2020 Archive - Mad Hedge Fund Trader

Cashless Payments are Here to Stay

Cashless payments have gained a major foothold into consumer’s lives all brought about by the pandemic, according to a new consumer survey.

This transformational trend is just another reason traders should look at Fintech firm Square (SQ) which has been one of my favorite tech stocks for the past 2 years.

The never-ending pandemic has accelerated the trend toward cashless transactions and the digit economy.

Conversely, the non-cashless society has taken the brunt of the pain in the form of job losses and the jobless rates remain stubbornly high in the Northeast and West trending above 10% in 10 states in the U.S. last month.

It’s clear which area of the economy to invest in and that’s digital payments.

Before the pandemic, in February 2020, 5.4% of Square sellers in the US were cashless, which Square defines as any business accepting more than 95% of their sales by in-person credit or debit card payments, online payments, or contactless payments.

Moving to April, that number soared to 23.2% and by August, when many stay-at-home restrictions were lifted, it was 30%.

To highlight the trend away from a hard currency society, for payments transacted by Square sellers, the share of cash transactions dropped from 37% in February to 33% in April at the height of the lockdown.

Square delivered an analysis indicating it would take over four years to achieve this oversized cashless drop.

That is the underlying story of the pandemic – multiple years of digital transformation and acceleration scrunched into 7 months.

Not only have the secular trends strengthened tech’s fundamentals, but the employees themselves have collaborated to deliver new products such as On-Demand Pay which will allow Square merchant employees to take a cash advance of up to $200 with no fee. The second service is Instant Payments which allows sellers to fund their payroll from their Square Seller account, speeding up the transaction.

Both services take advantage of the increasing number of consumers using Cash App, delivering wider access to cash for both employers and employees. The synergies between Square's consumer and seller ecosystem is a significant competitive advantage for the company that should drive continued adoption of its products and services.

Scaling the individual ecosystem, cross-selling services within each ecosystem, and finally connecting the ecosystem has been an effective three-prong strategy for Square’s management.

These are services that minimize business risk and an example of how it can disrupt the old way of handling something like payroll. As the two ecosystems grow, Square may find other areas where it can create value between them.

The new products will improve adoption for Payroll among merchants while boosting Cash App adoption and the direct-deposit feature in particular.

Both services will boost increased balances in seller and Cash App accounts. That should increase the appeal of other Square services like the Square Card or Cash Card. It could also lead to more Cash App users investing or sending cash to friends.

It would make sense that greater balances in seller accounts would produce similar results on the seller side. And as Square merchants use more than one service from the company, Square can start offering even better deals to sellers.

In the future, other products that could be rolled out include avenues like loyalty programs, lending products, or other ways to facilitate commerce. Square is just getting started, but the fintech company's new Payroll products show the potential to create significant change in the small business financial services industry and seize market share.

Contrast the bustling activity happening in the fintech space with brick and mortar stores and the difference couldn’t be starker.

The follow-through has been vivid with Square’s shares lurching higher by 150%.

Not only do Square’s engineers work together to create more revenue-building products at scale, but Square is feasting from a once in a generation pivot to mobile digital payments.

Square’s formula has been a recipe for success proving that the road to Damascus is shorter than it seems.

I am highly bullish Square.

September 25, 2020 - Quote of the Day

Tech Letter

“You don't have to start from scratch to do something interesting.” – Said CEO of Twitter and Square Jack Dorsey

September 24, 2020 - MDT Alert (HOG)

MDT Alert

Today, I would like to make a suggestion on a stock we have traded in the past.

The stock is Harley Davidson, Inc. (HOG).

HOG is oversold and is trading relatively flat today, as I write this.

It is oversold by virtue of the fact that it is trading right at its lower band on the 60 minute chart.

I would like to suggest a weekly covered call on the stock and use next week's expiration, which is October 2nd.

HOG is trading right at $23.25 as I write this.

Buy HOG at the market and then execute the sale of this call.

Sell to Open (1) October 2nd - $24.00 Call for every 100 shares you own.

You should be able to sell them for $.45 per every option.

If the calls are assigned next Friday, the return will be about 5.2% for seven days.

Based on the nominal portfolio, limit the buy in to 300 shares, which is 7% of the portfolio.

September 24, 2020 - MDT Pro Tips

MDT Alert

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

September 24, 2020

Biotech Letter

Mad Hedge Biotech & Healthcare Letter
September 24, 2020
Fiat Lux

(PLAY YOUR CARDS RIGHT WITH MODERNA)
(MRNA), (PFE), (AZN), (BNTX), (JNJ), (MRK), (VRTX), (CRSP)

Play Your Cards Right With Moderna

Biotech Letter

The COVID-19 race is entering the home stretch, and it could only be a matter weeks before the world finds out which among the leading vaccine candidates will work.

