Mad Hedge Technology Letter
April 16, 2019
Fiat Lux
Featured Trade:
(UBER’S DARK AND DIRTY SECRETS)
(UBER), (LYFT)
Mad Hedge Technology Letter
April 16, 2019
Fiat Lux
Featured Trade:
(UBER’S DARK AND DIRTY SECRETS)
(UBER), (LYFT)
The granddaddy of IPOs awaits us – Uber has filed an S-1 with the SEC detailing plans to go public.
Uber can’t do this any sooner as they preside over a decelerating ride-share operation and its high margin Uber eats division, food delivery business, that has experienced slowing margins.
Once helmed by swashbuckling entrepreneur Travis Kalanick, Uber was infamous for its cultural problems that played out in real time in the media with sexual harassment accusations amongst other things.
They were castigated for its environment of testosterone overload that current CEO Dara Khosrowshahi has rooted out.
Khosrowshahi is pinning the blame on the past leadership in the S-1 filing explaining they are still fine-tuning these problems and its inherent risk could be detrimental to the growth model.
The Iranian-American CEO needs as many outs as he can find because Uber is a high-risk, high-reward model that has revealed no possible way to becoming profitable.
Sequentially, Uber’s core growth has stagnated with revenues last quarter of 2018 coming in at $2.314 billion, decelerating from $2.315 billion in the third quarter.
This is a sensitive spot for Uber because it correlates to 91% of its revenue.
Its Uber Eats division has also presided over two sequential quarters of deceleration indicating the low-hanging fruit has been picked.
The company is shifting towards higher volume, lower margin restaurants in more competitive locations hinting that the gangbuster years of high margin food delivery service growth is over.
The proposed $90 billion IPO also marks the high-water mark to the Silicon Valley IPO parade with only smaller fish from the sea debuting after them.
Uber has altered economic and consumer habits as we know it and the size of the business means it’s no Lyft (LYFT) – Uber is global, and its revenues are six times larger than its American competitor.
Becoming an enormous start-up also means heavier losses, the company had $3 billion in operating losses last year while its smaller competitor Lyft had only $911 million.
Lyft is solely focused on the ride-share industry capping upside potential while Uber has more gunpowder to load if it wants to ammo up in the business world.
One direction Uber hopes to explore is under the banner of Uber Freight which plans to monetize the deeply fragmented logistic industry.
It can take sometimes days for suppliers to deliver shipments with most of the process conducted over the phone or by fax.
Uber Freight mitigates logistical risks by providing an on-demand platform to automate and accelerate logistics transactions end-to-end.
The software smoothly connects carriers with the most appropriate shipments available, and offers carriers upfront, transparent pricing and the ability to book a shipment with the touch of a button.
As of the end of 2018, Uber Freight delivered $125 million in annual revenue and they hope to ameliorate many of the same logistical pain points that occur around the world.
This division of Uber is one that Lyft lacks, thus Uber should be granted a higher multiple when shares go public.
A huge addressable market awaits Uber Freight, but as many know, logistic routes have been formed over many years, and disruptors won’t be able to come in overnight and sign up new contracts.
Revenue should be slow but steady, and not the sugar high rush of revenue management is wishing for.
Uber’s heavy cash burning enterprise needs to offer some glimmer of hope of becoming profitable in the future whether it's five or twenty years out.
Without this x-factor of potential profitability, committed capital could become strained as investor will shy away knowing that a solid balance sheet might be a pie in the sky.
Since 2015, Uber has paid drivers $78.2 billion in renumeration - Uber will need to curtail heavy costs like these to raise operating margins.
One upside to its model is that its software platform possesses synergetic effects cutting costs for rolling out newer software for Uber Freight and Uber Eats.
Uber is still growing, albeit at a slower rate, 2018 Gross Bookings grew to $49.8 billion, up 45% from $34.4 billion in 2017.
The growth contributed to revenues of $11.3 billion in 2018. While a mammoth number, Uber still needs to absorb capital hits from M&A when they acquired Careem, the Uber of Middle East, North Africa, and Pakistan, for $3.1 billion last year.
Uber clearly choreographed a future strategy in the S-1 filing saying, “Our strategy is to create the largest network in each market so that we can have the greatest liquidity network effect, which we believe leads to a margin advantage.”
Details of this strategy include more drivers, more riders, more rides per hour, lower fares, and smaller waiting times.
I believe Uber is biting off more than they can chew on this front.
