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A Lesson in Blitzscaling

One of the fastest parts of technology growing at a rapid clip is fintech.

Fintech has taken the world by storm threatening the traditional banks.

Companies such as Square (SQ) and PayPal (PYPL) are great bets to outlast these dinosaurs who have a laser-like focus on technology to move the digital dollars in an efficient and low-cost way.

Another section of the technology movement that has caught my eye morphing by the day is the online food delivery segment that has soaring operating margins aiding Uber on their quest to go public next year.

There have been whispers that Uber could garner a $120 billion valuation dwarfing Chinese tech giant Alibaba’s (BABA) IPO which was the biggest IPO to date at $25 billion.

Uber is following in Amazon’s footsteps executing the “blitzscaling” method to suppress competition.

This strategy involves scaling up as quick as possible and seizing market share before anyone can figure out what happened.

The growth explodes at such speed that investors pile in droves throwing inefficient capital at the business leading the company to make bold bets even though profit is nowhere to be seen.

Blitzscaling has fueled American and Chinese tech to the top of the global tech charts and the trade war is mainly about these two titans jousting for first and second place in a real-time blitzscale battle of epic proportion.

The audacious stabs at new businesses usually end up fizzling out, but the ones that do have the potential to blaze a trail to profitability.

One business that has Uber giving hope of one day returning capital to shareholders is Uber Eats – the online food delivery service.

Total sales of restaurant deliveries will hit 11% of revenue if the current trend continues in 2022 marking a giant shift in consumer attitudes.

No longer are people eating out at restaurants, according to data, younger generations view ordering from an online food delivery platform as a direct substitute.

This mindset is eerily similar to Millennials attitude towards entertainment.

For many, Netflix (NFLX) is considered a better option than attending a movie theatre, and all forms of outdoor entertainment are under direct attack from these online substitutes.

One firm on the forefront of this movement has been Domino’s Pizza (DPZ).

You’d be surprised to find out that over half of the Domino’s Pizza staff are software developers.

They have focused on the customer experience doubling down on their online platform to offer the easiest way to order a pizza.

In 2012, the company was frightened to death that it still took a 25-step process to order a pizza.

By 2016, Domino’s rolled out “zero-click ordering” offering 15 different ways to order their product across many major platforms including Amazon’s Alexa.

This has all led to 60% of sales coming from online and rising.

The consistency, efficiency, and seamless online payment process has all helped Dominoes stock rise over 800% since May 2012 and that is even with this recent brutal sell-off.

Uber is perfectly positioned to take advantage of this new generation of dining in.

In the third quarter, Uber booked $2.1 billion of gross booking volume in their powerful online food delivery service.

The 150% YOY rise makes Uber Eats a force to be reckoned with.

Uber’s investment into e-scooters and bike transportation stems from the potential synergies of online food delivery efficiency.

It’s cheaper to deliver pizzas on a bicycle or anything without an internal combustion engine.

If you ever go to China, the electric powered three-wheel modified tuk-tuk with a storage compartment in the back instead of passenger seating is pervasive.

Often navigating around narrow alleyways is inefficient for a four-wheel automobile, and as Uber sets its sights on being the go-to last mile deliverer of food and whatnot, building out this vibrant transport network is vital to its long-term vision.

In fact, Uber is not an online ride-sharing platform, it will be something grander and its Uber elevate division could showcase Uber’s adaptability by making air transport cheap for the masses.

As soon as the robo-taxi industry gathers steam, Uber will ditch human drivers for self-driving technology saving billions in labor costs.

As it stands, Uber keeps cutting the incentive to drive for them with rates falling to as low as an average of $10 per hour now.

The golden age of being an Uber driver is long gone.

Uber is merely gathering enough data to prepare for the mass roll-out of automated cars that will shuttle passengers from point A to B.

It doesn’t matter that Lyft has gained market share from Uber. Lyft’s market share was in the teens a few years ago and has rocketed to 31% taking advantage of management problems over at Uber to wriggle its way to relevancy.

It does not reveal how poor of a company Uber is, but it demonstrates that Uber’s network is spread over different industries and the sum of the parts is a lot greater than Lyft can fathom.

Lyft is a pure ride-share company and brings in annual revenue that is 4 times less than Uber.

Naturally, Uber loses a lot more money than Lyft because they have so many irons in the fire.

But even a single iron could be a unicorn in its own right.