For months, Moderna (MRNA) has been dubbed as the leader of the pack, with the company’s shares reaping the rewards thanks to this year’s wild growth and promising clinical results.

Now, it looks like Moderna is on the verge of officially claiming the crown as promising reports surfaced from its late-stage clinical trials.

If the Moderna’s COVID-19 vaccine candidate, called mRNA-1273, is proven to be at least 70% effective, the company will immediately ask for an emergency authorization to use it on high-risk patients.

Like Pfizer (PFE), Moderna is also expecting results to come as early as October. With potential delays in the trials, the company thinks the data would be released by November at the latest.

Moderna is also looking into building footprints outside the United States.

Part of its efforts to expand its potential market reach for mRNA-1273, Moderna opened a commercial hub – its first ever – in Switzerland, where it has already been collaborating with Swiss drug manufacturer Lonza (SWX: LONN).

This is a good move for Moderna.

After all, Europe presents a substantial market for the COVID-19 vaccine. For context, the European Union has over 446 million people while the US only has 328 million.

To date, Moderna has agreed to supply 100 million doses of its COVID-19 vaccine to the US government for up to $1.525 billion. The contract also provides for an optional additional 400 million doses, depending on mRNA-1273’s performance in the trials.

Meanwhile, Moderna already secured a deal with the Swiss federal government to deliver 4.5 million of mRNA-1273.

While it has yet to announce a similar deal with the rest of the EU, the company is reported to be in the advanced stages of its negotiations with other member countries, where it is estimated to provide an additional 160 million doses.

Overall, the global manufacturing projection for Moderna falls somewhere between 500 million and 1 billion doses starting in 2021.

Looking at the agreements, we can conservatively say that mRNA-1273 could rake in $12.4 billion in sales for Moderna by 2022.

Despite the current payment plans implying that each dose of Moderna’s vaccine would only cost $15.25, the company already received government funding of roughly $2.5 billion.

Taking those expenses into account, the actual value would be somewhere between $25 and $30 per dose.

In comparison, Pfizer’s vaccine candidate with BioNTech (BNTX) is estimated to cost less than $19.50 per dose while Johnson & Johnson (JNJ) announced that it will offer its vaccine at $10 per dose.

Meanwhile, AstraZeneca’s (AZN) candidate with Oxford University is expected to be even cheaper at $2.96 to $4 per dose.

With its COVID-19 vaccine rivals offering decidedly cheaper options, Moderna will need to leverage its first-mover advantage if it hopes to fight for a decent market share.

Outside COVID-19 vaccine efforts, Moderna has a rich pipeline, with 23 candidates distributed over 22 programs and 6 modalities.

Aside from the urgent need to offer a vaccine to the world, there is another reason why Moderna is focusing on the COVID-19 program right now.

If proven successful, the program can be used to validate another experimental vaccine, called mRNA-1647, which targets congenital cytomegalovirus infection.

Although CMV is identified as one of the leading causes of birth defects in the US, there remains no approved vaccine for it.

However, there is a catch.

Moderna will not be able to reap the full benefits of the CMV vaccine.

In fact, it will only be able to receive 50% of its profits if it becomes successful since mRNA-4157 is being developed alongside Merck (MRK).

The idea is for the drug to boost the oncology sector of Merck, with the goal of finding another blockbuster like the melanoma drug Keytruda.

As impressive as the CMV vaccine is as a product to launch in the market, there is a huge possibility that Moderna would not necessarily benefit from a large windfall because of it.

Aside from Merck, Moderna is also working with another biopharmaceutical giant and competitor in the COVID-19 vaccine race: Vertex (VRTX).

Moderna and the Massachusetts-based giant are collaborating to develop a treatment for cystic fibrosis, a niche that Vertex has dominated for years.

This is actually their second collaboration, but this project seems a tad more ambitious than the earlier one: Moderna and Vertex are working to develop a one-time treatment for cystic fibrosis using mRNA technology.

Basically, the two companies want to use gene-editing techniques to modify a patient’s DNA and correct the cells that cause cystic fibrosis.

The collaboration will span 3 years, with Vertex paying Moderna $75 million upfront. The smaller biotechnology company is also eligible for an additional $380 million in milestone payments plus royalties.

Notably, this is not the first cystic fibrosis treatment collaboration that Vertex formed with gene-editing companies.

Earlier this year, the company also secured a license option with CRISPR Therapeutics (CRSP) to work on practically the same thing.

Clearly, Vertex is hedging its bets on two potential options with this second partnership with Moderna.

Thanks to its trailblazing COVID-19 vaccine candidate, Moderna has become one of the most sought-after stocks of 2020, with its year-to-date growth reaching a stunning 360% last July.

