2022 Year End Letter + Twitter Update + Layoffs Update

Hey everyone,

Time for one last newsletter to recap the year. I’m going to talk through an update on Twitter, an update on banking layoffs, some of the pessimistic calls that played out over this year, some areas I messed up on, and my predictions for 2023.

Thank you all a ton for joining me beyond Instagram and Twitter and following along on my Newsletter. None of this is possible without you all. Let’s get into it:

First, in case you haven’t already figured out the stereotype, it is typical of a credit boi to be pessimistic about everything. I certainly am overly pessimistic and assume everyone is trying to screw me over. This can be a bad thing, but it can also be validated or used to work through the worst-case scenario of how an investment may play out.

I remembered one day on Twitter credit investors were getting made fun of for being too pessimistic. I vaguely remembered it was sparked by an Orlando Bravo fortune cookie tweet, so when I went back to find it I was pleasantly surprised to see this was LITERALLY tweeted at the top of the equity market! Orlandoooooooo

Twitter & Elon:

As many of you can tell I don’t really like Elon. I don’t think he’s a good dude, don’t think he’s funny, and think the Twitter buyout is heading to a restructuring. Of course, he is a pretty smart and hardworking guy – he wouldn’t be as worth as much as he is if that wasn’t the case. The reality is, he’s probably better suited to focus on getting us to Mars or revolutionizing electric batteries instead of arguing with journalists on Twitter Spaces. I also have to remember not to let my bias toward Elon impact my takes, but I think I’m pretty fair in laying out the pitfalls of the Twitter transaction.

The TLDR version is the equity check of the $44B valuation is too large and the $13B in debt is suffocating Twitter as a ~$1B Adj. EBITDA company because 13x is way too high (standard is 7x max), interest rates have risen materially this year and interest expense obligations are getting close to $1.4B a year at this point, and Twitter was never a FCF machine to begin with.

The long version of the F-ed capital structure is highlighted very well within this Twitter thread.

The ability to syndicate Twitter debt from banks to buy-side lenders is going to be harder too given Twitter’s credit ratings were withdrawn by S&P and Moody’s given a lack of information. The lack of rating agency information makes it a lot harder for “par loan” investors to play ball.

Beyond the debt side of this equation, I think Twitter equity investors are going to have a really hard time finding a lever to generate solid returns. Primarily, equity returns are driven through expanding EBITDA and your EV/EBITDA multiple, but when you buy a Company at 44x EV/EBITDA - it's going to be hard to retrade higher, and obviously Twitter doesn't seem like a huge growth story.

Another way to increase equity returns is through a dividend recapitalization. The business doesn’t need to be a FCF machine to do a divvy recap, all you need is capacity to take on incremental debt, or a lender group willing to further lever up the business. Given the high leverage at Twitter and limited FCF ability currently, it’s hard to imagine a lender group (Banks are also the lender group rn lol) allowing Elon & co to take equity out of the business.

Even if things work out and Elon is able to exit (by taking Twitter public in a few years) there will still be overhang from the debt. Even when a sponsor backed company goes public, there’s still usually debt left on the balance sheet. For example, I have typically seen a ~6x levered name go public, will pay down 2x-3x of debt with IPO proceeds, but not wipe the leverage slate clean with equity proceeds.

But I'll try to be positive (likely naïve) for a second. There’s $13B on the balance sheet, let's say Twitter is able to grow to $2B Adj. EBITDA – best case (assuming $5B in debt paydown to $8B) it’s probably still 4.0x levered upon going public. Let’s say Twitter goes public at 30x (why not am I right, no way they’re going public at 44x again), then now this business is worth $60B and Elon got some positive returns out of owning the business. With that said – he’s still stuck with a decent chunk of ownership % post going public again and will have to undergo the same type of volatility to sell Twitter stock that he typically has with selling Tesla stock.

So ya, the debt burden and valuation is pretty brutal here, but there are some other potential solutions. 1) Elon is a rich guy – maybe he can pay some of the debt off with his billions in cash? Probably the last thing he wants to do. 2) Maybe Elon can solve the debt problem by issuing more equity – Bloomberg noted last week he’s opening the door for new investors who are willing to join him at the original $54.20 price!

