“I want to put a ding in the universe.” – Said Co-Founder of Apple Steve Jobs
Mad Hedge Technology Letter
February 9, 2022
Fiat Lux
Featured Trade:
(THE TELEHEALTH TRADE GETS CROWDED)
(TDOC), (AMZN)
The last thing anyone should do with their money now — invest in telehealth provider Teladoc (TDOC).
Infringing on Amazon’s (AMZN) moat is equal to a death sentence and TDOC will soon understand how punishing it can be competing with a monopolistic oligarch.
Amazon just announced that Amazon care is now available all over America.
This service offers both virtual care and in-person services.
The Amazon Care model is desperately needed in a country where pharma has gouged the average citizen.
This much-needed health solution from the ecommerce juggernaut is to address shortfalls in current offerings for healthcare and has TDOC squarely in their crosshairs.
The in-person services are rolling out in more than 20 new cities this year and that’s just not the end of it — Amazon says the expansion comes as it continues to invest in growing its clinical care team and its in-person care services.
Remember that TDOC rode the momentum of the hard lockdowns to become one of the few pandemic tech darlings of 2020.
Fast forward to post-2020, TDOCs stock price is down by more than 70% over the past 12 months, and I hope that readers didn’t buy it at the peak!
Obviously, the telehealth company's rising sales serve as a bright spot, but sadly, the company is a one-trick pony like Facebook.
The one-trick ponies of the world are now receiving a discount when they used to receive a premium on their stock price.
The synergies of multi-industry tech firms are evident as shifting resources is way easier to do than hiring from scratch in a tight labor market.
Granted, TDOCs numbers stand up quite nicely for now, in the third quarter, its revenue grew by 81% year over year to $522 million, and investors are likely to see more big growth when it reports on Q4 in February.
In 2020, its total membership topped 73 million people, for whom it facilitated a total of 10.6 million telehealth visits throughout the year.
However, we don’t operate in a vacuum and one’s competitive advantage can be lost in a blink of an eye.
The reality is that incremental growth will never return to its early pandemic pace when millions of people were seeking ways to get medical assistance without going to doctors' offices.
Teladoc is loss-making and margins are getting worse.
When we add AMZN into the mix, margins will most likely get squeezed more and expenses balloon further which is never a great marriage.
Next, insurmountable challenges could be around the corner and TDOC might be in front store window for a bigger company to purchase.
TODCs management is planning to increase its average annual revenue per subscriber by as much as 25% by offering a wider range of services, potentially including remote monitoring of a patient's medical sensors.
But the question is how much of that proposed 25% will be eaten by AMZN with its brand name and army of talented employees?
In addition, TDOC's costs of providing service are dropping, albeit slowly, but I would argue that AMZN can scale better than anyone in corporate America.
Over the past three years, Teladoc's cost of goods sold has fallen as a percentage of its revenue, and its quarterly gross profits have risen by 320%, but profitability is still years off.
If this becomes a battle between two loss-making telehealth companies that are burning cash, AMZN is really the last company I would want to try my luck out against.
This year will be the year where TDOC either sinks or swims and if it sinks, we will all know why.
Avoid TDOC for now.
“Try never to be the smartest person in the room. And if you are, I suggest you invite smarter people…or find a different room.” – Said Founder and CEO of Dell Technologies Michael Dell
Mad Hedge Technology Letter
February 7, 2022
Fiat Lux
Featured Trade:
(A MIXED BAG FOR AMAZON)
(FB), (AMZN), (GOOGL)
Ecommerce had to cool off, didn’t it?
After 2 years of breakneck growth, Amazon (AMZN) came crashing back down to life reporting its slowest revenue growth in 4 years.
Amazon’s online stores reported $206 million in losses for the U.S. revealing that American online shopping has plateaued for the short-term.
Much of this was baked into the equation as Amazon shares have really done nothing for the past 6 months.
The sugar high it received from the pandemic is starting to wear off.
AMZN experienced more than $4 billion in costs from inflationary pressures, lost productivity, and disruptions. The inflation primarily relates to wage increases and incentives in the operations, as well as higher pricing from third-party carriers supporting AMZNs fulfillment network. Lost productivity and network disruptions were driven primarily by labor capacity constraints due to challenges in staffing up AMZN facilities.
Then when the omicron variant reared its ugly head, there was a certain conflict with retaining staff as many workers called out sick, making an already tight labor force less efficient.
If the earnings report stopped just there, no doubt AMZN would have braced for a Facebook-like 25% selloff, but the silver linings in the AMZN report were more like a gold lining.
Three positive data points that couldn’t be downplayed were in the Amazon Web Services (AWS) business, the advertising business, and pricing for Amazon Prime membership.
AWS delivered a strong quarter of growth, as enterprises and developers continued to look to AWS for critical, innovative cloud solutions.
A vivid example of AWS is with Amazon’s relationship with parent company of Chrysler, Dodge, Fiat, Jeep, and Ram.
They selected AWS as its preferred global cloud provider for vehicle platforms to accelerate new digital products and upskill its global workforce.
There’s a whole list of the world's largest companies that now use AWS like Adidas, Goldman Sachs, Pfizer, Rivian.
AWS revenue expanded to 40% from a year ago to $17.8 billion, and represents the anchor for the financial health of Amazon.
It allows AMZN to pursue other growth levers like advertising.
What happens is that there is an intense feedback loop with customers, to keep building and making that better.
