Mad Hedge Technology Letter
January 12, 2022
Fiat Lux
Featured Trade:
(JUMP OFF THE ROKU BANDWAGON)
(ROKU), (GOOGL), (AMZN)
Tag Archive for: (AMZN)
Many “experts” have been advising investors to buy the dip in Roku (ROKU) since it dropped to $370 from the peak of $480 it reached in July 2020.
These experts kept banging the drum to buy the dip on Roku as it slid to $350 then $320.
The calls for dip-buying continue as Roku nosedived to $280 then most recently on a downgrade, Roku fell all the way to $177.
Painful as it feels to be an investor in Roku, this is not the time to double down on high-tech growth stocks.
Growth tends to usually overshoot to the upside as investors give a pass to growth for losing money and selectively put a premium on high growth rates.
But that deal is only valid in a low-interest rate environment and what we are witnessing is the reverse happen as investors are bolting from Roku like stallions out the back of a stable.
At a micro level, there is somewhat distaste at the ever-increasing competition Roku is facing and the lack of growth prospects overseas.
Overseas is usually the growth engine for many of these streaming cohorts, but the dilemma here is that margins are lower because of a poor purchasing power profiles for the median consumer overseas.
That’s not to say it’s easy to succeed in the U.S. — hardly so.
However, Roku’s business in the United States has been highly successful, but the issue here is that the market is getting somewhat saturated and since the stock market is priced based on future cash flow, where does the incremental buying come from to save Roku’s stock?
Roku faces a perilous uphill challenge to convince the incremental platform user to install its Roku stick at a time when Amazon (AMZN) and Google (GOOGL) are using their greater clout and sharper elbows to get rid of the tech peons.
Amazon reported sales of over 150 million Fire TV devices recently. Roku has over 56 million active accounts, although it’s not a direct comparison because Amazon’s figure counts sold devices and includes Fire TV devices that are not being used.
There is no possible way that Roku can secure 50% of the market here and 40% would be a stretch capping its ceiling.
Another leery signal came when smart television maker TCL who have partnered to make the Roku smart TV decided to jump ship to Google.
This could represent a red flag as these bigger companies have the capacity to poach talent, know-how, and convince suppliers to jump ship with a more lucrative contract for a larger install base.
This could be the first point of contact that could eventually lead to Google buying out TCL and cutting off Roku from a source of a hardware supplier.
TCL has now claimed to be one of the biggest sellers of sets featuring Google’s connected TV operating system and the partnership will take precedence over anything Roku is involved with.
In the short term, readers need to stay away from Roku as we need more commentary on how it plans to shake off Google and Amazon and how it plans to navigate a perceived saturation in its domestic business while underperforming overseas.
Granted, it’s intimidating to go up against Google and Amazon because there are less tools available in the tool kit in terms of stacking resources and convincing consumers that they are indeed a higher quality product.
Long term, I don’t see it for Roku.
Short term, it’s dicey at best.
This stock promises to be volatile in the next three months and actively trading this stock will probably mean selling sharp rallies and avoiding dips.
The first-mover advantage was stellar for a while and Roku rode that donkey up the mountain of success, but now as reality sets in and the first-mover advantage dissipates, they need a miracle or should just negotiate to sell itself while the stock price is still near $200.
It’s sink-or-swim at this point.
Mad Hedge Technology Letter
January 7, 2022
Fiat Lux
Featured Trade:
(THE DEATH OF VISA AND MASTERCARD)
(MA), (V), (SQ), (PYPL), (AFTPY), (AFRM), (AMZN)
Visa and Mastercard’s card networks are a relic of the past, not in terms of reach or footprint, but the technology of it.
This will cost their stock price and we are already seeing it play out in the market.
The canary in the coal mine was fintech players Square (SQ) and PayPal (PYPL) whose share prices were pummeled at the back end of last year.
PYPL is down 40% from its 2021 peak and SQ experienced a similar 42% drop.
This fierce competition and the crowded marketplace have investors paying less of a premium than ever before.
In a tightening rate environment, it’s clear the wolves are out for more flesh and the contagion will spread to those further up the food chain.
Fintech business models aren’t as robust or foundational as the bulwarks of MA and V, but questions must be asked if small businesses aren’t willing to pay an extra 2% on sales for outdated technology.
