(AMZN) Archives

Is Walmart the Next Amazon?

Warren Buffett is right, retail is a tough game in the face of the Amazon (AMZN) threat.

I wouldn't want to face off with them either.

Technology has been the biggest catalyst fueling a tectonic shift in the retail climate with large cap technology players usurping market share decimating competition.

The rise of e-commerce platforms has been nothing short of spectacular.

Management has also used technology to modernize the global supply chain, in-house operations, and ramp up the hyper-targeting of prime customers.

The treasure trove of big data collected has been the key to pinpointing the weaknesses and finding solutions.

Amazon knew all of this before everybody else. And, Jeff Bezos has already annihilated a large swath of the retail community that will never return.

Walmart was one of the first retailers to wipe out the small brick-and-mortar shops, and Amazon is attempting to do what Walmart did to others in the past.

Luckily, the sleeping giant of Walmart (WMT) has awoken and is laying the groundwork to launch a full-frontal assault on Amazon.

Better late than never.

More than 90% of Walmart's customers live within a 15-minute drive of one of their stores, but why drive 15 minutes with exorbitant gas prices when Amazon says you don't have to?

Once a laggard, Walmart is now instilling its newfound e-commerce operation with a new sense of zeal and purpose, offering Amazon a real threat and copying its best ideas such as two-day free shipping.

Someone must stand up to Amazon. And Walmart with its massive embedded base of loyal and fervent customers and revenue is the ideal challenger.

Currently, Amazon has extracted more than 49% of the U.S. e-commerce market in 2018.

Walmart trails Amazon by a wide margin, and the investment into developing its e-commerce business will boost the 3.7% e-commerce market share.

If Walmart maintains the drive to enhance tech operations, its e-commerce division could double its market share to more than 7.5% from its low base.

This is entirely manageable as it would only need to convert a small percentage of current non-digital customers into using its digital portals whose quality has remarkedly improved the past few years.

Redesigning the official website was timely as the new interface is sleeker, more functional than past versions, and just plain better.

There is even a tinge of Amazon in the design borrowing the best parts of its foe's design and integrating it into a modern look.

The statement of intent is there, and Amazon won't have a frictionless pathway to profits anymore.

Walmart CEO Doug McMillon has been the main man to ramp up the tech side of the business and has injected a fresh batch of youth into the management style.

Online purchases only comprise less than 20% of sales and that runway is still long and wide for a company that has only barely scratched the surface of its tech strategy.

Most tech companies are in the first innings of a long game, but Walmart is even further behind meaning there is ample room to grow.

Even McMillon believes that Walmart will morph into a certain "kind of technology company" going forward.

Not only is it beefing up its digital commerce strategy, but physical stores are getting makeovers to extract additional marginal revenue from each customer.

Walk into your nearest Walmart and you might notice it looks completely different than your father's Walmart.

It is also dabbling a bit with augmented reality to boost the in-store customer experience.

Walmart has installed an avalanche of self-checkout kiosks at the front of the store to ease and quicken customer payment.

The use of big data analytics is now aiding decisions on how to best create the optimal shopping environment for its customers.

In-store pickup automated machines called towers help customers in picking up their goods if they choose to drive to the physical store, thereby enhancing the customer service quality.

Walmart is no longer playing defense and sticking to what it knows.

It is on the front foot and should be.

Walmart announced e-commerce sales spiked 40% YOY in Q, and the man responsible for this execution is Marc Lore.

Who is Marc Lore?

Marc Lore is the chief executive officer of Walmart eCommerce U.S., and the showdown against Amazon is a personal gripe for him.

Lore joined Walmart when his e-commerce company Jet.com was snapped up for $3.3 billion in 2016.

This was more of a talent and expertise grab that Walmart needed at the time to learn the ropes of the e-commerce business to better understand how to respond to Amazon.

Before Jet.com and Walmart, Lore was on the books at Bezos' Amazon.com where his feud began.

Lore joined Amazon by way of his e-commerce company Quidsi, which he cofounded and which was bought by Amazon for $545 million in 2011.

Following Amazon's purchase, Lore and Bezos did not always see eye to eye on how Quidsi would operate inside the confines of Amazon, creating long-lasting tension that has turning into bad blood.

