Mad Hedge Technology Letter
April 8, 2019
Fiat Lux
Featured Trade:
(THE BATTLE FOR COFFEE IN CHINA)
(SBUX), (MSFT), (AAPL), (IBM)
Tag Archive for: (AAPL)
If you ask me what you should sample at a Starbucks in China - I would say nothing.
Starbucks has become successful on the back of selling bad tasting coffee to the Chinese.
Even more peculiar, the CEO of Starbucks Kevin Johnson has been captaining the ship since 2017.
After watching Johnson's interview with Bloomberg, I fully believe he is not adequately prepared for what the future beholds.
Let me explain why.
Johnson started at IBM (IBM) in the 80s as an engineer, but he hasn't been an engineer for the last 20 odd years.
In the early 2000s, he became a salesman at Microsoft (MSFT), and his interview revealed that he is still a salesman at heart.
He continued to refer back to his engineering background, yet the know-how he accumulated in the 80s at IBM has little relevance to the “move fast and break things” environment of today.
Johnson was groomed under the tutelage of Microsoft’s Steve Ballmer at Microsoft, a salesman, who almost sunk Microsoft during his tenure.
Anyone who trained under Steve Ballmer is someone that would need to walk across fiery embers to prove his or her viability.
The interview with Bloomberg felt like an inauthentic marketing video, with Johnson regurgitating salesman rhetoric with little substance.
As Starbucks shreds the bear story of naysayers to make new all-time highs, there are serious icebergs ahead because of disruptive technological start-ups.
Starbucks has relied on emerging markets as its growth engine inaugurating 612 stores in China last year, and another 600 will come online before 2022.
Selling bad coffee to Chinese will be more difficult going forward.
The prominent tea drinking nation had no idea what good coffee tasted like 10 years ago.
Even recently, many Chinese thought instant coffee packaged in those convenient stick-shaped packets was high-grade coffee.
The last five years has seen an unmitigated onslaught of Chinese international tourism mainly flowing to Europe, Canada, Australia, and America.
Not only did Chinese shop until their panties dropped, but they began to become more inclined to understand culinary and cultural aspects of foreign cultures like, for instance, how good coffee should taste among other cultural trappings.
Five years ago, Chinese also went to Starbucks to sample the coffee. Now, they go to Starbucks because the interiors are comfortable making it a plausible place for an impromptu business meeting in a downtown or business district location.
Let’s remember that Starbucks could never crack the Italian market because teaching Italians how to make coffee doesn’t sell in Italy.
It took until last September to open the first Starbucks in the cultural center of Milan, Italy, and I can tell you that it’s not a regular, cookie cutter Starbucks.
The Milan Starbucks is billed as a “Reserve Roastery” with marble finishes contributed from the supplier that up until now was only used to build the famed Duomo of Milan and buildings in the surrounding Piazza.
To say this Starbucks is posh is an understatement.
The 25,000-square-foot coffee shop delivers small-batch roastings of exotic coffees from more than 30 countries, and artisanal food from the local culinary rock star, Rocco Princi.
In fact, Starbucks built it into a four-star restaurant with expensive cocktails and the whole shebang.
Understandably, the average revenue per user (ARPU) at the Italian roastery earns 400% more than the average American Starbucks shop.
This is what Starbucks had to do to get their first footprint into Italy, while coffee know-how isn’t up to that level in China, differentiating variables will be harder to discover moving forward as Chinese customers look to handcrafted, artisanal options demanding a superior customer experience.
The generic Starbucks in China sells mediocre black coffee made from inferior beans for $5 per cup, a far cry from the reserve roastery in Milan.
If you get into the creamier, frothy types of drinks, then price points shoot up to $6 or $7.
Meet the current tech disruptor of coffee business in China, Luckin Coffee headed by Chinese tech entrepreneur Qian Zhiya.
Her impressive resume spans from COO of Shenzhou, a car rental app and website, to Co-founder of UCAR, a ride-hailing service spun off from Shenzhou.
During the Bloomberg interview, Kevin Johnson bragged that Starbucks is opening a new Chinese Starbucks every 15 hours.
He forgot to mention Starbucks' local competitor opens a new Luckin Coffee every 8 hours amounting to about 3 per day.
Luckin Coffee's plan is to open 1,950 more stores in the next 18 months.
This has the inklings of a dogfight down to zero with a local upstart, and ask how that turned out for Facebook, Google, or even Amazon in China.