So hey, if Elon can run Twitter with 25% of the pre-takeover staff – that’s incredible and that’s a positive catalyst from the deal potentially working out – BUT it’s sooooo much harder for it to work out because he overpaid and the business is overlevered.

I have no idea who Dave Lee is, but this take below drives me crazy. Half of Facebook/Meta’s issues are self-inflicted (investing a ton of capex) to build the Metaverse and the Company was a FCF machine before they were spending $34B a year on Capex.

But hey, Elon is looking for more equity – so if you really are bullish, now is your chance!

There have been constant changes in terms of service at Twitter over the past week and most of the time it is in anticipation of suspending an account Elon doesn't like (journalists with the opposite political views of him, the ElonJet account, or Tech VCs). One prediction I have for 2023, is that Elon will turn his sights on FinTwit as the situation at Twitter worsens and as Tesla's valuation continues to fall.

I am operating under the assumption that FinTwit will break/I or other significant accounts will get suspended at some point. I have no desire to stop making fun of Elon on Twitter - it's a free country, but hey, maybe it won't be a free app.

The layoffs that started this year are likely to extend into 2023:

While I think we are in a world where most people can have a hybrid work life, it’s going to be important to show face in 2023 and make sure you’re in the office when your bosses are in. Unemployment will almost definitely rise in 2023.

I mean, the Fed has been very vocal about what its goals are…. You can argue they're posturing, a decent amount of the market thinks the Fed will be forced to cut in 2023..but doesn’t hurt to be a little conservative going into a more challenging labor market.

Banking layoffs have been telegraphed throughout the year, as shown by Bloomberg below.

In addition to this, Goldman announced that they’re looking to fire up to 8% of their workforce (4,000 employees) early next year. Part of this relates to Goldman’s consumer business, but cuts are still expected across the board at GS. I would expect a single digit % level of cuts across Banking this spring with some people getting zeroed on their bonus.

In case you didn't know, there’s usually an announcement that needs to be made when mass layoffs are expected. Within the state of New York, you can check this tool - It even shows layoffs at Facebook and Twitter as well as upcoming layoffs at BlockFi.

Another interesting note – if you want to track down a large list of base salaries by Company I’ve got you - you can search base salaries for all h1b visas in the US by firm and role here - not a bad way to get a good understanding of base salaries per firm.

The year end is also a good time for reflection. Here's two key mistakes I’ve made:

1) Breaking traditional investment guidelines to chase a dip:

Here’s an example, although I’ll exclude the stock name. When I saw a certain heavyweight tech stock down -50% from all times highs, I figured “oh okay the coast is clear” because I really liked the product, even though the business had minimal FCF. That was dumb as hell. I got in way too deep and got beat up on the next -50% down before I finally exited. I re-entered this stock with a tiny position near the bottom, but man, what a stupid move. Even now, while I still own it, this particular stock is still toughhhh on a valuation aspect since it generates barely any real FCF. The moral of the story I guess is once the soccer ball starts to deflate, don’t expect the air to be pumped back into it immediately, expect the soccer ball to continue to lose air, and even become flat.

Of course, if I actually spend time thinking about ideas for my PA – I tend to do better – some high-level thinking of my framework on ideas that have worked this year:

• The Company is undervalued on an EV/EBITDA basis & EBITDA is clean (doesn’t have significant add-backs)

• There is a variable cost structure and ability to generate more FCF longer term that isn’t appreciated

• There are real industry tailwinds

• ROIC is solid and there is operating leverage

• The business is less cyclical/the cyclicality is priced in

2) Being an NYC maximalist:

I’ll be clear I think NYC is incredible for the best banking groups and best entry-level stints on the buyside.

I’ve definitely made the mistake like 1-2 years ago in thinking “why would anyone ever leave NYC” from the lens of a single dude in his 20s. But I mean NYC has obvious pitfalls. The apartments in our city are so damn small & you pretty much need to pay $4k a month for a tiny one bedroom, other key goods are becoming absurdly expensive relative to a few years ago, there’s not as much readily available nature as in other cities, it’s cold for 5-7 months a year, the city is significantly less clean than other cities, and the safety within the city has come into question in the past couple of years.

But at least I had some tweets leading up to my pivot..

