Mad Hedge Technology Letter
April 1, 2019
Fiat Lux
Featured Trade:
(THE NEXT TECH BUBBLE TOP HAS STARTED)
(LYFT), (PIN), (UBER), (AAPL), (JPM), (FB)
Tag Archive for: (AAPL)
Don't go chasing rainbows.
That is what the current tech IPO environment is hinting.
Even though market conditions are frothy, that doesn't mean I'm calling a market top today, hardly so.
I predicted that Lyft (LYFT) would storm out of the gate like a bull on ecstasy, and I was vindicated when the stock flirted intraday with the $87 mark.
The scarcity value of these gig economy companies is hard to quantify.
Examples Uber unduly promise ambition and innovation leading to hopes of a possible air transport service and sharing network that I would need to see to believe.
The built-up expectations smell of over-promising and under-delivering, the majority won’t be able to deliver merely half of what their manifestos promulgate
As I put my analyst hat on, the 2019 IPO frenzy coming online has some of the same fingerprints of the infamous dot com bust of 2001.
The two main trends symbolic of the last time the tech industry disentangled were overly generous valuation, pricing in revenue expansion of 80% for the next five years when the leader of the pack Microsoft (MSFT) only grew at 50%.
A tantalizing clue was the utterly deficient cash flow generated back then.
The underlying premise revolved around putting the network effect on a pedestal irrespective of understanding that the network effect should have caused cash flow to accelerate which was conspicuously absent.
Losing money and losing a lot of it does lead to paralysis, examples were rife, for instance, priceline.com losing $30 on each air ticket sold.
Even more hard to fathom was that Priceline was stretching itself to the limits on the open market filling ticket orders because of a dearth of inventory steepening losses.
Priceline gushed about a unique business model of collecting excess ticket inventory that airlines couldn't sell at low cost and reskinning them to a digital audience hoping to take advantage of this price dispersion.
But in reality, this wasn’t always the case.
Priceline was on a suicide mission and expanding from 50 employees to 300 employees based upon misleading growth was madness.
In a nutshell, investors bypassed pragmatic arithmetic and were lifted by the fumes of exuberance that had manifested around the euphoria of the tech bubble.
Lyft is not revolutionary, they are a broker which occupy a low position in the spectrum of tech intellectual property.
Exploiting drivers, compensating them per hour, and letting them figure out their own cost structures for car insurance, fuel costs, and opportunity cost while offering zero benefits is a court battle waiting to happen in California.
And if your response was the way they craft value is by way of a proprietary app, well, Google, Apple, or even Netflix can produce the same type of app and quality of app in a few weeks with their legendary phalanx of top-tier engineering talent.
To Lyft’s credit, they have at least collected the treasure trove of data the app has compiled which is extraordinarily valuable.
The top of the tech bubble means that big tech is overreaching into any revenue they can get their hands on like a heroin addict yearning for the next syringe.
The environment has transformed into an eerily zero-sum game, such as Apple (AAPL) cooperating with JPMorgan Chase (JPM) to create Apple pay, and then instantly flipping around to compete with JPMorgan Chase in the credit card space with Apple Pay being an accomplice.
Big tech has sown the seeds of discord by quietly attempting to trample on any analog business they can get near.
Leveraging the network effect of billions of users in a proprietary walled garden to extract the incremental dollar for a new service is impossible to compete with for analog companies without a similar embedded on-demand audience.
Lyft co-founder and CEO Logan Green mentioned in an interview that in the next five year, he plans to deploy a subscription service coined as transportation-as-a-service like a software-as-a-service option which cloud platforms sell.
A fight to the bottom with Uber will cause major disruption in the pricing mechanisms of the subscription service and could force Lyft to earn less revenue per ride than the current pricing system.
Investors need to remember that Uber is bigger than Lyft and possessed more ammunition.
At the end of the day, the race to the bottom is never good for profitability or sustainability, and Lyft has yet to provide any substantial clues on how they will navigate through this quagmire.
My guess is that Lyft will have to do a deal with the devil of sorts to slang its branded broker app onto the cresting wave of Waymo as Waymo motors ahead and starts to materially monetize its self-driving program.
Remember that Alphabet already has a small stake in Lyft and these two could partner up with Alphabet dictating terms.
Lyft cannot compete with the holy grail of tech - self-driving technology – they are way down the tech value chain.
If we look at the bigger picture, the broader market has been riding the coattails of Federal Reserve Chairman Jerome Powell’s 180-degree turn from winter’s statement that interest rate tightening was on “autopilot.”