The fintech space has moved a long way in a short amount of time causing investors to be concerned about secular growth sustainability.
Among them are concerns that consumers are shifting to debit, away from higher-margin credit cards.
Consumers are also using more alternative payment methods that may bypass the card networks, including “buy now pay later” services offered by companies like Klarna, Afterpay (AFTPY), and Affirm (AFRM).
Visa has also come under pressure from a recent announcement by Amazon.com (AMZN) that next year it will stop accepting Visa-branded credit cards issued in the United Kingdom and this could be the beginning of a narrowing of Visas’ moat that could trigger a domino effect in other rich western countries.
The bulls would say that the stocks could undergo a reversal if the Omicron variant is not as bad as initially thought creating a tsunami of consumer spending massaging the bottom line for Visa and Mastercard.
But it’s looking more like V and MA are the victims of tightening travel restrictions around the globe and elevated positive cases that are immobilizing consumers.
The big card networks rely heavily on revenues related to cross-border travel as consumers and businesses use their cards for airfare, Airbnb’s, and Ubers, as well as duty-free gifts in foreign countries.
Multiples may need to come down if the Omicron variant puts the shackles on travel as countries reimpose bans or quarantine rules.
Investors had been counting on a recovery in cross-border travel to boost revenues for the card networks. This is definitely a kick in the nuts after initially seeing momentum as countries in general trended to loosening restrictions.
International transactions brought in $1.9 billion, or 21%, of Visa’s $8.9 billion in revenues for the 2021 fourth quarter.
The segment is highly profitable due to steep transaction and foreign-exchange fees. Cross-border margins come in around 69%, contributing significantly to Visa’s overall earnings per share.
The Christmas season has been confronted by a bevy of new restrictions as many places consider other measures to curb the spread of the Omicron variant.
Ultimately, even if MA and V can get positive reinforcement from increased short-term travel which seems unlikely, alternative business models are breathing down their neck as the technology of money has advanced.
The “buy now, pay later” phenomenon, although risky, is a rapid gut punch to the incumbents.
Then consider there is speculative technology like Bitcoin out there that bypasses these dinosaur networks altogether.
I believe 2022 is the year that MA and V get exposed as a luxury in a frugal world where small businesses can’t afford to give away 2% of revenue.
There’s too much money being invested into the technology of money for small businesses to reach for MA and V’s network.
Even open banking and digital networks can really dent the traditional payment networks.
Basically, I believe these companies have hit the high-water mark, and the likes of Zelle and Venmo will start to put pressure on these high fees.
Places like China don’t even use them by bypassing them through digital wallets like Wechat pay and Alipay.
Pie shrinkage and revenue decelerate — I believe this is one of the seminal trends we will see in fintech in 2022.
Automation is taking place at warp speed displacing employees from all walks of life.
According to a recent report, the U.S. financial industry will depose of 200,000 workers in the next decade because of automating efficiencies.
Yes, humans are going the way of the dodo bird and banking will effectively become algorithms working for a handful of executives and engineers.
The x-factor in this equation is the direct capital of $150 billion annually that banks spend on technological development in-house which is higher than any other industry.
Welcome to the world of lower cost, shedding wage bills, and boosting performance rates.
We forget to realize that employee compensation eats up 50% of bank expenses.
The 200,000 job trimmings would result in 10% of the U.S. bank jobs getting axed.
The hyped-up “golden age of banking” should deliver extraordinary savings and premium services to the customer at no extra cost.
This iteration of mobile and online banking has delivered functionality that no generation of customers has ever seen.
The most gutted part of banking jobs will naturally occur in the call centers because they are the low-hanging fruit for the automated chatbots.
A few years ago, chatbots were suboptimal, even spewing out arbitrary profanity, but they have slowly crawled up in performance metrics to the point where some customers are unaware they are communicating with an artificially engineered algorithm.
The wholesale integration of automating the back-office staff isn’t the end of it, the front office will experience a 30% drop in numbers sullying the predated ideology that front office staff are irreplaceable heavy hitters.
Front-office staff has already felt the brunt of downsizing with purges carried out from 2018 representing an eighth year of continuous decline.
