(SNAP) Archives - Page 6 of 7 - Mad Hedge Fund Trader

Why Snapchat Snapped

To the dismay of tech shares, the tech industry doesn’t operate in a bubble.

The broader landscape is experiencing a dose of volatility triggered by the ratcheting up in interest rates.

There’s not much tech can do to change the narrative.

The back and forth political saber rattling isn’t helping either.

Tech is experiencing a swift rotation out of hyper-growth names such as Amazon (AMZN) and Netflix (NFLX) with investors taking profits on these names that have gone up in a straight line this year.

This does not mean you should fling these stocks into tech heaven yet.

The hardest hit names will be the marginal tech firms in the marginal tech spaces headed by dreadful management.

This narrow criterion conveniently perfectly fits one company I have written about extensively.

Enter Snapchat.

It’s been a year to forget or remember - depending on how you look at it for CEO of Snapchat Evan Spiegel.

Snapchat was one of my first recommendations of The Mad Hedge Technology Letter when I told readers to run for the hills.

To read my story on Snapchat, please click here.

At that time, the stock was trading at a luxurious $19.

Lionizing this shoddy company would be a stretch as shares have parachuted down to the $6.60 level.

The latest word is that Snapchat is burning money fast.

The cash crunch will quickly force them to raise some capital and this is just one of the many litanies of spectacular misfortunes that have beset this Venice, California social media starlet.

Maybe management is spending too much time ripping the bong on Venice Beach because the decisions being made are of that ilk.

The first catastrophic move out of many was the botched redesign alienating the core base who were dazed and confused by the new interface and functionality.

Social media works poorly when you can’t find your friends on it.

Spiegel admitted the redesign was “rushed” and it behooves me to let readers know that the redesign was the worst redesign I have ever seen in my life as I tested it out in my office.

Snapchat quickly restored the previous interface calming their shrinking core audience.

The self-inflicted wound was deep, and earnings reflected the quicksand Snapchat quickly found itself in.

Snapchat announced that global daily active users (DAUs) shrank from 191 million to 188 million.

A company at this early stage in the growth cycle should be reeling in the users non-stop.

This is far from a mature company and if executed properly the company should have the ability to cast their net far and wide scooping up new users left and right.

Let’s remember that Instagram, the Facebook (FB) owned direct competitor, is growing their user base parabolically.

Simply put, Snapchat has had no answer to Instagram’s rapid rise to fame, and that was the center of my thesis to turn my back to this rapidly deteriorating company.

Snapchat has offered no meaningful innovation to combat the terrorizing force of Instagram.

The dearth of innovation has caused the average time spent on the platform to dip from 33 minutes to 31 minutes per session.

Instagram has stretched the lead on Snapchat. In fact, it was Instagram that cleverly borrowed Snapchat’s best features and integrated them into their platform.

Sentiment has turned rotten as the stock sold off when Spiegel announced that he wants the company to turn profitable in 2019.

Investors don’t believe this one iota.

Snapchat is expected to burn through $1.5 billion in 2019, and Spiegel’s pipedream of scratching out a profit is implausible.

Snapchat is not executing on the digital ad front.

It was a year and a half ago when consensus believed Snapchat was able to churn out revenue of $540 million this quarter, but it looks more likely that Snapchat is set for revenue of just a shade over $280 million.

The severe underperformance is due to a lack of advertisers causing the eventual price of digital ads to fetch a lower price in an auction-based model.

Stinging as it might be, the lower costs of ads is also caused by the average age group of Snapchat’s core base.

Snapchatters are usually teenagers and have low purchasing power.

Targeting an older user base would improve margins significantly.

However, the conundrum is that the core user base might jump ship like they did to Facebook and shifted over to Facebook-owned Instagram.

Snap doesn’t have a Facebook posing an acute problem that could likely backfire.

General Data Protection Regulation (GDPR) in the European Union made the issue of securing personal data a national issue.

Facebook poured fuel on the fire when they disclosed several breaches clobbering their share price.

Mark Zuckerberg’s company is still reeling from the series of mishaps.

Ironically, Facebook debuted a smart speaker with prime access to user’s home when trust is at its lowest ebb around Facebook’s data collection practices.

Investors really need to ask themselves if Facebook’s management has any common sense at all.

Any decent company would have halted this project and I expect it to be a complete disaster.

