Mad Hedge Technology Letter
July 2, 2018
Fiat Lux
Featured Trade:
(THE CLOUD FOR DUMMIES)
(AMZN), (MSFT), (GOOGL), (AAPL), (CRM), (ZS)
Tag Archive for: (MSFT)
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.
Microsoft's (MSFT) pivot to its Azure enterprise business has sent its stock skyward, and it is poised to rake in more than $100 billion in cloud revenue over the next 10 years.
Microsoft's share of the cloud market rose from 10% to 13% and is catching up to Amazon Web Services (AWS).
Amazon leads the cloud industry it created, and the 49% growth in cloud sales from the 42% in Q3 2017 is a welcome sign that Amazon is not tripping up.
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 73% to Amazon's total operating income.
Total revenue for just the AWS division is an annual $5.5 billion business and would operate as a healthy stand-alone tech company if need be.
Cloud revenue is even starting to account for a noticeable share of Apple's (AAPL) earnings, which has previously bet the ranch on hardware products.
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 anytime 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 through 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. According to a recent survey, 79% of respondents already work outside of their office some of the time, while another 60% would switch jobs if offered this flexibility.
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 work flow, 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.
_________________________________________________________________________________________________
Quote of the Day
"Life is not fair; get used to it," said founder of Microsoft Bill Gates.
Mad Hedge Technology Letter
June 27, 2018
Fiat Lux
Featured Trade:
(DON'T NAP ON ROKU)
(MSFT), (ROKU), (AMZN), (AAPL), (CBS), (DIS), (NFLX), (TWTR), (SQ), (FB)
Unique assets stand the test of time.
In an era of unprecedented disruption, unique assets' strength begets strength.
This is one of the big reasons the vaunted FANG group has carved out power gains in the business landscape bestowed with a largesse dwarfing any other sector.
As the FANGs trot out to imminent profitability by supercharging massive scale, the emerging tech environment gives food for thought.
These up-and-coming companies fight tooth and nail to elevate themselves to FANG status because of the ease of operating in a duopoly or an outright monopoly.
Microsoft (MSFT) is the closest substitute to an outright FANG. In many ways CEO Satya Nadella has positioned himself better than Facebook (FB) and Apple.
The Mad Hedge Technology Letter has pounced on the newest kids on the block offering subscribers buy, sell or hold recommendations zoning in on the best first and second tier companies in tech land.
The top echelon of the second tier is led by no other than Jack Dorsey and both of his companies, Square (SQ) and Twitter (TWTR), offer idiosyncratic services that cannot be found elsewhere.
I have devoted stories to Dorsey gushing about his ability to build a company and rightly so.
Another solid second tier tech company bringing uniqueness to the table is Roku (ROKU), which I have talked about in glowing terms before when I wrote, "How Roku is Winning the Streaming Wars."
To read the archived story, please click here.
Roku is a cluster of in-house, manufactured, online streaming devices offering OTT (over-the-top) content in the form of channels on its proprietary platform.
The word Roku means six in Japanese and it was chosen because Roku was the sixth company established by founder and CEO Anthony Wood commencing in 2002.
Cord-cutting has been a much-covered topic in my newsletters and this generational shift in consumer behavior benefits Roku the most.
In 2017, 25% of televisions purchased were Roku TVs. According to several reports, more than half of all streaming players purchased last year were Roku players.
This would explain how Roku has shifted its income streams from the physical box itself to selling ads and licensing agreements.
Yes, Roku earns the lion's share of its profits similar to the rogue ad seller Facebook.
Roku does not actually sell anything physical except the box you need to operate Roku, which earned Roku a fixed $30 per unit.
The box serves as the gateway to its platform where it sells ads. Migrating to higher caliber digital businesses like selling ads will stunt the hardware revenue part of its business.
That is all part of the plan.
A new survey conducted regarding fresh cord-cutters demonstrated that out of 2,000 cord-cutters questioned, 70% already had a Roku player and felt no need to pay for cable TV anymore.
Second on the list was Amazon Fire TV at 34%, and Apple TV (AAPL) came in third at 10%.
