Mad Hedge Technology Alerts!
Companies this small should be growing.
Growth companies and tech go hand in hand, especially at the incubation stage where there is little resistance hindering growth.
The law of numbers dictate that small companies only need marginal gains to generate high growth in terms of percentages.
Once a company becomes as big as Amazon (AMZN), it becomes harder to move the needle.
Snapchat (SNAP), which is in the same social media game as Facebook, is vastly smaller than the incumbent that hoovers up the digital ad dollars.
Facebook (FB) boasts 1.47 billion daily active users (DAU) and is one of the members of a powerful digital ad duopoly along with Alphabet.
Snapchat added 4 million net (DAU)s in Q1 2018 and blew its chance for sequentially increasing usership by losing 4 million (DAU)s last quarter.
The stock sold off hard in after-hours trading, down 11% at one point but rebounded big time with the earnings commentary with Snapchat revealing guidance for the first time.
Snap opened the next trading day demonstrably lower reflecting the disenchantment of investors.
Evan Spiegel's creation has really had a hard go of it lately. The app redesign was a cataclysmic failure of epic proportions denting the popularity of this app.
The fallout was sacking 100 engineers.
Overall, there were some positive takeaways from the earnings report, mainly, the revenue beat was satisfying, and profitability shone through with average revenue per user (ARPU) shooting up 34% YOY.
Another victory was the boost in ad revenue, up 48% YOY, which is the main driver of revenue in the company.
The hairiest issue with this company is the fundamentals are excruciatingly apathetic.
Stagnating usership growth at this stage is a red flag.
Social media stocks were bashed in recent trading sessions with Twitter (TWTR) dropping from $46 to $31 because of diminishing usership and soft guidance.
The amount of monthly active users dropped from 338.5 million to 335 million, and financial guidance was brought down a few notches.
Twitter has made a poignant attempt to clean up its system from the debris molding around the edges.
To "improve the health" of the Twitter platform, Twitter purged 6% of all accounts rooting out the influences undesirable to its ethos.
Social media companies must take the initiative to protect its platforms, instead of being a silent bystander to a stabbing in a dark alley.
Facebook was the mother of all drops in the social media space collapsing from an all-time high of $218 to $171, a drop in one trading day.
Guidance tore apart this stock after a rapid run-up to the earnings report that saw unbelievable strength rising almost every day.
Poor guidance reflects the ill-effects of the recently enacted General Data Protection Regulation (GDPR), which tainted the European numbers.
The epicenter of data regulation has crimped profitability and popularity of social media in the Eurozone.
If Facebook and Twitter are facing tough short-term headwinds, then imagine how Snap feels.
They are the small fish in the big pond, and they are running out of places to hide.
Every new user Instagram picks up is one less potential user missed for Snapchat.
Let me remind you that Instagram is boosting its monthly average usership (MAU) 5% per year.
Instagram recently surpassed the 1 billion (MAU) mark after eclipsing the 800 million mark in September 2017.
Instagram added 200 million users, more than the entire (DAU) for Snap, in 11 months.
Big trouble for Snap.
Effectively, Snap is the inferior version of Instagram for young kids and that narrative does not bode well for the future.
For every $1 Snapchat spends, it earns -$6 on that $1. Kids aren't the biggest distributors of wealth. It would help if Snap matured its interface to accommodate older millennials who are tech savvy to boost its average revenue per user.
As it stands, Facebook earns $9 per daily active user while Snapchat earns a smidgeon over $1 per daily active user.
I cannot say that Facebook is a quality platform, but it has successfully monetized the platform.
What's more, CEO Evan Spiegel blamed the drop in usership on the redesign.
Yes, the redesign didn't help, but the usership would have dropped anyway because of draconian data laws in Europe and the general malaise stigmatized toward current social media platforms.
Management is not executing effectively at Snap, and it is out of touch with its core base without opening up new sources of growth.
If a company redesigns an app, enhance the app, do not make it unusable such as the Snap redesign.
Snap's eggs are all in one basket. And that basket is shrinking in the high revenue locations of North America and Europe.
It only earned $2 million from non-digital ad revenue.
As FANGs power on to pass a trillion dollars of market cap, the diversity in their segments are nothing short of impressive.
Snap has no other irons in the fire and is overly reliant in an industry in which it will slowly bleed to death.
The only savior is in reinventing itself, but that takes guts and a bold CEO with a revolutionary strategy.
There is precedence for this transformation such as BlackBerry (BB), one of the original smartphone makers, which has morphed into an autonomous driving technology company.
Another good example is Netflix, which started out in the DVD industry and pivoted to online streaming.
What Snap is doing has its limits and it needs to shake up its business model or slowly rot.
The company must wake up to the stark realization that its platform is not engaging.
Many analysts believed Snap could become half as big as Facebook and that seems highly unlikely.
I have been bearish on Snap for the entire existence of the Mad Hedge Technology Letter.
And it has been the perfect sell on the rallies stock because of its poor performance, even poorer management, and awful fundamentals.
A telltale sign was the last earnings call.
It was the second quarter in a row of blaming the redesign on bad performance.
If Spiegel underperforms next quarter again - meaning negative growth usership - it will be interesting if he blames the redesign again.
Third times a charm.
Where does this all lead?
Facebook offered to purchase Snapchat after its IPO because management was worried it would steal market share from Instagram.
Snapchat rebuffed the advances and decided to lock horns directly with Instagram.
Well, the David and Goliath battle is playing as most would assume, boding ill for the fate of Snapchat.