To overcome the regulatory hurdles and the social backlash while offering cheaper fares and simultaneously increasing driver payout will be impossible unless drivers start shuttling around 5 or 6 people in one ride.
I do acknowledge that Uber has massive scale, first move advantage, and a handsome margin advantage working on their side.
But will this be enough if Uber adds more drivers and effectively piles more money into the same strategy?
I would say no and that could mean that growth rates could slip severely which leads me to suggest that Uber has a problem with the quality of growth.
On the bright side, the business model with be compensated by enhancements in the routing algorithms, payment technologies, in-car user experience, and user interface.
These incremental gains won’t help offset the relative weakness in the growth numbers that possess less and less quality in them.
The overarching theme of what to do when the low-hanging fruit is picked off the branch is a tough one, because any further incremental gain is negated by higher costs or competition.
Uber’s get out of jail free card is the eventual paradigm shift to aerial ride sharing, and if they are the leaders in that transition, it could offer another massive pay day and steeper growth trajectory that would propel the company into a realm of many more possibilities.
Whether Uber can complete this tectonic shift is too far away to predict, time could become a significant headwind in this case since mainstream adoption of autonomous driving has been relatively sluggish.
Expect heightened volatility as the main characteristics of Uber’s price action - it’s certain to be a bumpy ride.
Abstaining from Uber shares would be the smart play here while some more detective work can be deployed.
“Put the right people in the right places, and then you trust them to do the right stuff.” – Said CEO of Uber Dara Khosrowshahi
Global Market Comments
April 16, 2019
Fiat Lux
Featured Trade:
(WHY YOU WILL LOSE YOU JOB IN THE NEXT FIVE YEARS,
AND WHAT TO DO ABOUT IT),
(BLK)
Mad Hedge Hot Tips
April 15, 2019
Fiat Lux
The Five Most Important Things That Happened Today
(and what to do about them)
1) President Says the Dow Should Be 5,000-10,000 Higher, if only the Fed hadn’t raised interest rates last year. That would take the market multiple up to a record 25X. This is coming from a guy who went bankrupt four times himself buying at market tops. But is he buying now himself? Click here.
2) Watch Out for the Plane Shortage This Summer, as the 737 Max software fix drags on. American Airlines has already cancelled hundreds of vacation flights. Book that ticket early. Buy (BA) on the dip. Click here.
3) Home Mortgage Demand is Soaring. It looks like an ultra-low 4.03% 30-year fixed rate mortgage is going to rescue the residential real estate market from the jaws of defeat this spring. Click here.
4) Broker Earnings in Free Fall, as collapsing trading volumes take a bite. It seems investor faith in this rally is almost nil. Risk is high. Take profits you lucky bastard. Click here.
5) Earnings Are Coming in Better Than Expected for Q1. It is looking like companies excessively cut forecasts during the dark days of December. But is it already in the price? Cut risk. Click here.
Published today in the Mad Hedge Global Trading Dispatch and Mad Hedge Technology Letter:
(MARKET OUTLOOK FOR THE WEEK AHEAD, OR QE IS BACK!),
(SPY), (TLT), (TSLA), (DIS), (FCX), (GOOG), (MSFT), (AMZN),
(REACHING PEAK SOCIAL MEDIA)
(SNAP), (FB), (PINS), (TWTR), (GOOGL)
Global Market Comments
April 15, 2019
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, OR QE IS BACK!),
(SPY), (TLT), (TSLA), (DIS), (FCX), (GOOG), (MSFT), (AMZN)
Mad Hedge Technology Letter
April 15, 2019
Fiat Lux
Featured Trade:
(XXXXX)
(SNAP), (FB), (PINS), (TWTR), (GOOGL)
America is full – that is what domestic social media growth is telling us.
The once mesmerizing service that captured the imagination of the American public has soured in the country that created it.
Online advertising consultant emarketer.com issued a report showing that Snapchat (SNAP), the worst of the top social media outlets, will lose users in 2019.
The 77.5 million users forecasted by the end of 2019 represents a 2.8% YOY decrease.
This report differs greatly from the report eMarketer issued just past August showing that Snapchat was preparing for a rise of 6.6% YOY in 2019.
The delta, rate of change, represents a massive downshift in expectations and the sentiment stems from the widespread saturation of social media assets.
Market penetration has run its course and the players have run out of bullets mainly targeting Generation Z.
These platforms have given up on baby boomers and Snap feels that pursuing the millennial demographic would be an exercise in futility.