Quidsi specialized in certain genres such as baby products and household goods. After Amazon sucked all the knowledge and life out of Quidsi, it fired the remaining 260 employees at its New Jersey headquarters and closed down the firm.

Bezos cited "unprofitability" for shuttering Quidsi, and the thinly veiled parting shot at Lore registered deeply inside the back of his mind.

Lore reinvented himself and launched a new e-commerce business called Jet.com.

After being absorbed by Walmart, Lore was repositioned to the top of Walmart's e-commerce division leading the helm.

Lore understands how to take on Amazon after working inside its Seattle headquarters for years after the Quidsi integration and knows how to beat the company at its own game.

He is the perfect person to help Walmart infuse success into its e-commerce division. Walmart is the optimal platform for Lore to get revenge against Jeff Bezos.

A win-win proposition.

Walmart e-commerce business is on track to rise 40% in 2018.

A few changes he set off right away were the expansion of Walmart's online selection adding more than 1,100 brands, setting up a creative discount program attracting more shoppers into physical stores, cooperating with Google to integrate voice-activated shopping mechanisms, and signing up a new in-house brand called Bonobos to design an exclusive portfolio of brands mirroring Amazon's 76 private labels on its platform.

Lore even took a page out of Amazon's playbook and made two-day free shipping possible for millions of products through its website.

Warren Buffett has said in the past that not investing in Amazon and not investing more in Walmart when he had the chance were two of his most regrettable mistakes.

It could be true that this time around Buffett jumped the gun in unloading his Walmart shares. I agree that retail can be scary, but not all retail is created equal.

For some particular retailers such as Walmart, the future doesn't look so bad.

I agree with Buffett that Walmart has more than tough competitors, but if Walmart emphasizes its digital first strategy via mobile and desktop, there is a lot of wiggle room to harvest gains from these positive changes.

Walmart has been used to growing 1% to 2% in U.S. same-store sales per year, and it was habitually assumed as a constant.

The growth of 4.5% proves that tech investments are paying dividends and even though margins are pressured, it's a must to stay competitive.

If Walmart can lure in growth investors who believe in the evolving tech narrative, it would expand the variety of investors interested in Walmart.

Walmart has a lot going for them and sometimes that gets lost around all the hoopla about the Amazon threat.

Walmart has the mind-boggling scale retailers dream of and migrating its own customers online is the key to unlocking new value.

Certainly, these customers will purchase more products after algorithms identify the products customers desire to buy.

Margins will suffer somewhat from this new strategy, but growing pains and reinvestment are sorely needed to turn around the ship.

Luckily, this legacy retailer is on the right path and has hit on the right strategy.

Once the technology is running efficiently, the average revenue per user will start to rise as with for all top-tier technology companies because of leveraged scale making it possible to boost profits.

In addition, there is potential digital ad business to nurture along if Walmart can shift a decent number of legacy customers to mobile or desktop platforms.

The future doesn't look so bleak for Walmart, neither does its share price.

________________________________________________________________________________________________

Quote of the Day

"We will compete with technology, but win with people." - said CEO of Walmart Doug McMillon.

August 16, 2018

Tech Letter

Mad Hedge Technology Letter
August 16, 2018
Fiat Lux

Featured Trade:
(WILL AMAZON EAT GOOGLE'S LUNCH),
(AMZN), (FB), (GOOGL)

Will Amazon Eat Google's Lunch?

Tech Letter

And then there were three.

That's right, Amazon (AMZN) will join Facebook (FB) and Alphabet (GOOGL) as the last member of the triumvirate dominating the global digital ad industry.

That is what all signs are pointing to.

In a survey conducted by PricewaterhouseCoopers (PwC), the global digital ad industry increased by 21% YOY to $88 billion in 2017.

Of that growth, Facebook and Alphabet commanded 90% of it.

Mobile ad growth exploded last year because of the migration to smartphones increasing by 36.2% YOY in 2017.

Mobile ad revenue accounted for 56.7% of the digital ad dollars.

Search ad growth decelerated from 48% to 46% market share, but overall revenue climbed 18% to $40.6 billion reflecting the preference for older generations to use desktop search as their go-to platform.

Younger generations prefer dynamic video advertising, which suits mobile devices and tablets.

This segment grew 33% to $11.9 billion and is set to eat into search ad market share going forward.