Every FANG except Apple (AAPL) cease to exist in China now, and brewing bad coffee doesn’t create the positive network effect that Apple has in China, effectively delivering an additional 4 million ancillary jobs connected to the iOS system.
The entrenched nature of Apple in China means they cannot be removed without catastrophic job losses to local Chinese triggering massive social unrest.
In the case of Starbucks, every location that folds, employees can walk across the street to join a Luckin Coffee franchise, such is an environment in a zero-sum game.
Qian envisions coffee shops like a tech empire because of her background, and has earmarked fresh capital for product R&D, technology innovation, and business development.
Luckin is hellbent on capturing young office workers with its locations, delivery services, and low prices, operating a no-frills type of Starbucks alternative.
They have undercut Starbucks pricing by offering the same cup of Americano $5 coffee for $3.15.
How about their expansion plans?
Locations will explode to 4,500 by the end of 2019 which will eclipse the number of Chinese Starbucks in mid-2019.
The company has relied on technology, over half of the locations lack physical seating, shrinking space by way of applying kiosk structures as a coffee preparation station before customers access delivery orders through the smartphone app.
Digital payments are common via WeChat or Luckin’s own “coffee wallet,” and over 70% of digital customers are under 30.
Luckin's strategy is a far cry from the plush sofas of Starbucks' home away from home strategy. Distinctively, Luckin does not want customers to lounge around and talk business.
The rise of Luckin Coffee coincides with hamstringing Starbucks' comparable-store sales growth rising just 1%, with a 2% decline in transactions, down from 6% sales growth the prior Q1.
CFO Patrick Grismer did what CEO Kevin Johnson could not, admitting, “we have to acknowledge that competition is intensifying.”
Luckin Coffee burned through more than $100 million in cash in 2018, and like the prototypical tech company, will burn more cash to intensify competition with Starbucks.
I predict they will head further into deeper coffee discounts to snatch market share.
Other possible pain points for Starbucks that Qian could exploit are more subsidized deliveries which could continue for another “3-5 years” but could be extended if need be.
Qian is content with her model, stating she is “in no rush to make a profit,” signaling convenient access to a trove of generous debt instruments.
The best-case scenario in 2019 is that Starbucks' profit margins shrink or stagnate in China, the worst case, they lose significant Chinese market share and tier 1 city franchises continue to cannibalize revenue.
Starbucks' golden years in China are over and you can thank technology for offering a model to compete with them.
If Starbucks' shares continue moving up, it won’t be for much longer.
Global Market Comments
April 3, 2019
Fiat Lux
Featured Trade:
(WHO WILL BE THE NEXT FANG?)
(FB), (AMZN), (NFLX), (GOOGL), (AAPL),
(BABA), (TSLA), (WMT), (MSFT),
(IBM), (VZ), (T), (CMCSA), (TWX)
FANGS, FANGS, FANGS! Can’t live with them but can’t live without them either.
I know you’re all dying to get into the next FANG on the ground floor, for to do so means capturing a potential 100-fold return, or more.
I know because I’ve done it four times. The split adjusted average cost of my Apple shares is only 25 cents compared to today’s $174, so you can understand my keen interest. My average on Tesla is $16.50.
Uncover a new FANG and the riches will accrue rapidly. Facebook (FB), Amazon AMZN), Netflix (NFLX), and Alphabet (GOOGL) didn’t exist 25 years ago. Apple (AAPL) is relatively long in the tooth at 40 years. And now all four are in a race to become the world’s first trillion-dollar company.
One thing is certain. The path to FANGdom is shortening. It took Apple four decades to get where it is today, Facebook did it in one. As Steve Jobs used to tell me when he was running both Apple and Pixar, “These overnight successes can take a long time.”
There is also no assurance that once a FANG always a FANG. In my lifetime, I have seen far too many Dow Average components once considered unassailable crash and burn, like Eastman Kodak (KODK), General Electric (GE), General Motors (GM), Sears (SHLD), Bethlehem Steel, and IBM (IBM).
I established in an earlier piece that there are eight essential attributes of a FANG, product differentiation, visionary capital, global reach, likeability, vertical integration, artificial intelligence, accelerant, and geography.
We are really in a “What have you done for me lately” world. That goes for me too. All that said, I shall run through a short list for you of the future FANG candidates we know about today.
