(ZM) Archives

Goodbye to the Old World, Hello to the New

With the ongoing impacts of coronavirus, our world is suddenly changing beyond all recognition.

The WWII comparisons here are valid. Just as technological innovation accelerated tenfold from 1941-1945, bringing us computers, penicillin, jet engines, and the atomic bomb, the same kind of great leaps forward are happening now.

The end result will be a faster rate of innovation and economic growth, greater corporate profits in the right industries, and a hugely performing stock market. It perfectly sets up my coming Golden Age and the next Roaring Twenties.

Living in Silicon Valley for the last 25 years, I have gotten pretty used to change. But what is happening now is mind-boggling.

The bottom line for the impacts of the coronavirus pandemic has been to greatly accelerate all existing trends. The biggest one of these has been the movement of the economy online, which has been taking place since the eighties. Except that it is now happening lightning fast. Business models are hyper-evolving.

Legacy brick and mortar companies must move online or perish, as much of the restaurant business is now doing. Target (TGT) and Walmart (WMT) have accomplished this. Those with feet in both worlds are closing down their physical presence and going entirely digital. Pure digital companies, like Zoom (ZM), Netflix (NFLX), PayPal (PYPL), and Square (SQ) are booming.

The side effect of the virus may be to move an even greater share of America’s business activity to the San Francisco Bay area and Seattle. Almost all tech companies here are hiring like crazy. Amazon has announced plans for hiring a staggering 175,000 since the epidemic started, as millions shift to home delivery of everything.

The productivity of tech is also growing by leaps and bounds. Since everyone is working at home, no one wastes two hours a day commuting. Meetings in person are a thing of the past. Everything now happens on Zoom.

The whole mental health industry is now conducted on Zoom. So is much of non-Corona related medicine. And I haven’t seen my accountant in years. I think he died, replaced by a younger, cheaper clone.

Even my own Boy Scout troop has gone virtual. The National Council is offering 58 online merit badges, including Railroading, Stamp Collecting, and Genealogy (click here for the full list).

The stock market has noticed and several tech companies like Microsoft (MSFT) and Amazon are showing positive gains for 2020. Many legacy companies see share prices still down 80% or more. Sector selection for portfolio mangers has essentially shrunk from 100 to only 2: tech/biotech and healthcare.

Business models are evolving at an astonishing rate. Who knew the yoga instructor in Chicago was much better than the one down the street, thanks to Skype.

Education is now entirely online and much of it may never go back to school. My kids are totally comfortable in this new world. They have been social distancing since I bought them their own iPhones five years ago.

Now, if I can only figure out how to do my own haircut, the third most searched term on Google. It’s longer than at any time since the summer of love in 1967.

These are just a few of the practical impacts of coronavirus. The social changes are equally eye-popping.

While death rates are soaring, crime has fallen by up to 75%. So have deaths from car accidents. Alcohol and domestic abuse have gone through the roof. Drug addiction is plummeting because dealers are afraid to go out on the street.

There are many lessons to be learned from this crash. Too many companies drank the Kool-Aid and assumed business conditions would remain perfect forever.

Let's call a spade a spade. The year 2019 and the first two months of 2020 were the bubble top. All the growth in stock prices then were pure fluff.

That means you didn’t need costly reserves ran on thin margins, borrowed like crazy at artificially low-interest rates, and kept endlessly buying back your own stock and paying generous dividends.

Manufacturers didn’t need inventories, counting on a seamless, global supply chain to keep assembly lines running. “Just in time” has switched to “just-in-case.” Companies are going to have to keep enough inventories in the warehouse to guard against future disease-driven disruptions. This will raise costs and shrink profits.

It’s really hard to see how entire industries are going to come back. Cruise ships were packing guests onboard like sardines in a can to make money. I bet it will be a while before you sit at a crowded casino blackjack table. Want to stand in line at a popular chain restaurant?

Airlines have become the poster boy for the evils of bubblicious management. They flew full most of the time, seating their customers shoulder to shoulder, yet their net profit per fight depended on selling that last economy class seat.

The industry spent $50 billion in dividends and the buyback of shares that are now largely worthless, while senior management laughed all the way to the bank. They were the only industry to actually list a global pandemic as a major risk to their business in their SEC filings.

