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WCM Investment Management | Insight | Beach Reads 9 - 29 | Welcome to Fall. While those of you on the east coast are beginning to enjoy the changing color of leaves, here on the west coast we're finally free of summer crowds and hoping the same will soon be true of wildfires.

Beach Reads

September 29, 2020

Welcome to Fall. While those of you on the east coast are beginning to enjoy the changing color of leaves, here on the west coast we're finally free of summer crowds and hoping the same will soon be true of wildfires. This edition of Beach Reads touches on hot button topics in investing ranging from newsworthy companies such as TikTok and Nvidia to the value of Environmental, Social and Governance (ESG) investment approaches. For those pressed on time, I recommend the Eugene Wei article on TikTok, the Stratechery article about Nvidia, and the article weighing the pros and cons of ESG investing. Below, I outline the articles covered in the five section in this edition of Beach Reads.

  • How to better understand modern entertainment, through the lenses of TikTok, Quibi, and Take Two
  • Two stories of technology - Nvidia's success and Nikola's failure
  • Investment theses on FedEx and CoStar
  • Does ESG actually add value? And diving deeper into Sarah Tavel's "happiness as a moat source"
  • Reflections: Giving away over $8 billion dollars in a lifetime. Also, blaming others for COVID

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Conor Deveney



ABOUT Beach Reads

Welcome to Beach Reads, a collection of interesting links that we at WCM have come across and want to share. The goal of this publication is to engage with a broader audience in order to better ourselves and others. Feel free to email us at with any thoughts or feedback, and click here to subscribe!

01. Modern Entertainment: TikTok, Quibi, and Take Two

Seeing Like An Algorithm

In this second installment of a three-part series about some of the features that make TikTok successful (the first article was highlighted in the Aug. 18 edition of Beach Reads), Eugene Wei delves into the "magic" of the TikTok algorithm by illustrating how the app's design actually empowers the artificial intelligence (AI). Features on TikTok's For You Page (FYP) such as swiping to indicate pleasure or displeasure (much like Tinder) help TikTok's "machine learning FYP algorithm 'see' what it needs to see to do its job so effectively," Wei says. "An algorithm-friendly design ethos may become a model of how other companies in other verticals might achieve an edge in the age of machine learning." TikTok, Wei argues, creates network effects that are missed by other apps by effectively integrating the AI with the user interface (UI) to help power algorithmic development and user engagement. "Most software features or UI designs can be copied easily by an incumbent or competitor overnight," he writes. "But if you can create a flywheel, like TikTok's, it becomes much harder for a competitor like Reels or Triller to catch up. Triller may pay some influencers from TikTok to come over and make videos there, Reels might try to draft off of existing Instagram traffic, but what makes TikTok work is the entire positive feedback loop connecting creators, videos, and viewers via the FYP algorithm." While others focus on building a moat via advantages in scale or technology, TikTok does so by delighting customers (not far off what Sarah Tavel describes in her article in the Investment Philosophy section below), and I'm looking forward to Wei's insights on this approach in a further follow-up on the "network effects of creativity."

The Entertainment Value Curve: Why TikTok is On Fire and Quibi Isn't

So why is TikTok so successful, while new short-form video format Quibi has so far struggled to gain traction, despite serious backing from Hollywood and Silicon Valley heavyweights? "Quibi's shows were designed to be watched by a single person on a tiny mobile screen and, surprisingly, the app does little to promote online social interaction between its viewers," says the author in this Reforge article. "TikTok is built for sharing, whereas Quibi made it deliberately hard to share from the app — by making it impossible to snap screenshots." Short-form professional video content with limited sharing and social features seems to be a fundamental design flaw of Quibi and also alienates the "creators" who have become accustomed to generating content for viewers. "TikTok's design takes a clear stance—snackable media is social media. The right rail of TikTok is entirely dedicated to the social interactions vital to the app's experience: following creators, reacting, commenting, sharing, and mimicking the current video," the article says. "Quibi has been thinking about itself as a film studio. The company needs to think about itself as a social network." The author uses two graphs to illustrate differences between video content providers such as TikTok, Quibi, Netflix, and YouTube. The Entertainment Value Curve maps social value vs. production value (the two seem to be polar opposites), while the Content Distribution Curve plots view count vs. amount of content (again, the two are opposites). I'm interested to see whether slightly altered versions of the curves can apply to other social media platforms. Perhaps video games (free to play games vs. traditional) would be a good case study.