Even more disheartening is that between 2020-2023, there will be only a minor uptick of user growth by 600,000 users clamping down on the impetus of a comeback of sorts shackling the business model.
The trend is not mutually exclusive to Snap, Twitter or Facebook, social media as a group will only expand the overall user base by 2.4% in 2020 hardly satisfying the appetite for growth that these companies publicly advertise.
Remember that much of Instagram’s growth originates from borrowing Snapchat users by way of copying their best features.
Even with this dirty tactic, growth seems to be petering out.
Snap’s shares have made a nice double after peaking shortly over $25 after the IPO.
But the double was a case of investors believing that management and execution had hit rock bottom – the proverbial dead cat bounce in full effect.
Now investors will pause to reassess whether there is another reasonable catalyst to drive the stock higher.
First, investors will need to ask themselves, is Snap in for another double?
Absolutely not.
So where does Snap go from here?
I believe they will borrow from the playbook of Mark Zuckerberg and attempt to emphasize supercharging average revenue per user (ARPU).
Whether the company arrives at this conclusion by chance or strategy, they must confront the reality that there are almost no other levers to pull if they want to perpetuate this growth story.
M&A is also off the table because the company is burning through cash.
Facebook’s (ARPU) came in at $7.37 last quarter indicating how Snap needs to make substantial headway in this metric with last quarter’s paltry (ARPU) at $2.09.
Essentially, management will conclude that each user isn’t absorbing enough ads because of declining user engagement.
Snap CEO Evan Spiegel will need to improve the pricing power charging advertisers at higher rates.
Obviously, the lack of an attractive platform resulting from poor execution and engineering problems needs a quick turnaround.
It’s not all smooth sailing for Facebook either, they keep chopping and reshaping strategy by the day attempting to minimize costs as the regulation burdens rot at the bottom line.
On the bright side, regulation hasn’t been as bad as initially thought – usership hasn’t dropped by orders of magnitudes.
In fact, Facebook’s users have shown a resurgent indifference to Facebook chopping up their data and repackaging it to 3rd parties, meaning Facebook has come through rather unscathed in the face of a PR storm.
There have even been recent reports of Zuckerberg being persuaded to start paying journalists for original content, a vast pivot for his hyped-up propaganda machine of being in the distribution business.
Juicing up (ARPU) is the lowest hanging fruit on offer for Snapchat and Facebook right now, overperforming in this sphere will improve financials and keep the mosquitoes away while affording them time to ponder how to reaccelerate user growth.
One outsized negative trend is that 90% of user growth appears to originate from undeveloped nations with a lack of discretionary spending power showing that this strategy has its limits.
Searching for another tool in its toolkit will redefine Snapchat, Twitter, and Facebook as we know it.
I would even classify it as an existential crisis.
Instagram have bought Facebook the most time to readjust its future direction highlighting that stealing Snapchat’s audience is still effective, expecting user growth to climb to 106.7 million US users, up 6.2% from 2018.
Instagram will continue its expansion by adding nearly 19 million new US users by 2023, but as much as it adds to its new social media asset, Facebook will be struggling for new net adds.
Snapchat is in dire straits and the stock market bubble could support the share price for up to another 8-12 months, but when the guillotine drops on Snapchat, the blood will smatter everywhere.
The company also plans to introduce a gaming service to take advantage of the popularity with its core users, Generation Z.
This should be the trick that breathes life into operating margins and (ARPU) which is why I believe the stock will hold up for the next period of time.
But with the gaming initiatives also comes rampant competition with the likes of Alphabet (GOOGL) and don’t forget Fortnite is still the 800-pound gorilla.
These trends also bode negatively for Pinterest (PINS) who might be going public as the last shot of tequila is downed at the after party.
Let me warn you in advance that I am only going off drugs long enough to write this newsletter.
This year’s flu has finally laid me low and let me tell you it is a real killer. Perhaps it is my advanced age that has magnified its effects. Then I developed an allergic reaction to the flu medicine I was taking. For a couple of days there, I was looking like the Michelin Man.
However, I did have a lot of time to read research. And what I learned was sobering.
For a start, we are fully back to a quantitative easing market. In one fell swoop, the Fed went from an expectation of four interest rate hikes in 2019 to none. By ending quantitative tightening early, it has cut the amount of cash it is withdrawing from the financial system from $4.3 trillion to only $1.5 trillion.
The Fed is in effect reflating the bubble one more time. And what do you do in a QE-driven economy. YOU BUY EVERYTHING! This explains why stocks, bonds, commodities, and energy have all been marching upward in unison this year even though that is supposed to be theoretically impossible.
