Block trades for 17x 2024 earnings. EPS is expected to grow by 95% this year and by 28% next year. It is currently inflected to positive GAAP EPS as well.

Over the last few quarters, we’ve heard about several restructuring and strategic initiatives happening at Block. It tweaked Cash App’s focus to prioritize paycheck deposits, engagement gains and more monetization. Cash App also extended its target demographic to households earning up to $150,000 ($100,000 previously) and pushed to accelerate engineering and design innovation. Pretty much everything in Cash App needed tweaking, and the 20%+ gross profit growth for that segment is evidence of its work bearing fruit. Beyond Cash App, Block capped its headcount at 12,000 for the years ahead, reorganized teams under clearer roles, cut costs and committed to delivering operating leverage (including GAAP operating leverage).

This quarter, there was another area of restructuring that dominated the shareholder letter and call. Block is pushing to fix Square’s go-to-market and product velocity. It split this initiative into four groups: Sales, marketing, partnerships and products.

First, on sales, CEO and co-founder of Afterpay Nick Molnar (BNPL platform that Block bought) will add Square to his responsibilities. Going forward, he will lead a “centralized sales” push across Afterpay, Cash App and Block. The change will happen this month with “minimal disruption. Afterpay was purchased partially to improve Block’s go-to-market across all products. It came with a “high performing sales culture” and a large base of merchants ripe for Square cross-selling. It wants that energy for Square and wants a more cohesive go-to-market approach to make cross-selling Square and Afterpay products more straightforward. Molnar will focus on “raising the performance bar of the Square team.”

I find conjoining selling efforts across the Square and Cash App ecosystems to be positive and important. Like PayPal, Block has a large, two-sided network to deliver unique value to its stakeholders. Its large consumer base represents considerable purchasing power; its large merchant base wants to secure that purchasing power for themselves and many are happy to offer unique promotions to do so. Block should be aggressively selling customer targeting tools and leveraging the value that Cash App presents for merchants. The firm can greatly augment overall value creation by doing so and this change tells me that’s their plan.

Partnerships are the second item to discuss, and are directly related to supporting go-to-market. Not all customer wins come from direct sales teams. Consultants and value-added resellers are highly important channel partners to ensure Block is being recommended to prospective clients whenever possible. Partners are also instrumental in educating clients on efficient onboarding and usage of products. They shrink the learning curve and augment direct sales.

Block is investing to update its APIs and software development kits (SDKs) to make integration and customization easier for customers. It will also focus more of its partnership work on maximizing distribution. As part of this, it signed a new agreement with U.S. Foods, which has relationships with nearly 40% of U.S. restaurants – a key vertical for Square. Block still thinks its products provide lower total cost of ownership and more transparent pricing than peers, so partners should be eager to help spread the word.

Marketing approach also needs work at Square. It’s seeing “stronger returns on marketing than it has in years” and will lean into this strength to support its revamped sales efforts. More hiring here is coming. Still, it will focus spending on fewer areas to stretch each dollar as far as they can go. It will shift dollars to more high-return trade shows and webinars, as well as cutting some lower traction cities out of its plans. Marketing initiatives will be timed-up to coincide perfectly with its push to ramp product innovation.

Speaking of which…

All of this work will support the most important category of Square’s improvements: Product. Product is always vital for any enterprise. That may be especially true for Block, considering its new business skews to self-serve onboarding, where word-of-mouth powers growth. There were a few items to note from this part of the chat. Block’s new self-serve onboarding process rolled out last month and reduces the steps to join Square from 30 to 4. It upgraded inventory management systems and added more customization tools, like GenAI-powered web design and product descriptions too.

Most notably, its Orders Platform migration work will be wrapped up by the end of the summer. This is essentially just migrating its software stack to a “newer framework.” By doing so, Square will be able to build and iterate far more rapidly. This should also improve system up-time, which is important considering outages have led to Square churn issues in the past. Churn levels for the segment were stable Y/Y.