The dominant position has forced content creators to pander toward Roku TV's platform because third-party content creators do not want to miss out on a huge swath of cord-cutter millennials who are entering into their peak spending years and spend most of their time parked on Roku's platform.
Surveys have shown that millennials do not need a million different streaming services.
They only choose one or two for main functionality, and in most cases, these are Netflix (NFLX) and Amazon (AMZN).
Roku allows both these services to be integrated onto its platform. Cord-cutters can supplement their Netflix and Amazon Prime Video binge with a few more a la carte channels to their preference depending on points of interest.
In general, this is how millennials are setting up their entertainment routine, and all roads don't lead through Rome, but Roku.
If the massive scale continues at this pace, 2020 could be the year profitability explodes through the roof.
The next 18 months should give way to parabolic spikes, followed by consolidation to higher lows in the share price.
When I recommended this stock, its shares were trading at a tad above $32 on April 18, 2018, and immediately spiked to $47 on June 20, 2018.
The tariff sell-off hit most second tier tech companies flush in the mouth. The 5% and occasional 7% intraday sell-offs churn the stomach like Mumbai street food during the height of the Indian summer.
That is part and parcel of dipping your toe into these rising stars.
The move ups are parabolic, but the sell-offs make your hair fall out.
Well, glue your locks back onto your scalp, because we have reached another entry point.
Roku is now trading back down in the low $40 range, and I would bet my retirement fund that Roku will end the year above $50.
This unique company is expected to grow its subscriber base by at least 20% annually, and in five years total subscribers will eclipse 45 million users.
Reinforcing its industry leadership, traditional media companies such as Disney and CBS do not have built-in streaming viewership that comes close to touching Roku.
This has forced these traditional media giants to push their content through Roku or lose a huge amount of the 18 to 34 age bracket for which advertisers yearn.
These traditional players are armed with robust ad budgets, and a good bulk of it is allocated to Roku among others.
For each additional a la carte channel users sign up for on Roku, the company earns a sales commission.
As a tidal wave of niche streaming channels plan to hit the market, the first place they will look to is Roku's platform and this trend will only become stronger with time.
A prominent example was Sling TV, which showed up at Roku's front door first before circling around the rest of the neighborhood.
The runway for Roku's three main businesses of video ads, display ads, and licensing with streaming partners, is long and robust.
The one caveat is the fierce competition from Amazon Fire TV, which puts its in-house content on Amazon front and center when you start the experience.
Roku has head and shoulders above the biggest library of content, and the Amazon effect could scare traditional media for licensing content to Amazon.
We have seen the trend of major players removing their content from streamers because of the inherent conflict of interests licensing content to them while they are developing an in-house business.
It makes no sense to voluntarily offer an advantage to competition.
Roku has no plans to initiate its own in-house original content, and this is the main reason that Amazon and Netflix will lose out on Disney (DIS), CBS (CBS), NBC, and Fox content going forward.
These traditional players categorize Roku as a partner and not a foe.
To get into bed with the traditional media giants means digital ads and lots of them. In terms of a user experience, the absence of ads on Netflix and Amazon is a huge positive for the consumer experience.
But traditional players have the option of bundling ads and content together on Roku making Roku even more of a diamond in the rough.
In short, nobody offers the type of supreme aggregator experience, deep penetration of cord-cutting viewership, and the best streaming content on one graphic interface like Roku.
It is truly an innovative company, and it is in the driver's seat to this magnificent growth story.
It's hard to argue with CEO Anthony Wood when he says that Roku is the future of TV.
He might be right.
If Roku keeps pushing the envelope enhancing its product, it will be front and center as a potential takeover target by a bigger tech company.
Either way, the scarcity value of these types of assets will drive its share prices to the moon, just avoid the nasty sell-offs.
_________________________________________________________________________________________________
Quote of the Day
"Google's not a real company. It's a house of cards," - said former CEO of Microsoft Steve Ballmer.
