Mad Hedge Technology Letter
November 23, 2020
Fiat Lux
Featured Trade:
(COMMUNICATIONS HAS NEVER BEEN MORE IMPORTANT)
(TWLO), (TWTR), (CRM), (SQ), (AMZN), (OSTK), (W)
Tag Archive for: (CRM)
Growth is not dead as last week’s tech rally shows that tech stocks still have their allure.
One tech growth stock that I am absolutely in-love with is communications-as-a-platform cloud stock Twilio who services Airbnb and Uber as the software that connects the users to their staff.
The ability to communicate with customers in real time has never been more urgent in a fast-paced world, especially in the software-centric economy.
From food delivery to booking hotels, from customer service to password resets, literally anything revolves around the ability to connect reliably and rapidly.
Many people in 2020 still do not even know what Twilio (TWLO) does!
They are the dark horse cloud company that nobody has heard of.
The company provides the software building blocks that lets developers embed Twilio's communication technology in their apps, messaging systems, emails, and more. It also streamlines the process so it can be accomplished in a matter of hours, rather than weeks or months.
Here’s an insanely applicable example: The update you received from Lyft regarding your ride, the text messages and reservation confirmation you got from Airbnb, the customer service interactions with Disney's Hulu, and the booking confirmation from your restaurant via Yelp? These were delivered by Twilio's technology.
In pandemic third quarter, Twilio's revenue climbed 52% year over year, while also avoiding a loss, swinging from a loss in the prior-year quarter.
The company reported 208,000 active customers, up 24% year over year.
There is no mistake that these types of cloud stocks are in the vein of Twitter (TWTR), Salesforce (CRM), Square (SQ), and so on and at the vanguard of the hullabaloo of growth stocks.
Why are growth stocks so popular?
Growth stocks are companies that increase their revenue and earnings faster than average.
A growth company relentlessly develops an innovative product or service or at the top of the pack of fastest-growing industries and unsurprisingly that is technology, and that fact won’t change for generations.
Firms growing faster than average for long periods tend to be rewarded by the market, and this is why there has been a massive migration to growth stocks that has enriched shareholders of Apple (APPL), Facebook (FB), Netflix (NFLX), and so on.
Growth also begets additional growth and the faster they grow, the bigger the returns can be.
They are also more expensive than the average stock in terms of metrics like price-to-earnings, price-to-sales, and price-to-free-cash-flow ratios, but investors look past this in an age of expanding liquidity which is the catalyst that breathes even more momentum into these stocks.
US growth stocks secure a premium just for the possibility they will fulfill their parabolic growth potential.
Capitalizing on powerful long-term trends can grow their sales and profits for many years, and the following are a list of seminal trends that all involve technology data points as the secret sauce.
- E-commerce: The massive migration to online shopping is here to stay and the coronavirus has acted like a supercharger to e-commerce company like Amazon (AMZN), Overstock (OSTK), and Wayfair (W).
- Digital advertising: The digital ad market is moving marketing budgets from TV and print to online channels.
- Digital payments: Contactless payments and fintech (through a smartphone) will eventually replace physical card transactions.
- Cloud computing: Computing power is migrating from on-premise data centers to cloud-based servers. Amazon’s (AMZN) and Alibaba’s (BABA) cloud infrastructure services help make this possible, while Salesforce.com (CRM) provides some of the best cloud-based software available.
- Cord-cutting and streaming entertainment: Millions of people are only paying for internet services that offer on-demand content and provide access to premium packages. This trend has been supercharged by the Millennial generation.
These powerful trends will last decades giving you plenty of time to claim your share of the profits they create.
Rank growth companies with strong competitive advantages. Otherwise, their business might fail.
Some competitive advantages are:
- Network effects: Facebook is a valid example that built its usership by offering other assets like WhatsApp and Instagram to snowball into a 2 billion number usership. The synergies are plentiful with the ability to cross-sell its products across platforms and aggregating data to deploy the intel in the best way it can make money.
- Scale advantages: Size can be another powerful advantage. Amazon is a great example here, as its massive global fulfillment network is something its smaller rivals will find extremely difficult to replicate.
- High switching costs: Switching costs are expenses and difficulties involved in switching to a rival product or service. Once a company begins to use e-commerce company Shopify as the core of its online operations, they are unlikely to absorb the burden of switching to another competitor.
Pinpointing large addressable markets means a larger opportunity to secure higher revenue and Twilio is occupying a spot at the intersection of generational, long-term trends and almost unfair competitive advantages.
The underlying shares have rocketed this year as communications has never been more important. This is a great buy and hold stock for the long term because trading short term is difficult with its elevated volatility.