Alibaba (BABA)
Alibaba is an amalgamation of the Chinese equivalents of Amazon, PayPal, and Google all sewn together. It accounts for a staggering 63% of all Chinese online commerce and is still growing like crazy. Some 54% of all packages shipped in China originate from Alibaba.
The juggernaut has over half billion active users, and another half billion placing orders through mobile phones. It is a master of AI and B2B commerce. There is nothing else like it in the world.
However, it does have some obvious shortcomings. Its brand is almost unknown in the US. It has a huge problem with fakes sold through their sites.
It also has an ownership structure for foreign investors that is byzantine, to say the least. It is a contractual right to a share of profits funneled through a PO box in the Cayman Island. The SEC is interested, to say the least.
We also don’t know to what extent founder Jack Ma has sold his soul to the Beijing government. It’s probably a lot. That could be a problem if souring trade relations between the US and the Middle Kingdom get worse, a certainty with the current administration.
Tesla (TSLA)
Before you bet on a new startup breaking into the Detroit Big Three, go watch the movie “Tucker” first. Spoiler Alert: It ends in tears.
Still, Tesla (TSLA) has just passed the 270,000 mark in the number of cars manufacturered. Tucker only got to 50.
Having led my readers into the stock after the IPO at $16.50, I am already pretty happy with this company. Owning three of their cars helps too (two totaled). But Tesla still has a long way to go.
It all boils down to the success of the $35,000, 200-mile range Tesla 3 for which it already has 500,000 orders. So far so good.
It’s all about scale. If it can produce these cars in sufficient numbers, it will take over the world and easily become the next FANG. If it can’t, it won’t. It’s that simple.
To say that a lot is already built into the share price would be an understatement. Tesla now trades at ten times revenues compared to 0.5 for Ford (F) and (General Motors (GM). That’s a relative overvaluation of 20:1.
Any of a dozen competing electric car models could scale up with a discount model before they do, such as the similarly priced GM Bolt. But with a ten-year lead in the technology, I doubt it.
It isn’t just cars that will anoint Tesla with FANG sainthood. The firm already has a major presence in rooftop solar cell installation through Solar City, utility sized solar plants, industrial scale battery plants, and is just entering commercial trucks. Consider these all seeds for FANGdom.
One thing is certain. Without Tesla, there wouldn’t be s single mass-market electric car on the road today.
For that, we can already say thanks.
Uber
In the blink of an eye, ride sharing service Uber has become essential for globe-trotting travelers such as myself.
Its 2 million drivers completely disrupted the traditional taxi model for local transportation which remains unchanged since the days of horses and buggies.
That has created the first $75 billion of enterprise value. It’s what’s next that could make the company so interesting.
It is taking the lead in autonomous driving. It could also replace FeDex, UPS, DHL, and the US post office by offering same day deliveries at a fraction of the overnight cost.
It is already doing this now with Uber Foods which offers immediate delivery of takeouts (click here if you want lunch by the time you finish reading this piece.)
UberCopters anyone? Yes, it’s already being offered in France and Brazil.
Uber has the potential to be so much more if it can just outlive its initial growing pains.
It is a classic case of the founder being a terrible manager, as Travis Kalanick has lurched from one controversy to the next. The board finally decided he should spend much time on his new custom built 350-foot boat.
Its “bro” culture is notorious, even in Silicon Valley.
It is also getting enormous pushback from regulators everywhere protecting entrenched local interests. It has lost its license in London, the only place in the world that offered a decent taxi service pre-Uber. Its drivers are getting beaten up in Paris.
However, if it takes advantage of only a few of the doors open to it, status as a FANG beckons.
Walmart (WMT)
A few years ago, I was heavily criticized for pointing out that half the employees at my local Walmart (WMT) were missing their front teeth. They have since received a $2 an hour's pay raise, but the teeth are still missing. They don’t earn enough money to get them fixed.
The company is the epitome of bricks and mortar in a digital world with 12,000 stores in 28 countries. It is the largest private employer in the US, with 1.4 million workers, mostly earning minimum wage.
The Walmart customer is the very definition of the term “late adopter.” Many are there only because unlike Amazon, Wal-Mart accepts cash and Food Stamps.
Still, if Walmart can, in any way, crack the online nut, it would be a turbocharger for growth. It moved in this direction with the acquisition of Jet.com for $3 billion, a cutting-edge e-commerce firm based in Hoboken, NJ.