Cash App is performing well. Monthly actives only rose 5% Y/Y and fell short of expectations, but that was due to marketing cuts and prioritizing engagement over top-of-funnel growth.

Its push to bank the base continues to drive paycheck deposit traction and inflows per active growth. It added new Cash App Card spending insights to help customers more responsibly budget; it also continued to find great success with Cash App Borrow. Cash App Borrow is the firm’s short-term, small dollar lending product. Block uses extensive customer data profiles to ensure it knows its user better than a random lender and can enhance underwriting quality as well as approval rates. Volume here rose 3X Y/Y (small base). It will keep adding more financial services to strengthen the overall ecosystem’s value.

GAAP OpEx fell 4% Y/Y while non-GAAP OpEx fell 1% Y/Y. It continues to find rapid stock comp leverage, which is why GAAP declines are larger. Product and development expenses rose slightly Y/Y and sales & marketing fell by 6% Y/Y. GAAP G&A fell 14% Y/Y due to headcount control while non-GAAP G&A fell 1% Y/Y.

There are a lot of moving pieces at Block right now. Pretty much everything has changed to a certain degree over the last year. Now, attention will turn to how effective these changes will actually be. Cash App and Square are good assets just like Venmo and PayPal are good assets. And just like Venmo and PayPal, Block needs to organize go-to-market and execute a lot better. They’re capable; time to go prove it.

SE raised its initial Shopee gross merchandise value (GMV) growth target from high teens Y/Y to a mid-20% Y/Y growth rate.

It trades for 36x 2024 EPS and 90x 2024 GAAP EPS. EPS is expected to grow by 148% this year and by 94% next year. GAAP EPS growth is expected to grow by 238% Y/Y this year and by 126% Y/Y next year.

Gross orders rose 40% Y/Y, GMV rose 29% Y/Y and core marketplace revenue rose 33% Y/Y as this segment continued to regain its momentum. As briefly mentioned, Sea Limited has gotten more aggressive with marketing spend, which in addition to higher logistics costs, was the source of the segment returning to an EBITDA loss. Shopee will return to positive EBITDA next quarter. In Brazil, its newest growth market, unit economics continued to improve with scale. It now generates $0.09 in contribution profit per order there vs. -$0.24 Y/Y.

Competitive concerns from analysts were a key part of the call.

Leadership is “happy” with Shopee’s large and stable market share lead over the competition, which is why its growth outlook was raised. Ad take rate is improving (12.1% of GMV vs. 11.7% Y/Y), as it introduces new placements within live streaming and its marketplace; that should help with profitability. It has a “dedicated tech team working on improving ad bidding algorithms” to juice demand for these placements over time. It also debuted a new onboarding flow, which helped total advertisers on the platform rise by 20% Y/Y.

“We are seeing more market share consolidation, and an industry-wide take rate increase. We believe this will move the industry toward profitability and sustainability, and we welcome this trend.”

Founder/CEO Forrest Li

SE’s SPX Express delivery service is performing well and facilitating shorter delivery times and improved service. Sea Limited made deeper integrations with logistics partners a priority this quarter, and its work paid off. 70% of SPX express orders this quarter were fulfilled in three or fewer days and cost per order fell 8% Y/Y. It’s also investing in optimizations to its return and refund processes to cut miles, touches and costs per package. “Change of Mind” is a 15-day “no-questions-asked” return policy for buyers. This drove a 10% rise in average basket size for Malaysian buyers.

Garena (gaming division) continued to grow bookings at a strong, 20% Y/Y clip. Free Fire powered this growth, and is making leadership increasingly confident in this being an evergreen franchise. You may wonder how bookings could grow while revenue shrank? This is due to realizing lower levels of deferred revenue via weaker bookings trends over the last year. Bookings is the forward-looking indicator and that indicator is looking increasingly strong. Free Fire crossed 100 million daily active players every single day during the quarter and was the most downloaded game on the planet.

