Posts

July 16, 2019

Global Market Comments
July 16, 2019
Fiat Lux

Featured Trade:

(THE BIGGEST TELL IN THE MARKET RIGHT NOW),
(GOOGL), (FRC), (PINS), (WORK), (UBER),
 (ADSK), (WDAY), (SNE), (NVDA), (MSFT),
(POPULATION BOMB ECHOES),
(CORN), (WEAT), (SOYB), (DBA), (MOS)

The Biggest “Tell” in the Market Right Now

I am constantly looking for “tells” in the market, little nuggets of information that no one else notices, but gives me a huge trading advantage.

Well, there is a big one out there right now. San Francisco commercial real estate prices are going through the roof, smashing new all-time records on a monthly, if not weekly, basis.

The message for you traders is loud and clear. You should be picking up the highest quality technology growth stocks on every dip for they all know some things that you don’t. Their businesses are about to triple, if not quadruple, over the coming decade.

Technology stocks, which now account for 26% of stock market capitalization, will make up more than half of the market within ten years, much of that through stock price appreciation. And they are all racing to lock up the office space with which to do that….now.

San Francisco office rents reached a record in June as the continued growth of tech — now turbocharged by nearly $100 billion in new capital raised in a series of initial public offerings — met a severe space crunch.

Asking rents rose to a staggering $84.16 per square foot annually for the newest and highest quality offices in the central business district and citywide asking rents for such spaces known as Class A are up over 9% from the prior year. The citywide office vacancy rate was 5.5% in June, down from 7.4% a year ago.

Demand shows no sign of stopping. Brokerage CBRE reported around 20 large tenants are seeking more space. Google and Facebook each want to lease as much as 1 million square feet in additional San Francisco office space — room for more than 6,500 employees.

Google (GOOGL) confirmed on Tuesday that it recently signed an office lease at the Ferry Building, its fifth expansion since 2018.

First Republic Bank (FRC) signed the biggest lease of the second quarter. It expanded by 265,000 square feet at 1 Front St. Financial firms and companies in other sectors continue to scrap with tech companies for space.

What’s the tech connection here? The bank’s expansion is fueled largely by the rise of tech. Its clients include wealthy tech employees, and it could benefit from the wave of local stock-market debuts — an example of how the booming tech sector also lifts the financial sector.

In addition, local Bay Area home prices could get a turbocharger by the fall when restrictions on stock sales expire for some companies that went public in the spring.

San Francisco companies that have gone public continue to grow by leaps and bounds. Pinterest (PINS), Slack (WORK), and Uber (UBER) also signed office leases this year with room for thousands of new employees.

Tech companies Autodesk (ADSK) and Glassdoor also signed deals at 50 Beale St. in the spring. In a sign of the city’s rapidly changing economy, old line construction firm Bechtel and Blue Shield, the legacy health insurer, are both moving out of 50 Beale St. Sensor maker Samsara, software firm Workday (WDAY), and Sony’s (SNE) PlayStation video game division also expanded.

Globally, San Francisco has the seventh-highest rents in prime buildings. It’s still behind financial powerhouses Hong Kong, London, New York, Beijing, Tokyo and New Delhi (San Francisco’s average office rents beat out New York.)

Downtown San Francisco’s office costs in top buildings, including service charges and taxes, are $130 per square foot, while Hong Kong’s Central district is the world’s highest at $322 per square foot.

Only a handful of new office projects are being built, and future supply is further constrained by San Francisco’s Proposition M which limits the amount of office space that can be approved each year. That is creating a steadily worsening structural shortage. Only two large office projects are under construction without tenant commitments.

Which tech stocks should you be picking up now? NVIDIA (NVDA) has recently suffered a major haircut, thanks to the trade war with China. Microsoft (MSFT) seems hellbent on making its way from $140 to $200 a share due to its massive expansion into the cloud.

 

 

Suddenly, it’s Getting Crowded in San Francisco

April 15, 2019

Mad Hedge Technology Letter
April 15, 2019
Fiat Lux

Featured Trade:

(XXXXX)
(SNAP), (FB), (PINS), (TWTR), (GOOGL)

Reaching Peak Social Media

America is full – that is what domestic social media growth is telling us.

The once mesmerizing service that captured the imagination of the American public has soured in the country that created it.

Online advertising consultant emarketer.com issued a report showing that Snapchat (SNAP), the worst of the top social media outlets, will lose users in 2019.