This all bodes well for Amazon, which can take advantage of these various channels to pump through more ads that companies are clamoring to buy on Amazon's e-commerce platform.

Video ads would be ripe for Amazon Prime Video too, Amazon's on-demand media content service.

By 2021, Amazon's digital ad profits will eclipse its cloud profits solidifying Amazon as the best American tech company because of its multitude of premium profit drivers.

As time goes by, the quality of Amazon's company ascends with no restraints.

The Mad Hedge Technology Letter rates Amazon as the best publicly traded tech stock and that will not change anytime soon.

Amazon's digital ad revenue shot up 129% YOY to $2.2 billion.

This growth rate would make any investor drool.

Amazon might want to shift this business over from the "other" line item on its earnings report because it is blossoming into a main engine of growth and profit.

As Facebook and Alphabet have demonstrated, the digital ad game is a high profit, zero sum game, and Amazon is in perfect position to capitalize going forward.

Amazon's e-commerce business is the foolproof platform that can attract digital ad dollars in droves.

Not only are customers already buying products on Amazon.com, but they are usually purchasing numerous items highlighting the suitability of Amazon populating relevant ads to its customers.

Amazon's strategy to sell high-volume, good value for money products fits nicely into the digital ad strategy with plenty of opportunity for ad buyers to roll out ad campaigns to the masses.

Amazon continues to augment its digital ad tech team creating new tools and has now started directly approaching brands directly racking up digital ad sales.

Amazon's gain is Facebook and Alphabet's loss.

If Amazon goes full steam into the ad tech game, it could do what it has done to brick-and-mortar retail - deflate prices.

This is a worrying sign for Facebook, which is already on the ropes after realizing its business model has some major holes.

Alphabet's strategic position is superior to Facebook's, but it is very much still a one-trick ad tech pony.

The attempt to reintegrate a censored version of its Google search into China makes sense when other FANGs are coming for their lunch stateside.

This epitomizes the current tech climate - evolve now or die.

Amazon is working on a new video ad product that it will place in its search results.

This new product is currently in beta testing mode.

These video ads will be 90 seconds or less and will direct customers to a custom landing page or directly to an official website where they can purchase the item.

The video ad will only be shown for users of iPhones and iPads initially.

Amazon is requiring companies to pay a minimum of $35,000 for this new type of ad campaign. Some of its prominent ad buyers such as Procter and Gamble are already testing out this service to curate the perfect video ads to place inside Amazon search.

At first, the inventory for these video ads will be restricted.

Amazon Media Group is the in-house sales team responsible for selling these new products.

For example, in Germany, the habitual Amazon customer carries out a systematic routine to buy Amazon products.

First, customers will perform astute research on potential products and analyze different price points to gain a comprehensive picture of the market using their smartphone.

The customer later adds the desired items into the shopping cart.

At a later date, the customer purchases the item on a different device, and in many instances, mobile is used just to research products when the customer is out and about.

This multi-leg buying process gives Amazon multiple chances where it can fit in some video ads for the customers.

It is true that the minimum $35,000 will make it harder for small businesses to compete, but this is tailor-made for larger companies to offer a compelling case to customers while leveraging their brand awareness.

It is entirely possible that Amazon will surpass $8 billion in digital ad revenue in 2018 and then blow by $16 billion by 2020.

Of that $16 billion in revenue, $12 billion could be booked as operating profit showing off the juicy margins that make this industry so attractive for the neutral observer.

Yes, Amazon has the largest and best product search engine in the world, and it's time to start leveraging this asset to drive monetization growth.

Specifically, the ability for customers to click on an ad and be shuttled over to Amazon.com for final purchase.

This is the x-factor missing out on Facebook and Google search models.

Amazon has the capability to cherry-pick revenue from each part of the process up until the delivery to the door.

This opens a slew of extra revenue down the road as it enhances the shopping experience because Amazon has full control over the whole process.

This runs parallel with Amazon changing how its ad tech operates to accommodate the emphasis on generating huge growth numbers in ad volume and sales.

Small ad buyers usually work through an agency to integrate with Amazon while larger ad buyers work with Amazon's in-house team.

In the next few weeks, sponsored websites outside of Amazon's ecosystem will start advertising to shoppers who are able to click a link directly moving the buyer back to Amazon.com.

The sponsored ad route is a direct shot at Google search and Facebook.