Now, there is only a 27% chance given by the market that the Fed will raise rates at all in 2019.
The market responded with strength begetting strength allowing the bull run to continue and even whispers of a possible rate cut later this year.
Sentiment will not change until we get to the point when earnings can’t surpass the expectation which have been lowered substantially.
I bet this won’t happen until late this year or next year.
This is inning 8 or 9 of the bull crusade, the closer is warming up in the bullpen.
Lyft’s opening day gallop is just one of the side effects from a market that is toppy.
Global Market Comments
March 29, 2019
Fiat Lux
SPECIAL FANG ISSUE
Featured Trade:
(FINDING A NEW FANG),
(FB), (AAPL), (NFLX), (GOOGL),
(TSLA), (BABA)
Mad Hedge Technology Letter
March 26, 2019
Fiat Lux
Featured Trade:
(PINTEREST COMES OUT)
(PINS), (FB), (AAPL), (GOOGL), (AMZN)
The Facebook (FB) of digital images is on deck and has filed to go public.
I'll give you the skinny on it.
Pinterest (PINS) has slightly different lingo - they call digital images pins, a collection of pins, a pinboard, and the users that post pins are pinners.
Aside from this little creative wrinkle, Pinterest does little to help flow my creative juices.
That's not to say they are a bad company, in fact, it's quite refreshing that on the financial side of the equation, Pinterest is a solid financial enterprise.
They make money and aren't going to burn through their cash reserves anytime soon.
This should give some peace of mind to potential investors looking at snapping up shares of Pinterest.
Even though they are not a bad company, I cannot promote them as a firm revolutionizing technology in the way we know it, they certainly don’t, and never will, at least at the current pace of innovation.
Pinterest derives almost 100% of its revenue from digital ads à la Facebook, they do not sell anything and much like Facebook, the user is the product by way of mining private data and selling them over to third-party ad agencies who subsequently sell targeted ads on Pinterest’s platform.
As I read through Pinterest’s S-1 filing with the SEC, an overwhelming portion of the content is reserved for the litany of regulatory risks that serving digital ads, curating others' content, and the international risks that pose to Pinterest growth story.
As with most tech growth stories, this particular narrative must orbit around the strength of incessantly growing its domestic and international user base.
I surmise that part of the reason they desire to go public is because of the 265 million in global quarterly monthly users have reached the high watermark.
Therefore, this calculated risk of going public is entirely justified as the cash out for the venture capitalist and private owners that invested in this company as a burgeoning toddler.
Or the owners see catastrophic downside from the regulatory landscape which has been increasingly volatile in the past few quarters and wish to get out as soon as they can.
Let's make no mistake about this, Pinterest does not control its own destiny, and their success will be based upon external factors that they cannot control.
Some of these factors have already reared their ugly head, the most relevant example was when Google (GOOGL) changed its image search algorithm which disrupted Pinterest’s image function.
This was an example of third-party content originators clamping down on their willingness to allow Pinterest to populate content on their proprietary platform, and the lack of availability of content or the decreasing nature of it will sting the hope of increasing web traffic on Pinterest going forward.
Pinterest has clearly disclosed in its IPO filing that they are reliant on crawling third-party search engine services for third-party photos, this content is curated into their platform and credited to the original user.
I would classify this type of technology as unimpressively low grade and Pinterest will be susceptible to many more possible disruptions in the future.
In layman terms, if the stars do not align, Pinterest will be the first to feel it, and strategically speaking, this is a poor position to strategically operate from.
If Pinterest cannot serve the specific content that incites the tastes of pinners, this could destroy retention and engagement rates leading to a damaging downdraft of ad revenue.
Pinterest's feeble business model will certainly call for new investments in and around more innovative parts of technology.
What we have seen most successful technology companies flirt with are full-fledged recurring revenue models, and bluntly, Pinterest does not have one.
The likes of Microsoft, Amazon, Google, and Apple have pivoted hard towards this subscription model proving they can have their own cake and eat it too.
Funnily enough, Pinterest pays AWS, Amazon’s cloud arm, an extraordinary amount of money to store the pins or digital images on AWS Cloud platform to the tune of almost $800 million per year showing how beneficial it is to be on the other side of the equation.
Pinterest does benefit from a robust brand reputation and its footprint in America is quite large.
However, one group of potential customers have clearly been left out in the cold - Males.
The firm has been famous for being the go-to image platform for young mothers and generally speaking, American women born in the 1980s.
