(SQ) Archives - Page 8 of 17 - Mad Hedge Fund Trader

Communications Has Never Been More Important

Growth is not dead as last week’s tech rally shows that tech stocks still have their allure.

One tech growth stock that I am absolutely in-love with is communications-as-a-platform cloud stock Twilio who services Airbnb and Uber as the software that connects the users to their staff.

The ability to communicate with customers in real time has never been more urgent in a fast-paced world, especially in the software-centric economy.

From food delivery to booking hotels, from customer service to password resets, literally anything revolves around the ability to connect reliably and rapidly.

Many people in 2020 still do not even know what Twilio (TWLO) does!

They are the dark horse cloud company that nobody has heard of.

The company provides the software building blocks that lets developers embed Twilio's communication technology in their apps, messaging systems, emails, and more. It also streamlines the process so it can be accomplished in a matter of hours, rather than weeks or months.

Here’s an insanely applicable example: The update you received from Lyft regarding your ride, the text messages and reservation confirmation you got from Airbnb, the customer service interactions with Disney's Hulu, and the booking confirmation from your restaurant via Yelp? These were delivered by Twilio's technology.

In pandemic third quarter, Twilio's revenue climbed 52% year over year, while also avoiding a loss, swinging from a loss in the prior-year quarter.

The company reported 208,000 active customers, up 24% year over year.

There is no mistake that these types of cloud stocks are in the vein of Twitter (TWTR), Salesforce (CRM), Square (SQ), and so on and at the vanguard of the hullabaloo of growth stocks.

Why are growth stocks so popular?

Growth stocks are companies that increase their revenue and earnings faster than average.

A growth company relentlessly develops an innovative product or service or at the top of the pack of fastest-growing industries and unsurprisingly that is technology, and that fact won’t change for generations.

Firms growing faster than average for long periods tend to be rewarded by the market, and this is why there has been a massive migration to growth stocks that has enriched shareholders of Apple (APPL), Facebook (FB), Netflix (NFLX), and so on.

Growth also begets additional growth and the faster they grow, the bigger the returns can be.

They are also more expensive than the average stock in terms of metrics like price-to-earnings, price-to-sales, and price-to-free-cash-flow ratios, but investors look past this in an age of expanding liquidity which is the catalyst that breathes even more momentum into these stocks.

US growth stocks secure a premium just for the possibility they will fulfill their parabolic growth potential.

Capitalizing on powerful long-term trends can grow their sales and profits for many years, and the following are a list of seminal trends that all involve technology data points as the secret sauce.

E-commerce: The massive migration to online shopping is here to stay and the coronavirus has acted like a supercharger to e-commerce company like Amazon (AMZN), Overstock (OSTK), and Wayfair (W).
Digital advertising: The digital ad market is moving marketing budgets from TV and print to online channels.
Digital payments: Contactless payments and fintech (through a smartphone) will eventually replace physical card transactions.
Cloud computing: Computing power is migrating from on-premise data centers to cloud-based servers. Amazon’s (AMZN) and Alibaba’s (BABA) cloud infrastructure services help make this possible, while Salesforce.com (CRM) provides some of the best cloud-based software available.
Cord-cutting and streaming entertainment: Millions of people are only paying for internet services that offer on-demand content and provide access to premium packages. This trend has been supercharged by the Millennial generation.

These powerful trends will last decades giving you plenty of time to claim your share of the profits they create.

Rank growth companies with strong competitive advantages. Otherwise, their business might fail.

Some competitive advantages are:

Network effects: Facebook is a valid example that built its usership by offering other assets like WhatsApp and Instagram to snowball into a 2 billion number usership. The synergies are plentiful with the ability to cross-sell its products across platforms and aggregating data to deploy the intel in the best way it can make money.
Scale advantages: Size can be another powerful advantage. Amazon is a great example here, as its massive global fulfillment network is something its smaller rivals will find extremely difficult to replicate.
High switching costs: Switching costs are expenses and difficulties involved in switching to a rival product or service. Once a company begins to use e-commerce company Shopify as the core of its online operations, they are unlikely to absorb the burden of switching to another competitor.

