Mad Hedge Technology Letter
February 11, 2022
Fiat Lux
Featured Trade:
(THE GROWING CLOUT OF TWILIO)
(TWLO), (ADBE), (CRM), (GOOGL), (AAPL)
Tag Archive for: (CRM)
Twilio (TWLO) cranked the ball out of the ballpark in its latest quarterly performance.
For a company that’s been burning cash for years, such as 2021’s performance of negative $950 million, analysts expected another few years of losses.
That’s not the only loss, the years before were saddled with unprofitable times like the $490 million burnt in 2020 and they still haven’t recorded a single profitable year yet.
So for Chief Executive Officer of Twilio Jeff Lawson to tell us that he expects Twilio to be profitable in 2023 is a gamechanger.
This guy has elevated Twilio to the dominant provider of business-to-consumer communications tools, powering messages such as the Uber notification you receive after ordering a ride, into an estimated $79 billion market for software to help optimize customer experiences.
Busting out the “P word” when many analysts were expecting to count the losses is a big deal for growth tech and TWLO can expect a new breed of institutional investors to enter the fold because of their positive signaling.
It’s not only them.
They have been tactical in a series of aggressive moves adding new companies to their core like Segment.
Segment, the customer data platform provider that Twilio purchased in 2020 for $3.2 billion is one of the reasons why the juice might be worth the squeeze.
It was the company’s biggest acquisition to date and the most-watched by investors.
The integration of Segment is expected to enhance the bulk of Twilio’s product portfolio.
It effectively functions as a repository of continually updated first-party customer information that businesses can use to improve marketing and support, with the goal of fostering loyalty and higher sales.
The timing of the deal was critical given Apple’s (AAPL) stricter data treatment and Google’s (GOOGL) narrowing of its web-tracking software.
At the same time, the acquisition of Segment nudged Twilio towards the direction of competing with Silicon Valley stalwarts like Salesforce (CRM) and Adobe (ADBE).
A key difference between Twilio and its rivals is the ability for developers within businesses to conveniently build customized programs on top of the company’s base tools.
Not only did management indicate that profitability is arriving next year, but they signaled strong revenue growth of over 30% for the next three years.
Easily said, TWLO is morphing into an indestructible force that is harnessing soon-to-be profitability, growth, and future success all wrapped into one company.
In this era, it’s hard to get all broad strategies working simultaneously because most tech firms will sacrifice profits for growth.
On top of that, management shared that they fully expect gross margins to surpass 60% in the long-term translating into a highly profitable company.
That’s the beauty of the software as a service (SaaS) model, the scalability works well inside the financial parameters which is why companies like Adobe and Salesforce bust out such great metrics.
Three other acquisitions Lawson believes will make a difference are Engage for the marketer, which is still very early in its cycle, most recently, a software called Frontline, which can be used by frontline workers and even sales teams to be more efficient, and lastly, Flex for the contact center.
All indications show this is nowhere near a “pandemic stock” and the fourth-quarter revenue jumping to 54% to $842.7 million while guiding for $865 million next quarter validates that.
This communication as a software company is sticky as can be and has a valid use case in many different apps that need to link the back-end interfaces with customer functionality.
TWLO will move from strength to strength going forward and this software company has a real chance to make its mark as not just a company considered second tier, but even a flight to safety type of tech stock which are few and far between.
The stock is still highly volatile which makes it easy to add on the big dips, but readers should avoid the small dips.
I am bullish TWLO.
Mad Hedge Technology Letter
December 20, 2021
Fiat Lux
Featured Trade:
(GETTING AHEAD WITH THE CLOUD)
(AMZN), (ZS), (CRM), (GOOGL)
Dealing with the Cloud works and for every relevant tech company, this division serves as the pipeline to the CEO position.
If this isn’t the case for a tech company, then there’s something egregiously wrong with them!
Take Andy Jassy, the mastermind behind Amazon’s (AMZN) lucrative cloud computing division and is the man who succeeded company founder Jeff Bezos.
He’s been rewarded this important position based on his performance in the cloud and faces a daunting proposition of following Bezos as CEO.
Bezos incorporated Amazon almost 30 years ago.
Jassy developed a highly profitable and market-leading business, Amazon Web Services, that runs data centers serving a wide range of corporate computing needs.
Cloud 101
If you've been living under a rock the past few years, the cloud phenomenon hasn't yet passed you by and you still have time to cash in.
You want to hitch your wagon to cloud-based investments in any way, shape, or form.
Amazon leads the cloud industry it created.
It still maintains more than 30% of the cloud market. Microsoft would need to gain a lot of ground to even come close to this jewel of a business.