However, this remains a work in progress. Online sales account for only 4% of Walmart’s total. But they could only be a few good hires at the top away from success.
Microsoft (MSFT)
Talk about going from being the 800-pound gorilla to an 80 pound one, and then back to 800 pounds.
I don’t know why Microsoft (MSFT) lost its way for 15 years, but it did. Blame Bill Gates’s retirement from active management and his replacement by his co-founder Steve Ballmer.
Since Ballmer’s departure in 2014, the performance of the share price has been meteoric, rising by some 125% over the past two years.
You can thank the new CEO Satya Nadella who brought new vitality to the job and has done a complete 180, taking Microsoft belatedly into the cloud.
Microsoft was never one to take lightly. Windows still powers 90% of the world’s PCs. No company can function without its Office suite of applications (Word, Excel, and PowerPoint). SQL Server and Visual Studio are everywhere.
That’s all great if you want to be a public utility, which Microsoft shareholders don’t.
LinkedIn, the social media platform for professionals, could be monetized to a far greater degree. However, specialization does come at the cost of scalability.
It seems that the future is for Microsoft to go head to head against next door neighbor Amazon (AMZN) for the cloud services market while simultaneously duking it out with Alphabet (GOOGL).
My bet is that all three win.
Airbnb
This is another new app that has immeasurably changed my life for the better. Instead of cramming myself into a hotel suite with a wildly overpriced minibar for $600 a night, I get a whole house for $300 anywhere in the world, with a new local best friend along with it.
Overnight, Airbnb has become the world’s largest hotel chain without actually owning a single hotel. At its latest funding round in 2017, it was valued at $31 billion.
The really tricky part here is for the firm to balance out supply and demand in every city in the world at the same time. It is also not a model that lends itself to vertical integration. But who knows? Maybe priority deals with established hotels are to come.
This is another firm that is battling local regulation, that great barrier to technological innovation. None other than its home town of San Francisco now has strict licensing requirements for renters, a 30 day annual limitation, and a $1,000 a day fine for offenders.
The downtowns of many tourist meccas like Florence, Italy and Paris, France have been completely taken over by Airbnb customers, driving rents up and locals out.
IBM (IBM)
There was a time in my life when IBM was so omnipresent we thought like the Great Pyramids of Egypt it would be there forever. How times change. Even Oracle of Omaha Warren Buffet became so discouraged that he recently dumped the last of his entire five-decade long position.
A recent 20 consecutive quarters of declining profits certainly hasn’t helped Big Blue’s case. It is one of the only big technology companies whose share price has gone virtually nowhere for the past two years.
IBM’s problem is that it stuck with hardware for too long. An entrenched bureaucracy delayed its entry into services and the cloud, the highest growth areas of technology.
Still, with some $80 billion in annual revenues, IBM is not to be dismissed. Its brand value is still immense. It still maintains a market capitalization of $144 billion.
And it has a new toy, Watson, the supercomputer named after the company’s founder, which has great promise, but until now has remained largely an advertising ploy.
If IBM can reinvent itself and get back into the game, it has FANG potential. But for the time being, investors are unimpressed and sitting on their hands.
The Big Telecom Companies
My final entrant in the FANGstakes would be any combination of the four top telecommunication companies, Verizon (VZ), AT&T (T), Comcast (CMCSA), and Time Warner (TWX), which now control a near monopoly in the US.
There is a reason why the administration is blocking the AT&T/Time Warner merger, and it is not because these companies are consistently cited in polls as the most despised in America. They are trying to stop the creation of another hostile FANG.
Still, if any of the big four can somehow get together, the consequences would be enormous. Ownership of the pipes through which the modern economy courses bestows great power on these firms.
And Then….
There is one more FANG possibility that I haven’t mentioned. Somewhere, someplace, there is a pimple-faced kid in a dorm room thinking up a brand-new technology or business model that will take the world by storm and create the next FANG.
Call me crazy, but I have been watching this happen for my entire life.
I want to thank my friend, Scott Galloway, of New York University’s Stern School of Business, for some of the concepts in this piece. His book, “The Four” is a must read for the serious tech investor.
Creating the Next FANG?
Mad Hedge Technology Letter
April 1, 2019
Fiat Lux
Featured Trade:
(THE NEXT TECH BUBBLE TOP HAS STARTED)
(LYFT), (PIN), (UBER), (AAPL), (JPM), (FB)
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)