Mad Hedge Technology Letter
November 4, 2020
Fiat Lux
Featured Trade:
(WHICH JOBS ARE ON THE LINE NEXT?)
(CVX), (CRM), (ALL), (SCHW), (XOM), (RTN)
For every job created by Amazon during the pandemic, there are 10 jobs losses in the brick and mortar retail sector.
That is happening as we speak.
The next phase of job losses will move up the value chain and hit those precious $100,000 per year jobs precisely because the advancement of technology will allow management to seamlessly substitute these highly paid workers with a digital or automated solution.
The evidence is starting to follow through.
In the last few days, ExxonMobil, Chevron (CVX), Charles Schwab, and Raytheon have announced plans to cut thousands of white-collar jobs.
Wells Fargo, Goldman Sachs, Salesforce (CRM), Allstate (ALL) and CNN owner WarnerMedia have already announced a massive wave of firings too.
Corporate America's belt-tightening provides more evidence of the fragile and unforgiving nature of this pandemic.
Global consultant McKinsey & Company forecasts over 800 million global workers could be replaced by robots by 2030.
The most exposed jobs on the cutting block consist of artificial intelligence (AI), a subset of automation where machines learn to use judgment and logic to complete tasks.
Stanford University doctoral candidate Michael Webb analyzed the data for 16,000 AI-related patents and more than 800 job descriptions and found that highly educated, well-paid workers will become more impacted by the spread of AI.
Bachelor’s degree holders would be exposed to AI over five times more than those with only a high school degree.
That’s because AI is especially superior at completing tasks that require planning, learning, reasoning, problem-solving, and predicting — most of which are skills required for white-collar jobs.
Other closely related jobs are in robotics and software and are likely to impact the physical and routine work of traditional blue-collar jobs.
This will sap the demand from everything from home buying and shopping to credit card defaults if a large swath of the U.S. population earns no income.
The rolling wave of white-collar layoffs is very impactful because this is the group that possesses the most purchasing power in the U.S. economy which is a consumption-driven economy.
Evidence is starting to pop up all over the board.
For instance, Charles Schwab (SCHW) said it would cut about 1,000 jobs following its takeover of TD Ameritrade.
Efficiencies, or the lack of it, have never been more magnified where companies are slashing redundant jobs upon mergers.
In the short term, white-collar workers have fared far better during the pandemic than blue-collar workers, who tend to be younger and have less education.
This is because white-collar workers have been able to operate from a home office where the bulk of blue-collar workers do not have that option.
But in the long term, technology through automation is also going to swallow up these higher-paid workers.
That is not to play down the trend of mass furloughs and layoffs in various industries, but technology and artificial intelligence will be deployed to cut high-paying jobs when it improves.
I believe that in 10 years or less, the technology will improve by leaps and bounds to the point where companies are able to install and scale it globally in an instant.
Those jobs will then go poof!
Nearly 40% of low-income workers lost their jobs in March and it is likely that the U.S. economy will never see that level of peak employment again.
Many people were rehired or found jobs elsewhere as the US economy reopened. After peaking at nearly 15% this spring, the unemployment rate has descended steadily, falling to 7.9% in September.
The mounting signs of white-collar job cuts cannot be ignored.
In another example, Allstate announced in late September that it would lay off 3,800 employees.
The insurance giant blamed the job cuts on the lack of driving during the pandemic and the refunds given to customers.
The pandemic resulted in fewer accidents, thus needing fewer claims people.
ExxonMobil (XOM) announced it will cut 1,900 jobs in the United States, mostly at its headquarters in Houston.
A broader reorganization by Exxon will slash 14,000 jobs by the end of 2022.
Energy companies have been disproportionately impacted because the demand shock has halved oil revenues.
This list goes on and on as Raytheon (RTN) disclosed it will lay off 4,000 contractors, mostly engineers, as well as 1,000 corporate employees.
And that's on top of Raytheon previously announcing plans to lay off 15,000 employees because of the downturn in the aviation industry.
Government, local and federal, has to confront a massive loss of revenues which will affect its ability to hire and maintain government workers.
Layoffs could rise among government workers because the pandemic has set off an epic budget crunch at states and local municipalities.
Eventually, whether it's 5 or 10 years down the line, the next set of solutions will inherently lead to the A word which every employee dreads – Automation.
Going 100% remote means face to face communication has slowed down to a crawl and management is less inclined to reward employees who “put on a good face” and for the sake of their own survival have turned to employees that perform well.
There will be an ultimate race to the bottom with spiraling wages and human workers unable to justify their place when competing with machines.