Amazon relies on AWS to underpin the rest of its businesses and that is why AWS contributes most of Amazon's total operating income.
Total revenue for just the AWS division would operate as a healthy stand-alone tech company if need be.
The future is about the cloud.
These days, the average investor probably hears about the cloud a dozen times a day.
If you work in Silicon Valley, you can quadruple that figure.
So, before we get deep into the weeds with this letter on cloud services, cloud fundamentals, cloud plays, and cloud Trade Alerts, let's get into the basics of what the cloud actually is.
Think of this as a cloud primer.
It's important to understand the cloud, both its strengths and limitations.
Giant companies that have it figured out, such as Salesforce (CRM) and Zscaler (ZS), are some of the fastest-growing companies in the world.
Understand the cloud and you will readily identify its bottlenecks and bulges that can lead to extreme investment opportunities. And that is where I come in.
Cloud storage refers to the online space where you can store data. It resides across multiple remote servers housed inside massive data centers all over the country, some as large as football fields, often in rural areas where land, labor, and electricity are cheap.
They are built using virtualization technology, which means that storage space spans across many different servers and multiple locations. If this sounds crazy, remember that the original Department of Defense packet-switching design was intended to make the system atomic bomb-proof.
As a user, you can access any single server at any one time anywhere in the world. These servers are owned, maintained, and operated by giant third-party companies such as Amazon, Microsoft, and Alphabet (GOOGL), which may or may not charge a fee for using them.
The most important features of cloud storage are:
1) It is a service provided by an external provider.
2) All data is stored outside your computer residing inside an in-house network.
3) A simple Internet connection will allow you to access your data at any time from anywhere.
4) Because of all these features, sharing data with others is vastly easier, and you can even work with multiple people online at the same time, making it the perfect, collaborative vehicle for our globalized world.
Once you start using the cloud to store a company's data, the benefits are many.
No Maintenance
Many companies, regardless of their size, prefer to store data inside in-house servers and data centers.
However, these require constant 24-hour-a-day maintenance, so the company has to employ a large in-house IT staff to manage them - a costly proposition.
Thanks to cloud storage, businesses can save costs on maintenance since their servers are now the headache of third-party providers.
Instead, they can focus resources on the core aspects of their business where they can add the most value, without worrying about managing IT staff of prima donnas.
Greater Flexibility
Today's employees want to have a better work/life balance and this goal can be best achieved by letting them work remotely which effectively happened because of the public health situation. Increasingly, workers are bending their jobs to fit their lifestyles, and that is certainly the case here at Mad Hedge Fund Trader.
How else can I send off a Trade Alert while hanging from the face of a Swiss Alp?
Cloud storage services, such as Google Drive, offer exactly this kind of flexibility for employees.
With data stored online, it's easy for employees to log into a cloud portal, work on the data they need to, and then log off when they're done. This way a single project can be worked on by a global team, the work handed off from time zone to time zone until it's done.
It also makes them work more efficiently, saving money for penny-pinching entrepreneurs.
Better Collaboration and Communication
In today's business environment, it's common practice for employees to collaborate and communicate with co-workers located around the world.
For example, they may have to work on the same client proposal together or provide feedback on training documents. Cloud-based tools from DocuSign, Dropbox, and Google Drive make collaboration and document management a piece of cake.
These products, which all offer free entry-level versions, allow users to access the latest versions of any document so they can stay on top of real-time changes which can help businesses to better manage workflow, regardless of geographical location.
Data Protection
Another important reason to move to the cloud is for better protection of your data, especially in the event of a natural disaster. Hurricane Sandy wreaked havoc on local data centers in New York City, forcing many websites to shut down their operations for days.
And we haven’t talked about the recent ransomware attacks by Eastern Europeans on energy company Colonial Pipeline and meat producer JBS Foods.
The cloud simply routes traffic around problem areas as if, yes, they have just been destroyed by a nuclear attack.
It's best to move data to the cloud, to avoid such disruptions because there, your data will be stored in multiple locations.
This redundancy makes it so that even if one area is affected, your operations don't have to capitulate, and data remains accessible no matter what happens. It's a system called deduplication.
Lower Overhead
The cloud can save businesses a lot of money.
By outsourcing data storage to cloud providers, businesses save on capital and maintenance costs, money that in turn can be used to expand the business. Setting up an in-house data center requires tens of thousands of dollars in investment, and that's not to mention the maintenance costs it carries.
Plus, considering the security, reduced lag, up-time and controlled environments that providers such as Amazon's AWS have, creating an in-house data center seems about as contemporary as a buggy whip, a corset, or a Model T.
