(GOOGL) Archives

Who Will Be the Next FANG?

FANGS, FANGS, FANGS! Can’t live with them but can’t live without them either.

I know you’re all dying to get into the next FANG on the ground floor, for to do so means capturing a potential 100-fold return, or more.

I know because I’ve done it four times. The split adjusted average cost of my Apple shares is only 25 cents compared to today’s $174, so you can understand my keen interest. My average on Tesla is $16.50.

Uncover a new FANG and the riches will accrue rapidly. Facebook (FB), Amazon AMZN), Netflix (NFLX), and Alphabet (GOOGL) didn’t exist 25 years ago. Apple (AAPL) is relatively long in the tooth at 40 years. And now all four are in a race to become the world’s first trillion-dollar company.

One thing is certain. The path to FANGdom is shortening. It took Apple four decades to get where it is today, Facebook did it in one. As Steve Jobs used to tell me when he was running both Apple and Pixar, “These overnight successes can take a long time.”

There is also no assurance that once a FANG always a FANG. In my lifetime, I have seen far too many Dow Average components once considered unassailable crash and burn, like Eastman Kodak (KODK), General Electric (GE), General Motors (GM), Sears (SHLD), Bethlehem Steel, and IBM (IBM).

I established in an earlier piece that there are eight essential attributes of a FANG, product differentiation, visionary capital, global reach, likeability, vertical integration, artificial intelligence, accelerant, and geography.

We are really in a “What have you done for me lately” world. That goes for me too. All that said, I shall run through a short list for you of the future FANG candidates we know about today.

Alibaba (BABA)

Alibaba is an amalgamation of the Chinese equivalents of Amazon, PayPal, and Google all sewn together. It accounts for a staggering 63% of all Chinese online commerce and is still growing like crazy. Some 54% of all packages shipped in China originate from Alibaba.

The juggernaut has over half billion active users, and another half billion placing orders through mobile phones. It is a master of AI and B2B commerce. There is nothing else like it in the world.

However, it does have some obvious shortcomings. Its brand is almost unknown in the US. It has a huge problem with fakes sold through their sites.

It also has an ownership structure for foreign investors that is byzantine, to say the least. It is a contractual right to a share of profits funneled through a PO box in the Cayman Island. The SEC is interested, to say the least.

We also don’t know to what extent founder Jack Ma has sold his soul to the Beijing government. It’s probably a lot. That could be a problem if souring trade relations between the US and the Middle Kingdom get worse, a certainty with the current administration.

Tesla (TSLA)

Before you bet on a new startup breaking into the Detroit Big Three, go watch the movie “Tucker” first. Spoiler Alert: It ends in tears.

Still, Tesla (TSLA) has just passed the 270,000 mark in the number of cars manufacturered. Tucker only got to 50.

Having led my readers into the stock after the IPO at $16.50, I am already pretty happy with this company. Owning three of their cars helps too (two totaled). But Tesla still has a long way to go.

It all boils down to the success of the $35,000, 200-mile range Tesla 3 for which it already has 500,000 orders. So far so good.

It’s all about scale. If it can produce these cars in sufficient numbers, it will take over the world and easily become the next FANG. If it can’t, it won’t. It’s that simple.

To say that a lot is already built into the share price would be an understatement. Tesla now trades at ten times revenues compared to 0.5 for Ford (F) and (General Motors (GM). That’s a relative overvaluation of 20:1.

Any of a dozen competing electric car models could scale up with a discount model before they do, such as the similarly priced GM Bolt. But with a ten-year lead in the technology, I doubt it.

It isn’t just cars that will anoint Tesla with FANG sainthood. The firm already has a major presence in rooftop solar cell installation through Solar City, utility sized solar plants, industrial scale battery plants, and is just entering commercial trucks. Consider these all seeds for FANGdom.

One thing is certain. Without Tesla, there wouldn’t be s single mass-market electric car on the road today.

For that, we can already say thanks.

Uber

In the blink of an eye, ride sharing service Uber has become essential for globe-trotting travelers such as myself.

