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Good morning. The S&P 500 hit another all-time high yesterday. More importantly, Trump Media & Technology Group rose another 14 per cent, right after we wrote that it looked a bit overvalued. Unhedged’s record as a contrarian indicator remains spotless. We are off tomorrow for Easter. But you can still email us: robert.armstrong@ft.co m and ethan.wu@ft.com .
Also, tickets are nearly sold out for the FT Alphaville pub quiz in New York in two weeks, where both of us will be hosting a session. More info here .
Yesterday I argued , roughly, that trying to value internet platform companies such as Reddit was a futile attempt to impose order on a chaotic and arbitrary universe. My experience with trying to extrapolate forward from the early days of Google and Facebook taught me that trying to see into the future of industries characterised by massively increasing returns to scale and winner-take-all dynamics is simply beyond the tools of financial analysis.
I was, I can see now, being a bit dramatic. I realised this after talking to Dan Salmon of New Street Research, who made the sensible point to me that the internet has changed a lot in 15 years. Nothing is growing explosively any more, and the land grab of the early days is over. In social media, in particular, a stable industrial ecosystem has developed that operates in somewhat predictable ways. The main feature of the system is Meta’s dominance within it: it was the first company to get to massive scale and to nail how to sell advertising against user-generated content, so it has locked the market down. Only TikTok is a serious rival, and only within the short video niche. The second-tier players — Twitter, Snap, Pinterest and Reddit — take the scraps.
To get a sense of Reddit’s potential, I looked at the revenue of other social media companies, starting when each of them was roughly the size Reddit is now. Looking at it that way, you can see how Meta has followed a wildly different trajectory from the companies that followed it:
Taking Meta out of the picture, though, you can see how Snap, Pinterest and Twitter grew in broadly similar ways:
Like revenue, active users grew as those three companies grew steadily. As the companies have matured, user growth has settled into the low double digits (note Twitter has some missing data and Pinterest reports monthly rather than daily active users, but the slopes of the lines tell a clear story):
Another pattern that holds across the companies is that annual revenue per active user does not climb ever higher. It seems to find a level and stabilise:
Looking at all this, it seems possible to make some reasonable assumptions about the trajectory of a business such as Reddit, and derive an estimate of value from that. Other companies have done what it is trying to do. Obviously things could happen that could break Reddit out of the mould. Its huge cache of user-generated text could become very valuable to artificial intelligence companies for training their models; further commercialisation could infuriate its core users and volunteer moderators, such that growth stalls or reverses. But the forecasting challenges facing investors in the social media group are not all that much worse than those facing, say, a computer gaming company or a movie studio.
Salmon is the only analyst to have published his forecasts. His model has Reddit with 131mn users and $2.3bn in revenue in 2027, implying growth of 16 and 30 per cent a year, respectively, over the next four years. That’s in the range of what Snap and Pinterest did starting from a similar point in their development (Salmon rates Reddit a hold).
There is one area of concern. I’m not sure if the second-tier social media companies are profitable, even when their revenues rise into the billions. The profit metric I prefer to use for tech companies is what I call “true free cash flow”, which is operating cash flow minus capital expenditures and stock-based compensation (stock comp becomes a cash expense when a growing tech company becomes successful, because stock options vest and the company has to spend cash repurchasing shares to prevent shareholder dilution; this is happening to Uber now, for example). They may yet figure it out, but as of now, none of Twitter, Pinterest or Snap has consistently generated true free cash flow. They are, in other words, only profitable because they pay their employees in IOUs:
Salmon thinks Reddit will generate $344mn of true free cash flow in 2027. I’d bet, without much confidence, that it will be less than that.
The Bank of Japan has left negative interest rates behind, yet yen weakness continues unabated. The yen touched a 34-year weak point on Wednesday, prompting Japanese officials to threaten forex intervention and hold an emergency meeting.
Usually, big currency moves follow rate differentials — that is, the gap between two countries’ nominal interest rates. Higher rates should attract capital and push up a country’s currency. But rate differentials haven’t changed much in the past few months. The chart below shows the gap between Japanese and US two-year yields against the yen. The two tend to travel together but the latest bout of yen weakness has corresponded with US-Japan rate differentials moving mostly sideways. (Using 10-year instead of two-year yields renders the same picture.) At a high level, there isn’t a dead-obvious rates story here:
Various explanations have been mooted. A popular one is that traders expected the BoJ to sound more hawkish last week, were disappointed and started selling yen. Jonas Goltermann of Capital Economics wrote last week:
we suspect that [the yen falling] reflects market participants unwinding short-term positions built up in anticipation of a more aggressive tightening move from the BoJ. After all, press reports ahead of the meeting had (again) suggested a more hawkish approach might be in the offing and the yen and JGB yields had risen in response, only for policymakers to deliver another damp squib.
The BoJ’s own explanation is not entirely different. As our colleagues Leo Lewis and Kana Inagaki reported yesterday :
Japanese finance officials have privately told analysts that they do not believe the yen’s recent weakening is justified by the BoJ’s historic move and said the declines represent speculative money testing the authorities’ resolve…
This week, Japan’s top currency official, Masato Kanda, warned speculators against further attempts to sell off the yen and said “all options” were under consideration by the authorities.
You can find more exotic views, too, like the idea that US trade policy is to blame .
We put all these to Karl Schamotta, currency strategist at Corpay, who had yet another explanation. He thinks yen movements largely reflect what’s happening to the dollar. World-beating US growth, somewhat stubborn inflation and central bankers emphasising patience have meant rate-cut expectations are being curtailed. The US two-year yield has risen 37 basis points in the past two months, and more are talking about the possibility of zero Fed cuts this year . The result is that we are on the US dominance side of the “dollar smile” — the pattern whereby the dollar appreciates when US growth outpaces everywhere else.
One way to see this is that other currencies have weakened against the dollar in a similar way as the yen. The US dollar index is up 3 per cent this year. Recent renminbi weakness has looked much like the yen’s, and has also invited speculation about official intervention. Markets, says Schamotta, see a strong US economy begetting a strong dollar as a lasting feature, and are betting on it.
We find that convincing, and would add that the magnitude of the BoJ’s rate increase, moving from -0.1 per cent rates to merely zero, was more symbolic than substantive. That made it easy to be overwhelmed by the strong dollar’s momentum. In that sense, saying the yen is weak despite the BoJ rate rise isn’t quite right. Given the many constraints on its monetary policy , the BoJ just appears to have limited sway over the yen. It will have to do much more to wrest control of its country’s currency back from the Fed. ( Ethan Wu )
More on China’s pivot to manufacturing .
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