Global Market Comments
June 25, 2018
Fiat Lux
Featured Trade:
(THE MARKET OUTLOOK FOR THE WEEK AHEAD, OR IS THIS A 1999 REPLAY?),
(AAPL), (FB), (NFLX), (AMZN), (GE), (WBT),
(JOIN ME ON THE QUEEN MARY 2 FOR MY JULY 11, 2018 SEMINAR AT SEA),
(JUNE 20 BIWEEKLY STRATEGY WEBINAR Q&A),
(SQ), (PANW), (FEYE), (FB), (LRCX), (BABA), (MOMO), (IQ), (BIDU), (AMD), (MSFT), (EDIT), (NTLA), Bitcoin, (FXE), (SPY), (SPX)
Mad Hedge Technology Letter
June 25, 2018
Fiat Lux
Featured Trade:
(IT'S NOT HEAVEN FOR ALL CLOUD STOCKS)
(ORCL), (MSFT), (AMZN), (CRM), (GOOGL)
Below please find subscribers' Q&A for the Mad Hedge Fund Trader June 20 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader.
As usual, every asset class long and short was covered. You are certainly an inquisitive lot, and keep those questions coming!
Q: What are your thoughts on Square (SQ) as a credit spread or buyout proposition?
A: I love Square long term, and I think there's another double in it. They were a takeover target, but now the stock's getting so expensive it may not be worth it. So, Square is a buy. However, look for a summer sell-off to get into a new position.
Q: The FANGs feel a little bubbly here; will they pull back on a market dip?
A: Yes, my entire portfolio of FANG options is designed to expire on the July 20th expiration. In fact, I may even come out before then as we reach the maximum profit point on these option call spreads. Then look for a summer meltdown to get back in. The FANGs could double from here. If I am wrong they will just continue to go straight up.
Q: Palo Alto Networks (PANW) has a new CEO; are you concerned?
A: Absolutely not, I love Palo Alto networks, as well as the (FEYE) FireEye. It's just a question of getting in at the right price. It's one of the many ballistic stocks in Tech this year that we've been recommending for a long time. Hacking an online theft is never going to go out of style.
Q: Is it time to sell Facebook (FB)?
A: Yes, if you're a trader. No, if you're a long-term investor. There's another double in it. You're going to have natural profit taking on all of these Techs for the short-term, and possibly for the summer, because they've just had enormous runs. If you aren't in the FANGs this year, you basically don't have any performance because almost all of the rest of the market has gone down.
Q: What are your thoughts on Lam Research (LRCX)?
A: The whole chip sector has had two big sell-offs this year because of their China exposure and the trade wars. Expect more to come. China gets 80% of their chips from the U.S. This is normal at the end of a 10-year bull market. It's also normal when a sector transitions from highly cyclical to secular, which is what's happening in the chip sector. Twice the volatility gets you twice the returns.
Q: Would you stay away from Chinese stocks like Alibaba (BABA), Momo Inc.(MOMO), IQ (IQ), and Baidu (BIDU)?
A: I have stayed away because of the trade war fears, and it was the completely wrong thing to do, because they've gone up as much as our Tech stocks, except for the last week. So yes, I would be buying dips on these big Chinese Tech stocks, because they are drinking the same Kool Aid as our Techs, and it's working.
Q: I hear that short selling of volatility is coming back; is that a good thing?
A: Actually, it is a good thing, because it creates buyers on these dips when you had no short sellers left. The entire industry got wiped out in February creating $8 billion in losses. There was no one left to cover those shorts and support the market. Of course, the result was we got a lower low down here because of that. It's always better to have a two-way market to get a real price. Now professionals are sneaking back in on the short side, which is as it should be. This should never have been a retail product.
Q: Why are international markets so disconnected from the U.S.? Many Asian markets are down heavily while the U.S. are up.
A: The U.S. stock market benefits from a rising dollar and rising interest rates, whereas international markets suffer. When you have weak currencies in the emerging markets, people sell their stocks to avoid the currency hit, and that takes the emerging markets down massively. A lot of emerging market companies have their debts denominated in U.S. dollars, so they get killed by a strong greenback. Also, the emerging markets make a lot of money selling goods into China, so when the Chinese economy gets attacked by the U.S. and growth slows, it has the byproduct of attacking all our other allies in Southeast Asia.
Q: Is it a good idea to sell everything for the summer and just de-risk for my portfolio?