According to data analytics, it appears that content that males gravitate towards is not present on the platform and will need to be addressed going forward to grow users.
Another crucial problem that must be addressed is the lack of domestic growth in the user base.
In Q1 2018, Pinterest achieved 80 million monthly active users, however, fast forward to Q4 in 2018 and the number had barely inched up to 82 million monthly active users.
From Q1 to Q2, there was a dramatic deceleration in the number of monthly active users falling by 5 million to 75 million monthly active users.
The company blamed this on Facebook changing their password security causing users who rely on Facebook passwords and username entrance data to be temporarily stonewalled from entering Pinterest.
Millions decided to avoid the hassle and just stop using Pinterest because they were unable to enter the platform, causing major carnage to Pinterest’s ad-supported revenue model because of the hemorrhaging usership.
Unfortunately, bigger platforms such as Facebook and Google are not responsible to telegraph these structural changes in policy to Pinterest which means that this type of loss of usership could be a bi-annual or annual exercise in damage control.
Losing 10% of your user base based on someone else’s systemic changes is a bitter pill to swallow.
Investors must ask themselves why a premium search engine like Google search want to allow Pinterest to continue to curate its images for ad revenue effectively skimming off of Google’s top line?
As you have seen, Google has hijacked many of these types of business initiatives by taking on these opportunities themselves, dismantling the choke points, and going in for the kill.
The main avenue of user expansion is its international audience, and sadly, the average revenue per international user is a paltry $0.09. This number was up sequentially from the prior quarter which was $0.06.
If you compare the revenue per user with America, then it's easy to understand why the company wants to go public now.
Management presided over a sequential increase of American revenue per user from $2.33 to $3.16 in the prior quarter and the same growth will be hard to maintain and replicate spurring the higher-ups to cash out.
International growth is staring down a barrel of a gun with restricted access by governments who do not allow this type of service in their countries such as China, India, Kazakhstan, and Turkey.
The impact of these broad-based bans decodes into Europe being the only possible answer to user growth in revenue terms and total usership.
To state that Pinterest is confronted by widespread global risk is an understatement.
However, the low-hanging fruit would be squeezing more revenue out of the American user and I would guess that the ceiling would be around $7 per user in the near-term.
If management hopes to eclipse the $7 per American user, they will have to migrate into more data generative strategies such as video.
Global Market Comments
March 25, 2019
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, OR GAME CHANGER)
(SPY), (TLT), (BIIB), (GOOG), (BA), (AAPL), (VIX), (USO)
“When the facts change, I change. What do you do sir?” is a famous quote from the great economist John Maynard Keynes which I keep taped to the top of my monitor and constantly refer to.
The facts certainly changed on Wednesday when the Federal Reserve announced a change in the facts for the ages. Not only did governor Jay Powell announce that there would be no further rate increases in 2019.
He also indicated that the Fed would end its balance sheet unwind much earlier than expected. That has the effect of injecting $2.7 trillion into the US financial system and is the equivalent of two surprise interest rate CUTS.
The shocking move opens the way for stocks to trade up to new all-time high, with or without a China trade deal. Only the resumption of all-out hostilities, like the imposition of new across the board 25% tariffs, would pee on this parade.
As if we didn’t have enough to discount into the market in one shot. I held publication of this letter until Sunday night when we could learn more about the conclusion of the Mueller Report. There was no collusion with Russia and there will be no obstruction of justice prosecution.
However, the report did not end the president’s legal woes as it opened up a dozen new lines of investigation that will go on for years. The market could care less.
At the beginning of the year, I listed my “Five Surprises for 2019”. They were:
*The government shutdown ended and the Fed makes no move to raise interest rates
*The Chinese trade war ends
*The US makes no moves to impeach the Trump, focusing on domestic issues instead
*Britain votes to rejoin Europe
*The Mueller investigation concludes that he has an unpaid parking ticket in
NY from 1974 and that’s it
Notice that three of five predictions listed in red have already come true and the remaining two could transpire in coming weeks or months. All of the above are HUGELY risk positive and have triggered a MONSTER Global STOCK RALLY
Make hay while the sun shines because what always follows a higher high? A lower low.
The Fed eased again by cutting short their balance sheet unwind and ending quantitative tightening early. It amounts to two surprise interest rate cuts and is hugely “RISK ON”. New highs in stocks beckon. This is a game changer.