CEO Dara Khosrowshahi recently talked about its Uber Eats division in glowing terms and emphasized that over 70% of the American population will have access to Uber Eats by the end of next year.

Uber’s position in the American economy as a pure next-generation tech business reverberates with its investors causing Khosrowshahi to brazenly admit that Uber “suffers from having too much opportunity as a company.”

Ultimately, the amped-up growth of the food delivery unit feeds back into its ride-sharing division. These types of synergies from Uber’s massive network effect is what management desires and dovetails nicely together.

In 2018 alone, 40% of Uber Eat’s customers were first-time samplers.

A good portion of these customers have never tried Uber’s ride-sharing service and when they travel for business or leisure, they later adopt the ride-sharing platform leading to more Uber converts.

Uber Freight has enabled truckers to push a button and book a load at an upfront price revolutionizing the process.

The online food delivery service is the place to be right now and it would be worth your while to look at GrubHub (GRUB).

Quarterly sales are growing over 50% and quarterly EPS growth was 61% sequentially for this industry leader.

Profit Margins are in the mid-20% convincingly proving that the food delivery industry will not be relying on razor-thin margins.

Charging diners $5 for delivery and taking a cut from the restaurateurs have been a winning strategy that will resonate further as more diners choose to munch in the cozy confines of their house.

Blitzscaling has led Uber to the online food delivery business and they are pouring resources into it to juice up profits before they go public next year.

The ride-sharing business is a loss-making enterprise as of now, and Uber will need to exhibit additional ingenuity to leverage the existing network to find strong pockets of revenue.

I believe they have the talent on their books to achieve finding these strong pockets making this company an intriguing stock to buy in 2019.

October 4, 2018

Tech Letter

Mad Hedge Technology Letter
October 4, 2018
Fiat Lux

Featured Trade:
(HOW SOFTBANK IS TAKING OVER THE US VENTURE CAPITAL BUSINESS),
(SFTBY), (BABA), (GRUB), (WMT), (GM), (GS)

How Softbank is Taking Over the US Venture Capital Business

Tech Letter

One of the few people who can magnify pressure on the venture capitalists of Silicon Valley is none other than Masayoshi Son.

What a ride it has been so far. At least for him.

His $100 billion SoftBank Vision Fund has put the Sand Hill Road faithful in a tizzy – utterly revolutionizing an industry and showing who the true power broker is in Silicon Valley.

He has even gone so far as doubling down his prospects by claiming that he will raise a $100 billion fund every few years and spend $50 billion per year.

This capital logically would flow into what he knows best – technology and the best technology money can buy.

As Yahoo Japan and Alibaba (BABA) shares have floundered, SoftBank’s stock has decoupled from the duo displaying explosive brawn.

SoftBank’s stock is up 30% in the past few months and I can tell you it’s not because of his Japanese telecommunications business which has served him well until now as his cash cow.

Yahoo Japan, in which SoftBank owns a 48.17% stake, has existing synergies with SoftBank’s Japanese business, but has experienced a tumble in share price as Son turns his laser-like focus to his epic Vision Fund.

His tech investments are bearing fruit and not only that, Son revealed his Alibaba investment is about to clean up shop to the tune of $11.7 billion next year shooting SoftBank shares into orbit.

A good portion of the lucrative windfall will arrive from derivatives connected to the sale of Alibaba, and the other 60% comes from the paper profits finally realized in this shrewd piece of business.

Equally paramount, SoftBank’s Vision Fund hauled in $2.13 billion in operating profits from the April-June quarter underscoring the effectiveness of Masayoshi Son’s tech ardor.

Son said it best of the performance of the Vision Fund saying, “Results have actually been too good.”

So good that after this June, Son changed his schedule to spend 3% of his time on his telecom business down from 97% before June.

His telecommunications business in Japan has turned into a footnote.

It was the first quarter that Son’s tech investments eclipsed his legacy communications company.

Son vies to rinse and repeat this strategy to the horror of other venture capitalists.

The bottomless pit of capital he brings to the table predictably raises the prices for everyone in the tech investment world.

Son’s capital warfare strategy revolves around one main trope – Artificial Intelligence.

He also strictly selects industry leaders which have a high chance of dominating their field of expertise.

Geographically speaking, the fund has pinpointed America and China as the best sources of companies. India takes in the bronze medal.

Unsurprisingly, these two heavyweights are the unequivocal leaders in artificial intelligence spearheading this movement with the utmost zeal.