The cloud is where you want to be.
Mad Hedge Technology Letter
December 6, 2021
Fiat Lux
Featured Trade:
(THE HAWKS ARE HERE)
(ROKU), (ZM), (TWLO), (SNAP), (SQ), (MSFT), (CRM), (ADBE)
Higher inflation is something this tech bull cycle hasn’t dealt with, and it’s starting to rear its ugly head in the form of volatility and spades of it.
The Fed will have to increase interest rates or face runaway inflation that will crash the economy, but increasing interest rates will also make lives harder for tech companies.
As we try to understand the pace of interest hikes, certain tech companies will fare much better in this inflationary environment than others. To deduce the winners from the losers, investors should understand exactly how inflation affects each particular tech company.
Talk has gone from the Fed moving early to raise short-term rates, to the Fed moving even in early spring which in turn is spooking risk markets from cryptocurrencies, the S&P, and the Nasdaq.
Fed Chair Jerome Fed has done a poor job communicating his sudden hawkish tone and the market has had to quickly reprice risk assets because of the surprising nature of the hawkishness.
In the short-term, tech stocks will need some time to digest this new expectation, which I see as quite healthy, but short-term tough to swallow.
Fed Cleveland President Loretta Mester told the media she is “very open” to scaling back the Fed’s asset purchases at a faster pace so it can raise interest rates a couple of times next year if needed so this isn’t just one guy in Powell trying to move the needle.
Clearly, the Fed is moving in unison, and they threaten to become a major force in moving markets which is all we care about.
All that pressure is causing component and labor costs to rise. Companies that don't have enough pricing power to pass those costs on to their customers will likely see their gross and operating margins shrink.
This matters because tech companies offer some of the most generous salaries in the U.S. and substantial increases in pay hurts them the most.
Higher interest rates attract more consumers and businesses to put more money in higher-yield bonds and savings accounts.
There are 3 ways that higher rates are actually a gut punch to tech growth companies.
First, they increase the costs of borrowing incremental capital to expand a business. In more cases than not, tech growth companies rely on borrowed money because their operation is not yet sustainably profitable. That's bad news for high-growth tech companies, which are burning cash with widening losses.
Second, it reduces the long-term estimates for a company's earnings and free cash flow (FCF) growth meaning their underlying stock price is rerated downwards in the anticipation of this new reality.
Loss accruing tech companies commonly suffer an exodus as their underlying shares are repriced to reflect higher costs.
Just this morning we saw Roku (ROKU), Zoom Video Communications (ZM), Snap (SNAP), Twilio (TWLO), Square (SQ) breach 52-week lows.
The breadth of the market has been hollowed and the goalposts have indeed narrowed because of the hawkish tone at the Fed.
Lastly, higher interest rates drive institutional money into fixed income.
They do this largely by taking profits from crypto, tech stocks, or moving their stash on the sidelines then resurfacing the money into “safer” assets that anticipate weakening bond yields at the longer end of the curve.
So I won’t sit here and say sell all and every tech stock, it’s more nuanced than that.
I executed one position in December and that was Microsoft (MSFT) and it got pulled down with the broader market.
More importantly, I didn’t bet the ranch.
Ultimately, we still bask in the ideology that the tech bull market isn’t over yet because it isn’t, but this aggressiveness out of the blue has forced the overall tech market to temporarily rest with growth tech suffering major drawdowns.
In doing that, the ceiling for a Santa Claus rally is somewhat capped to the upside.
The Fed could have waited until January.
Sure, there will still be winners in tech and the odds of these winners are driven firmly behind the biggest and best like Microsoft, Amazon, Google, and Apple.
These are the type of companies that have the pricing power to raise prices and get away with it because consumers will be willing to pay it.
Other potential winners include cloud service giants like Salesforce (CRM) and Adobe (ADBE). These again are top-quality software stocks that can pass up higher enterprise software costs to the firms that can pay for it.
It’s entirely possible that the Fed could end up walking back some of these aggressive stances in the interest-raising process next year.
Don’t fight the Fed and don’t expect tech growth stocks to reverse until we receive more clarity with interest rate policy, if a reverse is triggered, it will play out with Apple, Amazon, Google, and Facebook, and Microsoft leading the way higher.
Mad Hedge Technology Letter
July 16, 2021
Fiat Lux
Featured Trade:
(THE CLOUD)
(AMZN), (GOOGL), (CRM)
Dealing with the Cloud works and for every relevant tech company, this division serves as the pipeline to the CEO position.
If that’s not the case, then there’s something egregiously wrong!
