Mad Hedge Technology Letter
October 21, 2020
Fiat Lux
Featured Trade:
(WILL ANTITRUST PROBLEMS UNLEASH GOOGLE?)
(GOOGL), (AMZN), (FB), (AAPL)
Tag Archive for: (AMZN)
The Department of Justice and 11 U.S. states filing an antitrust lawsuit against Google isn’t as bad as it seems.
Abusing its monopoly power to make Google the default search service on browsers, mobile devices, computers, and other devices has meant quarter after quarter of cash cow growth.
Alphabet’s cash reserves are to the point where they can fritter away capital on loss-making divisions like autonomous driving technology Waymo.
Yes, it’s true that Google is no longer the scrappy start-up that they once were, but that doesn’t matter, and they certainly have the financial balance sheet to deal with any litigation that might or might not take place.
Part of the Google shares not selling off was validation that they are resourceful enough to get through this unscathed and they certainly have had years to prepare how to defend itself through the courts.
Google let their position known publicly by tweeting that the “lawsuit by the Department of Justice is deeply flawed. People use Google because they choose to — not because they're forced to or because they can't find alternatives.”
The standard corporate speak that Google uses is just a sign of the times where big tech has dwarfed the banks, is too big to fail and of pure clout in American government, business and society.
This has been a long time coming as the firm has been under investigation by the Justice Department, the Federal Trade Commission, and state attorney general that its search engine and digital advertising businesses may operate as illegal monopolies.
The specific lawsuit will likely reference competitors like Bing for denying them access to user data, as well as targeting Google’s “search advertising.”
It was only in July, Alphabet CEO Sundar Pichai, along with the CEOs of Amazon (AMZN), Apple (AAPL), and Facebook (FB) appeared before a hearing of the House Judiciary Committee’s Subcommittee and were made to look bad for their dominant position in the digital ad game.
Google has repeatedly pointed to earlier antitrust investigations by the FTC and state attorney general into its display search business that concluded in 2013 and 2014 without incident but they surely have known that this issue would pop back up time and time again.
The knock-on effects have been drastic with American innovation sapped of its incubatory juices.
In the modern age of tech, it’s almost impossible to build a unicorn from scratch without getting your business model hijacked from one of the anti-competitive tech firms.
And now — there are 6 tech firms that use their scale and power to drag down innovation.
The consequences have been higher share prices for big tech because if they can’t scare competition out of place, they will either buy them or find internal ways to sabotage their business ala Yelp.
Google’s digital advertising business has faced accusations due to its unrivaled size and volume which is also why it makes so much money.
The company controls some of the most important links in the online advertising chain, centrally its DoubleClick platform, a premier tool for online publishers, helping them to create, manage, and track online marketing campaigns.
This is why the “internet” or the companies that have access to tracking technology know everything about you and can front run the marketing process to cater towards you.
Acquired in 2007, DoubleClick was cited by Senator Elizabeth Warren (D-MA) as one of the major acquisitions Google should be forced to unwind to improve competition in the advertising space.
If DoubleClick were to unwind itself from Google, they would be an instant unicorn out of the gate.
And that isn’t just the only unicorn in the stable, there are many stand-alone unicorns in Google’s umbrella of assets — from Gmail, Google Cloud, Google Maps, YouTube, and even Google’s hardware division that manufactures phones such as the Google Pixel line.
I believe in the argument that the sum of the parts is dragging down each segment meaning once broken from the Alphabet death grip, each unicorn would be able to pursue decisions that are best suited for their own division and not just the parent company Alphabet.
There is only so long that each unicorn is willing to play for the team and once they go out into the wild, each will become its own unique growth company.
One possibility is Google’s search business spun out while the other businesses stay inside under parent company which is also viable since the investigations specifically pinpoint Google search.
Google search controls more than 90% of the world’s search traffic market share and most notably, Yelp complain about Google favoring its own products in search results.