I’m now realizing a bunch of finance people leave NYC somewhere in the “spent 5-15 years in NYC” timeframe. There are certainly opportunities in finance in other cities..but it’s clear that the bulk of opportunities is in the greater NYC area. I think at some point I will leave NYC, but planning the exit is super hard given the many tradeoffs associated with making a move.

I still view it as incredibly important to get to a large city out of college – your earnings and outcomes will compound significantly higher than being in a rural area or within a smaller city. I’ve seen this difference play out over the past few years. The ability to scale in income is significantly easier in a larger city in a front office role than you would see in a much smaller city, or in a small hometown area. But of course – the entirety of your career doesn’t have to be within the greater NYC area/Chicago area/London area etc.

Predictions for 2023:

1. My best prediction in 2022 was not understanding wtf FTX was so strong while the rest of the crypto industry was in disarray. While FTX was bailing out other crypto players and trying to raise at a $32B valuation you saw public players, Coinbase and Robinhood, struggling in real-time with public balance sheets and public data showing how trading and user activity was tanking. This did not reconcile with me, and while I obviously didn’t know FTX was a fraud, clearly the alarm bells were ringing for me and everyone who liked the tweets.

It seemed like FTX went on a super coordinated PR campaign to hail themselves as saviors, but for many of us, there was an obvious dislocation between perception vs. how crypto exchanges were performing across the board. No one was predicting SBF & Co would use FTX funds to bail out Alameda, but wow, what an ending. The lesson here is to be very skeptical of super coordinated PR campaigns like this going forward – this is a good lesson in which Companies are actually pigs with lipstick.

2) Most people underestimate what sustained higher interest rates look like – and it’s not good, especially for real estate investors.

At the Banking/Credit level, this means the following – higher rates, lower M&A valuations, harder to leverage deals = less deal flow for almost everyone. Sustained higher rates that hurt deal flow = more layoffs among those exposed to M&A volume. Fingers crossed this doesn’t get too bad.

Here’s another group that might get hit hard by high rates: Social media entrepreneurs trying to sell high-ticket items. One thing on Twitter I don’t really understand is how everyone is a Real Estate/E-Commerce/Digital Agency expert. The biggest thing I see on the E-Commerce side are people saying they run a “7-figure brand”. Well, as someone who does an occasional merch store, they’re 99% referring to REVENUE because the margins on so many e-commerce offerings are shit. Of course, e-commerce businesses can still be pretty impressive and if the product is something that benefits from operating leverage (a newsletter, a course, etc.) then the margins can be juicy, but most people lead with REVENUE when they should be leading with EBITDA.

The real issue IMO on Twitter – is on the real estate fintwit side since so many mortgage rates are variable in nature AND a rising interest rate environment depresses the previous valuation of homes (that were too high in 2021 due to temporary covid relocation trends). There are a ton of people that have been building a real estate empire, or as some call it a “slumlord empire”, buying a boatload of entry-level homes. This tweet nailed it IMO.

I’m sure there are some really smart folks out there – but I would bet significantly that there are some less sophisticated folks who are overlevered on properties that will have a hard time 1) renting going forward or 2) see the same demand it used to as an Airbnb property. I think the Airbnb people are way more F-ed than the people who buy homes for rentals, but still, if occupancy rates and rental income take a hit, it can start looking ugly for a less liquid investor.

Conclusion - Even though portfolios are down and bonuses are down it’s still been a great year – every year we’re healthy on this big blue planet is a good year in my eyes.

On my end - work was fulfilling and paid the bills, spent quality time with friends and family, traveled to some nice places, did fun stuff, and got to continue to be obsessed with finance with all of you.

I expect 2023 to be a turbulent year – some of us will lose jobs and be down on our luck. If I happen to fall into that unlucky bucket, then I still plan to spend quality time with friends and family, try to travel a bit – and on the bright side, have some more time to pump out memes and newsletters. Regardless of potential turbulence, here’s to another year alive – YOLO – and let’s get after it.

For HYH – expect more of the same. More memes, more videos, more things to make fun of, and more newsletters to put out. On the newsletter side – expect updated compensation data, interviews with other anonymous fintwit accounts, views of the markets, and all the other chaos that will play out next year. Thank you all a billion times over for following along – none of this fun is possible without you all and I am incredibly appreciative.

Best,

HYH