Part of Snapchat’s turnaround strategy involves releasing scripted shows as short as five minutes long.

Entering into the original content wars is a tough sell. The competition is becoming fiercer and this move hardly will differentiate itself from ad buyers who already avoid Snapchat. In fact, it smells of desperation.

Snapchat has seen a brutal brain drain with management leaving in droves.

They have voted with their feet.

Chief Strategy Officer Imran Khan was the latest to announce his upcoming departure.

Others to jettison are the VP of product, VP of sales, VP of engineering, and its general counsel.

The high turnover rate will make it more complicated to execute a drastic reversal of fortune.

The only silver lining is if Zuckerberg manages to screw up Instagram after forcing the creators out with his behind-the-scenes meddling, giving a glimmer of hope to Snapchat.

A stellar performance from the execution team along with a Facebook mess of Instagram could resuscitate the user base if users start to flee Instagram in droves.

There aren’t many alternatives unless a user is inclined to quit social media.

Snapchat badly needs to build up its user base or else digital ad buyers will stay away.

I am still bearish on this stock and it would take a small miracle to spruce up the share price again.

September 18, 2018

Tech Letter

Mad Hedge Technology Letter
September 18, 2018
Fiat Lux

Featured Trade:
(THE DANGERS OF PLAYING TECH SMALL FRY),
(FIT), (AAPL), (CRM), (FTNT), (SQ), (SNAP), (BBY)

The Dangers of Playing Tech Small Fry

Tech Letter

The No. 1 complaint the Mad Hedge Fund Technology Letter receives is that I focus too much on the tech behemoths, and do not allocate much time for the needle-in-the-haystack inspirations aiming to disrupt the status quo.

Let’s get this straight – both are important.

And when a gem of a company riding the coattails of monstrous secular tailwinds comes to the fore, I do not hesitate to usher readers into the stock at a market sweet spot.

Fortunately, many of the lesser-known companies I have recommended have hit their stride such as Salesforce (CRM), Fortinet (FTNT), and Square (SQ), while I alerted readers to avoid Snap (SNAP) like the plague.

There are a lot of moving parts to say the least.

The most recent annual Apple (AAPL) product release event was emblematic of why I cannot go to the well and recommend the minnows of the tech world on a constant basis.

In 2017, Apple registered more than $229 billion in gross revenue. And under this umbrella of assets is a finely tuned operational empire that stretches like the Mongol empire of yore from best-in-class hardware to innovative software services.

Last year brought Apple a king’s ransom of profits to the tune of more than $48 billion.

Many of these upstart firms are fighting tooth and nail to surpass the $100 million gross sales mark, which is peanuts for the intimidating large tech companies.

In the process of expanding their dominion far and wide, the net they cast extends further by the day.

I hammer home the fact that these cash-rich stalwarts have an insatiable drive to initiate new businesses as a way to position themselves at the heart of each groundbreaking trend and capture fresh markets.

Some decisions are rued and some – brilliant.

At the very least, they can afford a few hits.

Algorithms, which suck up voluminous amounts of data, carry out the best decisions that software can buy.

Managers wield these finely tuned algorithms to make precise bets.

These myriads of algorithms are tweaked every day as the level of tech ingenuity snowballs incrementally with each passing day.

Enter Fitbit (FIT).

This company was first known as Healthy Metrics Research, Inc., a decisively less sexy name than its current name Fitbit.

Healthy Metrics Research, Inc. unglamorously began as did most tech companies - with little fanfare.

Its cofounders James Park and Eric Friedman identified the opportunity to jump into the sensor industry, as they saw a monstrous addressable market for future sensors in wearable smart devices.

They soon caught a bid and $400,000 flew into its coffers. They promptly marketed designs to potential investors with nothing more than a circuit board in a wooden box.

Oh, how the wearable smart device market has advanced since those early days…

All in all, the idea was good enough for some initial seed money.

At the first tech conference marketing their new sensors, they were hoping to eclipse 50 orders.

Fortuitously, the upstart firm received more than 2,000 pre-orders, and a reset upward in expectations.

With momentum at their backs, the cofounders now had the sticky situation of physically delivering the end-product to the end-user.

This involved scouring Asia for reasonable suppliers for three-odd months with “7 near death experiences” mixed in the middle of it.