Instagram will keep weakening Snapchat moving forward. And Facebook might end up scooping up Snapchat down the road for a discount.
It doesn't look good for Snapchat, and investors should consider shorting this stock after a dead cat bounce.
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Quote of the Day
"The subscription model of buying music is bankrupt. I think you could make available the Second Coming in a subscription model and it might not be successful," - said former Apple cofounder Steve Jobs in a Rolling Stone interview, 2003.
Mad Hedge Technology Letter
August 7, 2018
Fiat Lux
Featured Trade:
(WHAT TO DO ABOUT TECH NOW),
(AAPL), (FB), (NFLX), (AMZN), (GOOGL), (AMD), (MSFT)
Is it time to dump tech?
Short term, yes - long term, no.
Recently, a series of big tech earnings misses throttled the market tearing into the positive investor sentiment, which was holding up nicely after the early year sell-offs.
Every precipitous and steep drop this year has followed with a mammoth dip buying spree lifting stocks to newer highs.
This is the type of robustness investors rejoice in when talking about the price action of technology stocks.
Not only is the dip buying awe-inspiring, but the lack of hesitation in the dip buying is even more impressive.
Investors have scant time to pick up these precious names before the entry points disappear like an invisibility cloak.
Ditch these stocks at your peril, because the buying queue represents the likes of all the tech behemoths waiting to buy back their own stock, namely Warren Buffett, and the flight to quality brigade that view big cap stocks as a de-facto cash sanctuary.
The anxiety was palpable when Netflix's (NFLX) management badly miscalculated new subscription business after a brilliant earnings report from Microsoft.
Investors got another wrench in their stomach when Facebook (FB) followed Netflix with dismal guidance ripping apart the growth narrative and pivoting toward ameliorating its controversial business model giving investors a fresh dose of uncertainty.
All eyes were planted on Alphabet (GOOGL), Amazon (AMZN), and Apple to provide some calm to the markets.
That's exactly what they did.
Part of the problem now is that expectations are so exaggerated, these companies have little wiggle room to overdeliver.
Industry specialists largely believe tech profits to rise 20.9% YOY this earnings season. The lion's share of the growth has been contained to the headliner names such as Amazon, which has grown like no company has ever grown before.
Estimates show a slide in YOY tech profits for the third-quarter earnings decelerating down to less than 15%. While still good, it's not the 20% growth YOY, and over that it has been fueling tech's rise in increasingly precarious market conditions.
The downshift in profit growth has been anticipated for the past few quarters, as investors thought a trip wire would at some point bring down the entire FANG group.
What we have found out is that not all FANGs are created equal. Some are more equal than others.
The past earnings performance indicated this with Amazon's emphatic top-line growth numbers blowing away the most adamant bear.
Netflix's narrative is still intact, and consolidation is badly needed for a stock that has gone parabolic in 2018.
The short-term capitulation of Facebook and Netflix is proof that large cap tech also has downside risk embedded in its model.
It was starting to seem like down days were never in the cards.
Lowered tech guidance for next quarter will really test the market's resiliency during next earnings season.
If these numbers miss spectacularly, expect the tech sector to give back a good chunk of the year's gains back.
Decelerating profits is never a positive sign. However, after coming from Mt. Everest profit levels, will the markets brush it off and power higher?
There is a lot more juice left in this tech story, and sharp corrections should still be bought.
Tech is becoming quite frothy at these levels and choosing the right tech story will go a long way to sleeping well at night.
It will be excruciatingly difficult for tech companies to impressively beat on the upside next quarter.
However, the secular story and unique earnings growth are treasures compared to other sectors that are getting beaten into submission.
When you delve into the numbers, the success becomes comical.
Apple is the first company to cross the $1 trillion of market cap.
This company prints money to the tune of $11 billion in profits each quarter.
It possesses a devoted userbase, surging software and services segment, and premium grade smartphones allowing Apple to cash in profits to the extent they do.
CEO Tim Cook sent an email to Apple's employees downplaying the milestone, instead saying "financial returns are simply the result of Apple's innovation."
He is completely correct.
The innovation has fed back through spiking profits and boosting sales allowing Apple to make money hand over fist.
This in turn is a big reason why Apple's share price has almost quadrupled with Cook at the helm.
The best and brightest tech companies in 2018 share one unified trait: innovation.
And it is not a surprise that Amazon and Microsoft (MSFT) will be next to join the trillion-dollar club as they boast some of the most innovative staff in the world.
As these two companies pass the trillion-dollar market cap, it will encourage the next tier of flourishing tech companies to make the jump to the trillion-dollar club.
The tech sector is still eating everybody's lunch with every business in the world migrating to their front yard.
Some weakness in the extended tech shares have been a matter of when and not if.
Advanced Micro Devices, Inc. (AMD) is a stock gaining 22.8% just in the month of July underlining the overheated price action of some of these tech names.
I am largely staying away from chip stocks now because trade tensions have bred uncertainty around Chinese chip revenues.
The tech sector has many moving parts and a trade war can hurt one part of tech while others remain unblemished.
Another front of concern is data regulation headlines rearing their ugly heads from time to time.
There are more hurdles for tech stocks going forward, but that does not mean they will get tripped up.
I am in a tech holding pattern until I find an opening to issue my next slew of tech trade alerts.
Year Over Year Profit Growth
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Quote of the Day
"I will always choose a lazy person to do a difficult job because a lazy person will find an easy way to do it." - said founder of Microsoft Corporation Bill Gates.