In July, a Wall Street Journal investigation found Google’s search algorithm biased towards its own YouTube videos in search results over those of other services.
Google’s repeated abuses would likely be mitigated just by spinning out Google search and not allowing them to favor itself.
It is highly unlikely that a stand-alone Google search business would cede market share because they are simply the best search engine by a country mile.
They would most likely expand on the lead they already have.
In either case, if Google isn’t broken up, they win, and the share price will rise.
If they are broken up, the victory will be even more emphatic while supercharging each individual asset ending up in an even higher share price.
This could finally offer a jolt of innovation into the stagnant tech space which honestly has too many too-big-to-fail companies that are focused more on financial engineering at this point.
Mad Hedge Technology Letter
October 19, 2020
Fiat Lux
Featured Trade:
(ROLL OUT THE OVERSTOCK.COM PLAYBOOK)
(OSTK), (AMZN)
As the virus engulfs the U.S. once again — I can’t help but think it’s time for the 2nd wave of Overstock.com (OSTK) going ballistic again.
Highlighting the insanity of 2020, Overstock.com shares were trading at a pitiful $2 on March 11 and then lockdowns happened, and the stock never looked the same again.
To say that underlying shares went parabolic is an understatement, the meteoric rise from $2 to $115 in a 5-month span is stuff of legends.
Remember that Overstock.com was just a middling backwater stock almost as Myanmar’s mediocre geopolitical status is to the Asian continent.
In fact, shareholders were in the process of searching for a buyer — in a way waving the white flag as a resentful ending to a half-hearted try to catch Amazon’s (AMZN) e-commerce business.
Overstock.com sells everything from baby toys to wrought iron firepit décor.
If it’s for the home or something related, they probably have it in store for you and as Covid has throttled the population’s go-to shopping places from strip malls to the shopping lanes of America, Overstock.com has become an outsized winner.
Let’s get into the weeds of their business.
With the tectonic shift to e-commerce likely permanent, shares can keep rallying specifically because the risk of another lockdown is increasing and the virus spreads again.
Multiple catalysts, both on the macro and micro level that can drive continued upside to revenue meaning high estimates for Ebitda (earnings before interest, taxes, depreciation, and amortization).
Bricks-and-mortar stores will continue to bleed market share to online competition even if the virus is handled, providing a tailwind for Overstock into 2021.
The company’s improved pricing model will shoot margins higher, while it also works to broaden its target audience and expand marketing.
Overstock has evolved in recent years, thanks to new management and a new strategy, which includes a timely focus on home goods, a retail standout during the pandemic. It also has blockchain-based ventures that bulls say the market is ignoring.
The one-sentence answer to why the stock has gone ballistic is easy — 109% revenue growth year over year.
The company ended the quarter with a healthy balance sheet that included a cash balance of over $300 million.
Overstock Retail's exceptionally strong second-quarter performance was on fire supporting a 200% increase in new customers, and profitability, as measured by adjusted EBITDA, improved by $51 million year over year.
A key takeaway here is the scalability of Overstock’s pure-play e-commerce model and efficiencies created through partner drop-ship program.
Overstock’s overarching goal is to create operating leverage by growing top line at a faster pace than operating expenses.
Overstock is profitably gaining new customers and making progress toward achieving sustainable, profitable growth long term.
Last quarter, revenue from their Retail business was a record $767 million and customers are increasingly finding and purchasing products in core home furnishings categories.
Compared to the second quarter of 2019, new customer growth increased by over 200%, and Overstock has experienced strong customer purchase repeat behavior.
Gross margin improved by almost 3.5% year over year and the margin improvements were fueled largely by operational efficiencies, as well as several onetime items unique to the second quarter of 2020.
The onetime items included lower costs from being understaffed in the customer care organization as Overstock adjusted to increased sales volumes, a benefit from fulfillment-related charges as part of the service level agreements to protect customers' experience, and lower discounting activity as they strategically balanced marketing efforts against product availability and stockouts.