A: That's what I'm doing. Summer trading is usually horrible, and now we're going into the summer at close to a high for the year, with a terrible political backdrop and possible economic growth peaking right here. So, yes, it's a good time to sit back, count your money, and maybe even spend some of it on a European vacation.
Q: When do you think the yield curve will invert?
A: In a year, and that is typically when you get a peaking of economic growth and the stock market.
Q: Is the Fed's faster-than-expected desire to raise rates good for equities, or will investors likely sell this news as quantitative tightening continues?
A: Short-term they will buy the market on rising rates, they always do at the early part of an interest rate rising cycle. They sell stocks when you get to the middle or the end of a rate rising cycle.
Q: Do you think large Tech stocks are expensive here?
A: No, I think the Large-Cap Tech stocks can potentially double here. It can take another year to year and a half to do it, and if they don't do it in this cycle they will certainly do it in the next one, after the next recession in the 2020s. So, long term you want to think FANG, FANG, FANG, TECH, TECH, TECH. You really shouldn't have anything else in the long term, except for maybe Biotech, where you can now get in at a multiyear low.
Q: Can I buy a chip company like Advanced Micro Devices (AMD), or should I buy a cloud company, like Microsoft (MSFT)?
A: I would go with the Cloud company. The innovation there is incredible. Cloud is growing like the Internet itself was growing on its own in 1995, and with chip stocks like (AMD), you're going to get much higher volatility, but more gain. So, pick your poison. But I would go with the Cloud plays.
Q: Can we watch the recorded version of this webinar later?
A: Yes, we post the webinar on our website a couple hours later, if you're a paid subscriber.
Q: What about the CRISPR stocks?
A: They are a screaming buy right now, buy Editas Medicine (EDIT) and Intellia Therapeutics (NTLA) on the dip. The paper that triggered the sell-off saying that CRISPR causes cancer is complete BS.
Q: Only 30 million in Bitcoin was stolen in South Korea so will that still have an impact?
A: Yes, but there have been countless other hacks this year and the total loss is well over $500 million. In addition, Bitcoin is now down 70% from its December top so not all is well in cryptocurrency land.
Q: Should we expect any Trade Alerts before August 8?
A: Yes, some of my best trades have been done while only vacation. I once sold short the Euro (FXE) from the back of a camel in Morocco. Another time, I bought the S&P 500 (SPY) while hanging from a cliff face on the Matterhorn. Both of those made good money.
Q: Will the S&P 500 reach new highs before the end of the year?
A: Yes, once you get the election out of the way, that removes a huge amount of uncertainty from the market. If we could end our trade war before then, I think you're looking at another 10-15% in gains from this level by the end of the year. That takes you to an (SPX) of 3,100 by the end of 2018, which was my January 1 prediction.
Q: What does all the heavy mergers and acquisition activity mean for the market?
A: It means fewer stocks are left to trade. Stock shortages leads to higher prices, always, so it is a big market positive this year
Good Luck and Good Trading.
John Thomas
CEO and Publisher
The Diary of a Mad Hedge Fund Trader
The year of the Cloud takes no prisoners.
Cloud stocks have been on a tear resiliently combating the leaky macro environment.
Many of my cloud recommendations have been outright winners such as Salesforce (CRM).
However, there are some unfortunate losers I must dredge up for the masses.
Oracle (ORCL) announced quarterly earnings and it was a real head-scratcher.
I have been banging on the table to ditch this legacy tech company since the inception of the Mad Hedge Technology Letter.
It was the April 10, 2018 tech letter where I prodded readers to stay away from this stock like the black plague.
At the time, the stock was trading at $45, click here to revisit the story "Why I'm Passing on Oracle."
The first quarter was disappointing and abysmal guidance of 1% to 3% for annual total revenue topped off a generally underwhelming cloud forecast.
Investors spotlight one part of the business requiring the utmost care and nurturing - its cloud business.
The second quarter was Oracle's chance to revive itself demonstrating to investors it is serious about its cloud direction.
What did management do?
They announced a screeching halt to the reporting of cloud revenue and it would avoid reporting on specific segments going forward.