Its 2 million drivers completely disrupted the traditional taxi model for local transportation which remains unchanged since the days of horses and buggies.

That has created the first $75 billion of enterprise value. It’s what’s next that could make the company so interesting.

It is taking the lead in autonomous driving. It could also replace FeDex, UPS, DHL, and the US post office by offering same day deliveries at a fraction of the overnight cost.

It is already doing this now with Uber Foods which offers immediate delivery of takeouts (click here if you want lunch by the time you finish reading this piece.)

UberCopters anyone? Yes, it’s already being offered in France and Brazil.

Uber has the potential to be so much more if it can just outlive its initial growing pains.

It is a classic case of the founder being a terrible manager, as Travis Kalanick has lurched from one controversy to the next. The board finally decided he should spend much time on his new custom built 350-foot boat.

Its “bro” culture is notorious, even in Silicon Valley.

It is also getting enormous pushback from regulators everywhere protecting entrenched local interests. It has lost its license in London, the only place in the world that offered a decent taxi service pre-Uber. Its drivers are getting beaten up in Paris.

However, if it takes advantage of only a few of the doors open to it, status as a FANG beckons.

Walmart (WMT)

A few years ago, I was heavily criticized for pointing out that half the employees at my local Walmart (WMT) were missing their front teeth. They have since received a $2 an hour's pay raise, but the teeth are still missing. They don’t earn enough money to get them fixed.

The company is the epitome of bricks and mortar in a digital world with 12,000 stores in 28 countries. It is the largest private employer in the US, with 1.4 million workers, mostly earning minimum wage.

The Walmart customer is the very definition of the term “late adopter.” Many are there only because unlike Amazon, Wal-Mart accepts cash and Food Stamps.

Still, if Walmart can, in any way, crack the online nut, it would be a turbocharger for growth. It moved in this direction with the acquisition of Jet.com for $3 billion, a cutting-edge e-commerce firm based in Hoboken, NJ.

However, this remains a work in progress. Online sales account for only 4% of Walmart’s total. But they could only be a few good hires at the top away from success.

Microsoft (MSFT)

Talk about going from being the 800-pound gorilla to an 80 pound one, and then back to 800 pounds.

I don’t know why Microsoft (MSFT) lost its way for 15 years, but it did. Blame Bill Gates’s retirement from active management and his replacement by his co-founder Steve Ballmer.

Since Ballmer’s departure in 2014, the performance of the share price has been meteoric, rising by some 125% over the past two years.

You can thank the new CEO Satya Nadella who brought new vitality to the job and has done a complete 180, taking Microsoft belatedly into the cloud.

Microsoft was never one to take lightly. Windows still powers 90% of the world’s PCs. No company can function without its Office suite of applications (Word, Excel, and PowerPoint). SQL Server and Visual Studio are everywhere.

That’s all great if you want to be a public utility, which Microsoft shareholders don’t.

LinkedIn, the social media platform for professionals, could be monetized to a far greater degree. However, specialization does come at the cost of scalability.

It seems that the future is for Microsoft to go head to head against next door neighbor Amazon (AMZN) for the cloud services market while simultaneously duking it out with Alphabet (GOOGL).

My bet is that all three win.

Airbnb

This is another new app that has immeasurably changed my life for the better. Instead of cramming myself into a hotel suite with a wildly overpriced minibar for $600 a night, I get a whole house for $300 anywhere in the world, with a new local best friend along with it.

Overnight, Airbnb has become the world’s largest hotel chain without actually owning a single hotel. At its latest funding round in 2017, it was valued at $31 billion.

The really tricky part here is for the firm to balance out supply and demand in every city in the world at the same time. It is also not a model that lends itself to vertical integration. But who knows? Maybe priority deals with established hotels are to come.

This is another firm that is battling local regulation, that great barrier to technological innovation. None other than its home town of San Francisco now has strict licensing requirements for renters, a 30 day annual limitation, and a $1,000 a day fine for offenders.

The downtowns of many tourist meccas like Florence, Italy and Paris, France have been completely taken over by Airbnb customers, driving rents up and locals out.