Highlighting the unglamorous nature of incubation stage firms were the cofounders once quick fix sticking a “piece of foam on a circuit board to correct an antenna problem."

Somehow and some way they debuted their product at the tail end of 2009, delivering 5,000 orders with a backlog of additional orders to boot, offering the company some stress relief.

Fitbit had the best product in an industry that barely existed, and everything was rosy at their headquarters in San Francisco.

Best Buy (BBY) even adopted its products, and Fitbit watches were flying off the shelves like hotcakes.

Margins were gloriously high. The lack of threats around the corner made the company the gold standard for smartwatches.

In short, the company was having its cake and eating it, too.

In 2011, Fitbit was furiously adding to the best smartwatch on the market installing an altimeter, a digital clock and a stopwatch to its premium product.

Then came embedded Bluetooth technology: able to track steps, distance, floors climbed, calories burned, and sleep patterns.

After being embroiled in several law quagmires over big data, momentum was still at their back, and Fitbit still managed to go public.

The IPO was a roaring success and then some.

The share price rocketed to almost $50, and the firm sat pretty in the middle of 2015.

Then the company’s shares fell to pieces in one fell swoop.

Fitbit’s stock cratered more than 50% in 2016. To inject new life into the company, CEO James Park trumpeted Fitbit’s imminent face-lift that would transform the young company from a "consumer electronics company" to a "digital healthcare company."

Bad news for Fitbit. Apple planned to do the same exact thing but do it better than Fitbit.

The readjustment to Fitbit’s grand plan was to combat the original Apple smartwatch that debuted on April 24, 2015 – three years ago.

The Apple smartwatch rapidly became the dominant smartwatch in the wearable industry, selling more than 4.2 million units in just one quarter alone.

Fitbit is now trading just a smidgen over $5 today, and the devastation is far from over.

Fitbit’s shares are down almost 1,000% from its 2015 peak, stressing the dangers that minnow tech companies face getting outgunned by companies that have superior talent, unlimited resources, and top-grade management.

Not only that, Apple can integrate any wearable device linking it with the rest of its ecosystem in a heartbeat.

Even better, it does not need to develop an operating system from scratch because it can use what it already has in place - iOS.

Even if it were to run into development troubles, it would be able to throw around a wad of capital to find someone to solve idiosyncratic issues that pop up.

Yes, Tim Cook has not been the second incarnation of Steve Jobs, but he has demonstrated a natural ability to become a trustworthy steward, advancing the interests of the company, its shareholders, and most importantly its lineup of ultra-premium products.

Fitbit was enjoying its beach promenade stroll and walked into a doozy of a tsunami with little warning.

Spearheading a revival is even more daunting.

For David to outdo Goliath takes an emphatic sum of capital and a master plan to go with it.

Fitbit has neither.

The most recent Apple product launch event introduced a gem of a smartwatch, and Fitbit’s shares once again are on life support.

With each passing Apple smartwatch iteration, Fitbit experiences a new dramatic leg down in the share price.

It is almost curtains for this company.

It will be unceremoniously laid to rest in what is now quite an expansive tech graveyard of futility.

The best-case scenario is possibly salvaging itself by drastic reinvention.

It is easier said than done.

Add this company to your list of small companies obliterated by the phenomenon known as FANG, and this story gives credence to investors trying to be cute with their tech investments.

On paper it looks great until the company becomes steamrolled.

And the paper Fitbit was written on doesn’t even look all that hot with Fitbit poised to lose money until 2021.

It sounds cliché, but the network effect cannot be underestimated.

Without this powerful effect, tech investors are exposed to a demonstrably higher level of risk.

The risk of extinction.

Stay away from Fitbit shares and any dead cat bounces that shortly arise.

The Apple watch series 5 could be the dagger that finishes the walking wounded.

As an endnote, the next potential Fitbit creeping closer to the eye of the FANG storm could be the smart speaker company Sonos (SONO).

Sometimes the calm before the storm can be awfully quiet.

Not Good Enough In 2018

________________________________________________________________________________________________

Quote of the Day

“The best way to predict the future is to create it,” said influential philosopher Peter Drucker.

