Mad Hedge Technology Alerts!
Regulation lost again.
If regulation was a team at the 2018 Russian World Cup, they would have already been sent packing in disgrace.
Even if regulators want to regulate, tech companies swiftly respond with an army of well-paid lawyers fighting fiercely for its interests.
Tech is more powerful than government now and the desperation of government intervention after the fact falls on deaf ears.
Investors have even seen this happen in communist China where there are whispers in Beijing that China's BATs are getting too powerful for their own good.
In a major victory in the run-up to the 2019 IPO, Uber one-upped the Brits.
Uber won back its license to operate in the city of London, one of Uber's major growth engines, when British judge Emma Arbuthnot turned over the ruling and gave Uber a 15-month license.
Tech is invincible against the institutions attempting to clamp down on wild business practices involving data.
And this win proves that every emerging tech company should act brazenly and push the line when it can.
If regulations set tech in its crosshairs, this proves there is no recourse.
Tech is disrupting regulation.
Tech is changing so fast that regulators cannot keep up because of the creaky, bureaucratic nature of big government.
Once regulators wrap their heads around a new technology, the next technology is on its way to universal rollout.
If you want to boil everything down to the nuts and bolts, tech is just too nimble.
It can simultaneously morph into anything it wants in a jiffy because any morphing these days involves a computer, Internet connection, and execution ability.
This phenomenon has created a scenario where regulators will always be one step behind the tech companies, which at the same time are staying one step ahead of the hackers trying to skim off their profits or plain out blow a hole in their company.
It is hard to regulate something you do not know about or do not understand.
Even worse, if a technology becomes firmly embedded into popular culture, it's even harder to root it out.
The result is that Uber and the ride-sharing economy is here to stay. Now the most anticipated IPO in 2019 has its best European business up and running again.
When I say nimbleness, this does not just refer to staying ahead of regulators but also the agility to operate in certain geographic specific locations.
In just a few months, Uber shut up shop in Southeast Asia selling its business to Grab, the leading ride-sharing app in Southeast Asia, while receiving a 27.5% stake in Grab.
I have chronicled the problem with American companies entering into Southeast Asia, and this stake proves a shrewd move.
It will materially add to the top and bottom line once Uber goes public.
Southeast Asia is China's sphere of influence, and the special relationships Beijing has procured in the region offers Beijing unfettered access to claim it as its own turf.
This is going on while the Japanese "zaibatsu" and Korean "chaebols" are licking their chops to penetrate the Southeast Asian markets after grappling with an aging society and stagnant profitability.
SoftBank's Masayoshi Son, a recent investor of Uber, has applied pressure on Uber to focus on its premium markets and drop the third world pivot.
Effectively, Uber has done well to seize a stake in a region oozing with Chinese interests in a premium unicorn.
As Facebook has showed, the highest average revenue per user stems from North America and Europe.
Whether it's hawking ads or sharing transportation, companies can extract more profit per user in these two regions.
Migrating up the value food chain is bullish for its financials come the IPO.
London represents a huge opportunity for Uber.
Uber has cornered the London market with more than 3.6 million users serviced by more than 45,000 Uber drivers.
Digging its nails further into its core market will encourage the closing down of the cash burn model that Uber promulgated in its early days.
Before Uber sold its interests in China, it was burning $1 billion per year fighting domestic stalwart Didi Chuxing, one of China's best and brightest unicorns.
The $2 billion Uber lost in two years was enough and avoiding future China risk sealed the move out of China.
That move looks great considering the tariff war playing out in Washington.
The trend of western tech firms doubling down on western markets will strengthen going forward as Europe has the same worries about Chinese tech hijacking Europe's best technology such as China's Midea Group purchase of Germany's best robotic company Kuka in 2016.
China cannot do that anymore in Europe or America.
Uber Eats, one of Uber's hottest growth businesses, has no chance of succeeding in third world countries where delivery charges are a pittance due to cheap labor costs.
This business can only succeed in high transport cost societies.
Uber ran into headwinds using controversial UberPOP, Uber's compact vehicle app in Europe, in countries including Spain, Denmark, Germany, Italy, Finland, Japan, Hungary, and Bulgaria.
Aside from Bulgaria and Hungary, these locations represent high purchasing power countries that fit with Uber's business model.