Unsurprisingly, Amazon converts sales at a 350% higher rate than Google, underscoring the effectiveness of digital ads for Amazon.

When customers are already on the Internet to shop, shoppers could do a lot worse than clicking on a direct link funneling them to Amazon.com.

Posting baby photos on Facebook is not likely to convert users into product buyers.

Neither is checking your Gmail account, translating foreign language on Google Translate, or using Google Search to populate results usually not related to shopping.

These methods fail to convert an Internet surfer to product buyers to the detriment of Facebook and Google search.

Amazon has the perfect business model for selling digital ads.

This robust ad business will spur Amazon shares more than $2,000, and the quality of the sum of the parts keeps rising.

Execution is the only roadblock. And as most of us know, Amazon is one of the most innovative and cleanly executed companies in the world with visionary strategists.

That is why it is Amazon.

________________________________________________________________________________________________

Quote of the Day

"What's dangerous is not to evolve." - said Amazon founder and CEO Jeff Bezos.

August 15, 2018

Diary, Newsletter, Summary

Global Market Comments
August 15, 2018
Fiat Lux

Featured Trade:
(WHY BONDS CAN'T GO DOWN),
(TLT), (TBT), ($TNX), (TUR), (TSLA),
(HOW TO MAKE MORE MONEY THAN I DO),
(AMZN), (LRCX), (ABX), (AAPL), (TSLA), (NVDA)

How to Make More Money Than I Do

Diary, Newsletter

By now, most of you have figured out that I love calling readers every day and milking them for ideas on how to improve my service.

Often, they think I am an imposter, a telephone salesman, a machine, or an algorithm. It's only after listening for a few seconds that they recognize my voice from the biweekly strategy webinars and realize that it's the real me.

I don't do this to get renewals, because everyone renews anyway. Where else do you get a 62% annual return with no serious drawdowns?

No, I do it because the information I pick up from subscribers is golden. Some of my best Trade Alerts are inspired by reader questions.

One of my favorite Einstein quotes is that "There are no stupid questions, only stupid answers."

In fact, I have discovered that a lot of subscribers are making much more money from my service than I do.

I'll tell you how they do it.

First, let me remind readers that every Trade Alert I send out includes recommendation for a call or put option spread, a single stock, or an ETF.

The trading performance charts that we published are based on the options spread positions only.

WARNING: What worked swimmingly over the past 10 years is no guarantee that it will work next year, but I thought you'd like to know anyway.

1) Raise the Strike Prices

Move the strike prices up by a dollar. So instead of buying the Barrick Gold (ABX) September $15-$16 deep in-the-money vertical bull call spread, you pick up the $16-$17 call spread instead.

Generally, you make a profit that is 50% greater on this higher spread than with the original recommendation. But you are also taking on higher risk.

When 90% or more of our Trade Alerts are successful this has been a pretty good bet to make.

2) Buy the Call Options Only

Instead of buying the call spread, you buy the call option only in half the size.

When it works, your upside is unlimited. When it doesn't, you just write off the total value of your investment.

This is a great approach when the stocks I recommend take off like a rocket and double or more, as have Apple (AAPL), Amazon, (AMZN), Tesla (TSLA), Lam Research (LRCX), and NVIDIA (NVDA).

Option spread buyers leave a lot of money on the table with this scenario, but get lower performance volatility.

I have observed that many of my Australia readers pursue this approach, as they are fighting a 14-hour time zone disadvantage with the New York Stock Exchange. Not many civilians want to trade at 4:00 AM no matter how much it pays.

The payoff is that they earn about double what I do trading the same stocks.

3) Buy a 2X or 3X Leveraged ETF

This is moving out even further off the risk curve.

Almost every one of the 101 S&P 500 sectors have listed for them 2X and 3X bull and bear ETF's. In theory, the best-case scenario for one of these funds is that they will rise three times as fast as the underlying basket.

In theory, I said.

By the time you take out management fees, tracking error, and execution costs, and wide spreads, you are more likely to get 2.5 times the basket appreciation, if not 2X.

I normally steer investors away from 3X funds. But 401k traders, who are not allowed to deal in stock options, swear by them.

4) Trade Futures

This is a favorite of foreign exchange, precious metals, and bond traders. A futures contract can deliver up to 100 times the performance of the underlying currency, metal, or Treasury bond.

