Global Market Comments
November 9, 2018
Fiat Lux
Featured Trade:
(PLAYING THE SHORT SIDE WITH VERTICAL BEAR PUT SPREADS), (TLT)
(WHY TECHNICAL ANALYSIS DOESN’T WORK)
(FB), (AAPL), (AMZN), (GOOG), (MSFT), (VIX)
Tag Archive for: (AMZN)
If you thought software week at the Mad Hedge Technology Letter was over, you were absolutely wrong.
I have done my best to offer a barrage of cloud-based software stocks with monstrous upside potential that would put any other industry companies six feet under.
Silicon Valley software companies have access to quinine in a mosquito-infested market – digitally savvy talent.
This talent is the best and brightest the world has to offer, and they want to work for a dominant company that gets it.
Much of this involves companies with bright futures, career opportunities galore, solving deep-rooted problems, all applying a treasure trove of data and a mountain of capital your rich uncle would giggle at.
In the short term, I have been succinctly rewarded by my software picks with communication software Twilio (TWLO) rocketing upward 35% intraday at the time of this writing from when I recommended it just a few days ago.
Another Mad Hedge Technology Letter recommendation Zendesk (ZEN), a software company solving customer support tickets across various channels, is up a tame 10% after the election.
All in all, I would desire readers to access due caution as the volatility can bite you badly with crappy entry points, but the upside cannot be denied.
The turbocharged price action means the pivot to software with its new best friend, the software as a service (SaaS) pricing model, encapsulates the outsized profits this industry will rake in going forward.
Without further ado, I’d like to slip in two more companies rounding out a robust quintet of software companies – I bring to you Workday (WDAY) and Service Now (NOW).
Workday is a software company based on a critical component of every successful company – human resources.
Unsurprisingly, human resources are tardy to this wave of software modernization.
Sensibly, companies have chosen short-term software fixes that drive profits with instant success rather than to update its human resource department’s processes.
Big mistake.
I would argue that getting the right people in the doors is paramount and can save substantial time because of the wasted time rooting out toxic employees who weren’t suitable fits.
Ultimately, I have concluded the worst-case scenario entails the enterprise resource planning market stagnating driving minimal growth to the cloud, however, this minimal growth would be substantial enough for Workday to outperform.
The landscape as of now only involves several vendors with a competitive (SaaS) solution auguring well for Workday allowing them to capture a further chunk of market share.
Workday’s growth metrics back up my thesis with its businesses posting a 3-year EPS growth rate of 291% and a 3-year sales growth rate of 36%, painting a picture of a company that will turn profitable in the next few years.
They can even showboat their glittering array of heavy-hitting customers who purchase their software that include Walmart (WMT), Target (TGT), and Bank of America (BAC).
The one headwind tarnishing these types of software companies is the stock-based compensation awarded to employees.
SBC rose 21% YOY and is slightly worrying in an otherwise stellar company. This method of compensation only works when the stock is rising and is a major issue for new Facebook (FB) hires who will prefer cash over its burnt-out share price.
If Workday doesn’t whet your appetite, then how about sampling a main dish of ServiceNow.
This company completes technology service management tasks offering a centralized service catalog for workers to request technology services or information about applications and processes that are being used in the system.
Admirably, this software helps IT workers fix IT system problems which in this day and age is useful considering the bottleneck of chaos many tech and non-tech companies face.
And more often than not, the chaos inundates the in-house IT departments causing the whole business to go offline.
Putting out digital fires is a perpetual business that will never flame out.
As websites and enterprise systems become more complicated, a bombardment of errors are prone to crop up and instant remedies are crucial to carrying out businesses in a time sensitive manner.
Even ask the best tech company in the universe Amazon (AMZN), whose move off Oracle’s (ORCL) database software was the ultimate reason for a serious outage in one of its biggest warehouses on this past Amazon Prime Day, according to Amazon’s internal documents.
The faux paux underscores the hurdles Amazon and other companies could face as they seek to move completely off the Oracle legacy database software whose development has stayed relatively stagnant for a generation.
The slipup was minutes and snowballed into excruciating hours on Amazon Prime Day resulting in over 15,000 delayed packages and roughly $90,000 in wasted labor costs.
Crikey!
These numbers didn’t even consider the wasted man-hours spent by developers troubleshooting and solving the errors or any potential lost sales.