Despite the temptation to bet big on Moderna stocks, bear in mind that early leaders like this biotechnology company will be facing incredible pressure from pharmaceutical titans like Pfizer, Johnson & Johnson, and AstraZeneca – all of which have the capacity to meet the manufacturing and distribution demands across the globe.

At best, a company with Moderna’s size would probably receive a slice of the market in the early days.

At worst, it might struggle to keep a foothold as stronger and larger competitors flood the market with cheaper but equally effective alternatives.

Nonetheless, this is not to say that you should completely avoid smaller biotechnology companies just because they are too small to compete with the larger fish.

Rather, I think it would simply be prudent to invest based on each player’s proven ability and outlined plans to meet the demand at a mass scale.

Doing so would guarantee that you not only limit your risks but also allow you to reap the rewards of successful vaccine deployment. If you play your cards right, then you might even get a handful of different COVID-19 vaccine winners in your back pocket.

moderna

September 24, 2020

Diary, Newsletter, Summary

Global Market Comments
September 24, 2020
Fiat Lux

Featured Trade:

(ELON’S BATTERY DAY BLOWOUT),
(TSLA), (GM), (F)

Elon’s Battery Day Blowout

Diary, Newsletter, Summary

I have to admit that I have been buying into Elon Musk’s vision since I first met him more than 20 years ago, back in his PayPal days. He could see how the future would unroll for the next 50 years.

That has delivered the best investment of my lifetime, with my Tesla shares (TSLA) up 151X from my initial $16.50 cost.

Thanks to Elon, my home is now completely grid-independent, with 59 solar panels and three 13.5-watt Tesla Powerwalls. I am only connected to PG&E so I can sell them my excess power at afternoon peak prices. In the mornings, I recharge my batteries. That’s a cool thing to have when your local utility completely shuts off power for six days a year.

So it was with some enthusiasm that I attended Tesla’s annual shareholder meeting and Battery Day.

Elon Musk was there with all his swagger and confidence in front of a giant screen. The audience was limited to those sitting in Teslas to enable social distancing, and when they approved, they honked horns instead of clapping.

It was a noisy event.

The past five years have been hottest on record. Climate change is accelerating, so the time to step up the move to a truly sustainable grid is here. It is nothing less than a matter of survival of the species. As Musk spoke, pictures of San Francisco's recent orange days, when you could see 100 feet, flashed up on the screen. A hundred-fold increase in our efforts is called for.

The good news is that 76% of the new electricity generation built this year will be wind and solar, or 32 GW. In 2010, 46% of electricity was coal-generated. Today it is half. Trump promises to rescue the industry came to nothing.

Even if 100% of new electricity generation comes from alternatives, it would take 25 years to convert the entire national grid. There is not enough time left to accomplish this to avoid environmental catastrophe.

The three legs of the future of power are solar power, solar storage, and electric cars.

Tesla has made a major contribution so far in all of these, with over 1 million electric cars produced, 26 billion electric car miles driven, 5 GWh of stationary batteries installed (I have 40.5 Watts), and 17 terawatt-hours of solar power generated.

The Shanghai Tesla factory went from a pile of dirt to mass production in an amazing 15 months, and that facility will soon be doubled in size.

“Tera is the new giga,” said Elon. A terawatt is 1,000 times more power than a gigawatt.

The world needs 10 terawatt-hours of new battery production a year to transition the global car fleet to all-electric in 15 years. We need 1,600 fold growth in battery efficiencies to convert the entire grid to electric. That means we need 25 terawatt-hours a year for 15 years. That is Tesla’s goal.

Tesla’s present Nevada Gigafactory is producing only 1.5 terawatt-hours a year in batteries. Would need 135 more factories to meet the above demand with current technology.

To achieve this, Tesla needs to make cars cheaper. The cost per kilowatt is not improving fast enough.

Tesla’s current plan to cut battery costs by half working by improving every one of the dozens of steps of production.

The newest battery design brings 6X increase in energy density levels, will begin mass production in a year in Fremont. Interestingly, Musk relied on existing paper and mottle mass production as models. The design is too complex to describe here but is brilliant. It’s easier to understand with the graphics found in the YouTube video below.

Down the road, dry electrodes will bring further 10X improvement in power. New machine designs and processes will bring a 7X improvement in output. Tesla’s plan is to achieve a further 75% improvement in the cost of production. The eventual goal is to make Tesla the best manufacturer on earth.

By 2022, Tesla will see a 100 GWh production increase in batteries and 3 terawatt-hours by 2030. That is a 30-fold jump.

Silicon is the most abundant element in the world after oxygen and will be used to replace existing graphite chemistry. Moving from processed silicon to raw silicon will deliver cheaper anodes and an 18% cheaper battery. Cathodes will use nickel-manganese allowing an 80% cost reduction.