His eyes have been squarely set on Silicon Valley for quite some time and his record speaks for himself scooping up stakes in power players such as Uber, WeWork, Slack, and GM (GM) Cruise.

Other stakes in Chinese firms he’s picked up are China’s Uber Didi Chuxing, China’s GrubHub (GRUB) Ele.me and the first digital insurer in China named Zhongan International costing him $500 million.

Other notable deals done are its sale of Flipkart to Walmart (WMT) for $4 billion giving SoftBank a $1.5 billion or 60% profit on the $2.5 billion position.

In 2016, the entire venture capitalist industry registered $75.3 billion in capital allocation according to the National Venture Capital Association.

This one company is rivalling that same spending power by itself.

Its smallest deal isn’t even small at $100 million, baffling the local players forcing them to scurry back to the drawing board.

The reverberation has been intense and far-reaching in Silicon Valley with former stalwarts such as Kleiner Perkins Caufield & Byers breaking up, outmaneuvered by this fresh newcomer with unlimited capital.

Let me remind you that it was considered standard to cautiously wade into investment with several millions.

Venture capitalists would take stock of the progress and reassess if they wanted to delve in some more.

There was no bazooka strategy then.

SoftBank has thrown this tactic out the window by offering aspiring firms showing promise boatloads of capital up front even overpaying in some cases.

Conveniently, Son stations himself nearby at a nine-acre estate in Woodside, California complete with an Italianate mansion he bought for $117.5 million in 2012.

It was one of the most expensive properties ever purchased in the state of California even topping Hostess Brands owner Daren Metropoulos, who bought the Playboy Mansion from Hugh Hefner in 2016 for $100 million.

If you think Son is posh – he is not. He only fits himself out in the Japanese budget clothing brand Uniqlo. He just needed a comfortable place to stay and he hates hotels.

In August, SoftBank decided to top off the $4.4 billion investment in WeWork, an American office space-share company, with another $1 billion leading Son to proclaim that WeWork would be his “next Alibaba.”

Son continued to say that WeWork is “something completely new that uses technology to build and network communities.”

The rise of remote workers is taking the world by storm and this bet clearly follows this trend.

The unlimited coffee and beer found in the new Japanese Roppongi WeWork office that opened earlier this year was a nice touch.

WeWork plans to open 10-12 offices in Japan by the end of 2018.

Thus far, WeWork is operating in over 300 locations in over 20 countries.

Revenue is growing rapidly with the $900 million in 2017 a 12-fold improvement from 2014.

The newest addition to SoftBank’s dazzling array of unicorns is Bytedance, a start-up whose algorithms have fueled news-stream app Jinri Toutiao’s meteoric rise in China.

The deal values the company at $75 billion.

It also runs video sharing app Douyin, and overseas version TikTok.

Bytedance’s proprietary algorithm, serving to personalize streams for users, is the best in China.

They have been able to insulate themselves from local industry giants Tencent and Alibaba.

TikTok has piled up over 500 million users and brilliant investment like these is why Son revealed that the Vision Fund’s annual rate of return has been 44%.

SoftBank’s ceaseless ambition has them in the news again with whispers of investing in a Chinese online education space with a company called Zuoyebang.

China’s online education market is massive. In 2017, this industry pulled down over $33 billion in revenue, and 2018 is poised to break $55 billion.

Zuoyebang has lured in Goldman Sach’s (GS) as an investor.

This platform allows users to upload homework questions for third party assistance – the name of the app literally translates into “homework help.”

Cherry-picking off the top of the heap from the best artificial intelligence companies in the world is the secret recipe to outperforming your competitors.

At the same time, aggressively throwing money at these companies has effectively frozen out any resemblance of competition. Once the competition is frozen out, the value of these investments explodes, swiftly super-charged by rapidly expanding growth drivers.

How can you compete with a man who is willing to pay $300 million for a dog walking app?

Venture capitalist funds have been scrambling to reload and mimic a Vision Fund-like business of their own, but its not easy raising $100 billion quickly.

This genius strategy has made the founder of SoftBank the most powerful businessman in the world.

Son owns the future and will have the largest say on how the world and economies evolve going forward.

October 3, 2018

Tech Letter

Mad Hedge Technology Letter
October 3, 2018
Fiat Lux

Featured Trade:
(OUR HOME RUN ON SQUARE),
(SQ), (V), (AMZN), (GRUB), (SPOT), (MSFT), (CRM), (AAPL)

Our Home Run On Square (SQ)

Tech Letter

Pat yourself on the back if you pulled the trigger on Square (SQ) when I told you so because the stock has just lurched over an intra-day level of $100.

