Mad Hedge Technology Letter
February 7, 2022
Fiat Lux
Featured Trade:
(A MIXED BAG FOR AMAZON)
(FB), (AMZN), (GOOGL)
Tag Archive for: (AMZN)
Ecommerce had to cool off, didn’t it?
After 2 years of breakneck growth, Amazon (AMZN) came crashing back down to life reporting its slowest revenue growth in 4 years.
Amazon’s online stores reported $206 million in losses for the U.S. revealing that American online shopping has plateaued for the short-term.
Much of this was baked into the equation as Amazon shares have really done nothing for the past 6 months.
The sugar high it received from the pandemic is starting to wear off.
AMZN experienced more than $4 billion in costs from inflationary pressures, lost productivity, and disruptions. The inflation primarily relates to wage increases and incentives in the operations, as well as higher pricing from third-party carriers supporting AMZNs fulfillment network. Lost productivity and network disruptions were driven primarily by labor capacity constraints due to challenges in staffing up AMZN facilities.
Then when the omicron variant reared its ugly head, there was a certain conflict with retaining staff as many workers called out sick, making an already tight labor force less efficient.
If the earnings report stopped just there, no doubt AMZN would have braced for a Facebook-like 25% selloff, but the silver linings in the AMZN report were more like a gold lining.
Three positive data points that couldn’t be downplayed were in the Amazon Web Services (AWS) business, the advertising business, and pricing for Amazon Prime membership.
AWS delivered a strong quarter of growth, as enterprises and developers continued to look to AWS for critical, innovative cloud solutions.
A vivid example of AWS is with Amazon’s relationship with parent company of Chrysler, Dodge, Fiat, Jeep, and Ram.
They selected AWS as its preferred global cloud provider for vehicle platforms to accelerate new digital products and upskill its global workforce.
There’s a whole list of the world's largest companies that now use AWS like Adidas, Goldman Sachs, Pfizer, Rivian.
AWS revenue expanded to 40% from a year ago to $17.8 billion, and represents the anchor for the financial health of Amazon.
It allows AMZN to pursue other growth levers like advertising.
What happens is that there is an intense feedback loop with customers, to keep building and making that better.
The end result is building more relevancy and better engaging experiences.
Interaction promotes an understanding that AMZN can build better analytic tools, provide better measurement, give them better insight to performance.
Amazon’s focus on serving brands has really differentiated themselves from the likes of Facebook (FB) and Google (GOOGL).
The sponsored ad space with regards to video advertising is certainly a great opportunity.
And again, this is about delivering good recommendations to customers and helpful when they're making their purchase decisions and giving them information around that.
In the end, advertising grew 32% year over year and is a $10 billion business.
The most aggressive move that Amazon told us about is their price rise for Prime Membership.
Amazon will increase the price of a Prime membership in the United States, with the monthly price going from $12.99 to $14.99 and the annual membership going from $119 to $139.
The 15% increase is the first price increase since 2018 which should be a boon to the bottom line.
Ultimately, I believe the Amazon Prime Membership price hike was the reason for the investor response of bidding up AMZN shares.
Although the ecommerce numbers were a little disappointing, they should rebound nicely in 2022.
The bar was set extremely low coming into the earnings and AMZN gave us enough juice for shares to surge.
When combining the positives of AWS and advertising strength, this ecommerce behemoth’s momentum is just too hard to ignore.
If inflation starts to moderate, expect AMZN’s stock to be 25% higher by the end of the year and I do believe investors will sell out of Facebook and buy into a quality stock like AMZN.
Mad Hedge Technology Letter
February 4, 2022
Fiat Lux
Featured Trade:
(FACEBOOK IS BROKEN)
(FB), (AMZN), (MSFT), (AAPL)
Facebook (FB) is broken.
As a stock, management team, product, and as a business model – it is broken.
This portends poorly for the company that Mark Zuckerberg built.
Funnily enough, Zuckerberg decided to opt for a new company name, "Meta," to signal to his investors that the company is barreling straight into a new chapter of its existence.
