Mad Hedge Technology Letter
October 12, 2020
Fiat Lux
Featured Trade:
(DATA ANALYTICS IS THE WAY FORWARD FOR ANY BUSINESS)
(DDOG)
As the coronavirus shows no signs of stopping in the short-term, it only delays the economic recovery that was first labeled as a “V-shaped” recession.
I do believe the negative economic news is being understated when the broader global picture is being looked at.
The sad fact is that emerging countries have taken the harder hit to relative GDP than the US and the US has financial levels in dollar-denominated debt that other countries don’t have access to.
While this macro uncertainty remains in the near term, it only gives more proof that investors need to be digital-first and agile and confirms the cloud as the best path to achieve these results over the long term.
The evidence of this transformation is growing with the overall demand in the form of new customers and new use cases existing customers.
Data analytics will facilitate this renaissance towards digital offerings and that is why, for the first time, I am recommending Datadog (DDOG) — a monitoring service for cloud-scale applications, providing monitoring of servers, databases, tools, and services, through a SaaS-based data analytics platform.
Why are they a great tech firm to buy and hold in?
Their 2nd quarter performance was nothing short of breathtaking.
Revenue was $140 million, an increase of 68% year-over-year and they ended the quarter with 1,015 customers with new client accounts of $100,000 or more — an increase of 71% from last year.
As of the end of Q2, 68% of customers are using two or more products, which is up 40% a year ago.
Can you believe that it’s going so well now that 15% of Datadog’s customers are now using four or more products?
That figure is up from 0% the year before.
The support of cloud and other ephemeral architectures is more important than ever as the rapid change from work-from-home has demonstrated the limitation of legacy infrastructure.
Recent macro events like the pandemic that have accelerated the pivot to digital will unequivocally accelerate the migration to the cloud as the economy improves.
How does Datadog become one of the outsized winners?
They offer a broader solution with end-to-end visibility from back-end infrastructure all the way through to the end-user experience and now security as well. And they win because they offer a truly integrated platform for a single paid view into the IT stack.
Analyzing the management, execution was strong, being able to uphold accounts with larger customers who already have sizable cloud environments. Given macro uncertainty, these customers look to conserve cash while they still could and therefore optimize the consumption of cloud infrastructure and those management relationships are critical to preserving client accounts in major players.
Lower quality customers with large cloud deals from AWS, Azure, or Google Cloud look for immediate short-term savings and focus less on Datadog’s management and client relationships.
These quality customers will lead to a high rate of upselling into more robust packages as the broader economy strengthens.
Customers have been highly receptive of the single platform deliverability from Datadog — the customer has been able to move from multiple disparate monitoring tools to using a single platform for all three pillars of observability.
This allowed them to refocus engineering teams on building new features, and not out of the realm of possibility to expect more than 15% in savings from consolidating disparate monitoring and logging vendors into Datadog.
Another example of a recent deal is with a large entertainment platform that continued to upgrade its Datadog packages and now pledge to commit to over $10 million in the year.
This company has decided to increase investment in observability and broader use of Datadog both with new products and by scaling up on existing products.
So now they can use Datadog to quickly drill down into any failed request and easily identify layers. This company is now using all three pillars, including Synthetics, RUM, and NPM, and has standardized monitoring on Datadog.
The pathway to profits in 2020 is now to be a digital-first business, and the cloud is the best path to achieve this outcome.
Datadog will be the primary beneficiary of this trend and remains very well-positioned to win in the market.
In the near term, the macro environment is likely to continue to cause uncertainty, but in relative terms, Datadog will have no problem in scoring new deals as the volume of companies becoming digital will not cease.
Sustaining strong growth both in the near term and over time is something of a safe bet for Datadog and growing from $100 million of annual revenue in 2017 to $200 million in total revenue in 2018, and $362 million in annual revenue in 2019 is hard evidence the parabolic trajectory will continue uninterrupted for the foreseeable future.
I am bullish Datadog and not surprised that shares of the stock are up over 300% in 2020. This is just the beginning of share appreciation.