When these mammoth tech giants are running at an incredible scale, a small blip can result in job losses, lost revenue, lost time, a slew of IT engineer sackings, and for some smaller companies, an existential crisis.
The large-scale acts as a powerful multiplier to the lost resources and cost, and as you can see with the Amazon debacle, a few hours can make or break a developer’s career.
Fortunately, IT budgets are higher up the food chain than human resource budgets while more than inching up every year. This is the main reason why I believe ServiceNow will outperform Workday.
The proof is in the pudding and when I scrutinize various metrics, the truth is filtered out.
ServiceNow’s quarterly growth rate is 35% which is higher than Workday’s who slipped back to 28% last quarter even though the 3-year growth rate is in the mid-30%.
Put mildly, accelerating sales growth is better than decelerating sales growth.
Both companies have a market cap in the low $30 billion and almost identical annual sales in the $2 billion range.
However, ServiceNow presides over significantly higher quarterly profit margins than Workday and will achieve profitability sooner than Workday.
In short, Workday loses more money than ServiceNow.
I believe in the underlying thesis of HR modernization underpinning Workday’s rapidly growing revenue and this secular trend is here to stay.
But I much rather put my hard-earned money on a company tied to IT modernization which is imminent and harder to put on the backburner because of its strategic position at the forefront of the tech curve.
HR CAN be put on the backburner and kept analog longer, and as the economy inches closer to a recession, this expense will be shifted further away from greener pastures supported by the fact that companies decelerate hiring new talent in poor economic environments.
To wrap it up, I do believe ServiceNow is the Burmese python consuming a cow, but that doesn’t mean I am bearish on Workday.
Workday will flourish, just not as much on a relative basis as ServiceNow.
Effectively, these stocks are well placed to move higher even after the violent moves upward this year. As the economic cycle moves further into the late innings, the importance of cloud-based software companies will become magnified further.
As for the software week at the Mad Hedge Technology letter, these solid five picks will offer deep insight into one of the most compelling parts of the internet sector.
As many observers have found out, not all tech firms are created equal and that is made even trickier with the existence of the vaunted FANGs who are the real Burmese python in the current tech landscape.
Global Market Comments
November 5, 2018
Fiat Lux
Featured Trade:
(THE MARKET OUTLOOK FOR THE WEEK AHEAD, or THE MAD HEDGE FUND TRADER HITS A NEW ALL TIME HIGH),
(AAPL), (FB), (RHT), (GE), (VXX), (AMZN), (SPY), (IWM), (CRM)
I used to do a lot of skydiving from 20,000 feet. There’s nothing like a freefall, feeling the wind rip at your jumpsuit as you plunge towards the earth at terminal velocity of 125 miles per hour. In the beginning, the ground looks very far away. Then it suddenly gets very close, very fast.
I used to do this during the 1960s with WWII surplus silk parachutes with a “double L” cut. You hit the ground like a ton of bricks. Sometimes, we’d swing back and forth from the wings of the airplane before letting go just to have fun and freak out the pilot who had no chute.
Over time, you develop a very accurate sense of how fast the ground is approaching and when to pull the ripcord. If you’re wrong, you die.
That’s how I felt when markets went into freefall last Monday. However, after a half-century of trading, I have a highly developed sense of where the bottom is.
So, I piled on the “bet the ranch” longs in technology stocks and shorts in the bond market right at the absolute bottom. And to make sure everyone to a man got in, shares swooshed down one final time when rumors spread that Trump was escalating the trade war with China once again.
By Wednesday morning, the Mad Hedge Fund Trader model portfolio had booked its largest two day gain since the inception of this letter 11 years ago, some 12%. By miracle of miracles, we ended up positive for October, virtually the only one to do so in the entire hedge fund industry.
I would like to think that 50 years of toil in the markets is finally starting to pay off for me. The truth is, the harder I work, the luckier I get.
Stocks lost $2 trillion in market value in October, off 6.9%. Other than that, how was the play, Mrs. Lincoln? Tech took the worst hit in a decade, with many favorites down 20%-30%.
I am raising as much cash as I can ahead of the Midterm Elections tomorrow. Democrats seizing the House of Representatives is priced into the market already.
If the Republicans end up keeping the House, you can count on at least a 1,000-point rally in the Dow Average in the next few days as the door is now open for more tax cuts, more deregulation, and more deficit spending.
