Mad Hedge Technology Letter
June 2, 2021
Fiat Lux
Featured Trade:
(WHEN TO GET BACK INTO SALESFORCE?)
(CRM), (SONO), (HON), (SAP)
Posts
Looking for that optimal balance between growth and profitability is the ideal but of course if a tech firm in that state is also leaning towards driving growth...
That company is Salesforce (CRM) and it looks attractive now after pulling back from its peak.
Investing in growth, especially in this insatiable demand environment, is simply the best thing a tech firm can do for a company.
That said, I am also a staunch believer that a focus on discipline makes for a stronger and more durable company.
Over the long term, I believe tech firms need to be able to deliver both revenue acceleration and versatility in its revenue acceleration.
That shows up for Salesforce in the $3.2 billion in cash flow on $5.96 billion in revenue which adds up to being up 74% year over year.
CRM’s numbers reflect a strong performance since the onset of the public health situation and their operating margin is producing almost as if it was completely redesigned from the bottom up.
CRM has raised its operating margin to 18% and they are on track to doing $50 billion by 2025.
Then there are unbelievable stories to digest that make readers understand the true power of CRM.
The Sonos (SONO) story is just one to absorb — they just had this 84% growth when they went to consumer using CRM products.
More importantly, how to integrate operations with a cloud platform is at the forefront of every CEO’s thinking.
This takes looking at the trends of this past year and again, the individual stories where CRM has made that big difference, like the Honeywell (HON) story when they shifted 7,000 salespeople from in-person to virtual customer meetings — customer meetings aren't going back to conference rooms only.
Then when the business environment dictates that CRM is helping through the Service Cloud, together with Field Service and Experience Cloud to enable Honeywell to seamlessly dispatch technicians for on-site product maintenance and proactive asset management, connected service partner experiences, and customer experience for scheduling appointments and instantly solving troubleshooting problems.
It’s field service capability that helped CRM to amplify an already close-knit relationship with Honeywell, and that's when management started to collaborate and say, wow, we could bring this to the aviation business in Honeywell to transform and streamline the work they do via the cloud.
To succeed in the all-digital work-anywhere world enabling you to digitize your entire customer experience and get back to growth is the overarching goal in this incredible 2021 economy.
The outperformance really stretches across the portfolio. When we talk about the fact that of the seven-figure deals, they, on average, included more than four of CRM cloud services, meaning they are not selling individual products.
CRM’s AI Einstein started doing over 100 billion predictions per day. And it's a great example of these platform investments that CRM did multiple years ago that customers and the whole economy go digital are benefiting from.
It means every email is more personalized and every e-commerce you paid for is suited to your interest and your needs, driving growth and success for customers.
MuleSoft is now doing 4.86 billion integration transactions every day. That is up 28% quarter over quarter.
Integrating these legacy systems so customers can move faster in the face of an economy that’s shifting more rapidly than ever before shows the importance of CRM’s acquisitions as it relates to the overall value proposition of Customer 360.
Total revenue for the first quarter was $5.96 billion, up 23% year over year and CRM’s vertical strategy continues to align products to strategic industries.
In particular, we saw strength in the public sector, which continues to accelerate as governments around the world turn to Salesforce Solutions. Service Cloud demonstrated another quarter of incredible growth at scale with Q1 revenue of $1.5 billion, growing 20% year over year, and Tableau continues to perform well.
In Q1, Tableau was in eight of CRM’s top 10 deals for the company and in more than 60% of seven-figure plus deals.
The company expects Q2 revenue of $6.23 billion or approximately 21% growth year over year and CRM even raised annual revenue guidance by $250 million.
They are about to pass SAP as the largest enterprise applications company in the world. And all the analysts have their models. I know they track SAP and Salesforce.
It really shows the whole world is going digital, and customers are connecting with their customers in a new way, and everyone needs CRM to do it or get left behind.
They also need CRM’s analytics — they need integration and CRM just happens to be the leader in that area.
CRM has undergone an M&A consolidation after heavily paying for acquisitions. This earnings report signaled to investors to expect these headwinds to drop off towards the end of the year and since the stock market is forward-looking, CRM will start to transform into the buy the dip tech firm it was once before these expensive acquisitions took place.
Readers should keep an eye out for Salesforce for really any substantial pullback and long-term, this software company is a reliable revenue accumulator with a strong brand name.
Global Market Comments
November 7, 2018
Fiat Lux
SPECIAL ELECTION ISSUE
Featured Trade:
(THROWING RED MEAT TO MY BASE)
(RTN), (LMT), (NOC), (HON), (XOM), (CVX), (DVN)
It turned out to be a category two blue wave, not the Category four or five one Democrats had hoped for.
The Democrats picked up 28 seats in the House of Representatives but lost two in the Senate.