August 15, 2018

Tech Letter

Mad Hedge Technology Letter
August 15, 2018
Fiat Lux

Featured Trade:
(HOW TO PLAY THE NEW FORTNITE GAMING FAD),
(ATVI), (EA), (AMD), (NVDA), (MSFT), (AAPL), (GOOGL), (TWTR), (SNAP), (FB), (SPOT), (GAMR)

How to Play the New Fortnite Gaming Fad

Tech Letter

Each generation grows up in its own unique environment.

Childhood experiences differ more and more as the world rapidly changes because of hyper-accelerating technology.

Millennials are usually defined as children born between 1981 to 1996.

They were the last generation to grow up outside breathing crisp, fresh air and meandering around the neighborhood with their friends looking for excitement.

Generation Z is the first generation in America generally raised indoors because of their overwhelming preference and broad-based addiction to technology.

Social media stocks have been a huge winner from this new paradigm shift in the behavior of young adults.

Instead of running around the block in packs, children are laser focused on these platforms communicating with the entire world and propping up their social lives.

Children meet a lot less than they used to and convening on a social media platform of choice has become the new normal.

Platforms such as Twitter (TWTR), Instagram and Snapchat (SNAP) have convincingly won over these new eyeballs even so much so that the new "going out" is congregating on Snapchat with a group of friends.

Facebook (FB) is now considered a legacy social media platform full of millennials and the older crowd.

Generation Z do not fancy drugs or drinking like the youth before them, rather, their panacea is video games and a lot of them.

These new societal trends will hugely affect your portfolio going forward.

A battle royal game is a video game category mixing the survival, exploration and scavenging elements together with last-man-standing gameplay.

These types of games predominantly contain 100 players sharing the same experience on a broadband connection.

This genre has been all the rage with PlayerUnknown's Battlegrounds (PUBG) piling up 400 million gamers across the globe selling 50 million copies of the game.

Of the 400 million gamers, 88% access the game via mobile devices highlighting the vigorous shift to mobile for younger generations.

PUBG made more than $700 million in sales in 2017.

The rise of the billion-dollar video games is alive and well.

In fact, Activision Blizzard (ATVI) stakes claim to eight gaming franchises commanding more than $1 billion in annual revenue with titles such as Overwatch, Candy Crush, and Call of Duty.

The popularity of video games will drive GPU manufacturers Nvidia (NVDA) and AMD (AMD) to new heights because gamers require high-quality GPUs to effectively game.

Nvidia CEO Jensen Huang even spouted that "the success of Fortnite and PUBG are just beyond comprehension" boosting GPU sales and capturing the imagination of global youth.

Fortnite, a "Hunger Games" style battle royal video game mirroring PUBG, has taken the world by storm in 2018.

This cultural juggernaut surpassed the 125 million gamer mark in just one year.

In February 2018, Epic Games, the maker of Fortnite, earned $126 million in one month, and it was the first time it passed PUBG in monthly sales.

In April 2018, it followed up monster February numbers by pulling in $296 million.

The growth trajectory is parabolic. Hold onto your hats.

Fortnite sparkles in the sunlight because its free-to-play model does not exclude anyone and is available on all devices.

At first, Fortnite was available for iOS customers and Samsung Android holders because it inked an exclusive deal with Samsung.

This week is the first week Epic Games is rolling out Fortnite to non-Samsung Android users with an interesting caveat.

The Android version of Fortnite bypasses Google Play (Google's app store on Android) preferring to sell the game direct for download from its official website.

This highlights that content is truly king.

Epic Games is betting the surge in popularity for its juggernaut game will sell itself.

This decision will cost Alphabet (GOOGL) $70 million per year in commission.

Apple makes it mandatory that any app downloaded to its devices must be downloaded from Apple's app store.

However, Android doesn't have the same requirements as its system is more functional, open, and a developer's dream.

Simply put, there are ways to download the game on Android without ever touching Google Play.

Going forward this could have a similar effect Spotify (SPOT) had on Wall Street on its IPO.

The middlemen or broker app could get bypassed in favor of direct sales.

Apple pockets commission on 30% of all in-app spending raking in around $60 million from Fortnite.

In-game add-on revenue is how Fortnite makes money from this free-to-play game.

The bulk of spending comes in the form of costumes better known as skins, where players pay to dress up their character in various garments selected for purchase.

The other revenue stream is a season subscription on sale for $10.

The tech sector has been migrating to subscription-based offerings and video games are no different.