Consumer and small business loans rose 39.5% Y/Y to $3.5 billion and drove this segment’s revenue. Vitally, 90+ day non-performing loan (NPL) rate improved to 1.3% vs. 1.4% Q/Q and 1.6% Y/Y. Sub-10% provision for credit loss growth also greatly lagged volume growth. That’s great to see.

It’s using Shopee’s large customer base to affordably cross-sell newer financial service solutions, and that’s working. Financial services saw 4 million first-time borrowers this quarter vs. 2 million Y/Y. Overall, it has 21 million loan customers, representing 58% Y/Y growth.

In Indonesia, it partnered with a large cohort of merchants to unlock mobile phone plan pay later solutions. It will keep rolling out new credit products like this one to broaden this segment’s use cases.

“I wanted to share some observations of our Southeast Asian markets. Generally, retail and consumer spending trends in the region have remained healthy, with domestic consumption continuing to be a main driver of economic performance in many markets. This sets a very strong macro foundation for our e-commerce business.”

Founder/CEO Forrest Li

I don’t study Southeast Asia closely enough to have a strong opinion on this quarter or the investment case. Rather than offering my typical take, I thought it would be more valuable to frame the discussion and let you decide from there.

The last several quarters have brought with them an interesting SE bear/bull debate. Bears say competition in the region is fierce and newer entrants like Temu and Shein only make that more true. They say that growth is a direct byproduct of how much marketing spend SE incurs and that there’s little leverage there to be found. They don’t think margins can expand without growth suffering and that SE will play an endless balancing game of sacrificing profit or revenue. They don’t think this is like Spotify in terms of product and brand awareness building enough to create sticky users who don’t need constant promotions and marketing. They don’t think EBITDA can sustainably compound, as trying to let that happen will mean declining revenue and no fixed cost leverage. Bulls will tell you that’s wrong. They’ll say front-loaded logistics costs for Shopee will slow and that SE continues to effectively defend market share across all 3 segments. They’ll also rightfully point out how much better the entertainment segment looks vs. a year ago. They’ll say that cratering growth is related to the multi-year pandemic pull-forward and that comps only get easier from here. What say you?

Read my Nu Deep Dive here to learn about the company in detail.

Nu beat revenue estimates by 1.4%. Its 56.7% 2-year revenue compounded annual growth rate (CAGR) compares to 77% Q/Q & 94% 2 quarters ago. New customer growth also exceeded internal expectations across all three of its markets.

Annualized ROE was 33% vs. 19% Y/Y; annualized GAAP ROE was 28% vs. 17% Y/Y. That is not a normal pace of progress. It continues to productively place a larger and larger portion of its balance sheet into higher yielding assets. ROE metrics are already among best-in-class for Nu, despite 31% of its cash & equivalents being held as excess cash on its balance sheet. It’s also still heavily investing in early growth in Mexico and Colombia. Brazilian ROE is over 40% to show you where this business can eventually go.

Gross margin was supposed to be flat Q/Q due to the elevated Mexican and Colombian investment levels and rising cost of funding due to mix shift towards those countries. Rapid expansion was thanks to Brazilian profitability gains more than offsetting these headwinds. It continues to deliver rapid leverage while 2 of its 3 markets are firmly in their investment phases and burning cash.

Nu sees NIM and risk-adjusted NIM expanding throughout the rest of 2024. It doesn’t offer formal guidance. Nu trades for 32× 2024 earnings. Earnings are expected to rise by 66% Y/Y this year and by 52% Y/Y next year.

Broken record alert: to win over the long haul in any commodity sector, cost edges are needed. Nu updates us on its own cost advantages every quarter, and the importance of these advantages staying intact cannot be overstated. Nu combines the branchless cost edge that fintech’s enjoy with the deposit-funded loan cost edge that incumbents enjoy. It gives you the best of both worlds and that remained true as of this quarter.

No matter how you slice and dice the data, Nu is firing on all cylinders. There was considerable foreign exchange noise in today’s release, and we’ll focus on FXN growth to gauge the true operating momentum of this model. FX headwinds will ebb and flow.