Each victory in court will create additional income streams, and I am willing to bet on Uber's lawyers in the developed world, rather than a hodgepodge of uninformed regulators.
Imagine how regulators will police artificial intelligence (A.I.) in the future?
Only A.I. engineers understand what is happening under the hood of the car.
Uber will find the will and a way to enter into every market it considers healthy for its technology.
Under the new rules in London, Uber must now report crimes to the police instead of to the transport authority of London.
Drivers can only offer rides in locations where they have proper certifications to work for Uber.
Uber must now give a mandatory six-hour break to Uber drivers who have worked for 10 straight hours.
These new laws are hardly anything extreme and should already have been written into stone beforehand.
As expected, Uber blamed the debacle on Travis Kalanick, the maverick founder and former CEO of Uber. And Uber being "not fit" to operate was entirely convenient to use Kalanick as the scapegoat.
Uber has increased private hired vehicles in London 92% since 2009. Without London, Uber's future profitability and growth story becomes questionable.
Uber has interests in more than 600 cities worldwide and more than 40 of these are in England.
Uber can avoid any major damage with the Brighton's of the world refusing to cooperate, but it cannot lose its higher-grade locations in London, New York, San Francisco, and almost every major mega city in the western world.
They did it.
Tech disrupted regulation again, and next year's IPO should be a stunning spectacle.
It is normal in the current climate for expectations of tech darlings to explode, and 2019 will bring self-driving technology to the public markets creating even more demand for this asset scarce industry.
That is exactly what tech does.
Tech builds industry from scratch and regulators have no chance to control it.
Uber's ultimate goal is to profit from flying cars by 2023, in a new business called Uber Elevate that will cause regulators to fall even further behind the regulation curve as tech makes science fiction a reality in the near future.
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Quote of the Day
"We're in a political campaign, and the candidate is Uber and the opponent is an asshole named Taxi," said founder and former CEO of Uber Travis Kalanick.
Mad Hedge Technology Letter
June 27, 2018
Fiat Lux
Featured Trade:
(DON'T NAP ON ROKU)
(MSFT), (ROKU), (AMZN), (AAPL), (CBS), (DIS), (NFLX), (TWTR), (SQ), (FB)
Unique assets stand the test of time.
In an era of unprecedented disruption, unique assets' strength begets strength.
This is one of the big reasons the vaunted FANG group has carved out power gains in the business landscape bestowed with a largesse dwarfing any other sector.
As the FANGs trot out to imminent profitability by supercharging massive scale, the emerging tech environment gives food for thought.
These up-and-coming companies fight tooth and nail to elevate themselves to FANG status because of the ease of operating in a duopoly or an outright monopoly.
Microsoft (MSFT) is the closest substitute to an outright FANG. In many ways CEO Satya Nadella has positioned himself better than Facebook (FB) and Apple.
The Mad Hedge Technology Letter has pounced on the newest kids on the block offering subscribers buy, sell or hold recommendations zoning in on the best first and second tier companies in tech land.
The top echelon of the second tier is led by no other than Jack Dorsey and both of his companies, Square (SQ) and Twitter (TWTR), offer idiosyncratic services that cannot be found elsewhere.
I have devoted stories to Dorsey gushing about his ability to build a company and rightly so.
Another solid second tier tech company bringing uniqueness to the table is Roku (ROKU), which I have talked about in glowing terms before when I wrote, "How Roku is Winning the Streaming Wars."
To read the archived story, please click here.
Roku is a cluster of in-house, manufactured, online streaming devices offering OTT (over-the-top) content in the form of channels on its proprietary platform.
The word Roku means six in Japanese and it was chosen because Roku was the sixth company established by founder and CEO Anthony Wood commencing in 2002.
Cord-cutting has been a much-covered topic in my newsletters and this generational shift in consumer behavior benefits Roku the most.
In 2017, 25% of televisions purchased were Roku TVs. According to several reports, more than half of all streaming players purchased last year were Roku players.
This would explain how Roku has shifted its income streams from the physical box itself to selling ads and licensing agreements.
Yes, Roku earns the lion's share of its profits similar to the rogue ad seller Facebook.
Roku does not actually sell anything physical except the box you need to operate Roku, which earned Roku a fixed $30 per unit.