Pinpointing large addressable markets means a larger opportunity to secure higher revenue and Twilio is occupying a spot at the intersection of generational, long-term trends and almost unfair competitive advantages.

The underlying shares have rocketed this year as communications has never been more important. This is a great buy and hold stock for the long term because trading short term is difficult with its elevated volatility.

September 25, 2020

Tech Letter

Mad Hedge Technology Letter
September 25, 2020
Fiat Lux

Featured Trade:

(CASHLESS PAYMENTS ARE HERE TO STAY)
(SQ)

Cashless Payments are Here to Stay

Tech Letter

Cashless payments have gained a major foothold into consumer’s lives all brought about by the pandemic, according to a new consumer survey.

This transformational trend is just another reason traders should look at Fintech firm Square (SQ) which has been one of my favorite tech stocks for the past 2 years.

The never-ending pandemic has accelerated the trend toward cashless transactions and the digit economy.

Conversely, the non-cashless society has taken the brunt of the pain in the form of job losses and the jobless rates remain stubbornly high in the Northeast and West trending above 10% in 10 states in the U.S. last month.

It’s clear which area of the economy to invest in and that’s digital payments.

Before the pandemic, in February 2020, 5.4% of Square sellers in the US were cashless, which Square defines as any business accepting more than 95% of their sales by in-person credit or debit card payments, online payments, or contactless payments.

Moving to April, that number soared to 23.2% and by August, when many stay-at-home restrictions were lifted, it was 30%.

To highlight the trend away from a hard currency society, for payments transacted by Square sellers, the share of cash transactions dropped from 37% in February to 33% in April at the height of the lockdown.

Square delivered an analysis indicating it would take over four years to achieve this oversized cashless drop.

That is the underlying story of the pandemic – multiple years of digital transformation and acceleration scrunched into 7 months.

Not only have the secular trends strengthened tech’s fundamentals, but the employees themselves have collaborated to deliver new products such as On-Demand Pay which will allow Square merchant employees to take a cash advance of up to $200 with no fee. The second service is Instant Payments which allows sellers to fund their payroll from their Square Seller account, speeding up the transaction.

Both services take advantage of the increasing number of consumers using Cash App, delivering wider access to cash for both employers and employees. The synergies between Square's consumer and seller ecosystem is a significant competitive advantage for the company that should drive continued adoption of its products and services.

Scaling the individual ecosystem, cross-selling services within each ecosystem, and finally connecting the ecosystem has been an effective three-prong strategy for Square’s management.

These are services that minimize business risk and an example of how it can disrupt the old way of handling something like payroll. As the two ecosystems grow, Square may find other areas where it can create value between them.

The new products will improve adoption for Payroll among merchants while boosting Cash App adoption and the direct-deposit feature in particular.

Both services will boost increased balances in seller and Cash App accounts. That should increase the appeal of other Square services like the Square Card or Cash Card. It could also lead to more Cash App users investing or sending cash to friends.

It would make sense that greater balances in seller accounts would produce similar results on the seller side. And as Square merchants use more than one service from the company, Square can start offering even better deals to sellers.

In the future, other products that could be rolled out include avenues like loyalty programs, lending products, or other ways to facilitate commerce. Square is just getting started, but the fintech company's new Payroll products show the potential to create significant change in the small business financial services industry and seize market share.

Contrast the bustling activity happening in the fintech space with brick and mortar stores and the difference couldn’t be starker.

The follow-through has been vivid with Square’s shares lurching higher by 150%.

Not only do Square’s engineers work together to create more revenue-building products at scale, but Square is feasting from a once in a generation pivot to mobile digital payments.

Square’s formula has been a recipe for success proving that the road to Damascus is shorter than it seems.

I am highly bullish Square.