Get a good entry point, run a tight stop loss, and the potential gains can be astronomical.

Every year we get a couple of followers who earn 1,000% profits using our market timing for entry and exit point, and they always do it through the futures markets. Yes, that is a 10X return.

This is also a much higher risk, but higher return strategy. Your broker will present greater disclosure requirements and need a higher clearance level.

But potentially retiring in a year is ample bait for many professionals to go through with this.

5) Read the Research

I know a lot of you only buy this service only for our industry beating Trade Alert service.

But my decade-long experience in watching readers succeed, or fail, in their executions is that the more research they read, the more money they make.

Don't try to skim though with a minimal effort.

It's really very simple. The more work you put into this, the more profit you take out.

Understanding fully what is happening in the markets, indeed the entire global economy, will give you the confidence you need to take on bigger positions and make A LOT more money.

There is no free lunch. There is no Holy Grail.

Having said all that, good luck and good trading.

Looks Like I Got Another One

August 10, 2018

Diary, Newsletter, Summary

Global Market Comments
August 10, 2018
Fiat Lux

Featured Trade:
(AUGUST 8 BIWEEKLY STRATEGY WEBINAR Q&A),
(SPY), (TBT), (PIN), (ISRG), (EDIT), (MU), (LRCX), (NVDA),
(FXE), (FXA), (FXY), (BOTZ), (VALE), (TSLA), (AMZN),
(THE DEATH OF THE CAR),
(GM), (F), (TSLA), (GOOG), (AAPL)

August 8 Biweekly Strategy Webinar Q&A

Diary, Newsletter

Below please find subscribers' Q&A for the Mad Hedge Fund Trader August 8 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: What should I do about my (SPY) $290-295 put spread?

A: That is fairly close to the money, so it is a high-risk trade. If you feel like carrying a lot of risk, keep it. If you want to sleep better at night, I would get out on the next dip. The market has 100 reasons to go down and two to go up, the possible end of trade wars and continuing excess global liquidity, and the market is focusing on the two for now.

Q: What are your thoughts on the ProShares Ultra Short Treasury Bond Fund (TBT)?

A: Short term, it's a sell. Long term it's a buy. It's possible we could get a breakout in the bond market here, at the 3% yield level. If that happens, you could get another five points quickly in the TBT. J.P. Morgan's Jamie Diamond thinks we could hit a 5% yield in a year. I think that's high but we are definitely headed in that direction.

Q: What are your thoughts on the India ETF (PIN)?

A: It goes higher. It's been the best-performing emerging market, and a major hedge fund long for the last five years. The basic story is that India is the next China. Indicia is the next big infrastructure build-out. Once India gets regulatory issues out of the way, look for more continued performance.

Q: What are your thoughts on Intuitive Surgical (ISRG)?

A: Intuitive is a kind of microcosm in the market right now. It's trading well above a significant support level, which happens to be $508. I don't typically like Intuitive Surgical stock because the options are very inefficient, and therefore very pricey. I think, at this point, there is a bigger possibility of it breaking down than continuing to head higher. In other words, it's overbought. Buy long term, the sector has a giant tailwind behind it with 80 million retiring baby boomers.

Q: What are your thoughts on the entire chip sector, including Micron (MU), Lam Research (LRCX) and NVIDIA (NVDA)?

A: NVIDIA is the top of the value chain in the entire sector, and it looks like it wants to break to a new high. My target is $300 by the end of the year, from the current $240s. I think the same will happen with Lam Research (LRCX), which just had a massive rally. All three of these have major China businesses; China buys 80% of its chips from the U.S. You can do these in order in the value chain; the lowest value-added company is Micron, followed by Lam Research, followed by NVIDIA, and the performance reflects all of that. So, I think until we get out of the trade wars, Micron will be mired down here. Once it ends, look for it to get a very sharp upside move. Lam is already starting to make its move and so is NVIDIA. Long term, Lam and NVIDIA have doubles in them, so it's not a bad place to buy right here.

Q: You once recommended the Global X Robotics & Artificial Intelligence Thematic ETF (BOTZ) which is now down 10%, one of your few misses. Keep or sell?