The box serves as the gateway to its platform where it sells ads. Migrating to higher caliber digital businesses like selling ads will stunt the hardware revenue part of its business.
That is all part of the plan.
A new survey conducted regarding fresh cord-cutters demonstrated that out of 2,000 cord-cutters questioned, 70% already had a Roku player and felt no need to pay for cable TV anymore.
Second on the list was Amazon Fire TV at 34%, and Apple TV (AAPL) came in third at 10%.
The dominant position has forced content creators to pander toward Roku TV's platform because third-party content creators do not want to miss out on a huge swath of cord-cutter millennials who are entering into their peak spending years and spend most of their time parked on Roku's platform.
Surveys have shown that millennials do not need a million different streaming services.
They only choose one or two for main functionality, and in most cases, these are Netflix (NFLX) and Amazon (AMZN).
Roku allows both these services to be integrated onto its platform. Cord-cutters can supplement their Netflix and Amazon Prime Video binge with a few more a la carte channels to their preference depending on points of interest.
In general, this is how millennials are setting up their entertainment routine, and all roads don't lead through Rome, but Roku.
If the massive scale continues at this pace, 2020 could be the year profitability explodes through the roof.
The next 18 months should give way to parabolic spikes, followed by consolidation to higher lows in the share price.
When I recommended this stock, its shares were trading at a tad above $32 on April 18, 2018, and immediately spiked to $47 on June 20, 2018.
The tariff sell-off hit most second tier tech companies flush in the mouth. The 5% and occasional 7% intraday sell-offs churn the stomach like Mumbai street food during the height of the Indian summer.
That is part and parcel of dipping your toe into these rising stars.
The move ups are parabolic, but the sell-offs make your hair fall out.
Well, glue your locks back onto your scalp, because we have reached another entry point.
Roku is now trading back down in the low $40 range, and I would bet my retirement fund that Roku will end the year above $50.
This unique company is expected to grow its subscriber base by at least 20% annually, and in five years total subscribers will eclipse 45 million users.
Reinforcing its industry leadership, traditional media companies such as Disney and CBS do not have built-in streaming viewership that comes close to touching Roku.
This has forced these traditional media giants to push their content through Roku or lose a huge amount of the 18 to 34 age bracket for which advertisers yearn.
These traditional players are armed with robust ad budgets, and a good bulk of it is allocated to Roku among others.
For each additional a la carte channel users sign up for on Roku, the company earns a sales commission.
As a tidal wave of niche streaming channels plan to hit the market, the first place they will look to is Roku's platform and this trend will only become stronger with time.
A prominent example was Sling TV, which showed up at Roku's front door first before circling around the rest of the neighborhood.
The runway for Roku's three main businesses of video ads, display ads, and licensing with streaming partners, is long and robust.
The one caveat is the fierce competition from Amazon Fire TV, which puts its in-house content on Amazon front and center when you start the experience.
Roku has head and shoulders above the biggest library of content, and the Amazon effect could scare traditional media for licensing content to Amazon.
We have seen the trend of major players removing their content from streamers because of the inherent conflict of interests licensing content to them while they are developing an in-house business.
It makes no sense to voluntarily offer an advantage to competition.
Roku has no plans to initiate its own in-house original content, and this is the main reason that Amazon and Netflix will lose out on Disney (DIS), CBS (CBS), NBC, and Fox content going forward.
These traditional players categorize Roku as a partner and not a foe.
To get into bed with the traditional media giants means digital ads and lots of them. In terms of a user experience, the absence of ads on Netflix and Amazon is a huge positive for the consumer experience.
But traditional players have the option of bundling ads and content together on Roku making Roku even more of a diamond in the rough.
In short, nobody offers the type of supreme aggregator experience, deep penetration of cord-cutting viewership, and the best streaming content on one graphic interface like Roku.
It is truly an innovative company, and it is in the driver's seat to this magnificent growth story.
It's hard to argue with CEO Anthony Wood when he says that Roku is the future of TV.
He might be right.
If Roku keeps pushing the envelope enhancing its product, it will be front and center as a potential takeover target by a bigger tech company.
Either way, the scarcity value of these types of assets will drive its share prices to the moon, just avoid the nasty sell-offs.
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Quote of the Day
"Google's not a real company. It's a house of cards," - said former CEO of Microsoft Steve Ballmer.