The end result is building more relevancy and better engaging experiences.
Interaction promotes an understanding that AMZN can build better analytic tools, provide better measurement, give them better insight to performance.
Amazon’s focus on serving brands has really differentiated themselves from the likes of Facebook (FB) and Google (GOOGL).
The sponsored ad space with regards to video advertising is certainly a great opportunity.
And again, this is about delivering good recommendations to customers and helpful when they're making their purchase decisions and giving them information around that.
In the end, advertising grew 32% year over year and is a $10 billion business.
The most aggressive move that Amazon told us about is their price rise for Prime Membership.
Amazon will increase the price of a Prime membership in the United States, with the monthly price going from $12.99 to $14.99 and the annual membership going from $119 to $139.
The 15% increase is the first price increase since 2018 which should be a boon to the bottom line.
Ultimately, I believe the Amazon Prime Membership price hike was the reason for the investor response of bidding up AMZN shares.
Although the ecommerce numbers were a little disappointing, they should rebound nicely in 2022.
The bar was set extremely low coming into the earnings and AMZN gave us enough juice for shares to surge.
When combining the positives of AWS and advertising strength, this ecommerce behemoth’s momentum is just too hard to ignore.
If inflation starts to moderate, expect AMZN’s stock to be 25% higher by the end of the year and I do believe investors will sell out of Facebook and buy into a quality stock like AMZN.
“If you don't jump on the new, you don't survive.” – Said CEO of Microsoft Satya Nadella
Mad Hedge Technology Letter
February 4, 2022
Fiat Lux
Featured Trade:
(FACEBOOK IS BROKEN)
(FB), (AMZN), (MSFT), (AAPL)
Facebook (FB) is broken.
As a stock, management team, product, and as a business model – it is broken.
This portends poorly for the company that Mark Zuckerberg built.
Funnily enough, Zuckerberg decided to opt for a new company name, "Meta," to signal to his investors that the company is barreling straight into a new chapter of its existence.
The problem I have with Meta is that they face 10 years of losses before they can potentially spin a profit from a Metaverse-based product.
Reading the tea leaves, the name change appears to mask the internal destruction of the legacy Facebook model, and the warning signs are more than a few.
They are in the digital ad business at a time when e-commerce company Amazon (AMZN) is rapidly encroaching on their turf.
I would argue that it was Facebook who completely missed out on e-commerce, almost like how Microsoft (MSFT) missed out on the cell phone business that Apple were able to figure out.
The final kick below the belt was Facebook admitting that Apple’s (AAPL) privacy changes have materially affected Facebook’s ability to collect large swaths of data.
The result is less accurate and voluminous data because they can’t steal as much reducing the amount they can charge digital advertisers for the data.
Facebook’s underperformance is the most complete anecdotal evidence so far on the impact to the advertising industry of Apple’s App Tracking Transparency feature, which minimizes targeting capabilities by limiting advertisers from accessing an iPhone user identifier.
Even with the terrible report, I don’t believe a 26% haircut in Meta shares was warranted, but this represents the sign of the times where companies aren’t given a free pass anymore.
If something like this were to happen in a period of easy money, I believe Meta would have only sold off 4%-6%.
So how about that Metaverse business?
Chief Executive Officer Mark Zuckerberg announced Wednesday that Meta had a net loss of $10 billion in 2021 attributable to its investment in the Meeetaverse.
I believe this is a risky stance to take considering it’s not fully guaranteed that the Metaverse will be what all the experts think it might turn into.
It could still only pull through in a diluted way like many things in life.
Amazon has really broken away from the pack, from an advertising minnow into an ad revenue juggernaut with annual sales of $31 billion for 2021, which is more than the $28.8 billion in ad revenue that YouTube posted for the year.
At that pace, Amazon’s ad business is also larger than several other entities in online advertising, including cloud rival Microsoft, whose CEO, Satya Nadella, disclosed last week the company’s 2021 advertising revenue exceeded $10 billion.
Amazon has also decided to increase the price of Prime by nearly 17% all while Facebook lacks pricing power to charge digital ad manufacturers more.
It’s time to retire the acronym starting with F – FANG, which once represented the equity market profile of Facebook, Apple, Netflix, and Google.
Is this the end of Facebook?
No, they still have a sterling balance sheet and are awfully profitable in what they do.
But looking forward, growth rates will contract down to single digits and user growth has turned negative.
These are both ominous signs with no solutions in sight.
Have we seen the high-water mark for Facebook?
Fixing its stock trajectory to the backs of the metaverse is a fool’s game because of the large losses it will incur in the short to mid-term.
Zuckerberg largely understands the Metaverse as an existential crisis of epic proportions, which is why he’s throwing the kitchen sink at it.
Broadly speaking, the stock market might have a Facebook problem because the company is so valuable and part of so many indices that a dip in shares will hurt the wider market.
In any case, the bombshell report means that this bodes poorly for the 3-year trajectory of Meta’s stock; and to give Meta the benefit of the doubt, at least they have the cash to make a legitimate run at the Metaverse business.
Don’t expect high octane price action in Meta until they signal that the Metaverse business is legitimate and just around the corner, which might be a while!
My recommendation is to put this one on the backburner until prospects brighten up.
“A squirrel dying in front of your house may be more relevant to your interests right now than people dying in Africa.” – Said Founder and CEO of Facebook Mark Zuckerberg