Purchase volume rose by 29% Y/Y FXN; Ultravioleta purchase volume (high next worth) rose by more than 70% Y/Y FXN; deposits rose by 64% Y/Y FXN; customer count in Brazil rose 20% Y/Y despite it now having 56% of the entire population in its base; Mexico added 1.2 million customers to approach 8 million total and Colombia raced past 1 million total customers to reach 1.3 million.

But it’s not just strong top-of-funnel momentum helping Nu’s results… engagement gains remain strong as well. Active customer rate is now 83.4% vs. 82.2% Y/Y, which is a mile higher than any fintech competitor in its region. Average revenue per active customer (ARPAC) rose to $11.20 vs. $10.60 Q/Q and $8.60 Y/Y FXN. That has a ton of room to run considering its most mature cohorts have ARPACs of $25.

60% of its customers in Brazil now use Nu for their primary banking account (PBA), which continues to climb. It’s now the largest active customer creditor in Brazil. It has tripled total deposits in Mexico in just 6 months to $3.3 billion and pushed Colombia deposits from near $0 to $200 million in a quarter. 80% of that deposit growth came in June for its brand new Colombia banking products. Actual Q/Q deposit declines in Brazil were entirely related to FX headwinds, as FXN Brazilian deposit growth rose 10% Q/Q FXN (61% Q/Q in Mexico).

The declining 15-90 day NPL Q/Q was in excess of expected seasonality. The outperformance was attributed to underwriting strength. The sharp rise in Q/Q 90+ day NPL is due to the season spike in 15-90 day NPL rate last period. 90+ day lags 15-90 day by about a quarter. Credit loss allowance expense (CLAE) actually fell Q/Q, which was a positive surprise. The decline was partially related to FX benefits, but FXN CLAE still fell Y/Y. There are two factors contributing to this — one positive and one negative. On the positive side of things, 15-90 day NPL outperformance is putting downward pressure on CLAE. On the other hand, slower origination growth in Q2 vs. Q1 also helped this fall.

It sees NPL rates continuing to rise due to a multiple expected trends. First, it continues to grow unsecured loan originations faster than credit card receivables. Unsecured loans have higher NPL rates. Specifically, 24% of its credit portfolio is now personal loans vs. 19% Y/Y. Secondly, it continues to expand down the credit spectrum to riskier borrowers as planned. This expansion is going better than it expected.

The metrics to focus on are gross margin, NIM and risk-adjusted NIM to gauge if it’s properly pricing risk for these new borrowers. Expansion for all 3 offers clear evidence that it’s being compensated fairly for taking on more risk. There is one caveat. Balance sheet optimization also props up these metrics and can offset worsening underwriting on a temporary basis. But outperforming NPL and its expectation of NIM and risk-adjusted NIM expansion while also expecting a slow pace of balance sheet optimization tell you underwriting quality remains robust.

It also added a new chart of risk-adjusted margin with this downward move in credit originations and when adjusting for it. The purple line being well ahead of the red line tells you this move to accept riskier credit is going very well. It’s in a better revenue and profit spot today because of the decision.

This second chart shows you that the rise in NPL is related to the intentional shift to personal loans and riskier credit, rather the deterioration in apples-to-apples credit vintages:

The shift from revolving-style credit to interest earning installment credit remained in full force this quarter. Its interest-earning portfolio (IEP) rose to 28% of its total portfolio vs. 19% Y/Y. The pace of this rise will slow in the coming quarters, as absurdly high Pix and Boleta financing adoption is expected to moderate a bit.  PIX is basically a nationalized Venmo in Brazil where Nu customers can use credit card limits to make transactions; Boleta uses a credit card to pay bills in installments. IEP rising means more net interest income growth on top of revenue coming from more members and more products. It adds another powerful leg to the revenue growth engine, which will slow going forward. That’s entirely as expected and why sell-side sees growth slowing to 28% Y/Y next year.

Nu signed six new collateral agreements with the Brazilian armed forces and local governments to unlock more secured lending populations. This will allow it to address up to 75% of Brazil by the end of the year, which compares to 50% today. It’s wrapping up work on driving easier loan portability and seamless refinancing opportunities… and that’s a big deal for Nu.