If the Democrats end up taking both the Senate and the House you can look for a 1,000 point drop in the Dow. That would bring on a huge “flight to safety” bid in the bond market and yet another opportunity to sell short at great prices.
Either way, I want more dry powder with which to take advantage of any extreme moves that may take place. “Extreme” seems to be the order of the day.
By the way, we are so far in the money with our remaining positions that even with a 1,000 point drop we should still reap the maximum profit with the November 16 option expiration in only 9 trading days.
Not that it matters, but October Nonfarm Payroll Report came in at a red-hot 250,000. The headline Unemployment Rate remained at a two-decade low at 3.7%. The Broader U-6 “Discouraged worker” unemployment rate fell 0.1% to 7.4%.
For the first time in yonks, no sector lost jobs last month. HealthCare added 36,000 jobs, Manufacturing 32,000 jobs, and Leisure & Hospitality 42,000 jobs.
However, the real blockbuster was that Average Hourly Earnings exploded to a 3.1% YOY rate, the highest in ten years. Yes, ladies and gentlemen, this is what inflation looks like, up close and ugly.
The number immediately knocked the wind out of the bond market taking it to a new low for the year. Yes, this is what double short positions in bonds are all about. I saw this coming a mile off.
The backdrop for the bond market is looking worse than ever. The budget deficit is about to break $1 trillion for the first time since the 2009 crash. Rising interest rates mean the government’s debt burden is about to grow by leaps and bounds, eventually becoming its largest expenditure.
The US Treasury is hitting the markets daily with massive new issuance, and the Chinese are dumping what US bonds they have to support the Yuan, now at a ten-year low. This is what Armageddon looks like in slow motion.
Last week was dominated by a China trade war that was on again, then off, then on one more time. The stock market ratcheted four-digit figures every time this happened.
Apple (AAPL) announced record profits yet again but countered with cautious forward sales guidance. Social media pariah Facebook (FB) delivered an earnings report beyond all expectations popping the stock $10.
IBM took over Red Hat (RHT) for $33 billion, the third largest merger in history. It’s too little too late for Big Blue as the stock falls on the news. It all reeks of a “Hail Mary.”
General Electric (GE) cut its dividend from 12 cents a share to one cent after reporting a breathtaking $22.8 billion loss. The Feds have opened a criminal investigation into accounting practices. This may define the final bottom in the stock. Take another look at those long-term LEAPS.
My year-to-date performance rocketed to a new all-time high of +33.17%, and my trailing one-year return stands at 37.57%. October finished at +1.24% and that includes an ill-fated -4.23% loss in the iPath S&P 500 VIX Short Term Futures ETN (VXX).
And this is against a Dow Average that is up a miniscule 1.9% so far in 2018. So far in November, we are up an eye-popping +3.54%.
Incredible as it may seem, the Mad Hedge Fund Trader has been up 18 consecutive months. That’s what you pay for and that’s what you’re getting. There’s nothing more fulfilling in life than making promises to friends, then delivering in spades.
As the market collapses, I scaled into longs in Amazon (AMZN), the S&P 500 (SPY), the Russell 2000 (IWM), and Salesforce (CRM). I used the flight to safety bid in the bond market to double up my short position there, and am kicking myself for not going triple weight.
My nine-year return ballooned to 309.64%. The average annualized return stands at 34.72%.
All the BSDs are done reporting Q3 earnings and only a few tag ends are left to report. The carnage is over until we restart the cycle once again in February. In any case, economic data pales in comparison to the election in terms of market impact.
On Monday, November 5 at 10:00 AM, the ISM Manufacturing Index is out.
On Tuesday, November 6 is Election Day. Trading will be a subdued affair and the results will start coming out at 11:00 EST after the west coast polls close.
On Wednesday, October 24 we have the election aftermath to deal with. Up 1,000, down 1,000, or unchanged, who knows?
At 10:30 AM the Energy Information Administration announces oil inventory figures with its Petroleum Status Report.
Thursday, October 25 at 8:30, we get Weekly Jobless Claims. The Federal Open Market Committee meets to discuss interest rates but will take no action.
On Friday, October 26, at 8:30 AM, the October Producer Price Index is out, an important read on inflation.
The Baker-Hughes Rig Count follows at 1:00 PM.