The one-liner here is that the most generous corporate tax cuts in US history are frozen in place for two more years. That is good for the economy and good for stocks.
You have to laugh at some of the stories that started filing in on Tuesday. In Brooklyn, NY election, officials called the fire department to break down the door of the polling place because they had the wrong keys. Polls everywhere ran out of ballots, while others suffered voting machine breakdowns.
Not so here in Nevada where everything ran flawlessly. My smiling face was safely stored in the Washoe County voter database and a backup paper ballot was created for good measure. No Russians here! Nevada now has two Democratic Senators for the first time in history.
Fortunately, I am old enough to have taken a civics class in high school which has not been taught in public schools for decades. A year working in the White House Press Corps (during the Reagan era) gives me additional perspective.
It shows. According to a recent survey, only 27% of Americans can identify all three branches of the federal government (executive, legislative, and the judicial).
The responsibility, therefore, falls to me to explain the outcome of yesterday’s midterm election and the trading and investment implications therein.
With the Democrats winning the House of Representatives and the Republicans controlling the Senate, we are about to enter the golden age of gridlock.
It is now impossible for any new law to be passed at the federal level. The only way it could is if they agreed on something, but so far, the two parties have shown little propensity to do so. They might as well be chalk and cheese.
Even if they did jointly pass a bill, it could still be vetoed by president Trump. Can you really see Donald Trump signing a bill sponsored by Nancy Pelosi? Given his preference for disruption, I would say there is a little chance of that happening.
The Democrats now have a crucial power and that is complete control of the purse strings. If Trump wants to spend anything at all, it can only be with Democratic approval.
It is highly unlikely that the Democrats will not approve ANY expansion of the debt ceiling, given the enormous increases in government spending Trump has inspired.
You can certainly expect the growth of defense spending to slow, if not stop completely, so avoid these stocks like the plague, like Raytheon (RTN), Lockheed Martin (LMT), Northrop Grumman (NOC), and Honeywell (HON).
This perfectly sets up a number of government shutdowns in the coming two years. Each one of these will bring a 10% stock market correction, but probably not much more. This was the case when Republicans shut down the government under President Obama sometime for weeks.
Control of the Senate isn’t really all that important. Once one branch of government is gone, the legislative calendar grinds to a halt. It does retain for the president the right to appoint judges. But that really involves social issues, not market ones, and will have no market impact. I can’t think of any big business issues coming up before the Supreme Court.
You can count on the House to resurrect the investigation of Russian influence in the 2016 election which was put to sleep with no findings by the Republicans nearly a year ago. On the first day in office, the new Democratic majority will subpoena Donald Trump’s tax returns. Long in hiding like the Loch Ness monster and bigfoot, they will finally see the light of day.
An impeachment motion against Trump will almost certainly pass the House but it won’t be anything more than a symbolic gesture. Without a two-thirds vote in the Senate, it will go nowhere. I doubt it will even come up for a vote.
The House can also use the Congressional Review Act to roll back any Trump administration rule it doesn’t like, which is pretty much all of them. Just last week, Trump said he could overturn a constitutional amendment with an executive order.
Expect the courts to get clogged with litigation on everything. Oil companies will be the big victims here. Avoid Exxon (XOM), Chevron (CVX), and Devon Energy (DVN). Their free pass on environmental regulation is about to end.
And while the tax cuts have been frozen on place, so is the steep upward trajectory of the growth of government debt. Borrowing is expected to top $1.4 trillion next year, levels not seen since the Great Recession. That means the Golden Age of short selling in the bond market, now 2 ½-year-old, has many more years to run. Keep selling the United States Treasury Bond Fund (TLT) on rallies and buy the (TBT) on dips.
The figures belie the massive leftwing swing that has taken place in the nation. West Virginia went for Trump by 43 points in 2016 but just reelected a Democratic Senator, Joe Manchin. In Colorado, they elected the first openly gay governor. The Republicans only won the Senate in Arizona because the Green Party split the vote, taking 2.2%.
Where Republicans did win, it was only by razor-thin margins, seeing 2016 leads disappear from double digits to tenths of a percent across the country, as we saw in Florida and Texas. That sets up and interesting 2020 where demographic change alone should be enough to tip the balance leftward. Oh, and we will be in recession by then too.
Fortunately, you will be rewarded for your long suffering during the campaign which saw an unwelcome 46% increase in negative advertising. Markets have delivered an average 8.5% return in every fourth quarter since 1980 and are up 89% of the time. Since WWII, every midterm election has generated an eye-popping 14.5% average return in the following 12 months.
And now for the bad news: the 2020 presidential campaign starts tomorrow, and we won’t know who the Democratic candidate is until TWO MONTHS BEFORE THE ELECTION!