The Open Banking push in Brazil is picking up steam. There is mounting pressure on incumbents to freely share customer data across an ecosystem of banks. For Nu, this could free it to know when a shared customer has a more expensive loan at a competitor, with an easy means to undercut the rate with a refi offer. It can routinely do this, thanks to its lack of physical branches, agents and direct integrations with Brazil’s version of the IRS to cut out middlemen. Rate-undercutting is just one example.

If incumbents want to offer customers Pix and Boleta products (which is table stakes) they have to opt into data sharing. This could greatly accelerate lending market share gains. We’ll see.

It’s also worth noting that the growth bottleneck for secured lending is simply putting the contracts and partnerships in place to drive adoption. It’s not credit risk appetite like on the unsecured side, which means more durable origination growth across cycles. Partnerships have now been added and the foundation has been laid. It sees secured credit continuing to rise as a percentage of total over time.

Deposit growth has been better than expected since it rolled out its new high yield savings product a few years ago. Most Mexicans are paid 0% interest on deposits, so it makes sense that Nu is finding success with a 10%+ rate. Nu does not pay the highest rate in Mexico (others like Meli pay more), yet Nu captured 70%+ of all fintech deposits across Mexico and Colombia during the quarter. It doesn’t feel the need to beat everyone on yield. It can rely on its superior product breadth and world-class interface, while getting away from offering a still strong yield.

Mexico is arguably the most compelling fintech expansion market on the planet. Its population’s GDP per capita is higher than in Brazil, yet its underbanked rate is a whopping 85%. Its credit card penetration rate is also a low 12% vs. roughly 50% in Brazil. Furthermore, 60% of Mexican credit is encouragingly interest-bearing vs. 20%-25% in Brazil. The population is relatively affluent and the opportunity is quite untapped. It now has the credit risk models in place to confidently underwrite, and saw originations in that nation double Y/Y as a result.

This is a special company delivering the kind of financial results that most firms can only dream of. It’s not normal to have 56% of an entire population on a banking app… it’s not normal for that to take a little over a decade… and it’s not normal to continue delivering 20% Y/Y customer growth when most of the target market is already in your base. In the absolute best of way , there’s a lot about Nu that isn’t normal.

This is where best-in-class growth, profits, leverage, team and runway all collide. This quarter was simply more of the same elite execution that we’ve come to expect.

Brian Niccol was named as the new Starbucks CEO, with Laxman Narasimhan stepping down immediately and CFO Rachel Ruggeri serving as the interim CEO until next month. Two activists have been involved at Starbucks. Elliott Management is one of them, and seemed satisfied with letting Narasimhan stay on. Starboard was the other, and was likely the driving energy behind this move. I view Niccol as a superstar in food service. He spearheaded a Chipotle turnaround and morphed that troubled brand into a national powerhouse. He has been instrumental in pushing average store volumes and margins beyond where anyone thought they could go. Simply put, this is the best case scenario for Starbucks. I applaud the board for their willingness to make a quick change and Starboard for forcing their hand.

Starbucks is mightily struggling with throughput, food traction and communicating value to its customers. It’s also struggling to push more people to its loyalty app to drive retention and frequency. Chipotle is the throughput king, releases hit menu item after hit menu item and boasts arguably the best mobile app in the space. I repeat: He’s perfect. I’m somewhat surprised that Niccol would make this move, but I have to think the pay package offered to lure him was giant. He’s worth the dilution. If Starbucks popped 25% on no other news besides a new CEO, I would normally be tempted to reduce my stake. I respect Niccol and his career so deeply that I’m not willing to trim in this case.