It was me aggressively pushing readers into buying this gem of a fin-tech company at $49. To read that story, please click here (you must be logged in to www.madhedgefundtrader.com).

Since then, the price action has defied gravity levitating higher each passing day immune to any ill-effects.

The Teflon-like momentum boils down to the company being at the cross-section of an American fin-tech renaissance and spewing out supremely innovative products.

At first, Square nurtured the business by targeting the low hanging fruit– small and medium size enterprises in dire need of a strong injection of fin-tech infrastructure.

It largely stayed away from the big corporations that adorn billboards across the Manhattan skyline.

That was then, and this is now.

Square is going after the Goliath’s fueling a violent rise in gross payment volume (GPV).

Modifying themselves for larger institutions is the next leg up for Square.

They recently inaugurated Square for Restaurants for larger full-service restaurants.

Business owners do not need technical backgrounds to operate the software and integrating Caviar into this program emphasizes the feed through all of Square’s software.

Dorsey has built an ecosystem that has morphed into a one-stop shop for comprehensively running a business.

Migrating into business with the premium corporations offers an opportunity to augment higher margin business.

This is the lucrative path ahead for Square and why investors are festively lining up at the door to get a piece of the action.

The downside with an uber-growth company like Square are lean profits, but they have managed to eke out three straight quarters of marginal spoils.

However, the absence of profits can be stomached considering the total addressable market is up to $350 billion.

Grabbing a chunk of that would mean profits galore for this too hot to handle company.

Expenses are always a head spinner for Silicon Valley firms and attracting a dazzling array of engineers to spin out breathtaking profits can’t be done on the cheap.

The Cash app download figures are sizzling and is one of the most popular apps in the app store.

Square’s marketing strategy is also turning a corner getting out their name leading to sale conversions.

These are just several irons in the fire.

The last two years has seen this stock double each year, could we be in for another double next year?

If measured by growth, then I see why not.

Growth is the ultimate acid test deciding whether this stock will be dragged down into the quick sand or let loose to run riot.

Other second-tier tech firms in the middle of a sweet growth spot pack a potent punch like Spotify (SPOT) and Grubhub (GRUB) which are growing annual sales around 50-60%.

Material profits are also irrelevant for the aforementioned tech juggernauts.

Square is expanding at the same fervent pace too, and the hyper-growth only makes payment processors like Visa (V) quasi-jealous of such staggering numbers.

And when Square trots out numbers to the public like that with (GPV) shooting out the roof, the stock does nothing but go gangbusters.

Either way, Square has popularized making credit card payments through smartphones and that in itself was a tough nut to crack amongst tough nuts.

Square also has a line-up of impressive point-of-sales products such as Caviar.

In fact, merchant sellers are adopting an average of 3.4 Square software apps with invoices, loans, marketing, and payroll software being the most beloved.

Square also offers other software that can handle back office tasks and manage inventory.

The software and services business is on pace to register over $1 billion in sales in 2019.

The breadth of functions that can boost a company’s execution highlights the quality of software Dorsey has produced.

I always revert back to one key ingredient that all tech companies must wildly indulge in to fire up the stock price – innovation.

Innovation in bucket loads is something all the brilliant tech firms crave such as Microsoft (MSFT), Amazon, and Salesforce (CRM).

Overperformance starts from the top and trickles down to the people they hand pick to manage and run the businesses.

Jack Dorsey is right up there with the best of them and his influence cannot be denied or ignored.

His stewardship over his other company Twitter (TWTR) is sometimes worrisome because of a pure scheduling conflict, but it’s obvious which company is having a better year.

Square steers clear of the privacy and regulatory minefields handcuffing Twitter.

And it could be safely assumed that Dorsey enjoys his afternoons more at Square than his mornings across the street at Twitter where he is bombarded by heinous problems up the wazoo.

When you conjure up an up-and-coming company that could rattle the establishment, Square is one of the first companies that comes to mind.

Some analysts even argue this company deserves to be lifted into the vaunted Fang group.

I would say they are on their merry way but they just aren’t big enough to command a spot on the Fang roster.

I have immense conviction this stock will be a deep influencer of our time, and its diversified software offerings add limitless dimensions underpinning massive revenue streams.

In Q2, the subscription revenue grew 127% YOY underscoring the success the software team is having, crafting productive apps applicable to business owners.