Undoubtedly, something is wrong behind the scenes.
To withdraw financial transparency is indicative of Oracle's failure to pivot to the cloud and this has been my No. 1 gripe with Oracle.
It is simply getting pummeled by the competition of Amazon (AMZN), Alphabet (GOOGL), and Microsoft (MSFT).
Stuck with an aging legacy business focused on database software, transformation has been elusive.
To erect a giant cloak around its cloud business means that growth is far worse than initially thought to the point where it is better to sweep it under the carpet.
Instead of taking a direct hit on the chin, management decided to wriggle itself out of the accountability of bad cloud numbers.
A glaringly bad cloud business should be the cue for management to kitchen sink the whole quarter and start afresh from a lower base.
The preference to shroud itself with opaqueness is bad management. Period.
Instead of turning over a new leaf, Oracle could be penalized on future earnings reports for the way it reports financials for the simple reason it confuses analysts.
Wars were fought for less.
Bad management runs bad companies. The stock has floundered while other cloud stocks have propelled to new heights - another canary in the coal mine.
Amazon and Netflix are two examples of tech growth stocks that have celebrated all-time highs.
Even rogue ad seller Facebook broke to all-time highs lately.
The champagne is flowing for the top-level tech companies.
As expected, Oracle was punished heavily upon this news with the stock down almost 8% intraday to $42.70, and it sits throttled at $43.60 as I write this.
Diverting attention from the cloud will mire this stock in the malaise it deserves. Shielding its investors from the only numbers that really matter will give analysts a great reason to label this dinosaur stock with sell ratings.
Analysts are usually horrific stock predictors, but they will be able to wash their hands of this beleaguered stock.
Even if the stock goes up, analysts will still be geared toward sell ratings.
Oracle reported a $1.7 billion in total cloud revenue last quarter, a disappointing 9% increase QOQ.
Oracle's cloud revenue is only up 25% YOY.
For an up and coming cloud business, the minimum threshold to please investors is 20% QOQ, and the 9% QOQ expansion will do nothing to get investors excited.
The deceleration of growth is frightening for investors to stomach and Oracle's admission the cloud business is uncompetitive will detract many potential buyers from dipping in at these levels.
In short, Oracle is not growing much. There is no reason to buy this stock.
I always divert subscribers into the most innovative tech stocks because they are most in demand from investors.
Innovative inertia has reverberated through the corridors at its massive complex in Redwood City, California.
A major shake out in product development and business strategy is vital for Oracle clawing back to relevance.
This is the fourth sequential quarter with unhealthy guidance.
Much of the weakness comes from Amazon siphoning business out of Oracle.
Completed surveys suggest the conversion to AWS has one clear loser and that is Oracle.
Cloud vendors are now ramping up their smorgasbord of cloud offerings attracting more business.
The second and third cloud players, Alphabet and Microsoft, have been particularly active in M&A, attempting to make a run at AWS for pole position.
It is most likely that Oracle's capital spending will dip from $2 billion in 2017 to $1.8 billion in 2018.
Considering Salesforce spent $6.5 billion on MuleSoft, a software company integrating applications, an annual $1.8 billion capital expenditure outlay is a pittance and shows that Oracle is functioning at a pitiful scale.
Oracle won't be able to make any noteworthy transactions with such a miniscule budget.
Without enhancing its cloud offerings, Oracle will fall further behind the vanguard exacerbating cloud deceleration.
Oracle pinpointed data center expansion as the targeted cloud segment after which they would chase. Oracle will quadruple two data centers in the next two years.
One of the data centers will be placed in China collaborating with Tencent Holdings Limited to satisfy government rules requiring outsiders partnering with local companies.
Saudi Arabia is locked in for a data center, desperate to attract more tech ingenuity to the kingdom.
Saudi Arabia's iconic state-owned oil giant will form an "Aramco-Google partnership focused on national cloud services and other technology opportunities."
It will be interesting going forward to analyze the stoutness of the data center commentary considering foes such as Alphabet are boosting spending.
Alphabet quarterly spend tripled to $7.56 billion QOQ including the $2.4 billion snag of New York's Chelsea Market skyscraper Google will spin into new offices.