Progyny’s team took us through a three hour presentation on how Progyny has gotten where it is, and where it can go from here. Leadership offered their very first multi-year targets and provided more detail on the inner workings of Progyny. CEO Pete Anevski started the event by expressing his disappointment in how 2024 has unfolded and how excited he remains about the future. He took us through a review session on structural macro tailwinds, like rising 35+ year-old fertility rates, more single-mother pregnancy, rising prevalence of infertility and rising frequency of employees demanding coverage. He also reminded us of Progyny’s micro-based tailwinds like consistently growing financial and outcome-based leads over the field. My deep dive got into all of that, but there was a lot of new info that I’ll cover here – along with my event takeaway.

Progyny was eager to dispel competitive concerns. The new solutions that have popped up since the pandemic have not driven a “significant change in win rates.” Most of the pipeline that doesn’t convert for the year is due to delayed decisioning rather than losing to new entrants. Less than 6% of its annual pipeline has been lost to competition over the last several years. That includes next-gen disruptors and incumbents. It has also never seen a client won from a national carrier ever go back to that carrier.

Like with fertility, women’s health is plagued with too little research, too little education and too little access. That’s why fertility was Progyny’s initial product. It will only choose new product categories that are related to fertility and riddled with the same issues and inefficiency that allowed it to drive so much value there. For example, endometriosis is directly related to infertility as it causes 4/10 infertility cases. But? It takes years too long for a diagnosis to occur, which means unnecessary treatments and wasted time/money. There’s very little clinical data on this area and very little knowledge on how to address it. Just 7% of physicians are trained to treat menopause, which means extremely sparse access to needed hormone replacement therapy. Progyny just built a 50 state network to bolster that access. Enter Progyny. Pelvic health impacts 70% of women, yet the subspeciality was acknowledged just 13 years ago. Acceleration of education and service access here are needed too, which is why Progyny will debut a product here next year.

Maybe most interestingly, autoimmune diseases skew 80% female. Clinical trials have not focused on females up until very recently. There’s a lot of help Progyny can do here as well for a category of diseases impacting 8% of Americans. For all new products, it’s also seeing an influx of VC funding for new startups, new federal funding and bipartisan support for more research. The structural tailwinds are in place. This image gives us a good idea of what products Progyny thinks it can offer over time:

Progyny members pay $1,500 in average out-of-pocket cost with its service. This compares to $48,000-$65,000 on their own. And thanks to 72% fewer high risk pregnancies driven by its superior custom treatment design (described in detail in the deep dive), its clients also end up saving more money via lower NICU usage.

Its new products already have a 15% member attach rate, which directly shows you their ability to cross-sell new solutions in menopause and women’s health. These products have a lower revenue contribution than fertility cycles, but a higher margin. It has more services planned for 2025 launch.

Through global expansion and extension to smaller employers with 250-1000 employees. These employers obviously come with lower revenue per client, but higher margin per client too. As a reminder, it purchased a smaller company in Germany to turbo-charge international expansion.

Progyny has a unique arm of its go-to-market team called its “client success team.” These workers fixate on driving personal relationships with clients and helping them on their product and cycle adding journeys. They’ve been so successful at reaching up-selling targets every year that Progyny’s direct sales team has been able to focus solely on new customers. Within its partner program, it’s seeing a rising appetite for managed providers to partner more directly with Progyny. Progyny has always been competition for them, but Microsoft and Amazon and other early clients forced integrations that nobody else in the space has besides Progyny. That means pre-tax payment of benefits, which saves $10,000+ per cycle across stakeholders. The team also reminded us that partner sales include its full suite of products, rather than watered-down versions like with other competitors such as Kind Body and Carrot.

40% of Progyny’s clients openly and voluntarily advocate for other companies to use Progyny. That’s how impactful its products are.

Progyny guided to a 19.4% revenue CAGR through 2028. That leaves it with “at least” $2.4 billion in revenue, with that language implying there may be more upside. It also guided to a 25% EBITDA CAGR to reach $500 million in 2028 EBITDA, with $400 million in expected operating cash flow. Due to the very low CapEx needs of this business, operating cash flow and FCF are very similar. Revenue targets are 15% ahead of consensus for 2028, EBITDA targets are 20% ahead of consensus, and cash flow is 25% ahead of targets.