July 22, 2020

Diary, Newsletter, Summary

Global Market Comments
July 22, 2020
Fiat Lux

Featured Trade:

(MY NEWLY UPDATED LONG-TERM PORTFOLIO),
(PFE), (BMY), (AMGN), (CELG), (CRSP), (FB), (PYPL), (GOOGL), (AAPL), (AMZN), (SQ), (JPM), (BAC), (BABA), (EEM), (FXA), (FCX), (GLD)

My Newly Updated Long-Term Portfolio

Diary, Newsletter, Research

I am really happy with the performance of the Mad Hedge Long Term Portfolio since the last update on October 17, 2019. In fact, not only did we nail the best sectors to go heavily overweight, we completely dodged the bullets in the worst-performing ones, especially in energy.

For new subscribers, the Mad Hedge Long Term Portfolio is a “buy and forget” portfolio of stocks and ETFs. If trading is not your thing, these are the investments you can make, and then not touch until you start drawing down your retirement funds at age 70 ½.

For some of you, that is not for another 50 years. For others, it was yesterday.

There is only one thing you need to do now and that is to rebalance. Buy or sell what you need to reweight every position to its appropriate 5% or 10% weighting. Rebalancing is one of the only free lunches out there and always adds performance over time. You should follow the rules assiduously.

Despite the seismic changes that have taken place in the global economy over the past nine months, I only need to make minor changes to the portfolio, which I have highlighted in red.

To download the entire portfolio in an excel spreadsheet, please go to www.madhedgefundtrader.com , log in, go to “My Account”, then “Global Trading Dispatch”, then click on the “Long Term Portfolio” button.

My 5% holding in Biogen (BIIB) was taken over by Bristol Myers (BMY) at a hefty premium at an all-time high, so I’ll take the win. I am replacing it with Covid-19 vaccine frontrunner Bristol Myers (BMY) itself.

I am also taking out healthcare provider Cigna (CI), whose profits have been hammered by the pandemic. A future Biden administration might also move to a national healthcare system that will cap profits. I am replacing it with another Covid-19 vaccine leader Pfizer (PFE).

My 30% weighting in technology remains the same. Even though these stocks are 30% more expensive than they were three years ago, I believe they will lead the charge into the 2020s. It’s where the big growth is. These have doubled or more over the past nine months.

I am sticking with a 10% weighting in banking. Thanks to trillions in stimulus loans, they are now the most government-subsidized sector of the economy. I also believe that massive bond issuance by the US Treasury will deliver a sharply steepening yield curve, another pro bank development.

With my 10% international exposure, I am taking out a 5% weight in slow-growth Japan and replacing it with Chinese Internet giant Alibaba (BABA). The US will most likely dial back its vociferous anti-Chinese stance next year and (BABA) will soar.

I am executing another switch in my foreign currency exposure, taking out a long in the Japanese yen (FXY) and a short in the Euro (EUO) and substituting in a double long in the Australian dollar (FXA).

Australia will be a leveraged beneficiary of a recovery in the global economy, both through a recovery on commodity prices and gold which has already started, and the post-pandemic return of Chinese tourism and investment. I argue that the Aussie will eventually make it to parity with the US dollar, or 1:1.

I’m quite happy with my 10% holding in gold (GLD), which should move to new all-time highs imminently….and then go ballistic.

As for energy, I will keep my weighting at zero, no matter how cheap it has gotten. Never confuse “gone down a lot” with “cheap”. I think the bankruptcies have only just started and will stretch on for a decade. Thanks to hyper-accelerating technology, the adoption of electric cars, and less movement overall in the new economy, energy is about to become free.

My ten-year assumption for the US and the global economy remains the same.

When we come out the other side of this, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 400% or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old.

I hope you find this useful and I’ll be sending out another update in six months so you can rebalance once again.

Stay healthy.

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

July 20, 2020

Tech Letter

Mad Hedge Technology Letter
July 20, 2020
Fiat Lux

Featured Trade:

(THE RACE TO THE BOTTOM),
(SCHW), (FB), (SQ), (WMT), (AMZN), (FFIDX), (BOX)

July 8, 2020

Diary, Newsletter, Summary

Global Market Comments
July 8, 2020
Fiat Lux

Featured Trade:

(TRADING THE BLUE WAVE STOCK MARKET),
(FB), (AAPL), (MSFT), (AMZN), (ADBE), (SQ), (PYPL), (CRM), (SGEN), (REGN), (ILMN) (FEYE), (PANW), (AMD), (MU), (NVDA), (TSLA), (LEN), (PHM), (KBH), (XOM), (CVX), (XOM), (RTN), (NOC), (LMT), (KOL), (X), (GE)

Trading the Blue Wave Stock Market

Diary, Newsletter

At this point, it is possible that the president may lose the November election.