Business owners can even take out a loan through Square Capital which issues micro-loans to small business owners.

In need of financing? Ring up Dorsey’s company for a few quid.

Starkly contrasting Square in the payment processors space is Visa (V).

Visa is not a hyper-growth company going ballistic, but a stoic behemoth unperturbed.

The 3.283 billion visa cards that adorn its insignia represents scintillating brand awareness and efficiency.

When Tim Cook was asked if Apple (AAPL) plans to disrupt Visa, he smirked and said, “People love their credit cards.”

This is a prototypical steady as she goes-type of company.

They do not offer micro-loans to small businesses or dabble with any of the murky sort of products that can be found on the edge of the risk curve.

They are a safe and steady pure payment processor.

Its network can digest 65,000 transactions per second and is universally cherished as a brand around the world.

All of this led to an operating margin of 66% in 2017.

Square has identified other parts of the payment process to snatch and do not directly compete with Visa.

They partner with Visa and pay them a processing fee.

Subsequently, Square is paid a merchant fee after the payment is approved.

Visa has a monopoly and a moat around their business as wide as can be.

Square is a different type of beast – growing uncontrollably and hell-bent on spawning a revolutionary fin-tech paradigm shift.

The question is can Square eventually turn payment heavyweights like Visa on its head?

The path is fraught with booby traps and as Square generates the projected sales and bolsters its revenue, it could start to encroach on these legacy processors too.

Yet, it’s too early to delve into that threat yet.

Enjoy the ride with Square and better to lay off this potent stock until a better entry point presents itself.

This stock will go higher. Giddy-up!

September 6, 2018

Tech Letter

Mad Hedge Technology Letter
September 6, 2018
Fiat Lux

Featured Trade:
(THE SMART PLAYS IN FINTECH),
(SQ), (PYPL), (JPM), (COF), (WFC), (BAC),
(MGI), (GRUB), (BABA), (NFLX)

The Smart Plays in Fintech

Tech Letter

Fintech is all the rage now, and it’s time for investors to grab a piece of the action.

The tech sectors’ stellar performance in 2018 is a little taste of things to come as every industry forcibly pushes toward software and artificial intelligence to enhance products and services.

Bull markets don’t die of old age and some of these tech stalwarts are truly defying gravity.

The fintech sector is no exception.

Square (SQ) led by tech visionary Jack Dorsey has been a favorite of the Mad Hedge Technology Letter practically from the newsletter’s inception.

But another company has caught my eye that most of you already know about – PayPal (PYPL).

PayPal, a digital payments company, has extraordinary core drivers and a splendid growth trajectory.

Its arsenal of services includes digital wallets, money transfers, P2P payments, and credit cards.

It also has Venmo.

Venmo, a digital payment app, is the strongest growth lever in PayPal’s umbrella of assets right now, and was the first meaningful digital payment app in America.

It was established by Andrew Kortina and Iqram Magdon-Ismail, who were roommates at the University of Pennsylvania, and the company was bought out by PayPal for $800 million in 2014, marking a new chapter in PayPal’s evolution.

Funny enough, Venmo’s original use was to buy mp3 formatted songs via email in 2009.

Venmo is wildly popular with tech savvy millennials. A brief survey conducted illustrates how fashionable Venmo is by recording higher user statistics than Apple Pay.

The app is commonly used for ordering pizza through Uber Eats or Grubhub (GRUB), or even shelling out for monthly rent.

If you want to stir up your imagination even more, Venmo has a prominent social feed where users can view other Venmo users’ purchases.

Financial models suggest Venmo could contribute $300 million to the PayPal top line in 2021. If Venmo executes perfectly, revenue could surpass the $1 billion mark in 2021, with much higher operating margins than PayPal’s core products.

Even though management declines to speak specifically about Venmo, the dialogue in the earnings call usually provides some color into what is going on underneath the hood.

Xoom, a digital remittance distributor app with offices in San Francisco and Guatemala City owned by PayPal, along with Venmo grew payment volume by 50% YOY, surging to $33 billion annually.

Of that $33 billion in volume, $19 billion was contributed by Venmo and Xoom chipped in with $14 billion.

More than 60,000 new merchants joined PayPal’s array of platforms, adding up to more than 19.5 million total merchants.

All in all, PayPal locked in $3.86 billion of sales last quarter, which was a 23% YOY jump in revenue, at a time where widespread acceptance of fintech platforms is brisk.