IBM (IBM)

There was a time in my life when IBM was so omnipresent we thought like the Great Pyramids of Egypt it would be there forever. How times change. Even Oracle of Omaha Warren Buffet became so discouraged that he recently dumped the last of his entire five-decade long position.

A recent 20 consecutive quarters of declining profits certainly hasn’t helped Big Blue’s case. It is one of the only big technology companies whose share price has gone virtually nowhere for the past two years.

IBM’s problem is that it stuck with hardware for too long. An entrenched bureaucracy delayed its entry into services and the cloud, the highest growth areas of technology.

Still, with some $80 billion in annual revenues, IBM is not to be dismissed. Its brand value is still immense. It still maintains a market capitalization of $144 billion.

And it has a new toy, Watson, the supercomputer named after the company’s founder, which has great promise, but until now has remained largely an advertising ploy.

If IBM can reinvent itself and get back into the game, it has FANG potential. But for the time being, investors are unimpressed and sitting on their hands.

The Big Telecom Companies

My final entrant in the FANGstakes would be any combination of the four top telecommunication companies, Verizon (VZ), AT&T (T), Comcast (CMCSA), and Time Warner (TWX), which now control a near monopoly in the US.

There is a reason why the administration is blocking the AT&T/Time Warner merger, and it is not because these companies are consistently cited in polls as the most despised in America. They are trying to stop the creation of another hostile FANG.

Still, if any of the big four can somehow get together, the consequences would be enormous. Ownership of the pipes through which the modern economy courses bestows great power on these firms.

And Then….

There is one more FANG possibility that I haven’t mentioned. Somewhere, someplace, there is a pimple-faced kid in a dorm room thinking up a brand-new technology or business model that will take the world by storm and create the next FANG.

Call me crazy, but I have been watching this happen for my entire life.

I want to thank my friend, Scott Galloway, of New York University’s Stern School of Business, for some of the concepts in this piece. His book, “The Four” is a must read for the serious tech investor.

Creating the Next FANG?

April 2, 2019

Tech Letter

Mad Hedge Technology Letter
April 2, 2019
Fiat Lux

Featured Trade:

(HOW TO GET CONTROL OF YOUR LIFE)
(GOOGL), (FB), (LYFT)

How to Get Control of Your Life

Tech Letter

Don’t get caught up in the cesspool of digital ads inundating your life.

I’ll teach you how to take back control of your life and even mess with these data thieves.

No need to thank me.

One of the most frequented complaints I hear today is the overflowing number of digital ads people are faced with that make you want to pull your hair out.

If you want to play your part in taking back your internet freedom, then read on.

The internet ad business is a world that borders subterfuge.

The high stakes environment is perpetuated by none other than Silicon Valley and specifically the tech heavyweights that wield capital dominating the data sphere.

Even though it sounds remarkably cliché, data is truly the new oil.

You would be surprised how many internet operations are based on the back of you, the user, and the data you generate.

Take Lyft (LYFT).

They are forced to tap the digital marketing world to attract qualified drivers.

Not only does Lyft spend ad dollars on driver recruitment, but they must spend to grow the number of passengers.

The rider base, as a result, synthetically grows which is directly attributable to paid marketing initiatives.

Lyft lays out on a platter the ways they attempt to generate new passengers and drivers, essentially becoming market makers, and it’s a mind-boggling long list including:

“referrals, affiliate programs, free or discount trials, partnerships, display advertising, television, billboards, radio, video, content, direct mail, social media, email, hiring and classified advertisement websites, mobile “push” communications, search engine optimization and keyword search campaigns.”

Even if there is only a 20% chance of breaking even, these unicorns are incentivized to lose others' money translating into poor quality growth or initiate high-risk strategies or carry out a combination of the two.

Sales and marketing costs in the year ending Dec 2018 came in at $296.6 million, meaning that over 37% of overall costs to Lyft were attributed to this one segment.

If that wasn’t bad enough, Alphabet affiliated company CapitalG took in $41.4 million, $74.4 million, and $92.4 million of ad-related services in 2016, 2017, 2018 laughing all the way to the bank.

