"If a cluttered desk is a sign of a cluttered mind, what is an empty desk a sign of?" asked Albert Einstein.
Global Market Comments
June 7, 2019
Fiat Lux
Featured Trade:
(SUNDAY, JUNE 30 MANILA, PHILIPPINES STRATEGY LUNCHEON)
(THE CONTINUING DEATH OF RETAIL),
(AMZN), (WMT), (M), (JWN),
(TESTIMONIAL)
While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to a six-month time frame, Mad Day Trader, provided by Bill Davis, will exploit money-making opportunities over a brief ten minute to three-day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points. Read more
While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to a six-month time frame, Mad Day Trader, provided by Bill Davis, will exploit money-making opportunities over a brief ten minute to three-day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points. Read more
Mad Hedge Technology Letter
June 6, 2019
Fiat Lux
Featured Trade:
(THE SHAKEOUT IN GAME STOCKS)
(GME), (MSFT), (GOOGL), (APPL), (STX), (WDC)
Do not invest in any video game stocks that don’t make video games.
If you want to simplify today’s newsletter down to the nuts and bolts, then there you go.
The company that I have been pounding on the table for readers to sell on rallies has convincingly proven my forecast right yet again with GameStop (GME) capitulating 35%.
It’s difficult to find a tech company with a strategic model that is worse than GameStop’s, and my call to short this stock has been vindicated.
Other competitors that vie for awful tech business models would be in the hard disk drive (HDD) market, and that is why I have been ushering readers to spurn Western Digital (WDC) and Seagate Technology (STX).
This is a time when everybody and their grandmother are ditching hard drives and migrating to the cloud, while GameStop is a video game retailer who is set up in malls that add zero value to the consumer.
This also dovetails nicely with my premise that broker technology or in this case retail brokers of physical video games are a weak business to be in when kids are downloading video game straight from their broadband via the cloud and don’t need to go into the store anymore.
Let’s analyze why GameStop dropped 35%.
The rapid migration of the digital economy does not have room to accompany GameStop’s model of retail video game stores anymore.
It’s a 1990 business in 2019 – only twenty years too late.
This model is being attacked from all fronts - a live sinking ship with no life vests on board.
GameStop was already confronted with a harsh reality and pigeonholed into one of a handful of companies in need of a turnaround.
This isn’t new in the technology sector as many legacy firms have had to reinvent themselves to spruce up a stale business model.
The earnings call was peppered with buzz words such as “transformation” and “strategic vision.”
And when the Chief Operating Officer Rob Lloyd detailed the prior quarter’s results, it was nothing short of a stinker.
Total quarterly revenue dropped 13.3% in Q1 2019 which was down from the prior year of 10.3%.
The headline number did nothing to assuage investors that the ship is turning around, it appears as if the boat is still drifting in reverse.
Diving into the segments, underperformance is an accurate way to capture the current state of GameStop with hardware sales down 35%, software sales down 4.3% and selling pre-owned products declining 20.3%.
Poor software sales were blamed on weaker new title launches this year and comping the strong data war launched last year with increasing digital adoption.
The awful hardware sales were pinned on the late stages of the current generation PS4 and Xbox One cycle with GameStop awaiting an official launch date announcement from Sony and Microsoft for their new console products.
Pre-owned business fell off a cliff reflecting tepid software demand for physical games and the increasing popularity of the various digitally offered products via alternative channels.
The only part of GameStop going in the right direction is the collectibles business that increased 10.5% from last year but makes up only a minor part of the overall business.
Management has elected to remove the dividend completely to freshen up the balance sheet slamming the company as a whole with a black eye and giving investors even less reason to hold the stock.
Indirectly, this is a confession that cash might be a problem in the medium-term.
The move to put the kibosh on rewarding shareholders will save the company over $150 million, but the ugly sell-off means that investors are leaving in droves as this past quarter could be the straw that broke the camel’s back.
They plan to use some of these funds to pay down debt, and GameStop is still confronted by a lack of transformative initiatives that could breathe life back into this legacy gaming company.
It was only in 2016 when the company was profitable earning over $400 million.
Profits have steadily eroded over time with the company now losing around $700 million per year.
Management offered annual guidance which was also hit by the ugly stick projecting annual sales to decline between 5-10%.
GameStop is on a fast track to irrelevancy.
If you were awaiting some blockbuster announcements that could offer a certain degree of respite going forward, well, the tone was disappointing not offering investors much to dig their teeth into.
Remember that GameStop is now on a collision course with the FANGs who have pivoted into the video game diaspora.
GameStop will see zero revenue from this development and a boatload of fresh competition.
Microsoft (MSFT) has been a mainstay with its Xbox business, but Apple (AAPL) and Google are close to entering the market.
Google (GOOGL) plans to leverage YouTube and install gaming directly on Google Chrome with this platform acting as a new gaming channel.
The new gaming models have transformed the industry into freemium games with in-game upselling of in-game items, the main method of capturing revenue.
The liveliest example of this new phenomenon is the battle royale game Fortnite.