Alphabet has splurged on $30 billion on digital infrastructure alone in the past three years.
That bump up in infrastructure spending is to support the spike in computer power needed for the surging growth across Alphabet's ecosystem.
Apparently, Oracle is not experiencing the same surge.
If investors start to question global growth, investors will migrate into the top-grade names and the marginal names such as Oracle will be taken behind the woodshed and beaten into submission.
Oracle is much more of a sell the rally than buy the dip stock fueled by its growth deceleration challenges.
_________________________________________________________________________________________________
Quote of the Day
"If you don't have a mobile strategy, you're in deep turd," - said Nvidia CEO Jensen Huang.
Mad Hedge Technology Letter
June 19, 2018
Fiat Lux
Featured Trade:
(TRAVIS IS BACK!),
(UBER), (RDFN), (Z), (LEN), (CRM), (MSFT), (AAPL)
Travis Kalanick is back in full force after his Uber fiasco.
His creation kicked him to the curb preferring a more rigid approach to corporate governance as the 2019 IPO draws closer.
It didn't take much time for him to take stock of his piggy bank.
Yes, the $1.4 billion payout he received means he has nothing to do with Uber anymore.
Some piggy bank.
Travis intends to wield this wad aggressively using his new fund "10100" as his finance vehicle to pounce on hot, new tech names.
Travis doesn't know any other way, and investors should be alert to where he turns to find his new Uber and his new baby.
Future foes should understand Kalanick is one of the most feared disruptors on the face of the earth.
He co-founded Uber in 2009 growing it into the premier transportation platform.
The whirlwind few years launched him from a nobody to one of the premier tech names in Silicon Valley.
So, what's the deal?
What I can tell you is that house prices are about to get a whole lot pricier and there is nothing you can do about it.
Travis Kalanick's investment into house flipping app Opendoor will be the first stage of a torrential stampede of tech capital flowing into this sector.
More importantly, it's a sign of intent by Kalanick.
The real estate industry is the unequivocal prehistoric dinosaur that hasn't changed for decades.
It's almost a matter of time before the process of buying a house becomes digitized, either partially or fully.
Remember, Uber functions as a broker app matching drivers and passengers through a platform built on algorithmic software.
It would make logical sense for tech companies to attack the low-hanging fruit - meaning every industry that places brokers at the heart of business.
The broker app software is tried and tested with a gold stamp of approval. It works, and tech executives understand how to monetize the data.
Traditional brokers would get pummeled in this scenario, as the data applied to a new real estate broker app would eclipse anything a real human would be able to accomplish removing human error.
Real estate is next on disruption pecking order, and tech is coming for its bacon because of the huge sums of money associated with American real estate.
The real estate industry is not a scooter sharing business and requires boat loads of money to get ahead.
Tech has the cash but needs to figure out execution and its future road map.
The bulk of tech capital has been funneled into M&A that has seen tech companies pay multiples above what were guessed as fair value.
Share buybacks have been another hot source of investment.
Opendoor is a house-flipping firm intent on changing the status quo.
The business model entails snapping up distress properties, fixing them up, and selling them for a profit.
Opendoor receives a 6% commission for facilitating this whole process.
Opendoor has already served 20,000 customers saving more than 400,000 of prep time.
It is already on the hook for $1.5 billion in loans. SoftBank's vision fund is knocking on the door eager to become the next investor.
In 2016, this company was valued at $1 billion and after the latest round of financing giving Opendoor another $325 million, that number has crept up to $2 billion.
I have heard from solid sources that the SoftBank capital could be delivered in the next few months, likely paying another solid premium boosting tech valuations across the board.
Paying up has been a universal theme in 2018.
Microsoft's (MSFT) purchase of GitHub and Salesforce's (CRM) purchase of MuleSoft seem like overpaying but appear cheap in hindsight.
With the new cash ready to deploy, Opendoor seeks to expand to 50 cities by 2020, a swift upward jolt from its current 10 cities.
Not only will tier 1 cities feel the brunt of this new development, Opendoor plans to go into the lesser known cities and plans to double its staff from 650 to 1,300 in the upcoming year.