The problem I have with Meta is that they face 10 years of losses before they can potentially spin a profit from a Metaverse-based product.
Reading the tea leaves, the name change appears to mask the internal destruction of the legacy Facebook model, and the warning signs are more than a few.
They are in the digital ad business at a time when e-commerce company Amazon (AMZN) is rapidly encroaching on their turf.
I would argue that it was Facebook who completely missed out on e-commerce, almost like how Microsoft (MSFT) missed out on the cell phone business that Apple were able to figure out.
The final kick below the belt was Facebook admitting that Apple’s (AAPL) privacy changes have materially affected Facebook’s ability to collect large swaths of data.
The result is less accurate and voluminous data because they can’t steal as much reducing the amount they can charge digital advertisers for the data.
Facebook’s underperformance is the most complete anecdotal evidence so far on the impact to the advertising industry of Apple’s App Tracking Transparency feature, which minimizes targeting capabilities by limiting advertisers from accessing an iPhone user identifier.
Even with the terrible report, I don’t believe a 26% haircut in Meta shares was warranted, but this represents the sign of the times where companies aren’t given a free pass anymore.
If something like this were to happen in a period of easy money, I believe Meta would have only sold off 4%-6%.
So how about that Metaverse business?
Chief Executive Officer Mark Zuckerberg announced Wednesday that Meta had a net loss of $10 billion in 2021 attributable to its investment in the Meeetaverse.
I believe this is a risky stance to take considering it’s not fully guaranteed that the Metaverse will be what all the experts think it might turn into.
It could still only pull through in a diluted way like many things in life.
Amazon has really broken away from the pack, from an advertising minnow into an ad revenue juggernaut with annual sales of $31 billion for 2021, which is more than the $28.8 billion in ad revenue that YouTube posted for the year.
At that pace, Amazon’s ad business is also larger than several other entities in online advertising, including cloud rival Microsoft, whose CEO, Satya Nadella, disclosed last week the company’s 2021 advertising revenue exceeded $10 billion.
Amazon has also decided to increase the price of Prime by nearly 17% all while Facebook lacks pricing power to charge digital ad manufacturers more.
It’s time to retire the acronym starting with F – FANG, which once represented the equity market profile of Facebook, Apple, Netflix, and Google.
Is this the end of Facebook?
No, they still have a sterling balance sheet and are awfully profitable in what they do.
But looking forward, growth rates will contract down to single digits and user growth has turned negative.
These are both ominous signs with no solutions in sight.
Have we seen the high-water mark for Facebook?
Fixing its stock trajectory to the backs of the metaverse is a fool’s game because of the large losses it will incur in the short to mid-term.
Zuckerberg largely understands the Metaverse as an existential crisis of epic proportions, which is why he’s throwing the kitchen sink at it.
Broadly speaking, the stock market might have a Facebook problem because the company is so valuable and part of so many indices that a dip in shares will hurt the wider market.
In any case, the bombshell report means that this bodes poorly for the 3-year trajectory of Meta’s stock; and to give Meta the benefit of the doubt, at least they have the cash to make a legitimate run at the Metaverse business.
Don’t expect high octane price action in Meta until they signal that the Metaverse business is legitimate and just around the corner, which might be a while!
My recommendation is to put this one on the backburner until prospects brighten up.
Mad Hedge Biotech and Healthcare Letter
February 3, 2022
Fiat Lux
Featured Trade:
(A ‘BORING’ BUSINESS RESISTING THE ‘AMAZON EFFECT’)
(CVS), (UNH), (ANTM), (TDOC), (AMZN), (BRK.A), (BRK.B), (JPM)
The healthcare market is under attack.
Amazon (AMZN) is invading the healthcare sector, wielding its far-reaching online presence and countless distribution warehouses to dominate the market.
Leveraging its ability to offer quick shipping to practically all locations, Amazon has transformed into a grab-anything-and-everything-possible business.