This inevitably leads into the world of analytics to management part of the staff for better or worse and many companies have gone from all to nothing in an instant.
I know this is a lot of information to process, but the ones getting on board with the new normal will thrive and the ones late to implement the necessary measures will flounder.
2020 has been a strange year, and get ready for new twists and turns in the last two months.
Each ensuing year will most likely get weirder because of the heavy introduction of automation into human lives.
Mad Hedge Technology Letter
October 28, 2020
Fiat Lux
Featured Trade:
(THE CLOUD MOVEMENT IS INTACT)
(FFIV), (CRM), (CLOU)
We got another solid sign that the software-as-a-service (SaaS) phenomenon is sticky as ever. You can simply play this with cloud ETF — Global X Cloud Computing ETF Global X Cloud Computing ETF (CLOU)
One of the leading cloud barons of our time, Salesforce.com (CRM) Chief Executive Officer Marc Benioff criticized German rival SAPs business performance in explicit words, rejecting the idea that the German software giant’s challenges are a sign of things to come for his company.
Benioff said that at “SAP, you can see they’re having very significant troubles with the CEO transition they’re going through…they, as you know, moved from one CEO to two, they fired one of those two CEOs. The CEO transition is just not going well and their customers are saying that. Now you can see that their revenues are also reflecting this trouble.”
Protecting his industry makes sense as SAP have decided to blame the cloud industry on their woes and not their management.
Fair enough but Benioff is clearing the debris off the runway and offering a more accurate and rosier snapshot of the current cloud industry.
It’s certainly investor’s every right to worry over SAP’s decision to cut its full-year forecast that helped drag down other software makers, including Salesforce.
Benioff also chimed in and said, “SAP’s troubles, I think, are unique to them.”
Salesforce hasn’t felt the same weakness in guidance, and it was only just this past August, Salesforce reported quarterly sales increased 29% and jacked up its revenue forecast for the year.
The addressable market is growing, and Salesforce is making headway in that market.
Even weaker cloud companies are still showing a healthy heartbeat like Seattle-based F5 Networks (FFIV) saw shares rise after its fiscal fourth quarter earnings report beat expectations.
The company posted revenue of $615 million, up 4%, and non-GAAP earnings per share of $2.59. Wall Street expected revenue of $606 million and EPS of $2.37.
F5 Networks continues to benefit from its move into software and services, expanding beyond its traditional networking hardware business. Software revenue was up 36% from the year-ago quarter and their hardware business drags the overall growth number down to single digits.
The SaaS success is why President and CEO of F5 François Locoh-Donou has indicated that F5 is jumping headfirst into SaaS and nothing will stop this strategy apart from an apocalypse.
Locoh-Donou laid out the company’s strategy to enable “adaptive applications” that can adapt based on the environment.
F5 plans to leverage its traditional application delivery technologies along with its $1 billion acquisition of Shape Security and $670 million acquisition of web server NGINX to position itself as a key player amid a larger trend of automation and artificial intelligence driving advances in software applications and computer networks.
Cloud companies are held up so well that Locoh-Donou told employees that F5 won’t make layoffs during its fiscal year 2020.
I believe that this upcoming earnings season will offer more olive branches into why software stocks continue to be solid, but it's is not to say they aren’t expensive in the short-term.
The software-as-a-service (SaaS) business model continues to be a buckle-your-seatbelt-up growth leader, but other cloud-based services are poised to eclipse it as it matures.
SaaS applications are expected to deliver a highest-ever $105 billion in revenue this year, even as global technology spend dropped 8%, or about $300 billion.
The largest x-factor to SaaS was the broad-based pivot to cloud applications to accommodate remote working.
Even after workers return to the office, SaaS will continue growing because of the computing power and agility it could offer that otherwise couldn't afford it if they had to buy an on-premises or enterprise solution.
SaaS revenue is poised to surpass $121 billion next year and $141 billion in 2022.
For the five-year period between 2018 and 2022, SaaS will grow at a 12% annual rate.
We are now entering the consolidation phase for SaaS where companies are slowly replacing the last on-premises stalwarts in their portfolio, but the low-hanging fruit has mostly been harvested.
The applications with the strongest business case for SaaS have mostly been implemented.
SaaS companies are also facing increased competition and the numbers validate this as SaaS companies typically competed against three other companies in 2012, but by 2017, a SaaS startup could expect to face nine competitors in the same market segment.
Take for instance the digital market industry, the number of SaaS products increased from about 500 to 8,500 during that 5-year period.
The SaaS model has proven to be robust and critical to business continuity.
It will continue to be the preferred deployment mechanism for most applications and until this overarching strategy shifts, the money will be poured into SaaS software.