This could play havoc with Alphabet's Google Play and Apple's app store down the line if prominent content producers choose to bypass their stores to sell directly.

The lack of video game exposure to the FANG group is mind-boggling. It seems they have their finger on the pulse of every other major trend in technology but have missed out on this one.

Microsoft (MSFT) is the closest FANG-like stock deep inside the video game ecosphere by way of its famous console Xbox.

In fact, Microsoft earns more than $10 billion per year from its gaming segment surpassing Nintendo at $9.7 billion per year.

This doesn't eclipse Sony's gaming revenue, which is $17 billion per year, but the 36% YOY growth in Xbox-related revenue signals its intent in the gaming industry that plays second fiddle to its cloud and software businesses.

Gaming is just a side business for Microsoft right now.

Ironically, Tencent has a 40% stake in Epic Games and is patiently waiting for government approval to sell Fortnite in China, which could be painstakingly arduous.

If Tencent gets the green light, Fortnite could develop into a monster business in 2018, and this is just the beginning.

Regrettably, Tencent has been mired in regulatory issues with the communist government reluctant to approve selling in-game products, which usually make up the bulk of revenue.

Recent blockbuster hit "Monster Hunter: World" was blocked by censors after debuting to great fanfare on August 8, 2018.

This title was expected to be one of the most popular video games of 2018.

Chinese state censors are on a short-term crusade to block the video game industry from receiving critical licenses and is the main reason for Tencent shares' headwinds.

Tencent shares peaked in January and are down almost 15% in 2018 because of uncertain gaming revenues.

Investors need to wake up and understand the gaming industry is about to mushroom because of demographics and the migration away from outdoor activity.

Following generations will have an even stronger bias toward technology-based indoor entertainment.

We are entering into the unknown of $4 billion per year video game businesses based on just one title and not one company.

Fortnite made PUBG's $700 million in revenue last year look paltry.

Gamers will soon see the rise of a $5 billion game franchise in 2019 and the sky is the limit.

This industry has growth, growth, and more growth and these single titles could surpass revenue of large semiconductor or hardware companies.

Don't underestimate the power of your child gaming away in your basement, he or she is part and parcel of a wicked tech growth driver about which not many people know.

Unfortunately, Epic Games is not a public company and shares cannot be purchased, but the success of Fortnite means that investors must pay heed to these new developments.

I am highly bullish on the video game sector and a big proponent of Activision (ATVI). A secondary name would be EA Sports (EA), which curates the Madden and FIFA franchises.

ATVI has felt the Fortnite effect in its share price selling off 11% because of investors' nervousness of Fortnite siphoning off ATVI gamers.

This short-term drop is a nice entry point into a solid video gaming company with various successful franchises that have withstood the test of time.

The 200-day moving average has provided ironclad support on the way up, and the Fortnite phenomenon won't last forever.

I would avoid the video game ETF ticker symbol GAMR because it includes one of my bona fide shorts - GameStop (GME).

It's mainly comprised of American, Japanese, and a Korean name but it would be sensible to focus on the companies with the highest quality comprehensive content.

The ETFs recent drop is also due to the strength of Fortnite.

________________________________________________________________________________________________

Quote of the Day

"Companies in every industry need to assume that a software revolution is coming." - said Silicon Valley venture capitalist Marc Andreessen.

August 9, 2018

Tech Letter

Mad Hedge Technology Letter
August 9, 2018
Fiat Lux

Featured Trade:
(WHY SNAPCHAT IS GOING DOWN THE SOCIAL MEDIA DRAIN),
(SNAP), (FB), (NFLX), (AMZN), (GOOGL), (TWTR), (BB)

Why Snapchat is Going Down the Social Media Drain

Tech Letter

Companies this small should be growing.

Growth companies and tech go hand in hand, especially at the incubation stage where there is little resistance hindering growth.

The law of numbers dictate that small companies only need marginal gains to generate high growth in terms of percentages.

Once a company becomes as big as Amazon (AMZN), it becomes harder to move the needle.

Snapchat (SNAP), which is in the same social media game as Facebook, is vastly smaller than the incumbent that hoovers up the digital ad dollars.

Facebook (FB) boasts 1.47 billion daily active users (DAU) and is one of the members of a powerful digital ad duopoly along with Alphabet.