PayPal raised its end-of-year forecast and rewarded shareholders with authorization of a $10 billion buyback.

Upward margin expansion, expanding market share, multiple revenue stream, and untapped pricing power is the recipe to PayPal’s meteoric rise.

PayPal’s share price has climbed higher from a base of $73 at the beginning of the year to an all-time high of more than $90.

Offering more proof fintech is alive and kicking is Jack Dorsey’s Square’s dizzying rise of more than 200% YOY in its share price.

The company is exceeding all revenue growth expectations and is poised to ramp up subscription revenue.

As with the Venmo app, Square’s Cash app has unrealized potential and will be one of the outperforming profit drivers going forward.

Square hopes to be the one-stop-shop for all types of digital payment needs including consumer finance, equity purchases, possibly international transfers, and cryptocurrency.

All of this is happening amid a robust secular story that could have seen traditional banks swept into the dustbin of history.

Rewind a few years ago, perusing the data about the movement to digital payments must have frightened the living daylights out of the executives from major Wall Street mainstays.

Digital wallets assertive migration into mainstream money payment services could have detached traditional banks’ core businesses.

Slogging your way to a physical bank to put in a wire transfer was not appealing.

Archaic methods of business are painful to see, and traditional banks were still operating this way as of 2015.

Time is money and technology has crashed the traditional waiting time to almost zero.

The way these tech companies operate is simple.

They compete to hire a hoard of advanced computer developers or shortcut the process using the time-honored tradition of poaching the competition’s best talent.

Then snatch market share at all costs and grow like crazy.

Banks badly needed introducing some functions to their array of services such as linking with third-party payment APIs to facilitate online payments and enabling cross-platform digital payments.

Other functions such as establishing modern peer-to-peer payment systems or adopting QR code technology that are wildly popular in East Asia could enhance optionality as well.

These are several instruments they could have amalgamated into their arsenal of fintech technology that could have freshened up these dinosaur institutions.

Harmonizing banking tasks with mobile functionality was fast coming and would be the standard.

Anyone not on board would sink like the Titanic.

Ultimately, banking institutions needed to up their game and acquire one of these digital wallet processors or watch from the sidelines.

They chose the former when a consortium called Early Warning Services (EWS) jointly created by behemoth American banks, including JPMorgan Chase & Co. (JPM), Capital One (COF), Bank of America (BAC), and Wells Fargo (WFC) to “prevent fraud and reduce detection risk” made a game-changing decision.

(EWS) acquired digital payment app Zelle in 2016, and this was its aggressive response to Square Cash and PayPal’s Venmo.

Results have been nothing short of breathtaking.

Leveraging the embedded base of existing banking relationships, Zelle took off like a scalded chimp and never looked back.

In a blink of an eye, Zelle had already signed up more than 30 banks and over 100 financial institutions to its platform.

Banks couldn’t bear being left out of the fintech party.

With hearty conviction, Zelle is signing up users at a pace of 100,000 per day, and the volume of payments in 2017 eclipsed $75 billion.

Zelle projects to expand more than 73% in 2018, integrating 27.4 million new accounts in the U.S., head and shoulders above Venmo’s 22.9 million and Square Cash due to add 9.5 million more users.

Make no bones about it, Zelle was in prime position to convert existing relationships into digital converts. The banks that do not have an interest in Zelle have an uphill climb to stay relevant.

The United States is rather late to this secular growth story. That being said, already 57% of Americans have used a mobile wallet at least once in their lives.

Innovative ideas bring supporters galore and even more adoptees.

That is why the strong pivot into technological enhanced ideas bear unlimited fruit.

Using a mobile platform to just open an app then send funds within a split second with minimal costs is appealing for the Netflix (NFLX) crazed generation that can hardly get off the couch.

Ironically, it’s those in the emerging parts of the world leading this fintech revolution by skipping the traditional banking experience completely and downloading digital wallet apps on their mobile devices.

It’s entirely realistic that some fresh-faced youth have never been present at a physical banking branch before in India or China.

Download an app and your fiscal life commences. Period.

The volume of funds passing through the arteries of Chinese digital wallet apps surpassed $15 trillion in 2017.

And by 2021, 79.3% of the Chinese population are projected to use digital wallets as their main source of splurging Chinese yuan.

America lags a country mile behind China, but the Chinese progress has offered American tech companies a crystal-clear blueprint to springboard digital payment initiatives.