Front-office traders and brokers are being replaced by software engineers as banks follow the wider trend of every company transitioning into a tech company.
The infusion of artificial intelligence will lower mortgage processing costs by 30% and the accumulation of hordes of data will advance the marketing effort into a smart, multi-pronged, hybrid cloud-based and hyper-targeted strategy.
The last two human bank hiring waves are a distant memory.
The most recent spike came in the 7 years after the dot com crash of 2001 until the sub-prime crisis of 2008 adding around half a million jobs on top of the 1.5 million that existed then.
After the subsidies wear off from the pandemic, I do believe that the banking sector will quietly put in the call to trim even more.
The longest and most dramatic rise in human bankers was from 1935 to 1985, a 50-year boom that delivered over 1.2 million bankers to the U.S. workforce.
This type of human hiring will likely never be seen again in the U.S. financial industry.
Recomposing banks through automation is crucial to surviving as fintech companies like PayPal and Square are chomping at the bit and even tech companies like Amazon and Apple have started tinkering with new financial products.
And if you thought that this phenomenon was limited to the U.S., think again, Europe is by far the biggest culprit by already laying off 63,036 employees in 2019, more than 10x higher the number of U.S. financial job losses and that has continued in 2020 and 2021.
In a sign of the times, the European outlook has turned demonstrably negative with Deutsche Bank announcing layoffs of 40,000 employees through 2023 as it scales down its investment banking business.
Germany banks are also passing on the burden of negative interest rates to their clients.
A recent survey by Deutsche Bundesbank shows that 58% of banks are charging all savers negative interest rates while others only target wealthy and corporate clients.
If the U.S. dips into negatives rates in the future, expect the same nasty effect on job force cuts that Europe has experienced.
Either way, don’t tell your kid to get into banking, because they will most likely be feeding on scraps at that point.
THE LAST STAGE OF HUMAN-FACING BANK SERVICES IS NOW!
Mad Hedge Technology Letter
December 27, 2021
Fiat Lux
Featured Trade:
(SWITCHING CAMPUSES FOR FULFILLMENT CENTERS)
(AMZN), (TGT), (WMT)
Moving on to tomorrow’s tech and the decisive trends that will power your tech portfolio, you can’t help but think about what will happen to the American university system if we are slammed with another delta dropkick.
A bachelor’s degree has already been massively devalued with each subsequent “wave” knocking off an extra 20% from a 4-year achievement.
Another unstoppable trend that shows no signs of abating is the “winner take all” mentality of the tech industry.
The virus was a great catalyst for U.S. tech companies and U.S. asset holders in stocks and real estate to cash in with a smash and grab of the century effectively leaving the rest of the uncompetitive global economy in its wake.
Remember this is all while China is destroying their own tech companies with zeal because they perceive them as too powerful at this point and a legitimate threat to the interest of the communist party.
Now, tech giants will apply their huge relative gains to gut different industries and have set their sights on academics and the buildings they operate from as their next exercise in destroy and conquer.
Recently, we got clarity on big-box malls becoming the new tech fulfillment centers with the largest mall operator in the United States, Simon Property Group (SPG), signaling they are willing to convert space leftover in malls from Sears and J.C. Penny.
The next bombshell would hit sooner rather than later.
College campuses will become the newest of the new Amazon (AMZN), Walmart (WMT), or Target (TGT) eCommerce fulfillment centers, and let me explain to you why.
When the California state college system shut down its campuses and moved classes online due to the coronavirus in March, rising sophomore Jose Antonio returned home to Vallejo, California where he expected to finish his classes and “chill” with friends and family.
Then Amazon announced plans to fill 100,000 positions across the U.S at fulfillment and distribution centers to handle the surge of online orders. A month later, the company said it needed another 75,000 positions just to keep up with demand. More than 1,000 of those jobs were added at the five local fulfillment centers. Amazon also announced it would raise the minimum wage from $15 to $17 per hour through the end of April.
Antonio, a marketing and communications major, jumped at the chance and was hired right away to work in the fulfillment center near Vacaville that mostly services the greater Bay Area. He was thrilled to earn extra spending money while he was home and doing his schoolwork online.