A: Keep. It's had the same correction as the rest of Technology. All corrections in Technology are short term in nature--the long-term bull story is still there. (BOTZ) is a huge play on artificial intelligence and automation, so that is going to be with us for a long time, it's just enduring a temporary short-term correction right now, and I would keep it.

Q: What do you have to say about the CRISPR stocks like Editas Medicine Inc. (EDIT)?

A: The whole sector got slammed by a single report that said CRISPR causes cancer, which is complete nonsense. So, I would use this sell-off to increase your current positions. I certainly wouldn't be selling down here.

Q: What could soften the strong dollar?

A: Only one thing: a recession in the U.S. and an end to the interest-raising cycle, which is at least a year off, maybe two. Keep buying the U.S. dollar and selling the currencies (FXE), (FXY), (FXA) until then.

Q: What are your thoughts on Baidu and Alibaba?

A: I thought China tech would get dragged down by the trade wars, but they behaved just as well as our tech companies, so I'd be buying them on dips here. Again, if we do win the trade wars, these Chinese tech companies could rocket. The fundamental stories for all of them is fantastic anyway, so it's a good long-term hold.

Q: Have you looked at Companhia Vale do Rio Doce (VALE)? (A major iron ore producer)

A: No, I've kind of ignored commodities all this year, because it's such a terrible place to be. If we had a red-hot economy, globally you would want to own commodities, but as long as the recovery now is limited to only the U.S., it's not enough to keep the commodity space going. So, I would take your profits up here.

Q: With Tesla (TSLA) up $100 in two weeks should I sell?

A: Absolute. If the $420 buyout goes through you have $40 of upside. If it doesn't, you have $140 of downside. It's a risk/reward that drives like a Ford Pinto.

Q: How long will it take global QE (quantitative easing) to unwind?

A: At least 10 years. While we ended our QE four years ago, Europe and Japan are still continuing theirs. That's why stocks keep going up and bonds won't go down. There is too much cash in the world to sell anything.

Q: Apple (AAPL)won the race to be the first $1 trillion company. Who will win the race to be the first $2 trillion company?

A: No doubt it is will be Amazon (AMZN). It has a half dozen major sectors that are growing gangbusters, like Amazon Web Services. Food and health care are big targets going forward. They could also buy one of the big ticket selling companies to get into that business, like Ticketmaster.

Good Luck and Good trading
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

August 9, 2018

Tech Letter

Mad Hedge Technology Letter
August 9, 2018
Fiat Lux

Featured Trade:
(WHY SNAPCHAT IS GOING DOWN THE SOCIAL MEDIA DRAIN),
(SNAP), (FB), (NFLX), (AMZN), (GOOGL), (TWTR), (BB)

Why Snapchat is Going Down the Social Media Drain

Tech Letter

Companies this small should be growing.

Growth companies and tech go hand in hand, especially at the incubation stage where there is little resistance hindering growth.

The law of numbers dictate that small companies only need marginal gains to generate high growth in terms of percentages.

Once a company becomes as big as Amazon (AMZN), it becomes harder to move the needle.

Snapchat (SNAP), which is in the same social media game as Facebook, is vastly smaller than the incumbent that hoovers up the digital ad dollars.

Facebook (FB) boasts 1.47 billion daily active users (DAU) and is one of the members of a powerful digital ad duopoly along with Alphabet.

Snapchat added 4 million net (DAU)s in Q1 2018 and blew its chance for sequentially increasing usership by losing 4 million (DAU)s last quarter.

The stock sold off hard in after-hours trading, down 11% at one point but rebounded big time with the earnings commentary with Snapchat revealing guidance for the first time.

Snap opened the next trading day demonstrably lower reflecting the disenchantment of investors.

Evan Spiegel's creation has really had a hard go of it lately. The app redesign was a cataclysmic failure of epic proportions denting the popularity of this app.

The fallout was sacking 100 engineers.

Overall, there were some positive takeaways from the earnings report, mainly, the revenue beat was satisfying, and profitability shone through with average revenue per user (ARPU) shooting up 34% YOY.

Another victory was the boost in ad revenue, up 48% YOY, which is the main driver of revenue in the company.

The hairiest issue with this company is the fundamentals are excruciatingly apathetic.

Stagnating usership growth at this stage is a red flag.

Social media stocks were bashed in recent trading sessions with Twitter (TWTR) dropping from $46 to $31 because of diminishing usership and soft guidance.