Chinese state banks are already starting to become marginalized, and the Wall Street banks are not immune to the same fate.

Devoid of a digital strategy will be a death knell to certain banking institutions.

Compare the pace of adoption and some must question why American adoption is tardy to a fault.

Highlighting the lackadaisical pace of American fintech integration was Alibaba’s (BABA) smash-and-grab attempt at MoneyGram International Inc. (MGI), as it sought to gain a foothold into the American fintech market.

The attempt was rebuffed by the federal government.

The nascent state of the digital payment world in America must alarm Silicon Valley experts. And the run-up in Square and PayPal includes calculated bets that these two standouts will leapfrog into the future with guns blazing along with Zelle.

The parabolic nature of Square’s mystifying gap up means that a moderate pullback is warranted to put capital to work in this name.

Investors should wait for a timely entry point into PayPal as well.

These two stocks have overextended themselves.

As the fintech pie extrapolates, there will be multiple victors, and these victors are already taking shape in the form of Zelle, PayPal, and Square.

________________________________________________________________________________________________

Quote of the Day

“In the not-too-distant future, commerce is just going to be commerce. It won't be online commerce or offline commerce. It's just going to be commerce. And that will happen because of the phone,” – said CEO of PayPal Dan Schulman.

May 15, 2018

Tech Letter

Mad Hedge Technology Letter
May 15, 2018
Fiat Lux

Featured Trade:
(HARD TIMES AT UBER)
(UBER), (NFLX), (GOOGL), (AMZN), (GRUB)

Hard Times at Uber

Tech Letter

Uber has seen a ferocious challenge to its business model of late. It seems everything it touches turns into fool's gold.

It is easy to assign blame to the current CEO, but Dara Khosrowshahi was shoehorned into a difficult situation after previous CEO Travis Kalanick defiantly departed leaving the company in tatters in his wake.

What could go wrong went wrong.

The company was purged of its license to operate in London, which was one of its highest transactional cities.

Uber boasted a ridership of 3.5 million and sub-contracted 40,000 drivers in London that singlehandedly wiped out the Cockney black cab industry.

The land of fish and chips has not exactly been kind to Uber with the British seaside resort city Brighton the next location to excommunicate Uber from its sandy shores.

Uber's massive data breach of 2016, which took Uber a full year to publicly disclose, of 25.6 million names, 22.1 million mobile phone numbers, and 607,000 driver's license numbers was cited as one of the reasons Uber's license in Brighton was discontinued.

Is there a way back for CEO Dara Khosrowshahi?

The future looks turbulent at best.

Khosrowshahi has left no stone unturned carrying out his search for a new CFO. Uber has not had a CFO since 2015, and a CFO is required to shepherd the company through the IPO process.

Prospective candidates will not touch this position with a 10-foot pole.

Several high-profile hopefuls have already rebuffed offers.

It was painfully obvious to onlookers last week at Uber's Elevate conference in Los Angles that Alphabet (GOOGL) is dominating every potential business that Uber desires to penetrate.

Waymo, Alphabet's autonomous driving technology arm, is miles ahead of Uber after developing in secret for many years.

Waymo's self-driving testing began in 2009 while Uber's first test was carried out in September 2016 in Pittsburgh, conceding a seven-year head start to bitter rivals.

Even worse, Uber's trials have been sidelined as of late because of a casualty in the Phoenix program. Arizona is on the verge of removing Uber from possible future tests along with California making Pittsburgh the last place left to consolidate operations.

At the Elevate conference, Khosrowshahi elucidated Uber's roadmap to industry professionals, and his synopsis was largely underwhelming.

Khosrowshahi broke down the future into three easy-to-understand stages.

In the next two to three years, stage one consists of focusing on improving existing algorithms, enhancing ride share transactions, and expanding to different locations widening the companies ride-share footprint.

Stage 1.5 detailed refining its Uber Eats segment seizing further market share from Grubhub (GRUB) and Amazon (AMZN), the two biggest rivals.

In two to five years from now, stage two entails ramping up the e-bike segment through recently acquired e-bike firm Jump.

Lastly, stage three was proposed to happen in five to 10 years and encompass growing a newly minted air-taxi division called Elevate.

Up until today, Uber's core business has been an unmitigated failure of massive proportions.

In the fourth quarter of 2016, Uber hemorrhaged $2.8 billion then followed up the fourth quarter in 2017 with a $4.5 billion loss, a stark reminder that profits are hard to come by in the tech world.