Take Andy Jassy, the mastermind behind Amazon’s lucrative cloud computing division, and is the man who will succeed company founder Jeff Bezos.
He’s been rewarded this important business based on his performance in the cloud and faces a daunting proposition of following Bezos as CEO.
Bezos incorporated Amazon exactly 27 years ago.
Jassy developed a highly profitable and market-leading business, Amazon Web Services, that runs data centers serving a wide range of corporate computing needs.
Can you believe that Amazon's stock started out at $1.50 per share when adjusting for future equity splits?
It now trades at more than $3,500 per share and is worth over $1.8 trillion, making it one of the most valuable companies in the world.
Amazon's annual profit almost doubled in 2020 to $21.3 billion stoked by the pandemic that forced people to stay home and use Amazon services.
Consumers had no choice but to shop online, helping the company grow revenue 38% to $386.1 billion.
What exactly is the cloud that Amazon created?
Cloud 101
If you've been living under a rock the past few years, the cloud phenomenon hasn't passed you by and you still have time to cash in.
You want to hitch your wagon to cloud-based investments in any way, shape, or form.
Amazon leads the cloud industry it created.
It still maintains more than 30% of the cloud market. Microsoft would need to gain a lot of ground to even come close to this jewel of a business.
Amazon (AMZN) relies on AWS to underpin the rest of its businesses and that is why AWS contributes most of Amazon's total operating income.
Total revenue for just the AWS division would operate as a healthy stand-alone tech company if need be.
The future is about the cloud.
These days, the average investor probably hears about the cloud a dozen times a day.
If you work in Silicon Valley, you can quadruple that figure.
So, before we get deep into the weeds with this letter on cloud services, cloud fundamentals, cloud plays, and cloud Trade Alerts, let's get into the basics of what the cloud actually is.
Think of this as a cloud primer.
It's important to understand the cloud, both its strengths and limitations.
Giant companies that have it figured out, such as Salesforce (CRM) and Zscaler (ZS), are some of the fastest-growing companies in the world.
Understand the cloud and you will readily identify its bottlenecks and bulges that can lead to extreme investment opportunities. And that is where I come in.
Cloud storage refers to the online space where you can store data. It resides across multiple remote servers housed inside massive data centers all over the country, some as large as football fields, often in rural areas where land, labor, and electricity are cheap.
They are built using virtualization technology, which means that storage space spans across many different servers and multiple locations. If this sounds crazy, remember that the original Department of Defense packet-switching design was intended to make the system atomic bomb-proof.
As a user, you can access any single server at any one time anywhere in the world. These servers are owned, maintained, and operated by giant third-party companies such as Amazon, Microsoft, and Alphabet (GOOGL), which may or may not charge a fee for using them.
The most important features of cloud storage are:
1) It is a service provided by an external provider.
2) All data is stored outside your computer residing inside an in-house network.
3) A simple Internet connection will allow you to access your data at any time from anywhere.
4) Because of all these features, sharing data with others is vastly easier, and you can even work with multiple people online at the same time, making it the perfect, collaborative vehicle for our globalized world.
Once you start using the cloud to store a company's data, the benefits are many.
No Maintenance
Many companies, regardless of their size, prefer to store data inside in-house servers and data centers.
However, these require constant 24-hour-a-day maintenance, so the company has to employ a large in-house IT staff to manage them - a costly proposition.
Thanks to cloud storage, businesses can save costs on maintenance since their servers are now the headache of third-party providers.
Instead, they can focus resources on the core aspects of their business where they can add the most value, without worrying about managing IT staff of prima donnas.
Greater Flexibility
Today's employees want to have a better work/life balance and this goal can be best achieved by letting them working remotely which effectively happened because of the public health situation. Increasingly, workers are bending their jobs to fit their lifestyles, and that is certainly the case here at Mad Hedge Fund Trader.
How else can I send off a Trade Alert while hanging from the face of a Swiss Alp?
Cloud storage services, such as Google Drive, offer exactly this kind of flexibility for employees.
With data stored online, it's easy for employees to log into a cloud portal, work on the data they need to, and then log off when they're done. This way a single project can be worked on by a global team, the work handed off from time zone to time zone until it's done.
It also makes them work more efficiently, saving money for penny-pinching entrepreneurs.
Better Collaboration and Communication
In today's business environment, it's common practice for employees to collaborate and communicate with co-workers located around the world.
For example, they may have to work on the same client proposal together or provide feedback on training documents. Cloud-based tools from DocuSign, Dropbox, and Google Drive make collaboration and document management a piece of cake.