Snapchat added 4 million net (DAU)s in Q1 2018 and blew its chance for sequentially increasing usership by losing 4 million (DAU)s last quarter.

The stock sold off hard in after-hours trading, down 11% at one point but rebounded big time with the earnings commentary with Snapchat revealing guidance for the first time.

Snap opened the next trading day demonstrably lower reflecting the disenchantment of investors.

Evan Spiegel's creation has really had a hard go of it lately. The app redesign was a cataclysmic failure of epic proportions denting the popularity of this app.

The fallout was sacking 100 engineers.

Overall, there were some positive takeaways from the earnings report, mainly, the revenue beat was satisfying, and profitability shone through with average revenue per user (ARPU) shooting up 34% YOY.

Another victory was the boost in ad revenue, up 48% YOY, which is the main driver of revenue in the company.

The hairiest issue with this company is the fundamentals are excruciatingly apathetic.

Stagnating usership growth at this stage is a red flag.

Social media stocks were bashed in recent trading sessions with Twitter (TWTR) dropping from $46 to $31 because of diminishing usership and soft guidance.

The amount of monthly active users dropped from 338.5 million to 335 million, and financial guidance was brought down a few notches.

Twitter has made a poignant attempt to clean up its system from the debris molding around the edges.

To "improve the health" of the Twitter platform, Twitter purged 6% of all accounts rooting out the influences undesirable to its ethos.

Social media companies must take the initiative to protect its platforms, instead of being a silent bystander to a stabbing in a dark alley.

Facebook was the mother of all drops in the social media space collapsing from an all-time high of $218 to $171, a drop in one trading day.

Guidance tore apart this stock after a rapid run-up to the earnings report that saw unbelievable strength rising almost every day.

Poor guidance reflects the ill-effects of the recently enacted General Data Protection Regulation (GDPR), which tainted the European numbers.

The epicenter of data regulation has crimped profitability and popularity of social media in the Eurozone.

If Facebook and Twitter are facing tough short-term headwinds, then imagine how Snap feels.

They are the small fish in the big pond, and they are running out of places to hide.

Every new user Instagram picks up is one less potential user missed for Snapchat.

Let me remind you that Instagram is boosting its monthly average usership (MAU) 5% per year.

Instagram recently surpassed the 1 billion (MAU) mark after eclipsing the 800 million mark in September 2017.

Instagram added 200 million users, more than the entire (DAU) for Snap, in 11 months.

Big trouble for Snap.

Effectively, Snap is the inferior version of Instagram for young kids and that narrative does not bode well for the future.

For every $1 Snapchat spends, it earns -$6 on that $1. Kids aren't the biggest distributors of wealth. It would help if Snap matured its interface to accommodate older millennials who are tech savvy to boost its average revenue per user.

As it stands, Facebook earns $9 per daily active user while Snapchat earns a smidgeon over $1 per daily active user.

I cannot say that Facebook is a quality platform, but it has successfully monetized the platform.

What's more, CEO Evan Spiegel blamed the drop in usership on the redesign.

Yes, the redesign didn't help, but the usership would have dropped anyway because of draconian data laws in Europe and the general malaise stigmatized toward current social media platforms.

Management is not executing effectively at Snap, and it is out of touch with its core base without opening up new sources of growth.

If a company redesigns an app, enhance the app, do not make it unusable such as the Snap redesign.

Snap's eggs are all in one basket. And that basket is shrinking in the high revenue locations of North America and Europe.

It only earned $2 million from non-digital ad revenue.

As FANGs power on to pass a trillion dollars of market cap, the diversity in their segments are nothing short of impressive.

Snap has no other irons in the fire and is overly reliant in an industry in which it will slowly bleed to death.

The only savior is in reinventing itself, but that takes guts and a bold CEO with a revolutionary strategy.

There is precedence for this transformation such as BlackBerry (BB), one of the original smartphone makers, which has morphed into an autonomous driving technology company.

Another good example is Netflix, which started out in the DVD industry and pivoted to online streaming.

What Snap is doing has its limits and it needs to shake up its business model or slowly rot.

The company must wake up to the stark realization that its platform is not engaging.

Many analysts believed Snap could become half as big as Facebook and that seems highly unlikely.

I have been bearish on Snap for the entire existence of the Mad Hedge Technology Letter.