Not only do Alphabet have a 5% stake in Lyft, but they are incentivized to bump up Lyft’s search engine optimization ranking to the top because they’ll benefit through asset appreciation if the company flourishes.

The process is rigged so what can we do about it?

Seizing control of your life and personal data first centers on installing a different browser other than a Google-based product to diversify the data out of Alphabet’s (GOOGL) iron grip.

I have chosen to use the browser called Brave, based on the Chromium web browser, it comes preinstalled with an ad blocker and disables web trackers, and most importantly, works well.

To visit their website, click here.

Make sure to import your passwords and bookmarks from your prior browser to ensure a smooth transition.

Once you are armed with a browser with a functioning ad-blocker, notice how the ad-less experience enhances your browser experience.

Try out YouTube.com, notice that ads don’t pop up in the beginning or middle of your viewing session and they do not even prompt you to disable them.

To understand which websites are hellbent on grabbing your digital ad dollar, then you will visit the odd website such as CNBC’s live TV feed which forces the user to disable the ad blocker which can be done at the top.

As much as CEO of Facebook (FB) Mark Zuckerberg has been vilified for his ad practices, he does not force users to disable ad blockers to use his platform to his credit which indicates that most users really have no idea about this stuff.

Seeking Alpha, the internet financial new site, is one of the worst eggs in the dozen, full out blocking users from even viewing the main homepage if you are accessing it with a VPN (virtual private network).

If you do access Seeking Alpha with an ad blocker, every page you click prompts an annoying reminder to “white list” the site which is polite verbiage for don’t block us or we will prevent you from using us.

Awareness and actionable methods to take back your internet freedom and personal data are vital to the health and longevity of the internet.

Instead of enriching these few Silicon Valley bullies, change your browser to an independent service, install an ad-blocker, and lastly buy a VPN.

A VPN is a software that circumvents geographical restrictions by connecting to servers in different countries effectively masking your computer’s IP address location.

This can have many different applications such as during my summer vacations in Switzerland, I can access all the US-based internet services that would require my IP address to originate from a domestic American location.

A VPN is also important in minimizing the chances of cyber threats and offers extra layers of security.

Chinese internet users often access international websites that are habitually censored through VPN software getting access to the west’s treasure trove of professional knowledge.

In many cases, a small Chinese company wielding a VPN is the difference between success and failure.

VPN software is the Chinese communist party’s worst enemy which is why they forced Apple to remove them from Apple’s app store recently.

My go-to VPN is Astrill. To visit their website, please click here.

Knowledge is power.

The masking of a computer’s geographical location will stymy digital ad crawlers diluting ad data forcing them to revalue the digital ad tools they use to charge exorbitant amounts to analog companies to digitally advertise destroying ad revenue.

I see this as a positive development as the unintended consequences of these digital ad creatures have toxified the internet for the naive user with many digital companies resorting to perverse tactics that beget even more perverse marketing tactics.

The slew of new tech IPOs is offering us inside knowledge into how enslaved tech companies are to the likes of Alphabet and Facebook digital ad apparatus.

To shake them off our tails, users on mass need to alter how they use the internet to protect from being pickpocketed in broad daylight.

Once revenue begins to suffer, they will have to act more reasonably to the betterment of the internet which we all share as a communal good.

April 1, 2019

Diary, Newsletter, Summary

Global Market Comments
April 1, 2019
Fiat Lux

Featured Trade:

(MARKET OUTLOOK FOR THE WEEK AHEAD, OR THE INMATES ARE RUNNING THE ASYLUM)
(SPY), (TLT), (FCX), (DIS), (TSLA), (IWM), (AAPL),
(GOOGL), (MSFT), (PYPL), (AMZN)

The Market Outlook for the Week Ahead, or The Inmates are Running the Asylum

Diary, Newsletter

I have decided to run for president next year. If you wondered why my content has been slacking off lately, it’s because I’ve been hard at work writing the Mueller Report. Oh, and the Dow Average will reach 100,000 by December.