Bonds soared and rates crashed taking ten-year US Treasury bond yields down to an eye-popping 2.42%, still reacting to the Wednesday Fed comments. This is the final nail in the bond bear market as global quantitative easing comes back with a vengeance. German ten years bonds turn negative for the first time since 2016.
Interest rates inverted with short term rates higher than long term ones for the first time since 2008. That means a recession starts in a year and the stock market starts discounting that in three months.
Interest rates are now the big driver and everything else like the economy, valuations, and earnings are meaningless. Foreign interest rates falling faster than ours making US assets the most attractive in the world. BUY EVERYTHING, including stocks AND bonds.
Biogen blew up canceling their phase three trials for the Alzheimer drug Aducanumab. This is the worst-case scenario for a biotech drug and the stock is down a staggering 30%. Some $12 billion in prospective income is down the toilet. Avoid (BIIB) until the dust settles.
Europe fined Google $1.7 billion, in the third major penalty in three years. Clearly, there’s a “not invented here” mentality going on. It's sofa change to the giant search company. Buy (GOOG) on the dip.
More headaches for Boeing came down the pike. What can go wrong with a company that has grounded its largest selling product? Answer: they get criminally prosecuted. That was the unhappy news that hit Boeing (BA), knocking another $7 off the shares. It can’t get any worse than this, can it? Buy this dip in (BA).
Indonesia canceled a massive 737 order for 49 planes, slapping the stock on the face for $9. Apparently, they are unwilling to wait for the software fix. Buy the dip in (BA).
Oil prices hit a new four-month high at $58 a barrel as OPEC production caps work and Venezuela melts down. At a certain point, high energy prices are going to hurt the economy. Buy (USO) on dips.
The CBOE suspended bitcoin futures due to low volume and weak demand. It could be a fatal blow for the troubled cryptocurrency. Avoid bitcoin and all other cryptos. They’re a Ponzi scheme.
Equity weightings hit a 2 ½ year low as professional institutional money managers sell into the rally. They are overweight long defensive REITs and short European stocks. Watch out for the reversal.
December stock sellers are now March buyers. Expect this to lead to a higher high, then a lower low. Volatility is coiling. Don’t forget to sit down when the music stops playing.
Volatility hits a six-month low with the $12 handle revisited once again down from $30. (VIX) could get back to $9 before this is all over. Avoid (VIX) as the time decay will kill you.
Weak factory orders crush the market, down 450 points at the low. Terrible economic data is not new these days. But it ain’t over yet. Buy the dip.
The Mad Hedge Fund Trader was up slightly on the week. That’s fine, given the horrific 450 point meltdown the market suffered on Friday. We might have closed unchanged on the day but for rumors that the Mueller Report would be imminently released.
March is still negative, down -1.54%. My 2019 year to date return retreated to +11.74%, boosting my trailing one-year return back up to +24.86%.
My nine-year return recovered to +311.88%. The average annualized return appreciated to +33.71%. I am now 40% in cash, 40% long and 20% short, and my entire portfolio expires at the April 18 option expiration day in 14 trading days.
The Mad Hedge Technology Letter used the weakness to scale back into positions in Microsoft (MSFT), Alphabet (GOOGL), and PayPal (PYPL), which are clearly going to new highs.
The coming week will be a big one for data from the real estate industry.
On Monday, March 25, Apple will take another great leap into services, probably announcing a new video streaming service to compete with Netflix and Walt Disney.
On Tuesday, March 26, 9:00 AM EST, we get a new Case Shiller CoreLogic National Home Price index which will almost certainly show a decline.
On Wednesday, March 27 at 8:30 AM, we get new Trade Deficit figures for January which have lately become a big deal.
Thursday, March 28 at 8:30 AM EST, the Weekly Jobless Claims are announced. We also then get another revision for Q4 GDP which will likely come down.
On Friday, March 29 at 10:00 AM, we get February New Home Sales. The Baker-Hughes Rig Count follows at 1:00 PM.
As for me, I’m praying that it stops snowing in the High Sierras long enough for me to get over Donner Pass and spend the spring at Lake Tahoe. We are at 50 feet for the season, the second highest on record.
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Mad Hedge Technology Letter
March 25, 2019
Fiat Lux
Featured Trade:
(APPLE’S BIG PUSH INTO SERVICES)
(AAPL), (GS), (NFLX), (GOOGL), (ROKU)
The future of Apple (AAPL) has arrived.
Apple has endured a tumultuous last six months, but the company and the stock have turned the page on the back of the anticipation of the new Apple streaming service that Apple plans to introduce next week at an Apple event.
