…
Next up, a comment from a reader on our reporting of COVID-19.
As an Arizona resident, I can tell you COVID-19-related hospitalizations are increasing, the rate of new cases is higher than the rate of increased testing, and hospitals are nearing capacity. The 100 county results are not representative of what is happening here.
– Marc L.
Hi, Marc. Thanks for writing in with your comment. It’s great to hear the “boots on the ground” feedback from around the world. A colleague of ours is also in Arizona right now and has shared similar information.
We are definitely seeing some “hot spots” around the U.S. pop up, but it is not evenly spread across the country. And we’re also seeing some instances where areas that were not very affected by the first wave between February and April seem to be catching up.
The other interesting dynamic that is coming in to play here is that most health care facilities are now automatically running COVID-19 tests on patients even if they don’t come in for COVID-19. Naturally, because of the increased testing, more cases of COVID-19 are being discovered.
At a national level, however, the trends continue in the right direction.
For anybody who missed it, here is the chart I shared:
As I mentioned before, this data is a subset from the Center for Disease Control and Prevention (CDC). It is provided by the Coronavirus Disease 2019 (COVID-19) – Associated Hospitalization Surveillance Network (COVID-NET).
This group monitors 100 counties across the 10 Emerging Infections Program (EIP) states. This includes CA, CO, CT, GA, MD, MN, NM, NY, OR, and TN. This network covers about 10% of the population and is representative of the country. It also includes many of the hardest-hit areas in the U.S.
This is fantastic news. And we should all be excited to see that hospitalizations are headed in the right direction.
But even if we look at hospitalization rates for the state of Arizona, this trend holds true.
This data comes directly from the Arizona Department of Health Services. And as we can see, hospitalizations on a state level are collapsing.
Why do I make this point?
It’s because I believe the mainstream media is painting an inaccurate view of the virus. Frightening headlines about “apocalyptic” spikes in cases get a lot of attention. But they don’t tell the whole story.
Yes, cases are increasing. But as we know, a large percentage of COVID-19 cases are either asymptomatic or don’t require hospitalization. That’s the story we won’t hear from CNN.
Knowledge is power. Maintaining objectivity and performing analysis based on the real numbers rather than the headlines is critical to our rational thought process and decision making.
And my team is committed to digging into the data to share our analysis with readers of The Bleeding Edge.
And it’s important to mention that I don’t have a “side” on this issue. If the numbers start to shift, I’ll be the first to wave the warning flag. If hospitalization rates increase in the weeks ahead, we’ll be sure to let readers know.
For now, I still see a lot of reasons to be optimistic.
Interested in ditching Robinhood? Read this…
Let’s conclude with a question from a reader who wants to ditch Robinhood after I unveiled the company’s questionable business practices…
Hi, Jeff, Thank you for all your knowledgeable information and insider insight. I am a subscriber to all three of your great services. I also really appreciate your articles in The Bleeding Edge.
Concerning your recent article about Robinhood’s scheme of business… Are the behind-the-scenes fees on Robinhood different than fees from other brokers? Also, to transfer my investments to another broker, would I have to sell all my stocks and rebuy them? Another commission-free broker is Webull. Does it operate the same as Robinhood? Thanks in advance for your answers.
– Shawn M.
Hi, Shawn. Thanks for being such a dedicated reader. I’m happy to have you as a subscriber. I’ll keep working hard on my readers’ behalf.
Just to catch readers up on Shawn’s question, Robinhood is a brokerage firm geared toward younger investors that first got attention for its zero-fee trading policy. Robinhood’s success with marketing its “free” trading transformed the online brokerage industry. Most brokers shifted to that kind of model.
This “free” trading app has been on fire since the economic lockdowns. The company now has 13 million accounts on its platform.
But as Bleeding Edge readers know, if a service is “free,” it simply means we’re paying another way. If we’re not paying for a product, we are the product.
In the case of Robinhood, the company is routing most of its customers’ orders through hedge funds for execution.
As I said on Monday, 65.5% of all Robinhood orders go directly to Citadel Securities. In return, Citadel and the other hedge funds receiving orders pay Robinhood monthly commissions for that order flow.
But that’s not where it ends…
From there, Citadel buys the stock first and then turns around to sell it at a slightly higher price to the investor. Citadel only makes a tiny profit on each dollar the investor spends, but it adds up over time.
This is a deceptive practice. And I would understand why investors might be interested in switching from Robinhood.
As you likely know, Shawn, I can’t give personalized investment advice. But here’s what I would say to any readers considering switching brokerage firms.
The simplest way to switch is to sell all our positions and simply reestablish them with another online broker. But there are downsides.
For starters, our new brokerage firm would treat these as brand-new positions. It would not automatically track our long-term investment returns.
The second downside is taxes. Any time we sell a stock for a profit, it becomes a taxable event. Depending on our income and the length of time we held a security, this can get expensive. The short-term capital gain tax rate for high-income earners can be up to 37%.
A better solution would be to use something called an Automated Account Transfer Service (ACATS). These are processes that allow investors to move investable assets between brokerage accounts without having to sell and reestablish a position.
Shawn, you’ll have to research this and decide if this is a good route for you. But if so, it would allow you to transfer your holdings to a new brokerage account without having to sell.
Which brokerage you pick is your decision as well. But I would point out that most online brokers now offer commission-free trading. Interactive Brokers, TD Ameritrade, and Fidelity are among them. Robinhood no longer has a monopoly on fee-free investing.
And to be fair and balanced, all of the online brokers have to make money somehow if they offer fee-free trading.
Take Charles Schwab, for example. The brokerage pays its customers a lower interest rate on any cash deposits than a normal bank would. It earns a higher interest rate by investing your money elsewhere. Basically, it earns money on the spread.
I hope that helps.
That’s all the time we have this week. If you’d like me to answer a question in our next mailbag edition, write to me here. I’ll do my best to get to it next Friday.
Regards,
Jeff Brown
Editor, The Bleeding Edge
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