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
Global Market Comments
October 12, 2020
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or BACK TO THE NIFTY FIFTY),
(CAT), (JPM), (BAC), (NSC), (UNP), (V),
(MA), (FDX), (UPS), (IP), (AAPL), (TSLA)
My daughter needed a desk so she could go to high school from her bedroom. So, I drove around Northern Nevada to get the perfect piece, visiting Reno, Sparks, Carson City, and Minden. It is one of the most conservative parts of the country, probably 90% republican.
What I saw was amazing.
There were Biden/Harris signs everywhere. Yes, there will still some Trump signs, but they were in a definite minority. Four years ago, you only saw Trump signs. The rare Clinton/Kaine sign was full of bullet holes, torn down, or copiously marked with offensive graffiti.
I thought, hmm, there must be a trade here.
We seem to be on the verge of massive changes in the US economy. Get in front of them and you’ll make a fortune. Lag behind, and you’ll be seen driving an Uber cab.
Technology undoubtedly led the decade, bringing in a 30% annual return since 2009. Industrial and other domestic stocks brought in no more than 12%. The “Roaring Twenties” could bring the reverse.
Technology will continue to do OK. Ever falling prices and greater service is a tough business model to beat. But let’s face it, none of these things are cheap. Apple (AAPL) going from a 9X multiple to 45X?
Industrials could be playing a massive catch up game initiating a new supercycle as they did from 2000-2010 when tech lagged in the wake of the Dotcom Bust.
This switch is made easier by the fact that most big industrial companies are now de facto technology ones. They all now use advanced cloud software, sophisticated robots, and state of the art distribution systems. Caterpillar (CAT) even has a 290-ton dump truck that drives itself like a giant Tesla (TSLA)!
Many of these companies I have covered for nearly 50 years, when they last belonged to the Nifty Fifty. So, for me, it’s a matter of dusting off my old research, seeing who is left, and giving them a modern spin. The great thing about these stocks is that many pay decent dividends.
I’ll give you a short list of where to buy the dips.
Banks – JP Morgan (JPM), Bank of America (BAC)
Railroads – Norfolk Southern (NSC), Union Pacific (UNP)
Credit Cards – Visa (V), Master Card (MA)
Couriers – FedEx (FDX), UPS (UPS)
Consumer Discretionary – International Paper (IP)
Hmm, a market where everything goes up. I like it! Dow 120,000 here we come!
Trump ordered all Stimulus Negotiations to cease, and then changed his mind six hours later. Clearly, the president has given up on the election and wants the next administration to inherit a Great Depression. Or is this Covid-19 talking? It’s the perfect scorched earth strategy. Write off another 2 million small businesses. Down ticket republican candidates will be beaten like a red-headed stepchild. Stocks plunged 600, with airlines in free fall, then bounced 700.
Jay Powell REALLY wants a stimulus package, claiming the economy desperately needs fiscal help to maintain a recovery or face a prolonged depression. “The risks of overdoing it seem, for now, to be small,” the central bank chief told the National Association for Business Economics. Are his pleas falling on deaf ears in Washington? Trump just gave our Fed governor the middle finger salute.
Share Buybacks vaporized T\this year and will be miniscule next year, with companies whose earnings have been crushed by the pandemic not participating. The ban on bank share buybacks imposed by the Fed continues. This has been the largest portion of net stock buying for the past decade. The good news is that foreign investors stepped in as big buyers in 2020, taking the indexes to new highs.
Apple to announce new 5G iPhone this week. The release came a month late, thanks to the pandemic. Scheduled for October 13, the event is called “High Speed”. Apple’s biggest sales quarter in history has just begun. Buy dips in (AAPL).
The Election is Noise and its best to focus on the bull market that has just begun, says JP Morgan. Record fiscal stimulus and quantitative easing in the face of near-zero interest rates create a perfect storm in favor of equities. The best stock to own going into the October 13 Prime Day?