Now, it has set its sights on the healthcare and prescription sector. In fact, it has been attempting to infiltrate this segment since 2018 when it acquired PillPack.
The only limitation of that deal was that customers still had to get prescriptions from their doctors to avail of the PillPack service.
However, Amazon’s not the only one seeing the potential of this sector.
Following the difficulties it encountered in cornering the market, the e-commerce giant collaborated with fellow Wall Street titans Berkshire Hathaway (BRK.A) (BRK.B) and JPMorgan (JPM). Together, the three companies launched a service they called “Haven.”
Unfortunately, the venture eventually fell apart, and they canceled the deal altogether.
Despite that unfortunate end, Amazon refuses to back down on its vision. Recently, it decided to take another stab at the venture with a rebranding, giving birth to AmazonCare.
The goal is to offer assistance to customers in booking doctor appointments and receiving prescriptions online.
Undeniably, any business endeavor with Amazon’s backing will make waves in any industry. Nonetheless, this new venture could still be a tough sell.
For now, the company's strength is hoping to use the “Amazon effect” to sway members into signing up and using AmazonCare as well.
Surprisingly, Amazon finds itself facing an unlikely challenger in this pursuit: CVS (CVS).
Like Amazon, Berkshire, and JPMorgan, CVS has also recognized the potential of this market.
Unlike Amazon’s partners, CVS has decided to invest to become a frontrunner in terms of dominating the same sector and eventually taking advantage of this rapidly expanding total addressable market.
Instead of following the track of its fellow healthcare providers, such as UnitedHealth (UNH) and Anthem (ANTM), CVS has opted to change its angle of attack in the hopes of gaining more market share and reaping higher profits.
CVS is putting to good use its over 9,900 stores and distributions as means to establish better connections and rapport with customers.
After all, statistics indicate that approximately 80% of American citizens live less than 10 miles from a CVS branch.
This offers CVS a competitive advantage in terms of proximity to its customers. That is, it offers a unique convenience as it serves as the ever-present “corner stores” in practically every city.
Leveraging the locations, CVS has set up about 1,500 branches into “HealthHubs” by the end of 2021.
Basically, HealthHubs serve as emergency care clinics found inside CVS stores, providing customers with easy access to convenient and even cheaper after-hours health checkups.
Aside from this feature, a growing number of CVS stores are starting to get set up to be able to ship medicines or any other products ordered online, while other branches are being eyed as potential UPS drop-off points.
This setup will transform several branches into convenient “mini” distribution centers.
CVS has broken out of its “boring corner drugstore” image following its decision to target a more lucrative and massive healthcare sector.
It started the ball rolling when it acquired Aetna for $69 billion—a decision that so many investors disapproved of at that time.
Until recently, the market has largely ignored CVS because of the debt it incurred from the Aetna deal.
However, the tides had turned when investors finally realized that the drugstore giant had been efficiently and effectively executing a brilliant strategy all this time.
With Aetna under its wing, CVS has been granted access to a multitude of healthcare and managed care benefits availed by more than 23 million members. The sheer number of subscribers transformed the company into the third-biggest health insurer in the United States—next only to decades-long established providers Anthem and UnitedHealth.
Riding this momentum, CVS has been aggressive in revamping its image and expanding its services.
On top of its HealthHubs and Aetna advantages, CVS has recently paired up with Teladoc (TDOC) to leverage its virtual healthcare services to offer even more convenience to its customers.
This is another massive market since CVS already has roughly 35 million digital customers subscribed to its CVS app.
These users are all ordering products and other prescriptions from CVS. Integrating Teladoc’s services to the mix would be a surefire way of boosting its membership and adding a lucrative revenue stream.
Keep in mind that the global market for telehealth services is projected to expand somewhere between $300 billion to $700 billion by 2028—and that’s a conservative estimate.
CVS’ move to use Teladoc software is a positive indication of early technology adoption, positioning the drugstore chain at the forefront of a healthcare revolution.
Overall, CVS can only be described as a company striving to become a unique business that offers a range of products that no one else in the industry provides.