Yes, the decade long liquidity-driven bull market may have another leg up to go.
A higher high inevitably leads to a lower low. The trades you are executing now may be akin to picking up pennies in front of a steam roller. We are clearly planting the seeds of the next financial crisis. But for now, the pain trade is clearly to the upside.
Those of who who traded through the dotcom bubble are seeing déjà vu all over again. Huge money-losing tech companies are now floating IPOs on a daily basis. This too will end in tears, which is why I have recommended to followers to avoid all of them. This is a sucker’s game.
There is a cloud behind this silver lining. After a ballistic 21.43% move in the Dow Average in four months, markets are trading as if risk is a thing of the past. The euphoria is here and complacency rules. That means the number of new possible low risk/high return trades out there has fallen to zero.
There is another cloud to worry about. The more excess stimulus the Fed provides the economy now, the fewer resources it will have to get us out of the next recession, which might be only a year off. As a result, everyone is long but extremely nervous. They are still participating in the party but are standing next to the exit door. Pent up volatility is building like a volcano ready to explode.
The other great revelation is that markets have been trading extremely short term in nature, only one quarter ahead of what the real economy is doing. So, a stock market meltdown in Q4 2018 discounted a collapsing GDP growth in Q1 2019 of a 1% rate or less. That is down 80% from a year ago peak.
The ultra-strong market in Q1 is anticipating an economic rebound in Q2, After that, who knows?
That’s why I am moving both of my trading portfolios for Global Trading Dispatch and the Mad Hedge Technology Letter to 100% cash positions in the coming week.
Last week was the week when Walt Disney (DIS) morphed from being a has-been media stock hobbled by a failing holding in ESPN to a dynamic company that is suddenly taking over the world. The reward was an eye-popping 25% move in three weeks, which we caught.
Copper demand is rocketing, off of soaring global electric car production. Each vehicle needs 22 pounds of the red metal, and 4 million have been built so far. That number reached 5 million by June. Take a second bite of the apple with (FCX) as well.
General Electric got slaughtered again, with an earnings downgrade from Morgan Stanley. It will take years to sort out this mess. Avoid (GE).
The 30-year fixed rate mortgage plunged to 4.03% and may save the spring selling season for residential real estate.
Apple Topped $200. It looks like the market is finally buying the services story. Stand aside for the short term. It’s had a great run, up 42% from the December low. I’m waiting for 5G until I buy my next iPhone, probably next year.
The Mad Hedge Fund Trader hit a new all-time high briefly, up 15.46% year to date, and beating the pants off the Dow Average. Good thing I didn’t buy the bearish argument. There’s too much cash floating around the world. However, my downside hedges in Disney and Tesla cost me some money when I stopped out. I was late by a day.
We are taking profits on a six-month peak of 13 positions across the GTD and Tech Letter services and will wait for markets to tell us what to do next.
April is so far down -1.50%, as my downside hedges in Tesla (TSLA) and Disney (DIS) cost me some sofa change. My 2019 year to date return retreated to +13.92%, paring my trailing one-year return back up to +27.22%.
My nine and a half year return backed off to +314.06%. The average annualized return appreciated to +33.65%. I am now 100% in cash.
The Mad Hedge Technology Letter has gone ballistic, with an aggressive and unhedged 30% long which expires this week. It is maintaining positions in Microsoft (MSFT), Alphabet (GOOGL), and Amazon (AMZN), which are clearly going to new highs.
It’s going to be a dull week on the data front after last week’s fireworks.
On Monday, April 15 at 8:30 AM, we get the April Empire State Index. Citibank (C) and Goldman Sachs (GS) report.
On Tuesday, April 16, 9:15 AM EST, we learn March Industrial Production. Netflix (NFLX) and IBM (IBM) report.
On Wednesday, April 17 at 2:00 PM, we get the Fed Beige Book Indicators. Morgan Stanley reports (MS).
On Thursday, April 18 at 8:30 the Weekly Jobless Claims are produced. At 10:00 AM EST, we obtain the March Index of Leading Economic Indicators. American Express (AXP) reports.
On Friday, April 19 at 8:30 AM, the markets are closed for Good Friday.
As for me, I am staying planted in my bed reading up on research and watching HBO until I kick this flu. After that, I should be good for the rest of the year.
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
“People are going to copy your product if you build great stuff. Just because Yahoo has a search box doesn't make it Google.” – Said Founder and CEO of Snapchat Evan Spiegel
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