Nowhere in this business model includes revenue for GameStop highlighting the ease at which game studios and console makers are bypassing this retailer.
In this new gaming world, I cannot comprehend how GameStop will be able to stay afloat.
Unfortunately, the move down has been priced in and at $5, the risk-reward to the downside is not worth shorting the company now.
The company is the poster boy for technological disruption cast in a negative light and the risks of not evolving with the current times.
BYPASSING THE RETAILER THANKS TO THE CLOUD
“I even went to KFC when it came to my city. Twenty-four people went for the job. Twenty-three were accepted.” – Founder and Former CEO of Alibaba Jack Ma when asked about life after university.
Global Market Comments
June 6, 2019
Fiat Lux
Featured Trade:
(WEDNESDAY, JUNE 28 PERTH, AUSTRALIA STRATEGY LUNCHEON)
(THE IRS LETTER YOU SHOULD DREAD),
(PANW), (CSCO), (FEYE),
(CYBR), (CHKP), (HACK), (SNE)
(CHINA’S COMING DEMOGRAPHIC NIGHTMARE)
Mad Hedge Technology Letter
June 5, 2019
Fiat Lux
Featured Trade:
(BOX TAKES A HIT)
(BOX), (MSFT), (PYPL)
REVENUE DOWNGRADES – these are meaningful side effects that many public tech companies are grappling with.
To really understand the complete picture of the technology industry, analyzing the fringes goes a long way to telling us the level of health of firms operating in the face of a mammoth trade war.
Before companies start posting decelerating revenue numbers, the warnings and preannouncements come thick and fast.
That is exactly what we have been receiving as of late.
Redwood City-based cloud storage company Box (BOX) nosedived 14 percent at today’s opening after beating financial estimates but offering investors light guidance that fell short of expectations.
In fact, Box had a tidy quarter and its 16% YOY of revenue growth is performance that many industries would give a left arm for.
The $163 million in sales in the first quarter was a beat of about $1.6 million showing that cloud companies are still the kings of the modern economy.
Being that the stock market is forward-looking, mister market didn’t like what Box finished the call with.
Consensus had it that Box would deliver around $700 million of sales in 2019, but the company indicated that the souring climate because of the trade war made this highly unlikely and guided down to between $688 million to $692 million.
This won’t be the last downgrade if there are no resolutions in the next quarter, expect more than a handful to preannounce.
As we speak, both countries are digging their heels in, signaling to each other they are unlikely to budge.
Box is at an inflection point in their history where they are attempting to push their business model into a $1 billion per year operation.
This means chasing after corporate clients who have the scale and volume to satisfy these revenue goals.
Corporate clients usually are prone to having deep overseas supply chains and the diminishing success of these businesses will force them to think twice about partnering with firms like Box.
They might want to now but could put off the decision for a year or two.
The knock-on effect is massive with many areas of the expense puzzle shaved off here and there.
Expect downgrades in the quality of their office coffee beans as well.
Ultimately, many of the second-tier tech companies are at risk of issuing an imminent profit warning or if they don’t make profits, revenue downgrades will happen in the upcoming weeks.
If you thought the dollars are vanishing into thin air, you are wrong.
They still exist but are actively being pushed around to different parts of the global economy and there is one main recipient of the flow of funds.
Since tariffs have created a situation where it is too expensive to export or import from America and China, one country, in particular, has welcomed an avalanche of new money.
Many supply chains are moving over to Vietnam as we speak.
Malaysia, Chile, and Argentina have also seen an uptick in trade flows.
And you can bet that every drop of manufacturing foreign capital right now is avoiding China like the plague until they get more clarity on trade policy or weighing up moving operations to America, so they aren’t charged a tariff for selling to Americans.
Many Chinese manufacturers are using a workaround - offshoring their business taking a cue from America in the 1990s.
Vietnam has already gained 7.9% of GDP in new businesses from Chinese and American corporations.
America is past the point of no return as many executives believe this could be a dog fight in the trenches until 2035.
Better to move now and salvage what they can.
Many experts have chimed in admitting that Vietnam is what China was 20 years ago, offering manufacturers cheap labor and growing know-how in high precision industries.
Throw into the mix that Vietnam has a huge Chinese minority population which many not only speak the local language but also can communicate in Chinese, then it seems like a natural fit to source goods from there.
It could play out quite ironically with American tech companies deploying this exact carbon copy of a strategy, and we might see Chinese and American factories and research centers standing shoulder to shoulder with one another dotted around Ho Chi Minh City and Hanoi.
Expect Vietnam to be the next to ride the economic rollercoaster that China enjoyed for 30 years.
Effectively, tech profits and other American industries have seen their margins and revenue repackaged and delivered to the Vietnamese economy.
The Chinese and American economies are in for some short-term grinding and if they can’t get along at some point, Vietnam and others will be handsomely rewarded.
Investors need to keep a watch out for the next batch of data from second tier tech companies that will offer a glimpse into the future and how this trade war is playing out.
I believe the cleanup hitters like Microsoft and PayPal still swing a heavy bat and that won’t go away for the rest of 2019, but the little guys could get bullied with some revenue resets.