Although it’s improbable that it’ll sustain a monopoly in these services, CVS has been gradually transforming and growing into an almost unbeatable force in the industry by leveraging its strengths in an effective and logical method.
Moreover, it has evolved from a stodgy drugstore into an early tech adopter and a revolutionary business that can stand to challenge the likes of Amazon.
Mad Hedge Technology Letter
January 26, 2022
Fiat Lux
Featured Trade:
(MSFT DIGS US OUT OF A HOLE)
(MSFT), (AMZN), (GOOGL), (AAPL)
The 14% selloff year to date in tech shares finally met its match when Microsoft (MSFT) soothed us with its most recent quarterly performance.
It’s starting to feel like a broken record, but this world belongs to 5 large Silicon Valley tech companies and for the rest of the other few hundred publicly listed companies, we are just living in their world.
And it just so happens that if anybody or anyone is anointed as the savior to save this market from capitulating, it has to be the heavy lifters and we are getting validation from the strongest of cloud/enterprise companies.
Just as resonating, MSFTs positive quarter draws yet one more line in the sand for Mr. Market, offering us support and offering us evidence this could morph into a short-term bottom.
Even more salient, this is even deeper evidence that the software sector is the cream of the crop in tech and their strategic position is only getting stronger.
The thing that these guys have that is critical in today’s economic environment is tinged with inflation headwinds — pricing power.
Starting in March, Microsoft is pushing through an MSFT 365 price hike and consumers and businesses will see their monthly bill go up a few bucks.
According to Microsoft, those increases will apply globally with local market adjustments for certain regions.
And it’s not that 365 is MSFT's cutting edge division, it’s just another example of how MSFT can raise prices and consumers have no other choice but to comply because, at this point, 365 is a utility.
Sure, you can find a substitute, but it wouldn’t be as good of a product.
It was a record quarter, driven by the continued strength of the Microsoft Cloud, which surpassed $22 billion in revenue, up 32% year over year. We are living through a generational shift in our economy and society. Digital technology is the most malleable resource at the world's disposal to overcome constraints and reimagine everyday work and life.
Anyone who bet the ranch on the cloud and enterprise is happy they bet the ranch on it.
MSFT's earnings were just a giant confirmation of how tech won’t be knocked off its perch as the apex warrior, not only in the Nasdaq index but the broader market.
The stock market has been a tech market for quite a few years and that can’t be ignored or discounted.
Fundamentally, the foundations of profitable tech stocks have never been healthier, and they are extracting more of the pie than ever.
Then as we hear nonstop about the upcoming metaverse project and its entryways through gaming, MSFT is so on top of that new development that they will put all other companies to shame.
Granted, there are other heavyweights like Apple (AAPL), Amazon (AMZN), Alphabet (GOOGL) that MSFT must take measures of to see if they are pushing ahead with something they are unaware of, but all is good is Redmond, Washington.
As data volumes and transactions increased over 100% year over year, MSFT has a grip on what’s going on and can quickly pivot to anything that’s worth it with its army of high-quality developers.
MSFT’s ubiquitous fingerprints are everywhere with even over 90% of Fortune 500 companies using Teams Phone this past quarter highlighting the deep penetration into the richest corners of corporate America.
My overarching point is that MSFTs products aren’t just a one-trick pony ala Facebook.
More than half of customers have four or more MSFT workloads, up 75% year over year, underscoring MSFTs end-to-end differentiation.
On a short-term trading basis, traders must adopt tech winners with robust balance sheets, and this must be looked at as a dealbreaker or deal winner of sorts.
In a world that is clamoring for quality tech names, it’s no time to allocate your hard-earned savings into Podunk technology.
Once the macro washout fades, pile into MSFT!
What I am saying is that there is a great deal of the market to plain out avoid, and don’t get caught up in those lemons.
Mad Hedge Technology Letter
January 24, 2022
Fiat Lux
Featured Trade:
(BEST OF THE REST GETS SLAUGHTERED)
(MSFT), (SNAP), (GOOGL), (AAPL), (AMZN), (FB), (TIKTOK)
Popular nostrum has it that earnings will save the stock market.