Now they want a government bailout at your expense.

As for me, I am looking forward to this brave new world. Until then, I’ll be spending my afternoons getting in shape hiking in the High Sierras, long hair and all. I’m the only one up here. Maybe it will scare the mountain lions away.

March 30, 2020

Tech Letter

Mad Hedge Technology Letter
March 30, 2020
Fiat Lux

Featured Trade:

(THE NEW CROWN JEWELS OF SOCIAL DISTANCING)
(DOCU), (SIRI), (ZNGA), (NOK), (AMZN), (WORK), (MSFT), (ZM)

The New Crown Jewels of Social Distancing

Tech Letter

The second tier of social distancing tech stocks will do well in this brave new world in which digital lives have superseded physical ones.

Sure, most of you already know that Amazon (AMZN), Slack (WORK), Microsoft (MSFT), Zoom Communications (ZM), and Teladoc Health (TDOC) are the crown jewels of current social distancing tech stocks, but there is another group that should also outperform.

Here are 4 that you should take a look at with DocuSign being the best of the bunch:

DocuSign (DOCU)

Teleconferencing and other niches have come front and center and consummating deals have migrated to one place since people cannot physically sign their name from pen to paper.

Electronic signatures were basically a cottage industry when it came out, but it is here to stay and this company has investors buzzing. Although the volume of business agreements being signed globally may temporarily slip, those that are continuing to work are enabled by DocuSign to close agreements without meeting eye to eye.

I expect resiliency in the type of products DocuSign provides and the remote implementation options.

DocuSign is well-positioned within the defensive category of digital transformation spend. Their recent acquisition of Seal Software will help boost DocuSign’s ability to leverage the power of artificial intelligence in the domain of contract analytics.

The opportunity to mitigate time spent on manual workflows through the addition of Seal to the portfolio can bolster the value proposition and drive ROI (return on investment) for customers.

The trajectory of the company was validated by DocuSign’s strong fourth-quarter earnings results with adjusted earnings increasing 12 cents per share which is a 100% increase year over year.

Just as impressive, DocuSign posted quarterly revenue of $274.9 million, an increase of 38%. As the data suggests, the signals all point to this company continuing its outperformance.

The e-document market has been monopolized by DocuSign with competition shut out, and as business goes 100% virtual in the current environment, this should have a positive network effect that will resonate when the world opens back up.

The next 3 stocks aren’t growth companies like DocuSign but are cheap stocks under $10 that might be worth a look.

Sirius XM Holdings (SIRI)

With all the extra time at home, satellite radio has hit the jackpot, making their services much more appealing.

Since Sirius and XM Radio merged in 2008, the combined Sirius XM Holdings has enjoyed a near-monopoly on satellite radio.

Sirius built on that with the 2018 acquisition of Pandora, the music streaming product, helping to fill the sails again with rapid revenue growth; its audio products now reach more than 100 million people.

Sirius' situation is appearing healthy and added a further 1.1 million subscribers in 2019 alone, bringing its total paying subscribers to roughly 30 million. The company's audacious strategy of partnering with auto manufacturers to pre-install SiriusXM in new models should help steadily grow the business.

Zynga (ZNGA)

This video game stock is cheap and could be a beneficiary of the stay at home revolution.

Zynga's portfolio of popular games, combined with hyper-charged growth, makes it one of the best cheap stocks to buy under $10.

Last quarter, the social gaming developer behind franchises like Words With Friends, Zynga Poker, CSR Racing, and FarmVille set new company revenue records up 48%.

While growth is likely to decelerate quickly from such temporary coronavirus catalysts, I expect double-digit revenue growth in 2020.

Still, Zynga is holding up remarkably well, especially in the COVID-19 era, as people increasingly turn to mobile devices for entertainment.

Nokia Corp. (NOK)

Nokia's expected earnings growth is impressive with Wall Street looking for an 8% bump in 2020 and roughly 30% profit growth in 2021.

Cheap stocks to invest in under $10 don't often come in the form of well-oiled global corporations valued at $15 billion.

The Finnish communication equipment telecom is one of the rare exceptions against the rule.

Sales have grown 14% annually for the last five years. Nokia may end up one of the 5G stocks to watch in the coming years because of the stigma of Huawei forcing many Europeans to go with brands closer to home.