He is 14 points behind Democratic candidate Joe Biden in the polls. The odds at the London betting polls have him losing by a similar amount. My old employer The Economist magazine in London gives him a 10% chance of winning using a mix of economic and polling data.

And this assumes the election is held today. The fact is that the president is digging himself into a deeper hole every day, taking the wrong side of every issue confronting the country today. He seems to be refighting the Civil War….and taking the Confederate side when even the State of Mississippi is taking its symbol off its flag.

So, what will the post-Trump world look like? Will taxes go through the roof? Will the market crash? Is it time to go 100% cash, change our names, and move to a country with no US extradition treaty?

I don’t think so. In fact, with stocks soaring to meteoric new highs every day, the market expects that a Biden administration will be great news for stocks, perhaps the best ever.

Taxes will certainly go up. Favorable tax treatment of the energy, real estate, and private equity funds will get axed. Carried interest will finally become history. Marginal tax rate on net income over $1 billion could get hiked to the Roosevelt levels of 80-90%.

Biden has already announced an increase in the corporate tax rate from 21% to 28%. That will cut earnings for the S&P 500 by $9 a share. But the stock market is not the economy, with S&P earnings only accounting for 10% of US GDP.

And the $9 companies lose in taxes they will make back and more from new government spending, which isn’t slowing down any time soon. Some 14,000 American bridges need to be rebuilt. The Interstate Highway System is a shambles. High-speed broadband needs to go rural. The electrification of the US needs to accelerate to accommodate the millions of electric cars headed our way.

I believe that eventually, 51 million Americans will lose their jobs as a result of the pandemic. Perhaps a third of those are never coming back because the future has been so accelerated. That will leave the broader U-6 Unemployment rate stuck in double digits for years, maybe for decades.

So, we’re going to need some kind of Roosevelt style programs like the Works Progress Administration (WPA) and the Civilian Conservation Corps (CCC) who built much of the monolithic infrastructure that we all enjoy today.

At least 300,000 educated workers could immediately be put to work in contact tracing. Millions more could be employed in national infrastructure programs. One thing is certain. A new administration won’t stop massive government spending, it will simply redirect it.

And let's face it. A Biden win would bring a big expansion of Obamacare. With the best healthcare technology in the world, private industry has done the world’s worst job controlling the pandemic.

Countries with well-run national healthcare systems like Australia, New Zealand, Japan, and Singapore have almost wiped out the disease. This is why I am avoiding the healthcare sector for the foreseeable future.

Who are the big winners of all this? Big tech (FB), (AAPL), (MSFT), (AMZN), medium tech (ADBE), fintech (SQ), (PYPL), the cloud (CRM), and biotech (SGEN), (REGN), and (ILMN).

Cybersecurity will always be in demand (FEYE), (PANW). The global chip shortage will continue to worsen (AMD), (MU), (NVDA).

And Tesla (TSLA)? What can I say? It is already up nearly 100-fold from my initial $16.50 recommendation in 2010, and I’ve bought three Tesla’s (two S’s and an X).

Followers of the Mad Hedge Trade Alert service know that I am already long these names up the wazoo, and is why I am up 26% in 2020. It’s simply a matter of all pre-pandemic trends hyper-accelerating, which we were already tapped into.

If you have to add a purely domestic sector, a gigantic Millennial tailwind will keep homebuilders bubbling for years like (LEN), (PHM), and (KBH).

And while you won’t find me as a player here, retail will recover. The sector has not prospered during the current administration, thanks to a trade war with China and the pandemic.

And the losers? There is a classification of “Trump” stocks you don’t want to be anywhere near. Energy will do terribly (XOM), (CVX), (XOM), with Texas tea possibly revisiting negative numbers. If you take away the tax breaks, energy hasn’t really made money in decades.