Operating expenses improved 5% as management was able to leverage technology expenses, illustrating the strong operating leverage inherent in an e-commerce business.
Overstock is one of a slew of internet companies that will harvest the fallout from another spread of the virus.
I believe it’s time to roll out the Overstock playbook again and buy and hold shares.
For short time traders, this is a beast of a stock to execute short-dated trades on because of the elevated volatility, but in general, I am bullish on this company through 2021.
Global Market Comments
October 9, 2020
Fiat Lux
Featured Trade:
(THE NEW AI BOOK THAT INVESTORS ARE SCRAMBLING FOR),
(GOOG), (FB), (AMZN), MSFT), (BABA), (BIDU),
(TENCENT), (TSLA), (NVDA), (AMD), (MU), (LRCX)
Mad Hedge Technology Letter
October 5, 2020
Fiat Lux
Featured Trade:
(THE AMAZON OF LATIN AMERICA)
(MELI), (AMZN), (ASML)
If you thought you missed profiting off of Amazon then you’re in luck; you still have another chance with the South American iteration of Amazon – MercadoLibre (MELI).
This e-commerce and payments platform in Latin America boasts presence in 18 countries within South and Central America but derives the bulk of its revenue from three countries: Brazil, Argentina, and Mexico.
MELI is the entrenched e-commerce player in the region and has multiple retailer solutions such as MercadoLibre Marketplace (an online platform for the buying and selling of merchandise), Mercado Pago (an online payments solution), and Mercado Envios (a logistics solution).
The company's market-leading position revolves around a strong network effect that has allowed it to expand its exploding user base as well as its gross merchandise volume (GMV).
In 2015, MELI had around 145 million registered users, and that number has more than tripled by 2020.
The tectonic shift toward digital transactions network caused by the pandemic means the number of items sold jumped 66% year over year to 284 million, and the number of unique active users climbed 27% year over year.
It’s undeniable that the company has strong tailwinds backing its overarching story.
MELI was already primed for a strong growth trajectory before the pandemic crushed the global economy.
The company was savvy in introducing new and useful services over the years to solve digital bottlenecks, and its suite of services made customers stickier toward its platform.
Hosting an integrated e-commerce and payments platform meant an unrelenting buildup of new vendors and users coming on board over time.
MELI looks set to take the next step in e-commerce penetration.
Although its growth has been phenomenal over the last decade, I believe the company may be on the cusp of doubling its growth rate because of the rapid digitalization by businesses.
A share repurchase program has been set in motion and I do believe they will dip into this financial tool once the global economy stabilizes.
Getting into the weeds, MELI expanded its category-take rates to Chile and Mexico in Q2 2020, with Brazil and Argentina set for last half of 2020.
For online marketplaces like what Amazon and eBay offer, the take rate refers to the fees and commissions that the companies collect on sales by third-party sellers which is critical to overall revenue.
The successful take rate rationalization could drive sellers to list more of their inventory and reduce prices.
With this increased supply, MELI should be seeing the cascading benefits of an improving shopping experience and rising conversion rates.
Scaling this beautifully translates to lower per-unit logistic costs such as sequential 23% decrease in unit shipping costs.
Ala Amazon, its drive to step up the buildout of its own logistics network to take down the dependency on Correios in Brazil is yielding meaningful results and also places the company to potentially buttress a greater amount of free shipping subsidies as the unit cost of deliveries continues to swan dive.
Logistics transforming into a higher reliability, faster shipping times, and greater cost savings offering can be passed along to the consumer upgrading the quality of service.
Soon, MELI is expected to invest in Consumer Electronics and price competitiveness could see the company grab market share taking down yet another adjacent industry.
At some point, like Amazon, MELI will target the grocery market and will have the logistic infrastructure in place to do the same type of 1-day “free” shipping that Amazon guarantees.