As for me, I made a massive amount of money personally in the October crash. I am going to plop down $150,000 and buy a brand new Tesla Model X for myself. The ashtrays are full on the old one, and besides, there is a tiny nick in the windshield from driving up to Lake Tahoe. I hear the new one has new “Summon” technology that allows it to drive into a parking lot by itself and drive around until it finds an empty space, then back into it, all untouched by human hands.
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Knowing When You Hit the Ground is Crucial
My New Wheels
Global Market Comments
November 2, 2018
Fiat Lux
Featured Trade:
(OCTOBER 31 BIWEEKLY STRATEGY WEBINAR Q&A),
(EDIT), (TMO), (OVAS), (GE), (GLD), (AMZN), (SQ), (VIX), (VXX), (GS), (MSFT), (PIN), (UUP), (XRT), (AMD), (TLT)
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader October 31 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader.
As usual, every asset class long and short was covered. You are certainly an inquisitive lot, and keep those questions coming!
Q: I would like to keep CRISPR stocks as a one or two-year-old, or even longer if it is prudent. What do you think?
A: Yes, there is a CRISPR revolution going on in biotech—I’m extremely bullish on all these stocks, like Editas Medicine (EDIT), Thermo Fisher Scientific (TMO), and Ovascience Inc. (OVAS). If any of these individual companies don’t move forward with their own technology, they will get taken over. The principal asset of these companies is not the patents or the products, it’s the staff, and there is an extreme shortage in CRISPR specialists (and anybody who knows anything about monoclonal antibodies).
Q: Could you explain how to manage LEAPs? For example, the Gold (GLD) and the General Electric (GE) LEAPs. Sit and leave them or trade them short term?
A: You make a lot of money trading long-term LEAPs. Just because you own a year and a half LEAP doesn’t mean that you keep it for a year and a half. You sell it on the first big profit, and I happen to know that on both the Gold (GLD) and the (GE) LEAPs we sent out, people made a 50% profit in the first week. So, I told them: sell it, take the profit. The market always gives you another chance to get in and buy them cheap. You make the money on the turnover, on the volume—not hanging out trying to hit a home run.
Q: Why did you only close the Amazon (AMZN) November $1,550-$1,600 vertical bull call spread and not roll the strike prices down and out?
A: Well I actually did do the down and out strike roll out first, which is the super aggressive approach. By adding the November $1,350-$1,400 vertical bull call spread position on Monday at the market lows and doubling the size—we took a huge 30% position in Amazon and that position alone should bring in about $3600 in profits in two weeks, at expiration. And when I put on that second position I told myself that on the next big rally I would get out of the high-risk trouble making position, which was the November $1,550-$1,600 vertical bull call spread. So that’s how you trade your way out of a 30% drop in three weeks in one of the best tech stocks in the market.
Q: Is AT&T (T) no longer a good buy at these prices?
A: All of the telephone companies have legacy technology, meaning they are all dying. Basically, AT&T is about owning a bunch of rusting copper wire spread around the country. They haven’t been able to innovate new technologies fast enough to keep up with others who have. The only reason to own this is for the very high 6.56% dividend. That said, dividends can be cut. Look at General Electric which cut its dividend earlier this year. Whatever you make of the dividend can get lost in the principal.
Q: Do you think Square (SQ) is a good buy at this level?
A: Absolutely, it’s a screaming buy. It’s one of the favorite companies of the Mad Hedge Technology Letter and one of the preeminent disruptors of the banks. We think there’s another 400% gain in Square from here. It’s dominating FinTech now.
Q: When do you expect to close the short position in the iPath S&P 500 VIX Short-Term Futures ETN (VXX)?
A: If we can get the Volatility Index (VIX) down to $15, the (VXX) should crater. We’ll take a hit on the time decay and that’s why I say we may be able to sell it for 20 cents in the future when this happens. We’ll still take a 50% hit on the position, but half is better than none.
Q: What happened to Microsoft (MSFT) last week?
A: People sold their winners. They had a great earnings report and great long-term earnings prospects, but everyone in the world owned it. Buy the long-term LEAP on this one.
Q: If we want to double up on the iPath S&P 500 VIX Short-Term Futures ETN (VXX), how do you plan to do it?
A: Go out to further with your expiration date. When you go long the (VXX) you only buy the most distant expiration date. I would buy the February 15 expiration as soon as it becomes available.