The strength of corporate America time and time again is on display to show investors how high short-term growth follows through.
Anytime the Nasdaq enters a little rut, earnings bail us out and the next move is usually higher for tech shares.
Well, wait a second, things are different this time.
The bad news now is that confirmation of solid fundamentals during the upcoming earnings season, won’t make the Nasdaq index go higher.
The market is pricing in business as usually for the largest 5 tech stocks which are really the only ones that matter.
Internally, the rest of tech has been deeply damaged by this January sell-off and we are talking about 8-9% one-day sell-offs for the small cap tech growth and I haven’t even mentioned the peak to trough underperformance which is much worse.
Larger cap Enterprise and Cyber Security stocks still boast solid foundations and are going down less than the meme stocks, shelter-at-home stocks, and the best of the rest tech stocks.
Basically, we need to get through earnings because there is minimal upside for tech stocks as investors peruse through a lack of short-term catalysts.
We are stuck in a ditch where monetary and fiscal policy has been set dead straight against an environment of potentially appreciating tech stocks.
Until that changes, I don’t envision a snappy reversal apart from a dead cat bounce to sell into.
Chasing growth in a low-interest rate environment gave us an overshoot to the upside and now that is all working in reverse.
And for the big FANG stocks outperforming small cap, it just means shares are performing better than tech growth because they command lower volatility due to stronger balance sheets.
Resilience to indiscriminate selling is currency in today’s trading world.
Nothing wrong with growth, but they are what they are, so much so that if you cannot generate profitability now, sell-offs are indicative of their poor strategic position among bigger tech.
The carnage under the hood is stark today with Snap stock cratering after the social media company’s shares were downgraded amid risks to revenue growth and tough competition from rival TikTok.
Snap’s headwinds result from a weakening business profile stemming from IDFA headwinds, difficult [year-over-year comparisons] from stellar growth in 2020-21, and increasing competition from TikTok.
IDFA is a serious thorn in the side for the android-based systems of Google as well as for Facebook.
IDFA is Apple minimizing the reach of data harvesting platforms by turning off their data reach and these modifications by Apple (AAPL) to rules for advertising on mobile apps have forced companies like Snap to lower guidance.
When it reported quarterly earnings last October, Snap revealed that the impact on its advertising business could be long lasting and now we are experiencing that.
The IDFA issues could cut growth rates by half as these social media firms have been unable to remedy its loss of reach in digital advertising.
Snap has the unenviable position to not only be behind Google and Facebook, but they are also the next company to be upended by TikTok that has really come on the last few years.
TikTok has supplanted Snap as the go-to social media platform for teens and young adults.
In a rising interest rate environment, the best of the rest like Snap gets punished for not being the best of class.
Snap shares are down over 200% from its peak and threatening to close in on 300% in the red.
Snap represents the fortunes for the marginal tech stocks that rely on growth and that is not working in 2022.
Although not as loss-making as other tech growth, SNAP has been fairly pigeonholed as the tech you don’t want to own now.
It’s a dangerous position to fill in times of the VIX spiking to 30.
The problems don’t stop there with TikTok really threatening Snap’s position and the momentum signaling that Snap is prepared for a deeper slowdown than initially expected.
Snap’s foothold is strongest in the 13-34-year-old range in the U.S., Canada, the U.K., France, Australia, and the Netherlands, but TikTok’s audience is the most similar to Snap’s which means it puts both Snap’s user face time spent and ad dollars at risk.
From a monetary standpoint, digital advertisers will start to play off ad competition between TikTok and Snap, resulting in discounted ad revenue per unit which will narrow margins moving forward.
Not being able to command the prior ad premium is a stinging blow to Snap who thought they were in the driving seat to the third position behind Google and Facebook, but it shows that being a tech minnow is a harrowing experience and fending off toxicity is part of the playbook just to survive.
Head to higher waters in this volatile environment.