Nokia pays a hefty 8% dividend as well and will never need a last-second bailout.

March 17, 2020

Diary, Newsletter, Summary

Global Market Comments
March 17, 2020
Fiat Lux

Featured Trade:

(LONG TERM ECONOMIC EFFECTS OF THE CORONAVIRUS),
(ZM), (LOGM), (AMZN)
(HOW TO HANDLE THE FRIDAY, MARCH 20 OPTIONS EXPIRATION),
(AAPL), (AMZN), (MSFT)

Long Term Economic Effects of the Coronavirus

Diary, Newsletter

The world will never be the same again.
Not only is the old world rapidly disappearing before our eyes, the new one is breaking down the front door with alarming speed. In short: the future is happening fast, very fast, and with coronavirus, people are understanding wondering about economic effects long term.

To a large extent, long term economic trends already in place have been given a turbocharger. Quite simply, you just take out the people. Human contact of any kind will be minimized. I’ll tick off some of the more obvious.

You may think I’m nuts. But all San Francisco Bay Area counties have been given a “shelter in place” order. All travel is banned except to gain essential necessities. In any case, the grocery stores are now empty, unless you have a taste for chickpea-based pasta.

Let me clarify first that it is highly unlikely that you will get the Corona virus. If China peaks at the current 90,000 cases and 4,000 deaths, that means there is one chance in 325,000 you will die of the Corona virus. If the number of cases doubles, that drops to one chance in 175,000. In other words, you are more likely to win the lottery than die of Corona virus.

However, that is logic speaking. Fear is what is firmly in the driver’s seat right now. The only data point that counts now is the number of new Corona cases. You can find that figure here.

In the meantime, you better get used to your new life. You know that home office of yours? It is about to gain a full-time occupant, i.e. you. Most large companies already migrated to four, or even three-day work weeks, with the remainder to be spent at home.

One email, and that has suddenly become a five-day week at home. Many of these employees are never coming back, preferring to avoid horrendous commutes, lower costs, and yes, future pandemic viruses. We are already using GoToMeeting (LOGM) and Zoom (ZM) for many meetings. That simply becomes a full-time enterprise.

Commerce will change beyond all recognition. Did you do a lot of shopping on Amazon (AMZN) like I do? Now, you’re really going to pour it on. Amazon just announced the hiring of 100,000 new distribution and delivery people today to handle the surge in business. The pandemic is really going to be the death knell of the mall, where a potentially fatal disease is only a sneeze away. Avoid mall REITs (SPG) like the plague, no matter how much they promise to pay you in yield.

And how are you going to pay for that transaction? Guess what one of the most efficient transmitter of disease is? That would be US dollar bills. Take paper money in change and you are not only getting contact from the salesclerk, but the last dozen people who handled the money.

Contactless payments deal with this nicely. People may be swiping their iPhone wallet, or are simply scanned when they walk in the store, as with some Whole Foods shops owned by Amazon.

Conferences? A thing of the past. All of my public speaking events around the world over the next three months have been cancelled. In their place will be webinars. They offer lower conversion rates but include cheaper costs as well. At least I won’t have 18 hours of jet lag to deal with anymore. I’m sure Quantas will miss those first-class ticket purchases and I’ll miss the Champaign.

Entertainment is also morphing beyond all recognition. Comcast just announced that newly released movies will be available for a $20 rental. Clearly, they are assuming that theater attendance will go to zero. Again, this has been a long time coming and the other major movie producers will soon follow suit.

With the president banning assemblies of more than ten people today that’s a safe bet. Regal has announced that it is closing all 542 of its theaters. Stay away from AMC Entertainment Holdings (AMC), although its already almost gone to zero, down 75% this year.

Exercise is changing overnight. All gyms and health clubs are now closed, so working out will become a solo exercise far away on a high mountain. I have already been doing this for 30 years, so piece of cake here. Friends with yoga classes are now doing them in the living room, streaming their instructors online.

That's just a snapshot of some of the long term economic effects of coronavirus.

If you are having trouble getting your kids to comply with social distancing requirements, have a family movie night and watch Gwyneth Paltrow in Contagion. Is has been applauded by scientists as the most accurate presentation of the kind of out-of-control pandemic which we may now be facing.