Weekly Jobless Claims edged down to 840,000, still missing 200,000 from California, due to an upgrading computer system. California stopped reporting data so they can rebuild the antiquated computer system of the Employment Development Department, which has been breaking down due to overwhelming demand. Some 26.5 million workers are now claiming unemployment benefits.
Banks are making record trading profits on the back of the US Treasury market where volume has exploded. Even though there has been little net movement in prices in six months, the two-way bets have been enormous. It helps to have a massive home refi boom, incredible QE, and a government that is printing new debt like there’s no tomorrow.
When we come out the other side of this, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 400% or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old.
My Global Trading Dispatch maintained a new all-time high last week by staying 100% in cash. I was just as grateful for having no positions on the up 600-point days as I was on the down 600-point days. Safe to say that I will be an increasingly more aggressive buyer on ever smaller dips.
That keeps our 2020 year-to-date performance at a blistering +35.46%, versus a gain of 0.5% for the Dow Average. That takes my eleven-year average annualized performance back to +36.14%. My 11-year total return stood at new all-time high of +391.37%. My trailing one-year return dropped to +44.26%.
The coming week will be a dull one on the data front. The only numbers that really count for the market are the number of US Coronavirus cases and deaths, now at 210,000, which you can find here.
On Monday, October 12 at 8:30 AM EST, the government is closed for Columbus Day so there will be no data releases, even though the stock market is open.
On Tuesday, October 13 at 9:00 AM EST, the US Inflation Rate for September is out.
On Wednesday, October 14, at 8:30 AM EST, The Producer Price Index for September is released. At 10:30 AM EST, the EIA Cushing Crude Oil Stocks are out.
On Thursday, October 15 at 8:30 AM EST, the Weekly Jobless Claims are announced. We also get the Empire State Manufacturing Index.
On Friday, October 16, at 8:30 AM EST, US Retail Sales are printed. At 2:00 PM we learn the Baker-Hughes Rig Count.
As for me, I eventually found the perfect desk on Craigslist Reno. It was from the 1930s and had once occupied the office of the Metropolitan Life Insurance Company of New York, complete with two inkwells.
The company logo was prominently displayed in its wrought iron legs. When the Metropolitan modernized its offices in the 1950s, it sold off its furniture, which has been in circulation in the antique market ever since.
I told the seller, who had just moved from the east coast, of my amazing connection with the company. My Uncle Ed spent three years on a Navy destroyer in the Pacific during WWII. Enlistees in the 1940s were required to take out life insurance policies before they went off to war.
When Ed passed away a few years ago, I went through his papers and what did I find but a life policy from the Metropolitan Life Insurance Company for $1,000.
Ever the history buff, I called the company to find out if the policy was worth anything 70 years later. It turned out to have a cash value of $100,000, which they paid out immediately. I divided the money among my mom’s 20 grandchildren to pay for their college educations. Several now have PhDs. Got to love that compounding of interest.
Stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Bring on the Roaring Twenties
I would usually just suggest you let the $6 call on CLVS expire today, but with next week being a short week, I am going to suggest you cover back this week's call and sell next week's.
With the Columbus Day Holiday on Monday, the markets are close, so you are only selling 4 days worth of call premium.
I don't suggest you leave this week's call open and given the fact that it can be bought back for a penny, that is what I suggest you do.
So, Buy to Close the October 9th-$6 call for one cent.
After you close this week's call, then execute this trade:
Sell to Open (1) October 16th - $6 call for every 100 shares you own. You should be able to sell them for 15 cents.
I usually like to capture more weekly premium, but with a short week, the price has been reduced.
This brings the total call premium collected on this position to 10.4% of the purchase price.
This alert applies to you only if you own shares in CLVS. Enjoy your long weekend!
Mad Hedge Technology Letter
October 9, 2020
Fiat Lux
Featured Trade:
(INCHING TOWARDS A KICK IN THE TEETH),
(TECH ANTITRUST)
House Democrats have proposed a massive overhaul of U.S. laws that will take the air out of big tech, or will it?