Kalanick caught onto this investment opportunity after one of his former Uber minions, Gautam Gupta, made the jump to Opendoor as COO and liaised CEO Eric Wu with Kalanick to hash out a deal.
It's nice to have friends in high places as Kalanick knows very well.
Even traditional home builders are getting in on the venture capitalist act.
Lennar was one of the investors in the latest round of Opendoor investment, underscoring the existential threat these traditional companies face.
It makes more sense to partner now and form a budding relationship than get utterly wiped out down the road.
Uber hopes to deploy this strategy with Waymo as Kalanick's former company knows it will never possess superior self-driving technology over Waymo.
The Lennar investment also gave Jon Jaffe, the COO of home builder Lennar, a seat on Opendoor's board.
Opendoor is the first serious tech foray into the housing business. It is initiating business on the periphery by focusing on fixer uppers.
This will allow Opendoor to cut its teeth and learn more about the industry before it migrates into higher margin business such as downtown condos that Millennials love.
A swift migration of other tech names will briskly follow into this undisrupted industry if Opendoor can pry open its floodgates.
Fixing up distressed houses is the gateway into brokering and the holy grail of constructing.
Tech could eventually wipe out everyone and control the whole process just like what investors have seen in the transportation industry.
I can imagine a future where tech companies will be the best firms to construct smart houses, which all houses will eventually become.
One massive aftereffect is that the average quality of housing will rise dramatically in all metropolitan areas.
Once the data amasses, Opendoor will be able to identify every property from where it can extract value allowing America to transform into a nation of pristine, smart houses.
Renovating a house and selling it will boost the prices of current houses.
Effectively, tech with gentrify housing creating higher quality but higher priced properties.
Millennials, who have had an awful time jumping on the property ladder, will have an even more difficult task finding a starter home if every starter house turns into a beautiful Tuscan-styled villa from a shabby shed.
Vice-versa, beautiful Tuscan-styled villas that cannot be "flipped" will become smart homes creating even more demand for IoT smart products and higher prices per square foot.
Andreessen Horowitz, a venture capitalist firm based in Menlo Park, California, has been one of the avant-garde tech investors seizing stakes in Twitter, Facebook, Skype, Coinbase, and Lyft.
And these were just some of its investments before 2014!
An industry where Travis Kalanick, SoftBank, and Andreesen Horowitz are piling in must have real estate agents shivering in their wake.
If the general trend keeps up, the Oracle of Omaha Warren Buffett could be next on this powerful list.
He usually likes to buy things he understands with healthy cash flow. I am sure he understands real estate more than Apple (AAPL), in which he had no problem investing.
Traditional home builders and real estate agents aren't the only players that could be left in the dust.
Zillow (Z), the online real estate database company, reacting from the Opendoor threat launched its new business to buy and sell homes.
It was only three years ago that Zillow CEO Spencer Rascoff determinedly hunkered down telling investors "we sell ads, not houses."
Innovation, tech disruption, and competition changes everything.
The stock sold off hard due to the exorbitant costs related to buying homes on the announcement of buying and selling houses.
Margins will get massacred in this scenario, but I applaud the decision to move up higher on the value chain diminishing the existential threat.
This whole industry is about to be flipped on its head, and the winners will be the most innovative companies that incorporate data best.
Rascoff further expanded saying, "I can say without exaggeration, that no company understands the American homebuyer and home seller better than Zillow Group."
Zillow is 12 years old and the12-year treasury trove of data will give it an optimal chance to pivot from selling ads to buying and selling houses.
Seattle-based Redfin (RDFN), Zillow's arch nemesis competitor founded in 2004, has an even larger treasure trove of data dating back 14-plus years and has moved in the same direction.
Redfin was anointed the top tech company to work for in Seattle in 2017 by Hired.com.
There is enormous potential to add another monstrous business to Redfin and Zillow's top line.
The real estate industry is next in line to be digitized, and the Mad Hedge Technology Letter will be the first to know when it's time to dip your toe in.
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Quote of the Day
"As a tech entrepreneur, I try to push the limits. Pedal to the metal," - said former cofounder of Uber Travis Kalanick.