It is bone-chilling.

As for me, I have my stockpile of food and will be self-quarantining for the foreseeable future.

Stay healthy.

This is a REAL Bear Market

March 9, 2020

Tech Letter

Mad Hedge Technology Letter
March 9, 2020
Fiat Lux

Featured Trade:

(WHY ZOOM HAS BEEN ZOOMING)
(ZM), (VMW), (JNJ), ($COMPQ)

Why Zoom Has Been Zooming

Tech Letter

One man's heaven is another man's hell.

Zoom Video Communications (ZM) is the hero of video conferencing software.

Few companies are navigating the coronavirus situation better than Zoom. Their better-than-expected fourth-quarter earnings and forecast is a great omen for the coronavirus driving future demand for the company’s remote-work tools.

Even without the coronavirus, the company is doing spectacularly.

(ZM) delivers best in show teleconferencing services including video meetings, voice, webinars and chat across desktop and mobile devices, and has been the beneficiary of the dreaded coronavirus that has quarantined workers forcing them to rely on Zoom’s video app tools.

The virus has bolted by the 100,000 customer mark with at least 3,500 Corona deaths.

The panic has been overblown, and the same hysteria has seeped into the broader tech market triggering deep selloffs in almost every tech company.

The elevated awareness and adoption of the company’s video conferencing platform will allow the company to post an even better performance next quarter.

The migration into the company’s free app remains robust and it is unclear whether those users can be converted to paying ones. However, paid growth is still hitting on all cylinders.

Revenue crushed it at 78% to $188.3 million from $105.8 million a year ago.

In total, sales in 2019 were $622.7 million, up 88% year-over-year.

Zoom Communications is attracting more influential customers with 81,900 accounts with at least 10 employees, a 61% uptrend from the past year.

VMware Inc. (VMW) and Johnson & Johnson (JNJ) are two of Zoom’s largest accounts.

Zoom's first-quarter revenue guidance was strong as well predicting between $199 million and $201 million.

Another growth lever will be the mobile segment which has signed up more than 2,900 accounts with more than 10 employees in its first year after launch and will shortly be available in 18 countries.

Total operating margins surpassed expectation of 10%, by more than doubling, to 20.4%.

Ultimately, Zoom's robust Q4 results and guidance underline the company's smooth pathway to elevated revenue drivers as the world goes into pandemic mode because of Covid-19.

It was somewhat underwhelming that management cited a limited revenue benefit from the situation with a go-forward increase in costs as usage increases.

That could have been sorted out more delicately and keeping costs down is one of management’s responsibilities.

The positives still outweigh any minor negatives as the company has been able to capitalize by seizing mind share and expanding the funnel.

Zoom Communications has not been able to escape the recent volatility in shares as the 12% boost from a positive earnings report was met with a 13% haircut the following day as the broader Nasdaq was pummeled.

The Covid-19 virus is delivering agony to investors as the swings are simply hard to trade in and out of.

Making it even more difficult is fogging clarity breeding uncertainty stoking wild risk-off moves even when the central bank announced an emergency half-point rate cut.

The current issue is that short term, markets can behave as irrational as ever and trading algorithms are programmed to digest headlines by not only the volume but the potency and relevancy as well.

If every news wire sent out a story that free money was dropping from the sky, the market would be up 10% irrespective of whether it is true or not.

That is the world we live in where over 85% of the trading decisions and volume are executed by automated software and the exaggeration doesn’t discriminate in which direction it trends in.

So, we are stuck in this negative feedback loop where national headlines are almost entirely concentrated on the coronavirus and that is mainly the data that is fed into short-term trading algorithms.

Unfortunately, the tech market weakness is becoming a self-fulfilling prophecy and new headlines of Northern Italy being quarantined and New York announcing a state of emergency is poised to be the next catalyst for a volatile upcoming trading week ahead.

Short-term traders need to understand that this isn’t just a “buy the dip” event and the deep in the money call spreads that had cushions of 8-10% were blown out in just a few days.

Long term investors should be using every dramatic selloff to add slightly to their positions incrementally lowering their cost basis.