An Interview with Strauss Zelnick, CEO of Take Two Interactive Software

Speaking of video games, this interview with Take Two CEO Strauss Zelnick delves into the future of the gaming industry. Or, according to Zelnick, the future of all of entertainment. "Interactive entertainment is the standard bearer of the entertainment business," Zelnick says. "It is the most important entertainment business. It is the largest, it is the most rapidly growing, and it appeals to a very broad audience. It's become America's pastime and the world's pastime." While clearly talking his book a bit, I do think that video games are laying the groundwork for a new entertainment paradigm. Perhaps paradoxically, the maker of Grand Theft Auto is approaching the new entertainment paradigm from a "quality" viewpoint, rather than solely a "mass" standpoint. Quality allows Take Two to exert a bit of pricing power and avoid the free-to-play strategy that Epic Games' Fortnite was successful in helping to pioneer. "We deliver a much, much bigger game for $60 or $70 than we delivered for $60 10 years ago," Zelnick says. "The opportunity to spend money online is completely optional, and it's not a free-to-play title. It's a complete, incredibly robust experience even if you never spend another penny after your initial purchase." So far, Take Two has had tremendous success with its hit titles, but I'm curious if a move to something more closely resembling the metaverse forces a change to solely free-to-play models (more on the future of media here). So far, it looks like things are heading that way. However, there might be room for a couple of different models.

02. Technology: Nvidia's Success and Nikola's Failure

Nvidia's Integration Dreams

The previous edition of Beach Reads gave one author's positive take on Nvidia's ARM acquisition as it pertains to chief executive officer Jensen Huang's ambitions to dominate cloud data centers. In this article, Ben Thompson highlights his concerns with Nvidia's purchase of ARM, which licenses its IP, including complete chip designs and Instruction Set Architecture (ISA), to chipmakers. "That neutrality [associated with licensing] is gone under Nvidia ownership, at least in theory: now Nvidia has early access to ARM designs, and the ability to push changes in the ARM ISA," Thompson writes. "To put it another way, Nvidia is now a supplier for many of the companies it competes with, which is a particular problem given Nvidia's reputation for both pushing up prices and being difficult to partner with." To a certain extent, Nvidia's integration plans hark back to the "real men have fabs" days (see here). However, while this tight integration of design and manufacturing is the model still used by Intel, Thompson says Nvidia has set its sights on its Santa Clara rival by instead focusing on the integration of design and software. "In this vision Nvidia's IP is the CUDA to its graphics chips – the complement to its grander ambitions," he says. "Huang's argument is that it is the lack of software – a platform, as opposed to simply a chip or a core – that is limiting ARM in the data center, and that Nvidia intends to build that software." This is an incredibly interesting vision - one that I'm excited to watch unfold.

How Nikola Stock Got Torched By A Short Seller

Many readers have no doubt been following the rise and ongoing fall of embattled hydrogen truck startup Nikola. Just as compelling is the story behind Hindenburg Research, the company that published the short report that triggered the furor. Hindenburg has had success identifying troubled companies and making money from shorting their stock since being founded in 2017 by Nathan Anderson. Like peers, such as Muddy Waters Research and Citron Research, Hindenburg has leveraged its online presence to get distribution for its reports, and in a way is Anderson's response to a problem he sees in the investment management industry: "Anderson believed investment firms, rather than publicly traded companies, were more likely to yield frauds and other issues. 'I thought these incredibly smart people were vetting companies,' he says. After seeing a public company tumble as part of one of his fraud investigations, he switched gears." Anderson has taken advantage of what may perhaps be viewed as a lack of institutional oversight in the asset management industry. "I realized [credential investors] were doing a lot of run-of-the-mill analysis, there was a lot of conformity," he says. With his own shop and a growing track record, Anderson has bucked the trend of "run-of-the-mill analysis" and with the recent Nikola report established a name for himself in an industry where outsiders often have a hard go of it.

03. Company Overviews: Investment Theses on FedEx and CoStar

The Shipping Wars: FedEx Et. Al.

Odds are you've had at least one package delivered to your home this week. That package may have traveled via a number of shipping modalities: ship, train, plane, truck, and even personal cars. There is a vast network of companies that operate the infrastructure behind the scenes that (hopefully) gets your delivery to your door quickly. This article is a helpful overview of different parts of the delivery network and focuses on FedEx, with the author putting forth an investment case in an almost activist fashion: the company should more deeply integrate its business segments (like UPS does) to drive efficiencies. "If FedEx integrates its domestic Express and Ground networks, I think it can add over $2bn to operating earnings and increase margins/asset utilization significantly," the author writes. "If it successfully integrates what's left of TNT and thrives in the European market, this will also remove a huge roadblock that has been weighing on the stock for over 2 years. Will integration ever happen? Under [founder, chairman and CEO] Frederick Smith, I doubt it." A number of roadblocks make combining FedEx's Express and Ground networks difficult (including the potential for unionization), but the author highlights that UPS is more efficient despite unionization. "On a per driver basis, therefore, FedEx handles about 133 packages and UPS handles 233 packages; on a per facility basis, FedEx handles 9,231 packages and UPS handles 17,500 packages." The market is excited about the recent appointment of Carol Tome as CEO of UPS, and it sounds like the author of this article believes something similar should occur at FedEx.