Some 100% of batteries are now recycled, will eventually become sole source of raw materials for new batteries. Thus, it will become a super-efficient closed cycle.

Tesla will also reduce car costs by casting the battery as a single piece of the car body. The aircraft industry first accomplished this with fuel tanks during WWII. This alone would eliminate unnecessary 370 parts.

The next upgrade in design and manufacturing will take three years to implement and deliver a 69% reduction in cost creating a “compelling” $25,000 car that is fully autonomous and will not need maintenance.

This chops the lifetime cost of Teslas by half when compared to conventional gasoline-powered engines. If Musk can deliver on this promise, General Motors (GM) and Ford Motors (F) are toast.

Tesla is also developing a new supercar. The Tesla Plaid Model S will have a 520-mile range, go from zero to 60 miles per hour in under two seconds, and offer a positively bestial 1100 horsepower motor. You can order yours at the end of 2021. No price was mentioned, but my guess is somewhere north of $250,000.

I already have the Model X with “ludicrous” mode that catapults from 0 to 60 in 2.9 seconds and just that presents a major whiplash risk.

After the event finished, it was clear that the stock market was not drinking the Kool-Aide, Tesla shares diving 5%. It turned out to be a big “buy the rumor, sell the news” event. When traders hear the words “long-term” they glaze over and run a mile.

We may need to wait for the next cycle of upgrades and product announcements to achieve a true upside breakout.

September 23, 2020

Tech Letter

Mad Hedge Technology Letter
September 23, 2020
Fiat Lux

Featured Trade:

(THE HOT CLOUD IPO OF FALL 2020)
(SNOW), (ZM), (ORCL)

The Hot Cloud IPOP of Fall 2020

Tech Letter

The good news is that investors are thirsting for new cloud IPOs boding well for tech firms like Airbnb who plans to go public later this year.

The long-term health of the U.S. tech sector is on solid footing.

Most recently we had Snowflake (SNOW) who is a cloud provider and has an impressive enterprise business.

The public cloud is the data storage unit which literally everyone stores their operations on that has benefited from a massive wave of digital migration.

Many of the cloud-targeted tech firms of recent years have been 10-baggers and have dominated the overall market's returns.

Typically, these companies trade at high premiums, and rightly so, because of the corresponding growth trajectories and Snowflake is no different.

The stock has doubled after less than half a month as a tradable market-moving instrument.

Even by the standards of the most expensive software companies on the Nasdaq index, Snowflake is not cheap, although it’s a growth monster.

Snowflake was valued at $12.4 billion in February and even has investor Warren Buffett, the Oracle of Omaha, among its investors.

Buffett dove headfirst into tech investments in Apple and even some Indian fintech firms as well.

Snowflake is the largest software IPO on record and the largest since Uber's $8.1 billion IPO in May 2019.

The firm was striving for a valuation of $20 billion. In total, Snowflake has raised $1.4 billion from investors including Sequoia and Iconiq Capital.

Snowflake even makes the high-flying Zoom (ZM) Video Communications look cheap which is hard to do.

Zoom is growing three times faster than Snowflake, but trades at roughly half of Snowflake's price-to-sales ratio.

Zoom is also profitable, whereas Snowflake is a huge loss maker and that is a staple of many tech startups. This is an economic environment that is more conducive to profit drive companies instead of the tech model of promising future growth.

Snowflake is over four times more expensive than cloud company Datadog.

Snowflake's market is thought to be bigger than most other niche software applications, and therefore it may have a longer runway. In the regulatory filing, Snowflake claimed its total addressable market was around $81 billion.

Along with many other growth companies, Snowflake's ultimate margin potential is still hard to fathom and more passengers are starting to arrive in the sector than drivers.

Even worse, Snowflake not only competes with legacy data warehouse companies such as Oracle (ORCL) and Dell but also with products from the cloud infrastructure company it collaborates with.

Since shares have already doubled, I do believe that investors will need to wait for a pullback to put money to work in Snowflake.

The company said it had about 3,100 customers, including 56 clients that contributed about $1 million in a 12-month period.

Even with the pricey valuations, Snowflake is the pre-eminent cloud listing of the second half of 2020 and its enterprise business is sustainable.

If a broader sell-off drags this name down into the $180s, pull the trigger and start wading into this one.

The stock is currently priced as such that it represents flawless execution quarter after quarter for many years, and they would have to live up to lofty expectations to grow into its valuation.

While the management is stellar and is known for its execution, the odds of Snowflake's stock faltering are high because of the high bar.

Keep this one on your hot list because with all the variables waiting to pull down the market, there will be a time when the price is right in Snowflake.