It is hard to know when the coronavirus phenomenon will pass by but at the speed in which we are trending, U.S. school cancelations and further cities and states announcing highly negative events are in the pipeline for next week.

The bottoming event could eventually come in the form of US Corona cases topping 10,000 or cancelling the Olympics in Tokyo, but until then, the negative health headlines appear to be the new normal for the short-term and until we are fully washed out.

March 4, 2020

Tech Letter

Mad Hedge Technology Letter
March 4, 2020
Fiat Lux

Featured Trade:

(THE BEST TECH STOCKS TO BUY AT THE BOTTOM)
(NFLX), (ZM), (PTON), (AMZN), (OKTA), (WORK), (ATVI), (EA), (TTWO)

The Best Tech Stocks to Buy at the Bottom

Tech Letter

Tech stocks that are begging to be picked up on the back of the coronavirus pandemic are Netflix (NFLX), Zoom Video Communications (ZM), workplace collaboration service Slack Technologies (WORK), and Peloton Interactive (PTON), the spin bike company.

Their short-term outperformance indicates that these stocks work well during mass pandemics shelving most outdoor activity and commerce.

The basket of 3 stocks has easily beat the S&P 500 since the coronavirus emerged as a threat in mid-January.

Home sitting doesn’t generate a net output of business activity unless that job is digital.

The majority of workers still commute in a physical car only to sit in an office, restaurant, or some other type of self-contained space.

That is the underlying problem that has no solution, and any rate cut by the Fed cannot ultimately solve consumers holed up in their house.

If the companies that could opt to go pure digital do take up the option, the number of remote workers would rise and digital products would be the ultimate beneficiary of this trend.

Companies that promote remote working such as Slack (WORK) and Google Hangouts are in pole position to reap the rewards.

These services include video conferencing software, logistical services, administrative services, network security services, ecommerce and any service that aids in generating digital content like Adobe and its umbrella of assets.

The trend was already transforming American culture, but the virus vigorously pulls forward a trend that was already in overdrive.

Enabling information workers to produce outside the traditional office environment is one of the lynchpins of the Silicon Valley model.

Companies will ultimately realize that spending big bucks on business travel to meet face to face for 30 minutes is probably not an optimal allocation of resources.

Business travel is getting cut with a cleaver such as Amazon.com (AMZN) who are forcing employees to avoid all nonessential travel for now, including within the U.S. Much of that travel could be replaced by video calls.

Other companies will get in on the action by directing their employees to work from home in the coming weeks.

Coronavirus mania has reached the U.S. shores with consumers stocking up on all the essentials at the local Costco.

If this gets worse, there is no solution unless a viable medical solution starts improving the health crisis.

There are still only 7 known fatalities from the coronavirus, all in the state of Washington, and limiting that number is critical to the health of the tech market.

Another company is Okta (OKTA), a leader in authentication security cloud software.

The company’s offering allows employees to use corporate applications on-site and remotely and protecting their access to their digital services is just as important as the work itself.

As consumer spurn movie theaters, concerts, and gyms, the entertainment space will give way to digital entertainment that includes Netflix (NFLX) and Roku (ROKU).

Roku is a great place to hide out in the world where Covid-19 meets daily consumers in the U.S. in a more meaningful way during 2020.

Netflix is a company that has defied gravity this year by bull-rushing its way through the competition and proving there is space for everyone.

The increase in incremental demand for digital content will only help Netflix claim a bigger part of the pie.

We can also lump the videogame industry into this cohort such as Activision Blizzard (ATVI), Electronic Arts (EA), and Take-Two Interactive Software (TTWO).

They have faced serious headwinds from gaming phenomenon Fortnite, but prolonged home sitting will even boost their shares.

The spine of digital services will receive a boost as well from the usual cast of characters such as Microsoft (MSFT), Apple (AAPL), Alphabet (GOOGL), and Facebook (FB).

As investors wait for the climax of the coronavirus and the Central Bank has indicated that they are open to more accommodative policy, we could be ripe for more volatility.

Chinese coronavirus cases have started to taper off and if the rest of the world trends in a similar fashion, this virus scare could be in the history books in 2-3 months.

However, the trajectory of the virus is still a massive unknown in the U.S. and winning the health battle is the only panacea to this dilemma.