Mad Hedge Technology Letter
August 24, 2022
Fiat Lux
Featured Trade:
(ZOOMING TO FAILURE)
(ZM), (MSFT), (TDOC)
Let’s call it what it is – a one-hit wonder.
Zoom Video Technologies (ZM) was the darling of 2020 as we idled in our homes and succumbed to digital use if we liked it or not.
ZM became the hot item because they had an edge in the video conferencing product and their stock price boomed as we were all hooked on their software.
Fast forward to today and ZM CEO Eric Yuan wishes conditions were similar to 2020 so he can somehow combat the growth of Microsoft Teams which is essentially the same product as ZM but offered for free from competitor Microsoft (MSFT).
Teams keeps adding new features and when the inflationary monster disrupts the balance sheet too much, enterprises stop paying for ZM.
ZM is having a tough time battling it out with free software.
The company also cut its annual revenue forecast, saying it’s losing sales from consumers and small business faster than anticipated.
Zoom’s breakneck growth during the pandemic has cooled considerably as offices reopen and other software copycats take shape.
Online sales to consumers and small businesses are expected to decline 7% to 8% this year, Chief Financial Officer Kelly Steckelberg said on a conference call.
Zoom has responded by intensifying its focus on larger enterprise clients and pitching an expanded line of products such as software for customer contact centers.
In June, the company unveiled a new service bundle, Zoom One, to highlight offerings like internet-connected phones and physical conference rooms.
I’m not positive on these secondary offerings, particularly Zoom Phone, and see few use cases for it moving forward.
Sales to enterprise customers are expected to grow by more than 20% this year.
The company also reduced its annual sales forecast to about $4.4 billion from its May projection of as much as $4.55 billion. About $115 million of the cut is due to the “broader economic environment” and $35 million is due to the stronger US dollar.
ZM has effectively glamorized Facetime on the computer and the bad news is that there is no moat around this proprietary technology.
Zoom Phone is literally Facetime with no computer.
Good luck finding the incremental client.
This is the reason for big tech catching up to ZM so quickly and after relinquishing their first mover advantage, there has been no second act or even 1.5 act. It’s a quickly eroding wasteland for the ZM brain trust.
Then the company referenced the “broader economic environment” as to reasons for a lower forecast confirming what many people already know that we are barreling straight into a 2023 recession and ZM will be a discretionary service that gets cut with ease.
Not even the newly crowned federal student loan forgiveness group will spend their new bonuses on this unneeded software.
To be fair, it hasn’t only been ZM that has been body slammed, the other lockdown darling Teladoc (TDOC) which specializes in remote health consultations is trading at 5-year lows.
The stock is almost 10X lower than at its point in February 2021.
Even if there’s an apocalypse, users won’t gravitate to ZM highlighting the outsized risks of a one-trick pony with no competitive advantage.
Stay away from this stock.
“Formal education will make you a living; self-education will make you a fortune.” – Said American entrepreneur Jim Rohn
Global Market Comments
August 24, 2022
Fiat Lux
Featured Trade:
(THE MAD HEDGE TRADERS & INVESTORS SUMMIT IS ON FOR SEPTEMBER 13-15)
Mad Hedge Biotech and Healthcare Letter
August 24, 2022
Fiat Lux
Featured Trade:
(A NEW KID ON THE BLOCK)
(GSK), (HLN), (UL), (PG), (JNJ), (PRGO), (PBH)
GlaxoSmithKline (GSK) started 2022 by turning down a $60 billion offer from Unilever (UL) for its consumer healthcare division, describing the price as too low.
By June, this same division became a standalone company named Haleon (HLN), with a market value of $29 billion—less than half the amount Unilever wanted to pay.
This means investors looking to buy shares of this spinoff still have a chance to take advantage of the bargain price.
Haleon is so far valued at roughly 13.5 times the consensus average for 2023 earnings, making it a lower multiple compared to competitors selling consumer healthcare items like Unilever, which roughly trades at 17 times its projected 2023 profits, and Procter & Gamble (PG), which trades at about 24 times its estimated earnings.
Compared to Procter and Gamble and Unilever, though, Haleon is a large-cap company that’s considered a pure-play consumer healthcare company.
It started trading as a standalone company by July, with a portfolio that included oral health items such as Aquafresh and Sensodyne, some OTC drugs like Advil and Theraflu, and several supplements including the best-selling multivitamin brand Centrum.
Keep in mind that the majority of Haleon’s core products have been practically unchanged for years. This spinoff only allotted roughly $300 million for R&D in 2021.
That comprises a mere 2.7% of its turnover. Meanwhile, GSK spent over 20% of its turnover on R&D initiatives within the same period excluding Haleon.
So far, the only notable pure-play consumer healthcare competitors are Perrigo (PRGO) and Prestige Consumer Healthcare (PBH). However, these two operate at a far smaller scale, with market capitalizations of less than $6 billion.
The absence of a competitive peer group and the limited track record of Haleon as a solo company makes this GSK spinoff more speculative compared to other consumer healthcare firms.