Ha! Gotcha! April fool.

Still, looking at the market action last week, you really have to wonder if the inmates have seized control of the asylum when the average rose four of five days. These are people who are buying stocks at a decade high, with collapsing earnings, and the rest of the world falling into recession.

However, there is a method to their madness. Interest rates across every maturity in Europe and Japan turned negative last week. Suddenly both US stocks AND bonds looked like the bargain of the century, but only if you were foreign. An avalanche of cash into the US followed triggering an explosive move up in the bond market. For the first time in three years, I was not short.

And here’s the interesting part. It could continue for months.

In the meantime, investors have been grappling with a number that will be the most important print of the year. The first look at Q1 2019 GDP will be published on April 23, and it is widely expected to be awful, at less than a 1% annual rate. It will include the effects of the record 34-day government shutdown as well as the horrendous weather and flooding of last winter.

So, on the one hand, you have a stock market that is simultaneously being propped up by enormous cash flows and held back by a weakening economy and earnings and profit-taking from the best quarterly start in ten years. It all adds up to a market that could go absolutely nowhere.

And I just so happen to have the perfect portfolio for such a market. These are the precise conditions where deep in-the-money call and put option spreads absolutely prosper. When everything is going nowhere, spreads always expire at their maximum profit points.

The global easing trend is accelerating as central banks rush to head off the next global recession. Expect interest rates to drop to levels you once thought impossible.

The global bond short covering panic continues, with ten-year US Treasury yields dropping to an eye-popping 2.33%. Slowing global growth is to blame. Did I hear the word “refi”?

Foreign investors poured into the US bond market, driving ten-year US Treasury yields down to 2.33%. When everyone else in the world has negative yields, our bonds become the best paying in the world.

Q4 GDP final report came in at 2.2% as expected, down a third from Q3. Expect that figure to more than halve in Q1 2019. Put on your hard hat.

The Mueller Report gave Trump a clean bill of health, at least on the collusion issue. But it opened up a dozen other lines of investigation that will continue for years. It’s definitely a “RISK ON” development.

US Existing Home sales jumped 11.8% in January. Low mortgage interest rates are finally kicking in with the 30-year fixed at 4.23%. This is a one hit wonder, not the beginning of a new trend. But interest rates are going lower.

New Home Sales were up 4.9% to 667,000 units in February in a rare positive data point. Could low interest rates finally be kicking in? Still, avoid homebuilders.

Apple (AAPL) announced its new streaming service, Apple TV Plus, and the stock fell on a “sell the news” drop. Roku is included in the package so buy (ROKU). The Apple offering is weak enough to allow plenty of room for Disney to launch its own streaming service Disney Plus at the end of this year. Prepare for an onslaught of princesses. Buy (DIS) too.

Home price appreciation hit a four-year low with the S&P Case Shiller National Home Price Index growing only 4.2% YOY in January, down from 4.6% the previous month. Las Vegas, Phoenix, and Minneapolis are still showing the biggest gains while San Francisco and Seattle are seeing the biggest price drops. Avoid homebuilders (ITB).

Lyft (LYFT) priced at $72 a share, the top end of expectations, valuing the company at an eye popping $25 billion at the end of the day. Never mind that the company is losing money hand over fist, it’s all about potential. The tech IPO bubble top has started!

The Mad Hedge Fund Trader was up on the week with time decay in our combed 13 positions our best friend. The quarter end window dressing was kind to us.

March turned positive in a final burst, up 1.78%. My 2019 year to date return retreated to +15.49%, boosting my trailing one-year return back up to +35.16%.

My nine-year return recovered to +315.56%, a new all-time high. The average annualized return appreciated to +33.81%. I am now 45% in cash, 30% long and 25% short, and my entire portfolio expires at the April 18 option expiration day in 9 trading days. I took generous profits on my positions in copper miner Freeport McMoRan (FCX) right when it bounced off the 200-day moving average.

The Mad Hedge Technology Letter maintained long positions in Microsoft (MSFT), Alphabet (GOOGL), and PayPal (PYPL), and Amazon (AMZN), which are clearly going to new highs.