We are seriously inching our way to a meaningful change in anti-trust regulation in the U.S.
The conclusions offer a legislative road map for congressional Democrats — something that could become an even poignant threat to Silicon Valley if the party regains full control of Congress and a major overhaul could be in the cards.
The House Judiciary antitrust subcommittee is in the midst of a 16-month bipartisan investigation that analyzed the dark practices of Facebook, Google, Apple, and Amazon.
These companies have used their dominant power to abuse the spirit of competition and the side effects have been widespread, often negatively affecting U.S. society.
A major strategy at preventing competition is the “catch and kill method” acquiring up-and-coming rivals because of their financial advantage.
Unfairly favoring their own products on the online storefronts they operate, such as Amazon's Marketplace and Apple's App Store is another trick they have perfected.
There have been calls to ban major tech platforms from acquiring future startups or potential rivals and barring them from both owning marketplaces — such as Amazon’s broad-based e-commerce hub — and selling competing products on them.
Either way, there will be some sort of actionable legislation once Congress returns in 2021 — this is ultimately negative for tech stocks because most of the investor capital is overweight in the biggest tech names.
Democratic hopeful Joe Biden is currently the favorite in the polls and if he wins, the pressure to expedite this cause will grow. Trump hasn’t moved on this issue in 4 years and it could get bogged down if he were to be re-elected.
Senators are pushing to rewrite antitrust law and advocate breakups of the largest American tech companies.
Tech companies wouldn’t be able to hide behind some outdated law infamously called Section 230.
This 1996 statute became known as "a core pillar of Internet freedom" and "the law that gave us modern Internet" — a critical component of free speech online. But the egregiousness of Section 230 flows through some of the darkest corners of the Web. Most glaringly, the law had been used to defend the now-defunct Backpage.com, a website featuring ads for sex with children forced into prostitution.
Section 230 would be on the top of the heap to get rewritten, meaning Facebook would now have to pay monetary damages to harmful content posted on their platform which they have proven they cannot moderate.
This opens up an avalanche of potential lawsuits and compliance issues which ultimately adds up to higher costs.
At this point, it’s even a question mark whether these companies will be allowed to acquire any more start-ups to cement their gains before the regulations kick in. Just look at Europe’s blocking of Google’s purchase of tech wearable company Fitbit.
Besides China, this is one of the few bipartisan issues both parties agree on, and if they get their act together the pipeline of regulation could even be started before the end of 2020.
The pandemic has only helped highlight the diversion of fortunes between tech and non-tech as millions of Americans are out on the street with no food to eat.
Biden has already launched a scathing attack on Facebook calling it “the nation’s foremost propagator of disinformation about the voting process” last month in a letter to Facebook CEO Mark Zuckerberg.
Punitive actions against some of the world’s most valuable companies will most likely come in droves, not to mention that the balkanization of global tech revenues will translate into a lower future income trajectory.
There is still a chance that this is all bluster and no bite but only time will show what the politicians truly intend to do in terms of meaningfulness and duration.
Big tech has had a history of seizing uncanny ways to get around regulation; and just look at rideshare company Lyft who is hoping to pass legislation to avoid paying their employees as employees with an upcoming vote on Proposition 22.
This is definitely not the end of the road for big tech, but they are confronted by a situation where even if they are broken up, the value of those companies would be even greater than they are now.
But why not play it safe when you don’t need to compete with yourself?
That’s the essential problem as just a few CEOs harvest the fruit from the success of tech; and the San Francisco Bay Area has been a symbol of this, with an island of rich people among a sea of homelessness.
The last card up their sleeve is charging more for services such as Gmail and Facebook while increasing fees for digital ads. There are ways to fiddle with the structure to keep it intact, and although regulation is now staring us right in the face, I still believe in the big tech narrative.
On the flip side, this paves the way for the “2nd tier” tech firms to catch up with the entrenched.
“A founder is not a job, it's a role, an attitude.” – Said CEO of Twitter Jack Dorsey
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