Haleon’s future would become clearer by the end of 2022, with more earnings reports under its belt, alongside the completed deal with Johnson & Johnson (JNJ).
JNJ also plans to create a standalone company for its consumer healthcare division in 2023. Haleon will be combined with this particular spinoff to form a new category.
Based on its current portfolio, brand recognition, and years of experience under Big Pharma’s, Haleon is projected to grow by 3.3% annually from 2023 through 2026.
At this point, Haleon is already considered a dominant player in the field. In the 2021 earnings report, this division brought $11.5 billion to GSK. That’s lower than JNJ’s own consumer healthcare division, which raked in $14.6 billion, but higher than Procter & Gamble’s $10 billion.
A standalone consumer healthcare company has the capacity to attract additional investor attention and gain higher valuations for those looking for steady—albeit not jaw-dropping—growth while earning consistent income from dividends.
Haleon announced that it intends to start paying out in the first half of 2023 “at the lower end” of the 30% to 50% range of its earnings. Looking at the company’s recent price, its 2023 dividend yield is estimated to be at 2.3%.
The consumer healthcare sector is a lucrative segment. The size of this market is estimated to reach $301.4 billion by 2027, with a 7.2% growth in CAGR throughout that period.
The demand for products in this segment tends to be unaffected by economic issues like recessions. Moreover, established brands, particularly those under Big Pharma names like JNJ and GSK, can easily set a very high barrier for competitors to overcome.
Overall, Haleon presents an opportunity for investors to bag a bargain.
It has a solid lineup of strong brands, which have shown their capacity to drum up consistent sales and demand low R&D expenses. These factors make Haleon a potential cash cow that could steadily deliver rising dividends for years to come.
Haleon is a good bet on an excellent emerging market—not to mention a virtually recession-proof—market.
Mad Hedge Bitcoin Letter
August 23, 2022
Fiat Lux
Featured Trade:
(CRYPTO INFRASTRUCTURE TAKES ANOTHER HIT)
(FTX), (FDIC)
The scandals keep on rolling in for the crypto establishment and right on cue, the possibly most public figure in the crypto world is now facing the music.
FTX CEO Sam Bankman-Fried is in hot water as a prominent U.S. bank regulator Federal Deposit Insurance Corporation (FDIC) demanded crypto exchange FTX to halt what it called "false and misleading" claims the exchange had made about whether or not funds at the company are insured by the government.
Let’s be clear about this, crypto is not regulated and thus not insured as an asset.
The money an investor loses on a crypto exchange because of an exchange bankruptcy usually means the investors won’t get their funds back.
This is a serious risk that an investor must grapple with when pouring money into the digital gold.
This is also part of the reason why the asset class is so maligned, volatile, untrusted, and unpredictable.
The asset class also attracts scam artists who promise 1,000% returns in 7 days.
The lack of backstop in this industry deters many conservative investors and thus many crypto investors are fresh-faced with nothing to lose.
Trading with fearless abandon isn’t a great idea and is almost like hoping to win the lottery.
I have never recommended betting the family ranch on crypto and I have always advocated putting a small portion of one’s portfolio, perhaps 1-3%, into crypto.
And since November 2021, we have seen a precipitous decline in the digital asset as well as many exchanges disappearing.
There are so many concurrent federal investigations happening that I can’t keep track of them.
This is the reality of an emerging and unproven asset class.
Here’s just what happened.
The FDIC issued a cease and desist letter to FTX US that those statements implied that FDIC insurance was available for cryptocurrency and stock holdings and that the agency does not insure brokerage accounts.
In a tweet, FTX CEO Sam Bankman-Fried emphasized FTX is not FDIC-insured, and apologized if anyone misinterpreted previous comments.
The letter was not only sent to FTX as 4 others got the same letter, so this is a widespread problem in the crypto industry.
The bank regulator issued a similar cease and desist letter to bankrupt crypto firm Voyager Digital, arguing that the company had misled customers by claiming their funds with Voyager would be covered by the FDIC.
Later, the FDIC issued an advisory urging banks dealing with crypto companies to ensure that customers are aware of what types of assets are government-insured, particularly in cases where firms offer a mix of uninsured crypto products alongside insured bank deposit products.
Stocks are insured and to imply by word association that crypto is also insured shows that these exchanges are playing a dirty game.
I don’t want to paint the whole industry with one brush, but the crypto establishment isn’t doing itself any favors and their business practices smack of desperation.
No doubt that in 2022, sales have fallen off a cliff, and just look at FTX which did over $1 billion in sales last year and 2022 will end up just a fraction of that.
They are hoping to cling on to any revenue foothold even if it means misleading customers.
Crypto has a mountain to climb and this is yet another setback.
“I have not failed. I’ve just found 10,000 ways that won’t work.” – Said American Inventor Thomas Edison
Global Market Comments
August 23, 2022
Fiat Lux
Featured Trade:
(BETTER BATTERIES HAVE BECOME BIG DISRUPTERS)
(TSLA), (XOM), (USO)