If losses are what investors want, Uber gives it to you in spades.

If it cannot successfully monetize the core business using cars, the e-biking future is dead on arrival.

Stage 1.5 is all designer chocolates and fancy roses now because growth and margins remain healthy. However, this industry is fraught with booby traps that I chronicled in the recently published story about Grubhub (GRUB).

Stage three was a division that Khosrowshahi reviewed several times after he took the top job and it made the cut after deep contemplation.

Uber plans to start conducting trials in 2020 in Dallas or Los Angeles with the hope of commercial operations starting in 2023.

This timeline is wishful thinking because regulators would never grant operational authority to Uber in a mere five years when it cannot even succeed on asphalt with its self-driving technology.

Lamentably, Alphabet's co-founder Larry Page has an ace up his sleeve.

Since last October, stealth flight trials have been carried out in New Zealand by firm Kitty Hawk led by Sebastian Thrun one of the creators of Waymo, which is developing autonomous flying taxis.

Kitty Hawk was developed for years in secret and personally backed by Larry Page's personal wealth.

He has already poured more than $100 million of his own money into this venture.

To further develop its business, Kitty Hawk was forced to decamp to New Zealand as the Federal Aviation Administration (FAA) in America lacks a path to certification and commercialization.

New Zealand has embraced the revolutionary start-up, and New Zealand is the first country poised to develop a functional robo air-taxi network.

Kitty Hawk's hopes and dreams rely on the aircraft Cora. Please click here to visit its website for more information.

Cora is an all-electric affair powered by batteries with a 36-foot wingspan.

This meshes perfectly with New Zealand's hope to be carbon free by 2050.

Cora has been manufactured with capabilities of flying at heights up to 2,950 feet and a range of 62 miles.

New Zealand has bet the ranch on aerospace technology allowing even marginal start-ups within its borders such as Martin Jetpack, the first commercially sold jetpack, operating with a flight ceiling of 2,500 feet and sold at a starting price of $150,000.

It is ironic that Uber chose to host an aerial-taxi conference considering it is not the company building the flying taxis.

This is the crux of the problem in which Uber finds itself.

It does not produce anything unique.

The biggest winners that take home the lion's share of the spoils are the firms that create a proprietary product that cannot be replicated easily such as Netflix's original content or Google's advanced search engine.

The heavy lifters gain control and can dictate the path toward monetization.

Page's Kitty Hawk is in the driver's seat with the best technology and Uber's Khosrowshahi recently met with Thrun pitching his idea of partnering up.

Expectedly, Kitty Hawk declined to become buddies because nothing can be gained by collaborating with Uber.

Kitty Hawk stated that it plans to develop an app for its own robo-flights, which could crush Uber's dream of being the end all be all of transportation apps.

At the end of the day, Uber is just an app matching drivers and passengers, and creating this app is highly replicable.

It takes billions upon billions of dollars to build an autonomous aerial taxi from scratch. Uber's inability to produce aircraft gives it little negotiating power down the line.

On that note, Uber announced a partnership with NASA to build an air traffic control system, which would logically be used to construct landing ports similar to a helipad for aircraft to land.

By carving out a sliver of the industry mastering port construction, it gives Uber a narrow entranceway into the future of aero-taxi industry albeit a weaker strategic position than Page's Kitty Hawk.

Another day and another loss to Alphabet. Wave the white flag.

Each loss leads to the need for more funding.

More funding has brought on more losses for Uber in a vicious cycle that has seen Uber's valuation slip at the last round of financing.

In the next five years, onlookers can expect much of the same from Uber - underperformance in the form of accelerated losses from its core ride-sharing business.

Capital is disappearing into a black hole and the monetization of Uber Eats and Jump is nothing about which to boast.

These are side businesses at best.

The road map is wishy-washy at best. Uber's Elevate division could turn out to be lipstick on a pig hyping up the company for its 2019 IPO to attract more dollars - the same reason it needs to recruit a new CFO.

The IPO road show will give Uber a platform to explain how it plans to curtail losses. A miracle is required for Uber to finally turn into a profitable business by the time it goes public.

To visit Uber's Elevate division to watch a video of its version of the future of aerial taxis, please click here.

Kitty Hawk's Cora in New Zealand

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Quote of the Day

"A computer once beat me at chess, but it was no match for me at kickboxing." - said American comedian Emo Philips.

May 10, 2018

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May 10, 2018
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