This was just the first wave of hiring for these fulfillment center jobs, and there will be a second, third, and fourth wave as eCommerce volumes spike.
Even college students desperate for the cash might quit academics all together to focus on starting from the bottom at Amazon or launching an e-store.
Even though many of these jobs at Amazon fulfillment centers aren’t the plush office job that Ivy League graduates covet, any job will do for the bottom 40% of hardworking Americans.
The rise of ecommerce has happened at a time when the cost of a college education has risen by 250% and more often than not, the price rises don’t live up to the value accretion.
Many fresh graduates are mired in $100,000 or even $200,000 plus debt burdens that prevent them from getting a foothold on the property ladder and delay household formation and there’s been no indication President Biden is about to cancel this colossal debt.
Then consider that many of the 1000s of colleges that dot America have borrowed capital to the hills building glitzy business schools, $200 million football locker rooms, and rewarding the entrenched bureaucrats at the school management level outrageous compensation packages.
America will be saddled with scores of colleges and universities shuttering because they can’t meet their debt obligations.
The financial profiles of prospective students have dipped by 50% or more in the short-term with their parents unable to find the money to send their kids back to college, not to mention the health risks.
Then there is the international element here with the lucrative Chinese student that added up to 500,000 total students attending American universities in the past.
They won’t come back as well.
The college campuses will be carcasses with juicy meat on the bones allowing Jeff Bezos to choose the prime cuts.
The coronavirus has exposed the American college system for what it is, and not every college has a $40 billion endowment fund like Harvard to withstand today’s financial apocalypse.
The only two industries now big enough to quench big tech’s insatiable appetite for devouring revenue are healthcare and education.
We are seeing this play out quickly, and once tech gets a foothold literally and physically on campus, the rest of the colleges will be thrust into an existential crisis of epic proportions with the only survivors being the ones with large endowment funds and a global brand name.
It’s scary, isn’t it?
This is how tech has evolved and certain parts of society are now diminished while others supercharged.
This is also part of how the world is changing so rapidly now because of a combustible mix of geopolitics, health scares, and accelerating technology that average people can’t recognize the world we live in anymore.
When this happens, close your eyes and buy tech stocks since most of us don’t run pharma companies or can’t extract largesse from dollar or euro-denominated governments.
YOUR NEW DELIVERY CENTER
Mad Hedge Technology Letter
December 20, 2021
Fiat Lux
Featured Trade:
(GETTING AHEAD WITH THE CLOUD)
(AMZN), (ZS), (CRM), (GOOGL)
Dealing with the Cloud works and for every relevant tech company, this division serves as the pipeline to the CEO position.
If this isn’t the case for a tech company, then there’s something egregiously wrong with them!
Take Andy Jassy, the mastermind behind Amazon’s (AMZN) lucrative cloud computing division and is the man who succeeded company founder Jeff Bezos.
He’s been rewarded this important position based on his performance in the cloud and faces a daunting proposition of following Bezos as CEO.
Bezos incorporated Amazon almost 30 years ago.
Jassy developed a highly profitable and market-leading business, Amazon Web Services, that runs data centers serving a wide range of corporate computing needs.
Cloud 101
If you've been living under a rock the past few years, the cloud phenomenon hasn't yet passed you by and you still have time to cash in.
You want to hitch your wagon to cloud-based investments in any way, shape, or form.
Amazon leads the cloud industry it created.
It still maintains more than 30% of the cloud market. Microsoft would need to gain a lot of ground to even come close to this jewel of a business.
Amazon relies on AWS to underpin the rest of its businesses and that is why AWS contributes most of Amazon's total operating income.
Total revenue for just the AWS division would operate as a healthy stand-alone tech company if need be.
The future is about the cloud.
These days, the average investor probably hears about the cloud a dozen times a day.
If you work in Silicon Valley, you can quadruple that figure.
So, before we get deep into the weeds with this letter on cloud services, cloud fundamentals, cloud plays, and cloud Trade Alerts, let's get into the basics of what the cloud actually is.
Think of this as a cloud primer.
It's important to understand the cloud, both its strengths and limitations.
Giant companies that have it figured out, such as Salesforce (CRM) and Zscaler (ZS), are some of the fastest-growing companies in the world.