When a company offers guidance like this, the stock usually reacts a lot more positively. These are massive beats. The issue is that Progyny’s leadership struggles to effectively guide for one quarter out. I don’t know how anyone can be confident in them knowing what 2028 will look like. 

It did offer some new color on how they have visibility into claims and authorizations, which makes guidance slightly less of a crap shoot. It also reminded us that utilization has been very consistent since inception. Still, monetization per cycle has recently crept up as a new confounding variable that makes utilization in isolation a less reliable demand indicator. And again, it just issued its 3rd consecutive guidance reduction this past quarter. 

Their 2028 goals rely on continuation of historical trends that are tied to unpredictable biological, macro and geopolitical variables. These goals also rely on new products briskly rising to 9% of total 2028 revenue. That leaves us with a great deal of uncertainty.

And that’s the struggle here. If we assume it trades for a highly modest 16x GAAP operating cash flow, which is highly conservative for its expected growth rates, this is a 4x over the next 4 years for 40%+ compounded returns. If they are just wrong about 2028 and not very, extremely, absurdly wrong, this should still do well. There’s a massive margin of safety. Pairing this idea with its sharp value creation and a team that I just don’t trust, I’m left wanting to hold the small position that I own… but not wanting to accumulate like I normally would.

I appreciated all of the new information shared at this event. It changes nothing about my views towards the investment. 

Prove me and everyone else wrong.

FanDuel owner Flutter announced earnings today. In that release, they told investors that they would not be implementing the same high tax state surcharge that DraftKings announced this month. Immediately following the news, DraftKings announced that it will no longer be moving forward with the surcharge either.

There’s a reason why DraftKings decided to wait until January 1st to implement the surcharge in the first place. There’s also a reason why it explicitly said it’s open to changing its mind here if better ideas or other news surfaced. DKNG was not married to this surcharge, and was always going to pivot if it thought that became preferred.

This is good news for DraftKings. It gives it immediate clarity on where the other piece of this duopoly stands on the matter. It’s better to be the party reacting in this situation than the one leading. Now, DraftKings has the luxury to shift from leader to reactor. I would not be surprised if it pitched this idea just to get FanDuel to talk more about their plans so DKNG leadership had time to match up strategies before 2025. That’s anti-competitive, but still could have easily happened.

The news removes the market share risk for DKNG. At the same time, this also removes some upside to 2025 EBITDA targets that management saw as possible. DKNG’s $950 million EBITDA target did not rely at all on the surcharge, but potential for excess profitability has diminished somewhat. I think the key word here is somewhat, considering Flutter leadership did subtly reveal how they plan to combat rising taxes. FanDuel will pull back on marketing and promotional spend.

And now that DKNG can copy rather than lead, it has choices in how to combat higher taxes. It can choose to maintain its own spending levels in high tax states and likely pick up low margin market share. It can also decide to mimmic FanDuel’s cost cutting to bring back some of the 2025 EBITDA upside stemming from higher tax responses.

At the end of the day, the situation is highly fluid and the game theory will continue to unfold between these two market share kings. FanDuel will not let DraftKings steal all of their market share and vice versa. Both will bob and weave until the players arrive at the most efficient outcome under this new tax regime.

The Department of Justice is considering a break-up of Google. I think this is highly unlikely, but the probability of this actually occurring is rising a bit.

A strong argument can be made for the sum of the parts (Google Cloud, Search, YouTube, Waymo etc.) being worth more than $2 trillion as separate entities. It’s easy to argue that the cloud business and YouTube would likely get valuations in excess of 20x forward GAAP earnings. But at the same time, I think Google Cloud, Search and YouTube are so strong partially because they are together. The value creation from the bundling of these assets isn’t as apparent as with Microsoft, but the search king’s businesses undeniably support the traffic and monetization of each other (to some unknown degree). For this reason, I don’t think this would be a positive, like many others are arguing.

I’d have to see what the actual decision would be, but it’s possible that I’d exit this stake if a break-up occurs. Again, I don’t think this is likely.