Defense stocks (RTN), (NOC), (LMT) will take a big hit from budget cutbacks and fewer wars. Coal (KOL) will finally get shut down for good, probably sold to China in bankruptcy proceedings. Industrials will continue to lag (X), (GE), with no more free handouts from the government and no technology advantage.

So if Biden wins, you don’t need to slit your wrists, hang yourself from the showerhead, or cease investing completely. Just take your stock market winnings and go out and get drunk instead.

June 22, 2020

Tech Letter

Mad Hedge Technology Letter
June 22, 2020
Fiat Lux

Featured Trade:

(IS ROKU BREAKING OUT?)
(ROKU)

Is Roku Breaking Out?

Tech Letter

Roku (ROKU) is another tech growth stock that is a conviction buy in my eyes.

Never sell this company if you plan to be in this long term.

The only way a sell would make sense is if digital ads stopped existing or Roku’s platform somehow managed to blackball itself out of the digital ad landscape.

Both scenarios are highly unlikely.

What does Roku actually do?

This is the company that is single-handedly destroying linear television and is laughing all the way to the bank – or at least the shareholders are.

Roku is a leader in advertising-supported video-on-demand streaming services.

In layman’s terms, they basically run commercials on its own Roku Channel and other third-party channels.

A minor part of their business is involved in making set-top boxes and streaming sticks to plug into internet video services such as Netflix and Hulu.

Plus, it sells licenses to an operating system that is thrown up smart TVs.

To beef up its products and move up in the quality food chain, the streaming platform outperformer Roku (ROKU) has agreed to a data exchange agreement with supermarket giant Kroger (KR).

Roku will apply data from the supermarket chain in its recently launched shopper data program.

The tech firm will finally get a peek deep inside the psyche of the American consumer.

I also believe this is the beginning of a massive wave of data-sharing partnerships as companies desire to understand their consumers deeper at a time when the coronavirus shut their consumers inside their house with nowhere to go.

So, how will Roku parlay this partnership into more revenue?

As people cord cut, the main goal is to seduce advertisers away from linear TV.

Juicing up its targeting abilities by using Kroger’s leading data science KPM (Kroger Precision Marketing) program, Roku will be able to move closer to the customer’s digital wallet enabling them to anticipate what they buy and how much of it they want.

The ads will be pricier because Roku will be able to hyper-target specific audiences due to a higher quality set of data they will have to work with.

From the CPG marketers’ perspective, supermarket brands will apply the data from Kroger’s KPM platform to better target the approximately 40 million and growing households using Roku, thus enabling them to better gauge which ads viewers are more likely to respond to.

Kroger will be able to understand more about their audience by assessing what commercials they consume and how they can adjust and expand their supply of goods to better capture the demand of their shoppers.

Getting more bang for their buck is a winning strategy for Roku as they delve deep into the mystical art of artificial intelligence to offer a better ad funnel.

Kroger Precision Marketing (KPM) spans 60 million US households which is not shabby itself. Marrying the 60 million with the 40 million to create a 100 million data analytics treasury trove means that Roku has just become 20% more valuable in a blink of an eye.

Roku's international growth could experience the same type of meteoric rise as what Netflix had.

If Roku can accumulate 82 million active accounts by 2025, it should have $4.5 billion in annual platform revenue.

This would mean that Roku's market cap would be around $40 billion to $50 billion in 2025. Its current market value is about $16.5 billion.

Roku still has its share of headwinds and are still loss-making.

The company reported a 45-cent loss per share for the first quarter, in-line with analyst expectations and revenue of $321 million beating the estimates by $13 million.

Since the company is still a “growth” company, investors still look through the losses to glorify growth, and Roku reporting 39.8 million active accounts, up 37% from a year ago, means they are on track.

Another concern is the higher-than-normal number of cancellations in the short-term even though its long-term runway is still solid.

However, I would say the biggest problem Roku faces is that the stock is just too hot pricing around many investors looking to put new money to work in shares.

The stock has doubled since the March lows.

In short, unless the government bans digital ads, Roku is poised to harvest the lion’s share of the spoils of the streaming revolution.

I am highly bullish on Roku shares.

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