Q: How do you see Goldman Sachs (GS) from here to the end of the year?
A: It may go up a little bit as we get some index money coming into play for year-end, but not much; I expect banks to continue to underperform. They are no longer a rising interest rate play. They are a destruction by FinTech play.
Q: Is it too soon for emerging markets in India (PIN)?
A: As long as the dollar (UUP) is strong, which is going to be at least another year, you want to avoid emerging markets like the plague. As long as the Federal Reserve keeps raising interest rates, increasing the yield differential with other currencies, the buck keeps going up.
Q: What are your thoughts on retail ETFs like the SPDR S&P Retail ETF (XRT)?
A: You may get lucky and catch a rally on that but the medium term move for retail anything is down. They are all getting Amazoned.
Q: Is it better to increase long exposure the day before the election?
A: No, what we saw starting on Tuesday was the pre-election move. That said, I expect it to continue after the election and into yearend.
Q: Any opinions on Advanced Micro Devices (AMD)?
A: Yes, this is a great level. It was extremely overbought two months ago but has now dropped 50%. It is a great long-term LEAP candidate.
Q: What about the W bottom in the stock market that everyone thinks will happen?
A: I’m one of those people. So far, the bottom for the move in the S&P 500 is looking pretty convincing, but we will test the faith sometime in the next week I’m sure. We got close enough to the February $252 low to make this a very convincing move. It sets up range trading for the market for the next year.
Q: How do you figure the inflation rate is 3.1%?
A: The year-on-year Consumer Price Index for September printed at 2.3%, and the most recent months have been running at an annualized 2.9% rate. Given that this data is months old we are probably seeing 3.1% on a monthly annualized basis now given all the anecdotal evidence of rising prices and wages that are out there. That is certainly what the bond market believes with its recent sharp selloff and why I will continue to be a fantastic short. Sell every United States US Treasury Bond Fund ETF (TLT) rally. Like hockey great Wayne Gretzky said, you have to aim not where the hockey puck is, but where it's going to be.
Q: Will rising interest rates kill the housing market?
A: It already has. A 5% 30-year mortgage rate shuts a lot of first time Millennial buyers out of the market. We are seeing real estate slowing all over the country. Los Angeles is getting the worst hit.
Q: How do you see the Christmas selling season going?
A: It’s going to be great, but this may be the last good one for a while. And Amazon is getting half the business.
Q: October was terrible. How do you see November playing out?
A: It could well be a mirror image of October to the upside. We are already $1,000 Dow points off the bottom. So far, so good. Throw fundamentals out the window and buy whatever has fallen the most….like Amazon.
Did I mention you should buy Amazon?
Good luck and good trading
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Ten Years of Consumer Price Index
Global Market Comments
November 1, 2018
Fiat Lux
Featured Trade:
(THE TERRIFYING CHART FORMATION THAT IS SETTING UP),
(SPY), (AMD), (MU), (AMZN), (NFLX),
(THE TECHNOLOGY NIGHTMARE COMING TO YOUR CITY)
The Mad Hedge Fund Trader is seeing its biggest one-day gains since the inception of our Trade Alert Service 11 years ago. By the time you read this, we will have picked up an astounding 11% profit for the entire portfolio in 24 hours.
However, this being Halloween, I don’t want to sound like I’m whistling by the graveyard. But what I am about to say will scare the daylights out of you.
I hate to say I told you so but my prediction a year ago that the bull market would end on May 10, 2019 at 4:00 PM is starting to look pretty good.
If I am right, the charts for the S&P 500 (SPY) are setting up a classic head and shoulders top. The left shoulder was created by the January 2018 rally to $282.
We just saw the head created at the beginning of October at $293. All that remains is to build the right shoulder back up to $282 by the spring. What will then follow is the crying.
This is not a matter of throwing a dart at a calendar or reciting a chant taught to me by a long-dead Yaqui Indian. It is a simple matter of math. Here’s how it goes:
*The Fed Raises funds rate 25 basis points per quarter for the next four quarters to 3.25%
*The Yields Curve Inverts, taking short rates higher than long rates now at 3.15%
*Bond yield spread trades increase massively going into the inversion as traders ramp up the size to make up for shrinking spreads.
*When the spread turns negative, they dump everything, creating an interest rate spike to 4% or 5%.