On the digital payments side of the business, MELI has sold over 1 million mobile point-of-sale (mPOS) devices, versus 900,000 during Q1 2020, driven primarily by smaller merchants.
The individual bull case for MELI is rock-solid but feeling out the global state of affairs is a must in a quickly changing environment.
With an onslaught of stimulus in Europe and the U.S. to deal with the pandemic, China’s economy beginning to recover, and a weaker dollar, foreign markets are becoming more attractive to U.S. investors.
Emerging markets could turn from stock market pariah to darling in a nanosecond and if investors are comfortable with targeting companies in higher growth markets, then MELI should be an option.
Emerging markets broadly have lagged behind developed market peers over the past decade, even as some fund managers have found investing in domestically-oriented companies in India, China, or Brazil hugely rewarding—just look at the outperformance by foreign brand names like Alibaba Group (BABA), Meituan Dianping and HDFC Bank (HDFC) in India just to name a few.
It’s true that more developed markets have the advantages of greater trading liquidity, minimal systemic risk, better corporate governance, and greater access to dollar-denominated debt that emerging markets’ companies don’t benefit from.
Therefore, investors seeking a conservatively biased portfolio should only focus on U.S. tech brand names that have moats around their business model.
Another second derivate play would be to find U.S. tech companies that siphon a big chunk of sales in emerging markets and are U.S. companies like Apple (AAPL), Nvidia (NVDA), and Mastercard (M).
Each secures between one-third and two-thirds of sales from emerging markets. But with those companies vulnerable to the geopolitical trip wire between the U.S. and China, proportioning a small amount of the portfolio to a Latin American tech growth firm could produce alpha.
Another quick recommendation is ASML, a semiconductor chip company from the Netherlands.
It’s an option generating outsized sales coming from emerging markets but is headquartered in an economically responsible country.
This Dutch tech firm boasts positive free cash flow yields, a sign the company is generating ample cash to operate and also reinvest in itself.
Investors who can stomach greater risk levels and desire growth should take a serious look at MELI, plus the myriad of other tech recommendations I offered if MELI doesn’t suit your appetite.
Global Market Comments
September 23, 2020
Fiat Lux
Featured Trade:
(AN INSIDER’S GUIDE TO THE NEXT DECADE OF TECH INVESTMENT),
(AMZN), (AAPL), (NFLX), (AMD), (INTC), (TSLA), (GOOG), (FB)
Last weekend, I had dinner with one of the oldest and best performing technology managers in Silicon Valley. We met at a small out of the way restaurant in Oakland near Jack London Square so no one would recognize us. It was blessed with a very wide sidewalk out front and plenty of patio tables to meet current COVID-19 requirements.
The service was poor and the food indifferent as are most dining experiences these days. I ordered via a QR code menu and paid with a touchless Square swipe.
I wanted to glean from my friend the names of the best tech stocks to own for the long term right now, the kind you can pick up and forget about for a decade or more, a “lose behind the radiator” portfolio.
To get this information I had to promise the utmost confidentiality. If I mentioned his name, you would say “oh my gosh!”
Amazon (AMZN) is now his largest holding, the current leader in cloud computing. Only 5% of the world’s workload is on the cloud presently so we are still in the early innings of a hyper-growth phase there.
By the time you price in all the transportation, labor, and warehousing costs, Amazon breaks even with its online retail business at best. The mistake people make is only focusing on this lowest of margin businesses.
It’s everything else that’s so interesting. While its profitability is quite low compared to the other FANG stocks, Amazon has the best growth outlook. For a start, third party products hosted on the Amazon site, most of what Amazon sells, offer hefty 30% margins.
Amazon Web Services (AWS) has grown from a money loser to a huge earner in just four years. It’s a productivity improvement machine for the world’s cloud infrastructure where they pass all cost increases on to the customer who, once in, buys more services.