And it has been the perfect sell on the rallies stock because of its poor performance, even poorer management, and awful fundamentals.

A telltale sign was the last earnings call.

It was the second quarter in a row of blaming the redesign on bad performance.

If Spiegel underperforms next quarter again - meaning negative growth usership - it will be interesting if he blames the redesign again.

Third times a charm.

Where does this all lead?

Facebook offered to purchase Snapchat after its IPO because management was worried it would steal market share from Instagram.

Snapchat rebuffed the advances and decided to lock horns directly with Instagram.

Well, the David and Goliath battle is playing as most would assume, boding ill for the fate of Snapchat.

Instagram will keep weakening Snapchat moving forward. And Facebook might end up scooping up Snapchat down the road for a discount.

It doesn't look good for Snapchat, and investors should consider shorting this stock after a dead cat bounce.

________________________________________________________________________________________________

Quote of the Day

"The subscription model of buying music is bankrupt. I think you could make available the Second Coming in a subscription model and it might not be successful," - said former Apple cofounder Steve Jobs in a Rolling Stone interview, 2003.

July 16, 2018

Tech Letter

Mad Hedge Technology Letter
July 16, 2018
Fiat Lux

Featured Trade:
(THE REGULATION EFFECT),
(GOOGL), (AMZN), (FB), (SNAP), (TWTR), (NFLX)

The Regulation Effect

Tech Letter

Locking horns with large cap technology companies in court is inconceivable for regulators in Washington.

Yes, it is their job to put out fires left, right, and center, but when the scorching inferno reaches full intensity, regulators hit the pass button.

Taking on an industry that employs an army of lawyers and data analysts up the wazoo is frightful.

Tech wants to make the skirmish into a resource fight and no cohort has more ammunition than these four companies.

They are already on the way to create more unregulated industries simply because they do not exist yet.

This is why regulators cannot keep up with the nimbleness on display by the tech industry.

They are always one, maybe two steps ahead.

Investors have been able to digest consequences of the data fiasco fueling an even more bullish narrative for the likes of Facebook (FB) and Alphabet (GOOGL).

Facebook and Alphabet are the two laggards in the vaunted FANG group, only because they are up against Netflix (NFLX) and Amazon (AMZN), two of the most transformational companies of the gig economy generation.

Facebook and Alphabet give traders entry points; Amazon and Netflix hardly ever.

Investors are hard pressed to find days when Amazon and Netflix drop more than 1%, and a brief respite is met with a torrent of new buying.

Even more of a head-scratcher is the American law etched into the books, calculating harm by connecting it with price increases, underscoring the FANG's dominant position.

It is almost impossible to prove caused "harm" because Alphabet and Facebook services are free. However, the free service is a misnomer, because of the extreme manipulation of data allowing tech titans to profit from data opportunities instead of charging customers a service fee.

The Mad Hedge Technology Letter has been rolling out a steady dose of Facebook recommendations since its inception to scintillating effect.

The Cambridge Analytica scandal stoked mayhem on the global news waves ravaging Facebook shares from $192 down to $153.

Investors were panicking and rightly so. A precipitous drop is nothing investors with skin in the game like to see.

The Mad Hedge Technology Letter saw it as a gift from the celestial stars and ushered subscribers into this suave stock at $168, to reread this memorable story please click here.

Facebook has gone from strength to strength blowing past expectations celebrating all-time highs of a recent intraday price of $207 earlier this week.

I am still highly bullish on Facebook, even more so after the first fines were doled out for the recent scandals.

Under the old data laws in Britain, Facebook was fined a grand total of $660,000 along with a detailed report from the Information Commissioner's Office castigating Facebook's business practices.

This amount is peanuts for Facebook, practically equaling the cost of providing a16-person security detail for CEO Mark Zuckerberg around his Palo Alto, California, estate for maybe two weeks.

If Facebook can hold down these fines to inconsequential amounts, regulation will be a decisive tailwind going forward.

How does a headwind turn into a tailwind in the blink of an eye?

General Data Protection Regulation (GDPR) rolled out in Europe lately has helped Alphabet and Facebook solidify their digital ad business.

Alphabet has adopted a stringent version of the rules to its new model because the behemoth does not need to take on the added risk of noncompliance.

Marginal companies do.