Understand the cloud and you will readily identify its bottlenecks and bulges that can lead to extreme investment opportunities. And that is where I come in.
Cloud storage refers to the online space where you can store data. It resides across multiple remote servers housed inside massive data centers all over the country, some as large as football fields, often in rural areas where land, labor, and electricity are cheap.
They are built using virtualization technology, which means that storage space spans across many different servers and multiple locations. If this sounds crazy, remember that the original Department of Defense packet-switching design was intended to make the system atomic bomb-proof.
As a user, you can access any single server at any one time anywhere in the world. These servers are owned, maintained, and operated by giant third-party companies such as Amazon, Microsoft, and Alphabet (GOOGL), which may or may not charge a fee for using them.
The most important features of cloud storage are:
1) It is a service provided by an external provider.
2) All data is stored outside your computer residing inside an in-house network.
3) A simple Internet connection will allow you to access your data at any time from anywhere.
4) Because of all these features, sharing data with others is vastly easier, and you can even work with multiple people online at the same time, making it the perfect, collaborative vehicle for our globalized world.
Once you start using the cloud to store a company's data, the benefits are many.
No Maintenance
Many companies, regardless of their size, prefer to store data inside in-house servers and data centers.
However, these require constant 24-hour-a-day maintenance, so the company has to employ a large in-house IT staff to manage them - a costly proposition.
Thanks to cloud storage, businesses can save costs on maintenance since their servers are now the headache of third-party providers.
Instead, they can focus resources on the core aspects of their business where they can add the most value, without worrying about managing IT staff of prima donnas.
Greater Flexibility
Today's employees want to have a better work/life balance and this goal can be best achieved by letting them work remotely which effectively happened because of the public health situation. Increasingly, workers are bending their jobs to fit their lifestyles, and that is certainly the case here at Mad Hedge Fund Trader.
How else can I send off a Trade Alert while hanging from the face of a Swiss Alp?
Cloud storage services, such as Google Drive, offer exactly this kind of flexibility for employees.
With data stored online, it's easy for employees to log into a cloud portal, work on the data they need to, and then log off when they're done. This way a single project can be worked on by a global team, the work handed off from time zone to time zone until it's done.
It also makes them work more efficiently, saving money for penny-pinching entrepreneurs.
Better Collaboration and Communication
In today's business environment, it's common practice for employees to collaborate and communicate with co-workers located around the world.
For example, they may have to work on the same client proposal together or provide feedback on training documents. Cloud-based tools from DocuSign, Dropbox, and Google Drive make collaboration and document management a piece of cake.
These products, which all offer free entry-level versions, allow users to access the latest versions of any document so they can stay on top of real-time changes which can help businesses to better manage workflow, regardless of geographical location.
Data Protection
Another important reason to move to the cloud is for better protection of your data, especially in the event of a natural disaster. Hurricane Sandy wreaked havoc on local data centers in New York City, forcing many websites to shut down their operations for days.
And we haven’t talked about the recent ransomware attacks by Eastern Europeans on energy company Colonial Pipeline and meat producer JBS Foods.
The cloud simply routes traffic around problem areas as if, yes, they have just been destroyed by a nuclear attack.
It's best to move data to the cloud, to avoid such disruptions because there, your data will be stored in multiple locations.
This redundancy makes it so that even if one area is affected, your operations don't have to capitulate, and data remains accessible no matter what happens. It's a system called deduplication.
Lower Overhead
The cloud can save businesses a lot of money.
By outsourcing data storage to cloud providers, businesses save on capital and maintenance costs, money that in turn can be used to expand the business. Setting up an in-house data center requires tens of thousands of dollars in investment, and that's not to mention the maintenance costs it carries.
Plus, considering the security, reduced lag, up-time and controlled environments that providers such as Amazon's AWS have, creating an in-house data center seems about as contemporary as a buggy whip, a corset, or a Model T.
The cloud is where you want to be.
Global Market Comments
December 17, 2021
Fiat Lux
Featured Trade:
(DECEMBER 15 BIWEEKLY STRATEGY WEBINAR Q&A),
(FCX), (FCI), (TLT), (TBT), (BITO), (AAPL), (AMZN), (T), (TSLA), (BABA), (BLOK), (MSTR), (COIN)