*Inverted yield curves last an average of 14 months or until February 2020 in this cycle when a recession begins.
*Stock markets peak on average seven months before recessions, and you arrive at Friday, May 10, 2019 at 4:00 PM EST as the date for the demise of the bull market. At that point, it will be ten years and two months old, the longest such move in history.
A lot of people asked why I sent out so few trade alerts during the summer and going into the fall.
In fact, the list of negatives has reached laughable proportions:
*Longest bull market in history
*In the face of rising interest rates
*In the face of rising oil prices
*Rising inflation
*Nothing else to buy
*Only bull market in the world
*Valuations approaching two-decade highs
*Overwhelmingly concentration in big cap tech
*Double top in the market on an Equal Weight S&P 500 chart
*Record retail inflows into ETFs
*Recession has already started in the auto industry
*Recession has already started in the housing industry
*Rotation to value defensive stocks underway
*Massive unicorn IPOs planned in 2019- $215 billion
*Slowing GDP Growth 4.2% to 3.5%
*Large amount of economic growth sucked forward from 2019 as businesses accelerate Chinese imports to beat the tariffs
*The same is going on in China to buy our exports
Should you throw up your hands, dump all your stocks, and hide out in cash?
Absolute not! In fact, the last six months of a bull market are often the most profitable. Many tech stocks like Micron Technology (MU) and Advanced Micro Devices (AMD) have dropped by half in recent months. That means they have to double to get back to their old highs.
Other big quality stocks such as Amazon (AMZN) and Netflix (NFLX) have plunged by 30% and only have to appreciate by 43% to hit highs. It is, in fact, the best entry point for large-cap tech stocks since 2015 with valuations at a three-year low.
If I am wrong, the trade war with China plunges us into recession and ends the bull market sooner. Almost all the “worry” items on the list above are getting worse by the day.
Save That Date!
Mad Hedge Technology Letter
November 1, 2018
Fiat Lux
Featured Trade:
(LOOK AT ZENDESK FOR YOUR NEXT TEN BAGGER)
(ZEN), (RHT), (AMZN), (MSFT), (CRM), (IBM), (SNAP)
At the recent Mad Hedge Lake Tahoe Conference, I pinpointed software companies as a robust group of tech stocks that are the perfect late cycle investment in the economic environment we find ourselves in now.
To add some granularity about my thesis, I would like to start elaborating on an up-and-coming software stock that I find compelling and in the middle of a growth sweet spot.
And with the rapacious pullback, the tech sector has experienced as of late, this high-octane growth stock is poised to rev back up, albeit with more than your average volatility attached to its stock symbol.
If you can stomach the volatility, then Zendesk (ZEN) is the company for you to dip your toe in.
Zendesk is a customer service software offering solutions to clients through a flexible platform revolving around customer service tickets.
This $6 billion market cap tech firm thriving in the dodgy San Francisco Tenderloin district only need to be reminded of how fast a tech firm can be disrupted by stepping out of the office and experiencing ground zero of the San Francisco homeless movement in the scruffy Tenderloin.
I usually get lambasted for the lack of time I spend following budding tech firms, but you cannot blame me when the bulk of this year’s stock market gains have been extracted by the biggest and mightiest tech titans.
That does not mean all small tech is dead, but they certainly do have heightened existential risk because of the Amazons (AMZN) and Microsofts (MSFT) of the world, spreading their network effects far and wide.
International Business Machines Corporation’s (IBM) purchase of cloud company Red Hat (RHT) underscores the value of applying M&A to grow the top and bottom line, and the chronic bidders of these smaller minnows are usually the Amazons and Microsofts themselves who have the cash to dole out.
Salesforce (CRM) is always adding to its arsenal of integrated software companies that can scale up in the cloud, and Marc Benioff’s M&A strategy has thrived to devastating effect boosting the bottom and top line.
I must admit, tech does get the rub of the green over other industries because of the scaling effect afforded to profit poor tech companies.
The ample time to prove to investors they can snatch a growing user base, enhance product offerings, and develop an eco-system intertwined with recurring subscription products is not fair to other industries who are judged on different metrics mainly profits and profits now.
Well, life isn’t fair.
The addressable market is usually massive causing investors to stick with these burgeoning tech firms through thick and thin.