These products, which all offer free entry-level versions, allow users to access the latest versions of any document so they can stay on top of real-time changes which can help businesses to better manage workflow, regardless of geographical location.
Data Protection
Another important reason to move to the cloud is for better protection of your data, especially in the event of a natural disaster. Hurricane Sandy wreaked havoc on local data centers in New York City, forcing many websites to shut down their operations for days.
And we haven’t talked about the recent ransomware attacks by Eastern Europeans on energy company Colonial Pipeline and meat producer JBS Foods.
The cloud simply routes traffic around problem areas as if, yes, they have just been destroyed by a nuclear attack.
It's best to move data to the cloud, to avoid such disruptions because there your data will be stored in multiple locations.
This redundancy makes it so that even if one area is affected, your operations don't have to capitulate, and data remains accessible no matter what happens. It's a system called deduplication.
Lower Overhead
The cloud can save businesses a lot of money.
By outsourcing data storage to cloud providers, businesses save on capital and maintenance costs, money that in turn can be used to expand the business. Setting up an in-house data center requires tens of thousands of dollars in investment, and that's not to mention the maintenance costs it carries.
Plus, considering the security, reduced lag, up-time and controlled environments that providers such as Amazon's AWS have, creating an in-house data center seems about as contemporary as a buggy whip, a corset, or a Model T.
Now you might digest somewhat how Amazon built their share price from $1.50 in 1997 to over $3,500 today.
Thanks to the cloud.
Mad Hedge Technology Letter
June 4, 2021
Fiat Lux
Featured Trade:
(RIDING THE COATTAILS OF ELLIOT MANAGEMENT)
(DBX), (TWTR), (EBAY), (CRM), (BOX)
Renowned Vulture Fund Elliott Management is at it again, looking to feast on the frail like the predator fund it is.
It was recently announced they own a large stake in cloud provider Dropbox (DBX) and has been holding private discussions with the file-sharing service provider for some time.
The hedge fund owns a stake of more than 10% which is valued at more than $800 million, the source said, declining to reveal the exact size of the investment.
Dropbox currently has a market cap of around $11 billion.
This is a cloud company that allows users to store documents, videos, and photos online, listed its shares in March 2018 at $21 a share.
Elliott has previously gotten their way at other tech companies like Twitter (TWTR) and eBay (EBAY).
Now Elliott Management is assumed to own the second biggest holding in Dropbox after CEO Drew Houston.
Elliot’s previous 13-F filing form has shown they are scooping up shares of Dropbox.
Dropbox shares also gained in March on news of a potential takeover that never came to fruition, and it smells a lot like that was Elliot.
I have heard other analysts mention Dropbox as a short-listed acquisition candidate for a handful of big players.
An acquisition looked close especially after Salesforce (CRM) announced the purchase of Slack Technologies and it’s logical that Dropbox could have been a retaliation purchase for a bigger tech company looking to keep pace with Salesforce's acquisitive thirst.
Elliot Management overtook Vanguard Group Inc. as the largest shareholder outside of Houston. Vanguard had a stake just below 10% as of March 31, according to Bloomberg.
The hedge fund has not made it clear whether it is seeking board seats on Dropbox’s board or other changes at the company.
But I will tell you there is a standard playbook that Elliot loves to roll out each time they buy into a tech company.
These changes almost always revolve around switching management and squeezing out more efficiencies in operations.
They even threatened Founder and CEO of Twitter Jack Dorsey to become more attuned to revenue acceleration so he could keep his job.
There are those who want to play the moral compass card out there, but I can say that almost any tech company Elliot Management has bought into experience a significant boost in asset appreciation 3-6 months after the acquisition.
Elliot is hyper-targeted in what they do, and they usually seek out management who has become too comfortable in their routine.
I believe they do not go after tech companies if they feel they cannot boost the underlying stock shares by 30% within a year.
They have a brilliant track record and any tech investor who doesn’t want to overcomplicate tech investing buys the same tech companies Elliot acquires.
Why?
Because changes are in the pipeline and every management or board seat change is usually met with a 5-7% surge in share price.
What’s not to like about that?
Then there are many up days on the operational front from cutting costs, and forcing through other changes that are first and foremost beneficial for the stakeholders of the company.
Other vulture fund specialists do this too like Starboard Value when they launched a proxy fight earlier this year at Box (BOX), where it has nominated four directors for the three seats that are coming available this year.
To play it simple, buy into Dropbox on the next dip and hold onto shares for the first part of the turnaround.
Once the pace of changes starts to plateau, by then, you should already have a decent-sized profit and can dump the shares.