CoStar: A Dominant Information Business and Fast Growing Marketplaces

For those interested in finding out more about CoStar, "the number one provider of information, analytics, and online marketplaces to the commercial real estate industry in the United States and United Kingdom," this article is a comprehensive thesis and solid jumping off point. The company has two segments: "the most comprehensive commercial real estate database available," and "the largest research department in the industry." It also owns and operates leading online marketplaces for commercial real estate and apartment listings in the U.S. in LoopNet and The author outlines competitive positioning and growth opportunities for these segments and concludes that CoStar "is priced for exceptional growth at attractive incremental margins, which is not surprising. I was a little surprised, however, that the stock looks reasonably priced even if growth is lower than recent history. You can even come up with a bull case on the stock if you believe that [CoStar] can follow the path of another impressive marketplace business, Booking Holdings."

04. Investment Philosophy

Sounding good or Doing good? A Skeptical Look at ESG

Following the recent 50th anniversary of Milton Friedman's seminal New York Times piece on how businesses should maximize shareholder value, New York University Stern School of Business professor Aswath Damodaran offers his thoughts on ESG investing. While ESG followers tend to argue that pursuing positive ESG ends ultimately helps maximize shareholder value, Damodaran doesn't seem to buy into the hype. He instead highlights two potential benefits of ESG. The first occurs when a company transitions from non-ESG to ESG focused: "The presence of a transition period, where markets learn about ESG and price them in, can also explain why there may be a payoff to more disclosure and transparency on social and environmental issues, by speeding the adjustment. It is perhaps this hope of transition period excess returns that that has driven some institutional investors to become more activist on ESG issues." The second scenario is that ESG investing helps to protect against the downside by avoiding companies that end up running into fines or disasters associated with non-ESG friendly practices. "To the extent that socially responsible companies are less likely to be caught up in controversy and to court disaster, the argument is that they will also have less downside risk than their counterparts who are less careful," Damodaran writes. While these positives fall short of the usual ESG narrative put forth by many practitioners, they do appear to add value. As ESG scoring and analysis improve, public equity investors must watch what it really means for shareholders. As of now, the jury is still out.

Measuring Happy GMV

Previous Beach Reads have featured the thoughts of Benchmark Capital's Sarah Tavel. Prior to this most recent post from her blog, Tavel published the "Hierarchy of Marketplaces" and introduced an interesting concept: customer happiness as a moat source. This follow up piece adds some detail to the idea by introducing something she calls "happiness GMV." "In the beginning, the experience that qualifies as Happy GMV will be a hunch, driven by first principles and user research. For example, you could imagine for a ride-sharing company starting with the hunch that on the rider side it's an experience where a rider gets picked up within a certain number of minutes and rates the driver 4 or 5 stars. So you would measure what percentage of riders open the app and get a car within a set number of minutes, and then the percentage of those that rate the driver 4 or 5 stars." Tracking and tuning the happiness GMV can help improve a number of key metrics, such as user retention. Tavel believes that this metric (among others) is likely better than the common "Net Promotor Score." Regardless of the metric, tracking and understanding customer happiness is likely important and efforts to do so probably improve any given company.

05. Reflections

The Billionaire Who Wanted To Die Broke...Is Now Officially Broke

Not too long ago, I read "The Billionaire Who Wasn't" by Conor O'Clery, a fantastic book about Chuck Feeney, a self-made billionaire who founded Duty Free Shoppers as well as private equity firm General Atlantic. While detailing how Feeney made his money, the book also chronicles his goal to give away every penny before he dies. "Over the last four decades, Feeney has donated more than $8 billion to charities, universities and foundations worldwide through his foundation, the Atlantic Philanthropies," this Forbes article says. He "has finally given all his money away to charity. He has nothing left now—and he couldn't be happier." According to the article, Feeney's approach to philanthropy was instrumental in the creation of "The Giving Pledge" by Bill Gates and Warren Buffett, "an aggressive campaign to convince the world's wealthiest to give away at least half their fortunes before their deaths." Feeney's logic for pursuing the goal is admirable and delightful. "I see little reason to delay giving when so much good can be achieved through supporting worthwhile causes," he says. "Besides, it's a lot more fun to give while you live than give while you're dead."

Millennials and Gen Z are spreading coronavirus—but not because of parties and bars

Despite stories about careless young people, this National Geographic look into the demographic and social aspects associated with the spread of COVID-19 points to a more nuanced and complicated reality. Specifically, young people are often on the front lines of the economy, keeping the proverbial wheels on the bus. "So while younger generations are being blamed, in some quarters, for the pandemic's spread, they are bearing the greatest burden of poverty and the brunt of the transmission risk that comes with keeping the economy going, all with little help in sight," the article says. While there is likely carelessness from people of all ages, those that are younger, have limited mobility, and simply don't have a safety net to fall back on can have no choice but to run the risk of working and being exposed. So be kind out there, and stay safe.


Disclaimer: To the extent that Beach Reads discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. The companies and or securities referenced and discussed do not constitute an offer nor recommendation to buy, sell or hold such security, and the information may not be current. The companies identified and described do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that an investment in the companies identified was or will be profitable. Beach Reads does not constitute a recommendation or a statement of opinion, or a report of either of those things and does not, and is not intended, to take into account the particular investment objectives, financial conditions, or needs of individual clients.

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