Zendesk is another company burning money, but let me tell you, they are no Snapchat (SNAP).
Operating margins are marching towards positive territory, meaning this outfit is well-run.
It was only at the beginning of 2015 when Zendesk’s operating margin registered -53%, and since then, they have dramatically reduced it to -36% at the end of 2016 and now -24% in 2018.
Gross margins next quarter will be hit a bit with its acquisition of Base CRM, headquartered in Mountain View, California and R&D offices in Krakow, Poland, offering a web-based all-in-one sales platform featuring tools for email, phone dialing, pipeline management, and forecasting.
Improving service offerings in the tech world usually means nabbing niche cloud companies that can easily be integrated into the larger eco-system and Base CRM, even though it has lower margins than Zendesk, is a nice pickup for the company boosting the top line while expanding cross-selling activities.
Then there is the sales revenue growth demonstrating all the hallmarks powerful software companies live up to with its 39% quarterly revenue growth.
Zendesk’s management has remarked that they fully expect to hit $1 billion in total sales by 2020 which is more than double the 2017 annual revenue of $430 million.
This year, Zendesk is forecasted to post just shy of $600 million in sales.
Large clients keep piling in hoping to modernize their customer service operations and wean themselves off the siloed legacy systems.
Disruption by some fresh newcomer in a disruptive industry that they operate in is usually the trigger forcing companies to spruce up their customer service software.
This path of migration will healthily continue for Zendesk reaffirming management’s thesis of $1 billion in sales by 2020.
Zendesk, flaunting off their innovation skills, identified the universal popularity of messenger app WhatsApp as an effective platform for its services and rolled out a product that integrates Zendesk services with WhatsApp.
This will allow businesses to manage customer service interactions and engage with customers directly on WhatsApp.
The customized integration links conversations between businesses and their customers on WhatsApp within Zendesk.
This move will allow Zendesk to stretch their tentacles further and wider while being able to provide faster support for customer service tickets which are incredibly time-sensitive.
Since management highlighted that WhatsApp is the go-to messenger in Asia Pacific and Latin America, there was no reason not to extend their offerings in a way that captures this vital userbase.
The WhatsApp pivot has been a nice addition with Zendesk’s management remarking that they “handle over 20% of our order status inquiries daily with WhatsApp and Zendesk, which is much faster than traditional methods.”
Omnichannel support within Zendesk’s platform will be key to securing the growth it needs to reach its $1 billion of sales milestone.
Innovation is the crucial ingredient in constructing the perfect products that can maximize customer service performance.
Its overseas exploits are not just a flash in the pan with its services supported in 30 languages and offices in 15 different countries. It all makes sense considering half their revenue is outside of America.
With IBM’s recent acquisition of Red Hat, buyers are still hunting for the right pieces to add to their portfolio.
The Red Hat purchase proved that demand still eclipses supply by a far margin.
Zendesk is one of those in the queue for a big buyer to swoop in with a mega offer.
It’s no guarantee that a company will pay a 63% premium like IBM did, but some sort of premium will be definitely warranted.
Zendesk offers the type of robust growth and premium cloud services that could easily fit into a bigger cloud player looking to improve their assortment of cloud tools.
This type of tailwind itself will naturally boost the stock by 5-10% alone if the macro picture can somehow manage to gain footing for the rest of the year.
As with the rest of tech, Zendesk dipped about 20% in the last 30 days but by no means does that mean this is a bad company with a weak future.
I would very much argue the opposite.
The weakness in sales offers a prime entry point in a fast-growing company that is part of the software and cloud movement that I have incessantly harped about.
If this company can show continued operating margins growth, maintain sales growth of above 30% YOY, and demonstrate product innovation, this stock will break out to higher levels.
As of now, that is exactly the road they are headed down.
Business abroad is doing so well that Zendesk recently splurged on a Europe, Middle East and Africa (EMEA) headquarters in Dublin, Ireland coined as the “the tech capital of Europe.”
Zendesk started with two employees in Dublin in 2012 and now boast over 300 employees occupying 58,000 square feet in a new office costing $10 million.
By 2020, Zendesk expects to build their Dublin branch to over 500 employees implying that the overseas pipeline is ripe for the taking.
I am highly bullish Zendesk and recommend that readers check out this attractive growth story.
SNAZZY NEW HEADQUARTER IN DUBLIN