Apple (AAPL) is his second holding. The company is in transition now justifying a massive increase in earnings multiples, from 9X to 40X. It now trades at 30X. The iPhone has become an indispensable device for people around the world, and it is the services sold through the phone that are key.
The iPhone is really not a communications device but a selling device, be it for apps, storage, music, or third party services. The cream on top is that Apple is at the very beginning of an enormous replacement cycle for its installed base of over one billion phones. Moving from up-front sales to a lifetime subscription model will also give it the boost.
Half of these are more than four years old, positively geriatric in the tech world. More than half of these are outside the US. 5G will add a turbocharger.
Netflix (NFLX) is another favorite. The world is moving to “over the top” content delivery and Netflix is already spending twice as much on content as any other company in this area. This is why the company won an amazing 21 Emmys this year. This will become a much more profitable company as it grows its subscriber base and amortizes its content costs. Their cash flow is growing by leaps and bounds, which they can use to buy back stock or pay a dividend.
Generally speaking, there is no doubt that the pandemic has pulled forward some future technology demand with the stay-at-home trend. But these companies have delivered normal growth in a hard world. Tech growth will accelerate in 2021 and 2022.
5G will enable better Internet coverage for everyone and will increase the competitiveness of the telecom companies. Factory automation will be another big area for 5G, as it is reliable and secure and can be integrated with artificial intelligence.
Transportation will benefit greatly. Connected self-driving cars will be a big deal, improving safety and the quality of life.
My friend is not as worried about government threatened breakups as regulation. There will be more restraints on what these companies can do going forward. Europe, which has no big tech companies if its own, views big American tech companies simply as a source of revenues through fines. Driving companies out of business through cutthroat competition is simply not something Europeans believe in.
Google (GOOG) is probably more subject to antitrust proceedings both in Europe and the US. The founders have both retired to pursue philanthropic activities, so you no longer have the old passion (“don’t be evil”).
Both Google and Facebook (FB) control 70% of the advertising market between them, which is inherently a slow-growing market, expanding at 5% a year at best. (FB)’s growth has slowed dramatically, while it has reversed at (GOOG).
He is a big fan of (AMD), one of his biggest positions, which is undervalued relative to the other chip companies. They out-executed Intel (INTC) over the last five years and should pass it over the next five years.
He has raised value tech stocks from 15% to 30% of his portfolio. Apple used to be one of these. Semiconductor companies today also fall into this category. Samsung with 40% margins in its memory business is a good example. Selling for 10X earnings, it is ridiculously cheap. It is just a matter of time before semiconductors get rerated too.
He was an early owner of Tesla (TSLA) back in the nail-biting days when it was constantly running out of cash. Now they have the opposite problem, using their easy access to cash through new share issues as a weapon to fight off the other EV startups. Tesla is doing to Detroit what Apple did to the cell phone companies, redefining the car.
Its stock is overvalued now but will become much more profitable than people realize. They also are starting to extract services revenues from their cars, like Apple has. Tesla will grow revenues 30%-50% a year for the next two or three years. They should sell several million of the new small SUV Model Y. Most other companies bringing EVs will fall on their faces.
EVs are a big factor in climate change, even in China, the world’s biggest polluter. In Europe, they are legislating gasoline cars out of existence. If you can make money building cars in Fremont, CA, you can make a fortune building them in China.
Tech valuations are high, there is no doubt about it. But interest rates are much lower by comparison. The Fed is forcing people to buy stocks, enabling these companies to evolve even faster.
When rates rise in a year or so, tech stocks may have to come down. They have a lot more things going for them than against them. The customers keep coming back for more.
Needless to say, the above stocks should make up your shortlist for LEAPS to buy at the coming market bottom.
Global Market Comments
September 21, 2020
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or HERE’S THE BLACK SWAN FOR 2020),
(SPY), (INDU), (TSLA), (JPM), (TLT), (C),
(V), (GLD), (AAPL), (AMZN), (UUP)