The Saturday - 2/6/21 Edition
Volume 2, Issue 4
Good Morning!
Nothing gives me more hope in this world than the Super Bowl being played, on time, in the middle of a pandemic. Tomorrow, COVID be damned, two football teams will play in front of live fans (thank you, Florida) and give the whole world a sense of normalcy. As long as the game is played, our civilization has not been defeated!
Still, there will be a familiar face missing in Sunday’s broadcast and, unfortunately, it won’t be Tom Brady’s. After running iconic ads in 37 consecutive championship games, Budweiser is allocating this year’s Super Bowl budget to COVID-19 vaccination awareness programs instead.
Good for the King of Beers! I’d raise a Bud Light to that, but it’s 7am, so they will have to settle for a free shoutout in The Saturday.
It’s Saturday February 6, 2021.
That Wasn’t So Hard
Too much ink has been spilled over GameStop and I have no desire to continue writing about it. With that being said…
Last week, we theorized that Robinhood shut down trading in GME and other meme stocks because of liquidity issues. Robinhood infamously denied it, which naturally let people’s imaginations run wild.
On Sunday, Elon Musk - because, who else? - squeezed the truth out of Robinhood CEO Vlad Tenev. In a live stream with the man who dubbed him Vlad the Stock Impaler, Tenev conceded that clearinghouses demanded $3B in collateral for the meme trades, prompting Robinhood to halt trading in a number of securities.
There you go! Admitting to liquidity issues can’t feel great, but it can’t be much worse than letting internet conspiracy theories run rampant.
Robinhood has now raised $3.4B in fresh capital since last week to help buoy its balance sheet and sustain its trading operations, allowing it to lift all trade restrictions on Friday. The fund raise was structured as a note, convertible into equity at the lesser of (i) a $30B valuation and (ii) a 30% discount on the eventual IPO valuation.
Didn’t See You There
In December, FireEye, Inc., a preeminent cybersecurity company, uncovered one of the most severe and sophisticated hacks in history.
Readers interested in all the intricacies of the hack should read this report, but for those with less time on their hands: hackers (linked to the Russian government) inserted malware into the code of Orion, which is software developed by SolarWinds Corp. As is customary for software, Orion is updated every now and again, so when SolarWinds pushed out a new update to its clients… classic trojan horse.
For those who - like me - only go to restaurants if the menu has pictures:
It’s unclear how many SolarWinds clients were affected by the hack, but we know it’s not more than 18,000. As far as hacks go, these look like rookie numbers: hacks of Sony in 2011 and Equifax in 2017 compromised the personal information of 77 million and 162 million people, respectively.
What distinguishes this incident, however, are the victims: Microsoft, Cisco, and the United States Departments of the Treasury, Justice, Energy, Commerce, State, Homeland Security, Labor, and Energy.
On Tuesday, SolarWinds’ CEO revealed more concerning details: at least one company account had been hacked as early as December 2019. By my estimation, and I’m no mathematician, this means that a group of highly sophisticated foreign government-sponsored hackers spent the better part of a year entrenched in the systems and databases of the United States’ most important, sensitive, and secretive agencies. Crazy stuff!
Per the WSJ:
The attack blended extraordinarily stealthy tradecraft, using cyber tools never before seen in a previous attack, with a strategy that zeroed in on a weak link in the software supply chain that all U.S. businesses and government institutions rely on—an approach security experts have long feared but one that has never been used on U.S. targets in such a concerted way.
Meanwhile, I can’t even figure out how to pay for rides using my Uber Cash. I digress…
The cost of investigating the full extent of the breach and of securing government information systems will be staggering. In 2017, for example, FedEx and Merck had to pay over $1B to remediate damage caused by Russian hacks. That’s some serious dough.
SolarWinds is down 28% since the hack was revealed, while FireEye is up 54%.
Walk-Off
On Tuesday, Jeff Bezos did his best Bryce Harper impersonation, announcing Amazon Q4 revenue of $125B(!) and immediately stepping down as CEO. The news came as a surprise to the public and even to some senior officials at Amazon, but it had long been in the works according to the WSJ.
In 2003, Bezos survived a helicopter crash, which put succession plans at the forefront of the board of directors’ minds. In 2016, Bezos elevated Andy Jassy to CEO of Amazon Web Services (the company’s cloud business) and Jeff Wilke to CEO of Consumer Worldwide (the online retail business), narrowing the list to two potential successors.
AWS’ Jassy got the nod. Although Amazon is best known for its retail website, the cloud business is the company’s most profitable division, accounting for more than 50% of the firm’s operating profits despite only generating 10% of its top line revenues. Jassy, who has been with Amazon since 1997 and launched AWS in 2006, succeeds Bezos, who becomes executive chairman and will focus on strategic initiatives.
The company stock price remained flat after the announcement.
The Shorts Strike Back
Times have been hard for short sellers. As we discussed last month, Melvin Capital Management lost over 30% of its AUM in the GameStop saga and Citron Research pulled out of the short selling industry after over 20 years in the game.
This week, the shorts struck back. After exposing the Nikola fraud last year, Hindenburg Research has now set its sights on Clover Health, a SPAC sponsored by Social Capital founder Chamath Palihapitiya.
Hindenburg’s research report is available here and raises many red flags including: (i) undisclosed DOJ investigations into Clover’s business practices, (ii) price gouging charges and accusations that the CEO syphoned $150M+ from three hospitals he owned prior to launching Clover, (iii) an executive using his wife identity on regulatory filings to conceal his role with another company under investigation by the DOJ, and (iv) unusually high turnover in the company’s C-suite.
For good measure, Hindenburg also took aim at Chamath’s fees in the deal:
Oof. Chamath, who famously sponsored Virgin Galactic’s SPAC and is taking four other companies public this year, denies the claims. Just as shorts are likely rooting for Hindenburg, so are SPAC sponsors rooting for Chamath: while SPACs have been wildly popular over the last year, the light diligence and hefty sponsor fees have been points of contention for many critics. Chamath - dubbed SPAC Jesus by short seller Carson Block of Muddy Waters - is a high profile sponsor and a Clover flop would not go unnoticed.
My favorite part about this story? Hindenburg didn’t even short Clover! Typically, short firms take short positions (duh!), announce their position, and profit. Not here; Hindenburg just offered up its report. That’s strange!
Is Hindenburg afraid of getting short squeezed a-la Melvin Capital? Do they now espouse Chamath’s belief that shorting is “un-American”? Who knows?
Have a great weekend.