The amount of monthly active users dropped from 338.5 million to 335 million, and financial guidance was brought down a few notches.

Twitter has made a poignant attempt to clean up its system from the debris molding around the edges.

To "improve the health" of the Twitter platform, Twitter purged 6% of all accounts rooting out the influences undesirable to its ethos.

Social media companies must take the initiative to protect its platforms, instead of being a silent bystander to a stabbing in a dark alley.

Facebook was the mother of all drops in the social media space collapsing from an all-time high of $218 to $171, a drop in one trading day.

Guidance tore apart this stock after a rapid run-up to the earnings report that saw unbelievable strength rising almost every day.

Poor guidance reflects the ill-effects of the recently enacted General Data Protection Regulation (GDPR), which tainted the European numbers.

The epicenter of data regulation has crimped profitability and popularity of social media in the Eurozone.

If Facebook and Twitter are facing tough short-term headwinds, then imagine how Snap feels.

They are the small fish in the big pond, and they are running out of places to hide.

Every new user Instagram picks up is one less potential user missed for Snapchat.

Let me remind you that Instagram is boosting its monthly average usership (MAU) 5% per year.

Instagram recently surpassed the 1 billion (MAU) mark after eclipsing the 800 million mark in September 2017.

Instagram added 200 million users, more than the entire (DAU) for Snap, in 11 months.

Big trouble for Snap.

Effectively, Snap is the inferior version of Instagram for young kids and that narrative does not bode well for the future.

For every $1 Snapchat spends, it earns -$6 on that $1. Kids aren't the biggest distributors of wealth. It would help if Snap matured its interface to accommodate older millennials who are tech savvy to boost its average revenue per user.

As it stands, Facebook earns $9 per daily active user while Snapchat earns a smidgeon over $1 per daily active user.

I cannot say that Facebook is a quality platform, but it has successfully monetized the platform.

What's more, CEO Evan Spiegel blamed the drop in usership on the redesign.

Yes, the redesign didn't help, but the usership would have dropped anyway because of draconian data laws in Europe and the general malaise stigmatized toward current social media platforms.

Management is not executing effectively at Snap, and it is out of touch with its core base without opening up new sources of growth.

If a company redesigns an app, enhance the app, do not make it unusable such as the Snap redesign.

Snap's eggs are all in one basket. And that basket is shrinking in the high revenue locations of North America and Europe.

It only earned $2 million from non-digital ad revenue.

As FANGs power on to pass a trillion dollars of market cap, the diversity in their segments are nothing short of impressive.

Snap has no other irons in the fire and is overly reliant in an industry in which it will slowly bleed to death.

The only savior is in reinventing itself, but that takes guts and a bold CEO with a revolutionary strategy.

There is precedence for this transformation such as BlackBerry (BB), one of the original smartphone makers, which has morphed into an autonomous driving technology company.

Another good example is Netflix, which started out in the DVD industry and pivoted to online streaming.

What Snap is doing has its limits and it needs to shake up its business model or slowly rot.

The company must wake up to the stark realization that its platform is not engaging.

Many analysts believed Snap could become half as big as Facebook and that seems highly unlikely.

I have been bearish on Snap for the entire existence of the Mad Hedge Technology Letter.

And it has been the perfect sell on the rallies stock because of its poor performance, even poorer management, and awful fundamentals.

A telltale sign was the last earnings call.

It was the second quarter in a row of blaming the redesign on bad performance.

If Spiegel underperforms next quarter again - meaning negative growth usership - it will be interesting if he blames the redesign again.

Third times a charm.

Where does this all lead?

Facebook offered to purchase Snapchat after its IPO because management was worried it would steal market share from Instagram.

Snapchat rebuffed the advances and decided to lock horns directly with Instagram.

Well, the David and Goliath battle is playing as most would assume, boding ill for the fate of Snapchat.

Instagram will keep weakening Snapchat moving forward. And Facebook might end up scooping up Snapchat down the road for a discount.

It doesn't look good for Snapchat, and investors should consider shorting this stock after a dead cat bounce.

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Quote of the Day

"The subscription model of buying music is bankrupt. I think you could make available the Second Coming in a subscription model and it might not be successful," - said former Apple cofounder Steve Jobs in a Rolling Stone interview, 2003.