It’s jobs week again with the usual trifecta of employment reports. Last month was a disaster, so this month will be interesting.

On Monday, April 1 at 8:30 AM, February Retail Sales are published.

On Tuesday, April 2, 8:30 AM EST, we learn February Durable Goods.

On Wednesday, April 3 at 8:15 AM, the ADP Employment Report comes out for private hiring.

On Thursday, April 4 at 8:30 AM EST, the Weekly Jobless Claims are announced.

On Friday, April 5 at 8:30 AM, we obtain the big number of the week, the February Nonfarm Payroll Report.

The Baker-Hughes Rig Count follows at 1:00 PM.

As for me, I’m going to use a rare spell of good weather to drive up to Lake Tahoe and start the planning work on my October 25-26 Mad Hedge Lake Tahoe Conference. Half the dinner tickets sold out on the first day, so you better get moving now.

Maybe it’s something I said? To learn more about the conference, please click here. I’ll see you there.

Good luck and good trading.

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

March 29, 2019

Diary, Newsletter, Summary

Global Market Comments
March 29, 2019
Fiat Lux

SPECIAL FANG ISSUE

Featured Trade:

(FINDING A NEW FANG),
(FB), (AAPL), (NFLX), (GOOGL),
(TSLA), (BABA)

March 26, 2019

Tech Letter

Mad Hedge Technology Letter
March 26, 2019
Fiat Lux

Featured Trade:

(PINTEREST COMES OUT)
(PINS), (FB), (AAPL), (GOOGL), (AMZN)

Pinterest Comes Out

Tech Letter

The Facebook (FB) of digital images is on deck and has filed to go public.

I'll give you the skinny on it.

Pinterest (PINS) has slightly different lingo - they call digital images pins, a collection of pins, a pinboard, and the users that post pins are pinners.

Aside from this little creative wrinkle, Pinterest does little to help flow my creative juices.

That's not to say they are a bad company, in fact, it's quite refreshing that on the financial side of the equation, Pinterest is a solid financial enterprise.

They make money and aren't going to burn through their cash reserves anytime soon.

This should give some peace of mind to potential investors looking at snapping up shares of Pinterest.

Even though they are not a bad company, I cannot promote them as a firm revolutionizing technology in the way we know it, they certainly don’t, and never will, at least at the current pace of innovation.

Pinterest derives almost 100% of its revenue from digital ads à la Facebook, they do not sell anything and much like Facebook, the user is the product by way of mining private data and selling them over to third-party ad agencies who subsequently sell targeted ads on Pinterest’s platform.

As I read through Pinterest’s S-1 filing with the SEC, an overwhelming portion of the content is reserved for the litany of regulatory risks that serving digital ads, curating others' content, and the international risks that pose to Pinterest growth story.

As with most tech growth stories, this particular narrative must orbit around the strength of incessantly growing its domestic and international user base.

I surmise that part of the reason they desire to go public is because of the 265 million in global quarterly monthly users have reached the high watermark.

Therefore, this calculated risk of going public is entirely justified as the cash out for the venture capitalist and private owners that invested in this company as a burgeoning toddler.

Or the owners see catastrophic downside from the regulatory landscape which has been increasingly volatile in the past few quarters and wish to get out as soon as they can.

Let's make no mistake about this, Pinterest does not control its own destiny, and their success will be based upon external factors that they cannot control.

Some of these factors have already reared their ugly head, the most relevant example was when Google (GOOGL) changed its image search algorithm which disrupted Pinterest’s image function.

This was an example of third-party content originators clamping down on their willingness to allow Pinterest to populate content on their proprietary platform, and the lack of availability of content or the decreasing nature of it will sting the hope of increasing web traffic on Pinterest going forward.

Pinterest has clearly disclosed in its IPO filing that they are reliant on crawling third-party search engine services for third-party photos, this content is curated into their platform and credited to the original user.

I would classify this type of technology as unimpressively low grade and Pinterest will be susceptible to many more possible disruptions in the future.