The first-mover advantage will take hold as the more marginal SaaS applications appear; the more customers will migrate into “brand” names.
For companies like Salesforce and F5 Networks, this means tailwinds, but it will virtually be impossible to become a new SaaS start-up in 2020 as this industry starts to mature.
Mad Hedge Technology Letter
July 17, 2020
Fiat Lux
Featured Trade:
(THE ROAD OUT OF SILICON VALLEY),
(AAPL), (CRM), (MSFT), (FB), (AMZN), (GOOGL)
In a study last year, 44% of Millennials planned to move out of the Bay Area in the “next few years.”
In the same study, 8% of Millennials indicated that they would move out of the Bay Area within the next 365 days.
Then Covid-19 hit.
The pandemic has accelerated this trend of Millennials ditching big-ticket cities and rental prices in San Francisco have experienced 30% drops with many owners offering free two months upon move in to salvage a souring situation.
The U.S. has also moved to ban foreign HB-1 visas citing the 40 million unemployed American citizens that are now looking for a job.
The knock-on effect is a wave of Indian and Chinese tech workers, who are usually the recipients of the HB-1 visas, that won’t be renting Silicon Valley apartments at inflated market prices.
The migratory trends sum it all up and the Bay Area has finally hit that inflection point where it is no longer the most desirable place to live anymore.
On a social level, the area has also become squalid like some third world countries due to a ravaging homeless problem that is growing faster than any software company.
The pandemic forced the local city government to create a tent encampment in front of San Francisco city hall.
The ones that weren’t gifted a spot in front of city hall were temporarily put up in five-star hotels in Russian Hill and paid by for the city because of the absence of any travelers.
Salesforce Founder and CEO Marc Benioff has lamented that San Francisco, where ironically he is from, is a diabolical “train wreck” and urged fellow tech CEOs to “walk down the street” and see it with their own eyes to observe the corrosion of society.
The leader of Salesforce doesn’t mince his words when he talks and beelines to the heart of the issues.
Sadly, the pandemic will put more pressure on the lower end of society and force more Americans into homelessness adding to the surge.
How many homeless can San Francisco absorb?
It’s scary to think about what will happen when the eviction moratorium ends and extended unemployment benefits stop.
It’s just another factor in a long list of why San Francisco is losing talent.
The environment has really turned from day to night in Silicon Valley where just a half a year ago, Silicon Valley was overflowing with tech jobs and now start-ups are shedding jobs faster than ever.
Uber, Lyft, and Google are just some that have rescinded job offers to new graduates, frozen salaries, slashed annual bonuses, and straight-up laid-off employees.
The trend of outsourcing tech jobs from California was already well underway before the pandemic.
That was exactly what Apple’s $1 billion investment into a new tech campus in Austin, Texas and Amazon adding 500 employees in Nashville, Tennessee is all about.
Apple also added numbers in San Diego, Atlanta, Culver City, and Boulder just to name a few.
Apple currently employs 90,000 people in 50 states and is in the works to create 20,000 more jobs in the US by 2023.
Most of these new jobs won’t be in Silicon Valley but is it possible that the pace of new hires will get bogged down because of the health crisis.
Millennials are reaching that age of family formation and they are fleeing to places that are affordable and possible to take the first step onto the property ladder.
The health crisis has crushed many of their dreams to become a first-time homebuyer, meaning they could become lifelong renters.
Millennials came of age during 9-11, graduated into the Great Recession of 2008, and have now been dealt a cruel and devastating blow of navigating through Covid-19 during many of their best years of income earning.
No wonder why Silicon real estate has dropped, people and their paychecks are on the way out.
In a perfect storm of a health crisis, economic crisis, and the desire to live in more physical space as most jobs become remote, San Francisco has never been less attractive at any point in time.
It will no longer be the economic juggernaut that was so vital to tech companies.
Silicon Valley simply doesn’t share the wealth with all of its participants and the place is now feeling the side effects.
The last time San Francisco was this unattractive, you would have to go back to before the California Gold Rush of 1848 when San Francisco was just a backwater village of 10,000 people.
When hiring comes back, look for many of the second-tier cities like Nashville to recover fast taking off from what Silicon Valley built.
Just as harrowing as the health crisis, the start of wildfire season has just commenced in the state of California.
It used to be such a great place to live.
Mad Hedge Technology Letter
July 15, 2020
Fiat Lux
Featured Trade:
(CLOUD 101)
(AMZN), (MSFT), (GOOGL), (DOCU), (CRM), (ZS)
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 triple 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's 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 telecommute. 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.
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.