The company also recently announced a partnership with Goldman Sachs (GS) to launch an Apple-branded credit card.
In the deal, Goldman Sachs will pay Apple for each consumer credit card that is issued.
These new initiatives indicate that Apple is doing its utmost to wean itself from hardware sales.
Effectively, Apple's over-reliance on hardware sales was the reason for its catastrophic winter of 2018 when Apple shares fell off a cliff trending lower by almost 35%.
This new Apple is finally here to save the day and will demonstrate the high-quality of engineering the company possesses to roll out such a momentous service.
Frankly speaking, Apple needs this badly.
They were awkwardly wrong-footed when Chinese consumers in unison stopped buying iPhones destroying sales targets that heaped bad news onto a bad situation.
I never thought that Apple could pivot this quickly.
Apple's move into online streaming has huge ramifications to competing companies such as Roku (ROKU).
In 2018, I was an unmitigated bull on this streaming platform that aggregates online streaming channels such a Sling TV, Hulu, Netflix and charges digital advertisers to promote their products on the platform through digital ads.
I believe this trade is no more and Roku will be negatively impacted by Apple’s ambitious move into online streaming.
What we do know about the service is that channels such as Starz and HBO will be subscription-based channels that device owners will need to pay a monthly fee and Apple will collect an affiliate commission on these sales.
Apple needs to supplement its original content strategy with periphery deals because Apple just doesn’t have the volume to offer consumers a comprehensive streaming product like Netflix.
Only $1 billion on original content has been spent, and this content will be free for device owners who have Apple IDs.
Apple's original content budget is 1/9 of Netflix annual original content budget.
My guess is that Apple wants to take stock of the streaming product on a smaller scale, run the data analytics and make some tough strategic decisions before launching this service in a full-blown way.
It's easier to clean up a $1 billion mess than a $9 billion mess, but knowing Apple and its hallmarks of precise execution, I'd be shocked if they make a boondoggle out of this.
Transforming the company from a hardware to a software company will be the long-lasting legacy of Tim Cook.
The first stage of implementation will see Apple seeking for a mainstay show that can ingrain the service into the public's consciousness.
Netflix was a great example, showing that hit shows such as House of Cards can make or break an ecosystem and keep it extremely sticky ensuring viewers will stay inside a walled pay garden.
Apple hopes to convince traditional media giants such as the Wall Street Journal to place content on Apple's platform, but there has already been blowback from companies like the New York Times who referenced Netflix’s demolition of traditional video content as a crucial reason to avoid placing original content on big tech platforms.
Netflix understands how they blew up other media companies and don’t expect them to be on Apple’s streaming service.
They wouldn’t be caught dead on it.
Tim Cook will have to run this race without the wind of Netflix’s sails at their back.
Netflix has great content, and that content will never leave the Netflix platform come hell or high water.
Apple is just starting with a $1 billion content budget, but I believe that will mushroom between $4 to $5 billion next year, and double again in 2021 to take advantage of the positive network effect.
Apple has every incentive to manufacture original content if third-party original content is not willing to place content on Apple's platform due to fear of cannibalization or loss of control.
Ultimately, Apple is up against Netflix in the long run and Apple has a serious shot at competing because of the embedment of 1 billion users already inside of Apple's iOS ecosystem that can easily be converted into Apple streaming service customers.
If you haven't noticed lately, Silicon Valley's big tech companies are all migrating into service-related SaaS products with Alphabet (GOOGL) announcing a new gaming product that will bypass traditional consoles and operate through the Google Chrome browser.
Even Walmart (WMT) announced its own solution to gaming with a new cloud-based gaming service.
I envision Apple traversing into the gaming environment too and using this new streaming service as a fulcrum to launch this gaming product on Apple TV in the future.
The big just keep getting bigger and are nimble enough to go where internet users spend their time and money whether it's sports, gaming, or shopping.
Apple is no longer the iPhone company.
I have said numerous times that Apple's pivot to software was about a year too late.
The announcement next week would have been more conducive to supporting Apple’s stock price if it was announced the same time last year, but better late than never.
Moving forward, Apple shares should be a great buy and hold investment vehicle.
Expect many more cloud-based services under the umbrella of the Apple brand.
This is just the beginning.
Mad Hedge Technology Letter
March 19, 2019
Fiat Lux
Featured Trade:
(GOOGLE’S AGGRESSIVE MOVE INTO GAMING),
(GOOGL), (AAPL), (FB), (NFLX), (MSFT) (EA), (TTWO), (ATVI)