The possibility of exorbitant fines clearly grabbed the attention of Silicon Valley CEOs, and they have put the ball in motion to insulate themselves from such downside risk.

Unsurprisingly, Alphabet has a higher opt-in consent rate than its smaller tech brethren.

Users are more comfortably entrusting data to an Alphabet instead of a smaller unknown that could potentially be 10 times worse than Alphabet.

Uncertainty breeds risk aversion.

Recent data shows other companies have a galling time keeping up with the same percentage of consent as Alphabet.

You cannot expect a college basketball player to perform miracles like Steph Curry.

This puts Alphabet in a healthier strategic position as the users who consent are five times more valuable to digital ad exchanges and easier to monetize.

Other ad exchanges face an uphill battle against Alphabet if they cannot increase the rate of consent.

The extra premium is derived from the ability to personalize the advertisements boosting the conversion rate for sellers.

Alphabet has in effect increased its quality of data just by being Alphabet.

It is certainly not fair, but life is not fair.

And then there is the conundrum of where do you go if you do not want to sell on Alphabet or Facebook?

Well, Twitter (TWTR), Snapchat (SNAP), and Instagram (owned by Facebook) are the other alternatives fighting for the scraps.

The battle to get users to consent is really the be-all and end-all for many of these ad sellers.

Facebook and Alphabet have seen the best results and will likely extend their hegemony.

Recently, Alphabet has been offering 15% less ads on its exchange. But, it all involves consented users demonstrating the unenviable position for other exchanges to match Alphabet's quality.

The EU antirust watchdog is expected to levy a multi-billion dollar fine for abusing its dominant position of its Android operating system.

This comes on the heals of fining Alphabet $2.82 billion last year for abusing the dominance of a search again.

The stock barely budged on this news.

Alphabet's punishment for being too dominant in Europe is laughable.

When a company is punished for being too good then you sit back and admire from afar.

There is no other company that can undermine its position and even hit with billions in fines - its leadership status is unquestioned.

American readers sometimes forget the popularity of the Android ecosystem outside of America because of the ubiquitous nature of iPhones stateside. The network effect has made it impossible to do business in Europe without collaborating with the Android platform.

Facebook took more than eight years to reach a billion users but only half that time to reach the next billion.

The stock has held up relatively well. The 73% market share of digital ad dollars Facebook and Alphabet extracted in 2017 is up from 63% in 2015.

This two-headed monster shows no sign of abating, demonstrated by taking in 83% of all digital ad growth, leaving the crumbs for the rest.

They are specialists at exploiting their business environments, much like mining companies exploit the earth.

Their platforms are so influential, they turn elections on its head.

Governments are scared of taking them down, empowering these companies to new heights creating a massive halo effect worldwide.

The Chinese communist government has even used Chinese social media platforms to establish an Orwellian surveillance system monitoring its people at all times. Such is the power of technology these days.

Users are forced to accept any conditional terms they offer, because many jobs are reliant on these platforms such as the millions of app developers hustling to create the new hot app.

They all have families to feed.

On an individual level, people would not sacrifice a cushy income because they do not wish to consent to tracking services.

The next step is for the Amazons and Alphabets to ramp up their private label businesses using their high-quality treasure trove of data.

Amazon has been the leader in selling its own products from tech behemoths, and that percentage in terms of overall sales will increase over time.

It does not need others to sell products they can make themselves for cheaper, better quality retaining every cent.

Amazon's private label is geared toward decent quality and low prices capturing the volume of transactions desired.

Bundling services, exploiting the data, and applying discriminatory pricing will become the new normal for these powerful platforms and nobody does that better than Amazon.

It has no incentive to allow eyeballs, data and dollars to escape these proprietary walled gardens hence the term walled gardens.

Even more genius, Facebook and Alphabet can track users outside their walled gardens if they are signed into their Facebook or Google accounts.

Granted, Facebook has had better price action of late as traders understand there has been no lasting effect from the misuse of leaked data.

However, Alphabet has the crown jewel of the next leg up in A.I. (Artificial Intelligence) - Waymo. Waymo is a company I have chronicled in the past leading the race in autonomous driving inching closer to full-scale deployment sometime in the next year.

If you think Alphabet and Facebook shares are lofty now and "overbought," then I cannot imagine what you'll think when these companies dominate further because the runway is as far as the eye can see.