In layman terms, if the stars do not align, Pinterest will be the first to feel it, and strategically speaking, this is a poor position to strategically operate from.

If Pinterest cannot serve the specific content that incites the tastes of pinners, this could destroy retention and engagement rates leading to a damaging downdraft of ad revenue.

Pinterest's feeble business model will certainly call for new investments in and around more innovative parts of technology.

What we have seen most successful technology companies flirt with are full-fledged recurring revenue models, and bluntly, Pinterest does not have one.

The likes of Microsoft, Amazon, Google, and Apple have pivoted hard towards this subscription model proving they can have their own cake and eat it too.

Funnily enough, Pinterest pays AWS, Amazon’s cloud arm, an extraordinary amount of money to store the pins or digital images on AWS Cloud platform to the tune of almost $800 million per year showing how beneficial it is to be on the other side of the equation.

Pinterest does benefit from a robust brand reputation and its footprint in America is quite large.

However, one group of potential customers have clearly been left out in the cold - Males.

The firm has been famous for being the go-to image platform for young mothers and generally speaking, American women born in the 1980s.

According to data analytics, it appears that content that males gravitate towards is not present on the platform and will need to be addressed going forward to grow users.

Another crucial problem that must be addressed is the lack of domestic growth in the user base.

In Q1 2018, Pinterest achieved 80 million monthly active users, however, fast forward to Q4 in 2018 and the number had barely inched up to 82 million monthly active users.

From Q1 to Q2, there was a dramatic deceleration in the number of monthly active users falling by 5 million to 75 million monthly active users.

The company blamed this on Facebook changing their password security causing users who rely on Facebook passwords and username entrance data to be temporarily stonewalled from entering Pinterest.

Millions decided to avoid the hassle and just stop using Pinterest because they were unable to enter the platform, causing major carnage to Pinterest’s ad-supported revenue model because of the hemorrhaging usership.

Unfortunately, bigger platforms such as Facebook and Google are not responsible to telegraph these structural changes in policy to Pinterest which means that this type of loss of usership could be a bi-annual or annual exercise in damage control.

Losing 10% of your user base based on someone else’s systemic changes is a bitter pill to swallow.

Investors must ask themselves why a premium search engine like Google search want to allow Pinterest to continue to curate its images for ad revenue effectively skimming off of Google’s top line?

As you have seen, Google has hijacked many of these types of business initiatives by taking on these opportunities themselves, dismantling the choke points, and going in for the kill.

The main avenue of user expansion is its international audience, and sadly, the average revenue per international user is a paltry $0.09. This number was up sequentially from the prior quarter which was $0.06.

If you compare the revenue per user with America, then it's easy to understand why the company wants to go public now.

Management presided over a sequential increase of American revenue per user from $2.33 to $3.16 in the prior quarter and the same growth will be hard to maintain and replicate spurring the higher-ups to cash out.

International growth is staring down a barrel of a gun with restricted access by governments who do not allow this type of service in their countries such as China, India, Kazakhstan, and Turkey.

The impact of these broad-based bans decodes into Europe being the only possible answer to user growth in revenue terms and total usership.

To state that Pinterest is confronted by widespread global risk is an understatement.

However, the low-hanging fruit would be squeezing more revenue out of the American user and I would guess that the ceiling would be around $7 per user in the near-term.

If management hopes to eclipse the $7 per American user, they will have to migrate into more data generative strategies such as video.

March 25, 2019

Tech Letter

Mad Hedge Technology Letter
March 25, 2019
Fiat Lux

Featured Trade:

(APPLE’S BIG PUSH INTO SERVICES)
(AAPL), (GS), (NFLX), (GOOGL), (ROKU)

Apple's Big Push Into Services

Tech Letter

The future of Apple (AAPL) has arrived.

Apple has endured a tumultuous last six months, but the company and the stock have turned the page on the back of the anticipation of the new Apple streaming service that Apple plans to introduce next week at an Apple event.

The company also recently announced a partnership with Goldman Sachs (GS) to launch an Apple-branded credit card.

In the deal, Goldman Sachs will pay Apple for each consumer credit card that is issued.