The 77.5 million users forecasted by the end of 2019 represents a 2.8% YOY decrease.

This report differs greatly from the report eMarketer issued just past August showing that Snapchat was preparing for a rise of 6.6% YOY in 2019.

The delta, rate of change, represents a massive downshift in expectations and the sentiment stems from the widespread saturation of social media assets.

Market penetration has run its course and the players have run out of bullets mainly targeting Generation Z.

These platforms have given up on baby boomers and Snap feels that pursuing the millennial demographic would be an exercise in futility.

Even more disheartening is that between 2020-2023, there will be only a minor uptick of user growth by 600,000 users clamping down on the impetus of a comeback of sorts shackling the business model.

The trend is not mutually exclusive to Snap, Twitter or Facebook, social media as a group will only expand the overall user base by 2.4% in 2020 hardly satisfying the appetite for growth that these companies publicly advertise.

Remember that much of Instagram’s growth originates from borrowing Snapchat users by way of copying their best features.

Even with this dirty tactic, growth seems to be petering out.

Snap’s shares have made a nice double after peaking shortly over $25 after the IPO.

But the double was a case of investors believing that management and execution had hit rock bottom – the proverbial dead cat bounce in full effect.

Now investors will pause to reassess whether there is another reasonable catalyst to drive the stock higher.

First, investors will need to ask themselves, is Snap in for another double?

Absolutely not.

So where does Snap go from here?

I believe they will borrow from the playbook of Mark Zuckerberg and attempt to emphasize supercharging average revenue per user (ARPU).

Whether the company arrives at this conclusion by chance or strategy, they must confront the reality that there are almost no other levers to pull if they want to perpetuate this growth story.

M&A is also off the table because the company is burning through cash.

Facebook’s (ARPU) came in at $7.37 last quarter indicating how Snap needs to make substantial headway in this metric with last quarter’s paltry (ARPU) at $2.09.

Essentially, management will conclude that each user isn’t absorbing enough ads because of declining user engagement.

Snap CEO Evan Spiegel will need to improve the pricing power charging advertisers at higher rates.

Obviously, the lack of an attractive platform resulting from poor execution and engineering problems needs a quick turnaround.

It’s not all smooth sailing for Facebook either, they keep chopping and reshaping strategy by the day attempting to minimize costs as the regulation burdens rot at the bottom line.

On the bright side, regulation hasn’t been as bad as initially thought – usership hasn’t dropped by orders of magnitudes.

In fact, Facebook’s users have shown a resurgent indifference to Facebook chopping up their data and repackaging it to 3rd parties, meaning Facebook has come through rather unscathed in the face of a PR storm.

There have even been recent reports of Zuckerberg being persuaded to start paying journalists for original content, a vast pivot for his hyped-up propaganda machine of being in the distribution business.

Juicing up (ARPU) is the lowest hanging fruit on offer for Snapchat and Facebook right now, overperforming in this sphere will improve financials and keep the mosquitoes away while affording them time to ponder how to reaccelerate user growth.

One outsized negative trend is that 90% of user growth appears to originate from undeveloped nations with a lack of discretionary spending power showing that this strategy has its limits.

Searching for another tool in its toolkit will redefine Snapchat, Twitter, and Facebook as we know it.

I would even classify it as an existential crisis.

Instagram have bought Facebook the most time to readjust its future direction highlighting that stealing Snapchat’s audience is still effective, expecting user growth to climb to 106.7 million US users, up 6.2% from 2018.

Instagram will continue its expansion by adding nearly 19 million new US users by 2023, but as much as it adds to its new social media asset, Facebook will be struggling for new net adds.

Snapchat is in dire straits and the stock market bubble could support the share price for up to another 8-12 months, but when the guillotine drops on Snapchat, the blood will smatter everywhere.

The company also plans to introduce a gaming service to take advantage of the popularity with its core users, Generation Z.

This should be the trick that breathes life into operating margins and (ARPU) which is why I believe the stock will hold up for the next period of time.

But with the gaming initiatives also comes rampant competition with the likes of Alphabet (GOOGL) and don’t forget Fortnite is still the 800-pound gorilla.

These trends also bode negatively for Pinterest (PINS) who might be going public as the last shot of tequila is downed at the after party.

 

 

 

 

SNAPCHAT ARPU

March 26, 2019

Mad Hedge Technology Letter
March 26, 2019
Fiat Lux

Featured Trade:

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

Pinterest Comes Out

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

I’ll give you the skinny on it.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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