These new initiatives indicate that Apple is doing its utmost to wean itself from hardware sales.

Effectively, Apple's over-reliance on hardware sales was the reason for its catastrophic winter of 2018 when Apple shares fell off a cliff trending lower by almost 35%.

This new Apple is finally here to save the day and will demonstrate the high-quality of engineering the company possesses to roll out such a momentous service.

Frankly speaking, Apple needs this badly.

They were awkwardly wrong-footed when Chinese consumers in unison stopped buying iPhones destroying sales targets that heaped bad news onto a bad situation.

I never thought that Apple could pivot this quickly.

Apple's move into online streaming has huge ramifications to competing companies such as Roku (ROKU).

In 2018, I was an unmitigated bull on this streaming platform that aggregates online streaming channels such a Sling TV, Hulu, Netflix and charges digital advertisers to promote their products on the platform through digital ads.

I believe this trade is no more and Roku will be negatively impacted by Apple’s ambitious move into online streaming.

What we do know about the service is that channels such as Starz and HBO will be subscription-based channels that device owners will need to pay a monthly fee and Apple will collect an affiliate commission on these sales.

Apple needs to supplement its original content strategy with periphery deals because Apple just doesn’t have the volume to offer consumers a comprehensive streaming product like Netflix.

Only $1 billion on original content has been spent, and this content will be free for device owners who have Apple IDs.

Apple's original content budget is 1/9 of Netflix annual original content budget.

My guess is that Apple wants to take stock of the streaming product on a smaller scale, run the data analytics and make some tough strategic decisions before launching this service in a full-blown way.

It's easier to clean up a $1 billion mess than a $9 billion mess, but knowing Apple and its hallmarks of precise execution, I'd be shocked if they make a boondoggle out of this.

Transforming the company from a hardware to a software company will be the long-lasting legacy of Tim Cook.

The first stage of implementation will see Apple seeking for a mainstay show that can ingrain the service into the public's consciousness.

Netflix was a great example, showing that hit shows such as House of Cards can make or break an ecosystem and keep it extremely sticky ensuring viewers will stay inside a walled pay garden.

Apple hopes to convince traditional media giants such as the Wall Street Journal to place content on Apple's platform, but there has already been blowback from companies like the New York Times who referenced Netflix’s demolition of traditional video content as a crucial reason to avoid placing original content on big tech platforms.

Netflix understands how they blew up other media companies and don’t expect them to be on Apple’s streaming service.

They wouldn’t be caught dead on it.

Tim Cook will have to run this race without the wind of Netflix’s sails at their back.

Netflix has great content, and that content will never leave the Netflix platform come hell or high water.

Apple is just starting with a $1 billion content budget, but I believe that will mushroom between $4 to $5 billion next year, and double again in 2021 to take advantage of the positive network effect.

Apple has every incentive to manufacture original content if third-party original content is not willing to place content on Apple's platform due to fear of cannibalization or loss of control.

Ultimately, Apple is up against Netflix in the long run and Apple has a serious shot at competing because of the embedment of 1 billion users already inside of Apple's iOS ecosystem that can easily be converted into Apple streaming service customers.

If you haven't noticed lately, Silicon Valley's big tech companies are all migrating into service-related SaaS products with Alphabet (GOOGL) announcing a new gaming product that will bypass traditional consoles and operate through the Google Chrome browser.

Even Walmart (WMT) announced its own solution to gaming with a new cloud-based gaming service.

I envision Apple traversing into the gaming environment too and using this new streaming service as a fulcrum to launch this gaming product on Apple TV in the future.

The big just keep getting bigger and are nimble enough to go where internet users spend their time and money whether it's sports, gaming, or shopping.

Apple is no longer the iPhone company.

I have said numerous times that Apple's pivot to software was about a year too late.

The announcement next week would have been more conducive to supporting Apple’s stock price if it was announced the same time last year, but better late than never.

Moving forward, Apple shares should be a great buy and hold investment vehicle.

Expect many more cloud-based services under the umbrella of the Apple brand.

This is just the beginning.

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