Mad Hedge Technology Letter
February 14, 2022
Fiat Lux
Featured Trade:
(THE STRATEGIC WINNER OF TECH)
(NVDA), (TDOC), (ZM)
Nvidia (NVDA) is one of the best buy-the-dip tech candidates after the pullback from around $350.
This is one of the premier tech stocks of our generation and readers shouldn’t be fooled by the recent weakness.
NVDA simply has been dragged down with the rest of the best as technology still tries to find some footing after a rough January that was sideswiped by exogenous shocks out of NVDA’s control.
Tech growth stocks have been pigeonholed as one broad category, and even though NVDA boasts a sterling balance sheet that achieved $4.33 billion in profits in 2021, they are penalized with the general category of growth stock.
The rotation into energy and commodities has been swift, but make no mistake, this company is no Teladoc (TDOC) or Zoom Video (ZM), unequivocally not.
NVDA sits at the heart of every cutting-edge technology today by its production of high-quality CPUs and GPUs that are required for businesses as broad as data centers to the metaverse which includes gaming to automotive driving.
NVDAs stock accelerated too fast too soon which made them vulnerable to significant headline risk.
So headlines like war with Ukraine and Russia don’t really have much bearing over the trajectory of Nvidia’s business at all, but since index funds contain NVDA, NVDA gets heaped into the risk-off moves.
The stock further sold off after news leaked of the dead acquisition between British chip company ARM due to antitrust concerns.
At a broader level, semiconductor chips have possibly never been in such high demand, yet supply is painfully constrained.
The U.S. Commerce Department has recently emphasized the precarious nature of the global semiconductor supply chain in 2022.
However, the agency also expressed the possibility of new manufacturing capacity coming online as early as the second half of 2022, which may help somewhat in reducing the chip shortages.
With Intel, Taiwan Semiconductor Manufacturing, and Samsung having already planned huge investments in capacity expansion, we may see increased pricing pressures in the semiconductor industry in the next few years.
Even with new supply coming to market, the world and the semiconductor industry will fail to satisfy the world’s insatiable demand for chips which has forced many end products to delay finishing products for the foreseeable future.
How well is NVDA really doing?
In one word, fantastic.
Nvidia's revenues and free cash flow have more than doubled while gross margin and operating margin are up big.
This terrific growth has been mainly driven by increasing demand for the company's graphics cards and artificial intelligence (AI) processors in gaming and data center segments.
Nvidia currently accounts for almost 80% of the gaming GPU market. The company's GeForce RTX-powered laptops are being increasingly used not only in gaming but also in areas such as esports, digital content creation, and streaming.
Many of my key employees are using PC-based NVDA GPUs to support and service the company.
Nvidia saw its gaming revenues jump 72% year over year to $9 billion last quarter.
In the first nine months of fiscal 2021, the company's data center revenues soared by 53% year over year to $7.4 billion. Increasing revenue exposure to the data center segment is also helping improve the company's gross margin profile.
The next big business could be the car business.
The company offers a complete platform solution, which includes hardware, software, and infrastructure (servers, computing power, and data centers) required to support autonomous vehicles.
Many car shoppers are quickly realizing that cars are starting to appear like an iPad on wheels.
Lastly, Nvidia is also well placed to secure a big portion of the evolving metaverse opportunity, estimated to be around $30 trillion.
The company's high-throughput GPU chips, data center CPU, and next-generation Bluefield data processing unit will play a major role as the hardware technology needed to support the metaverse.
No matter what anyone says, it is hard to construct a case in which NVDA is one of the losers of future and tech.
Not only do they boast the metrics of a growth company, but their brand recognition almost falls into the top tier of tech companies.
The real tech people will tell you this stock is a long-term keeper and despite the high volatility, don’t let that dissuade you from betting big on NVDA.
“I couldn't imagine a more incompetent politician than myself.” – Said Founder and Co-CEO of Salesforce Marc Benioff
Mad Hedge Technology Letter
February 11, 2022
Fiat Lux
Featured Trade:
(THE GROWING CLOUT OF TWILIO)
(TWLO), (ADBE), (CRM), (GOOGL), (AAPL)
Twilio (TWLO) cranked the ball out of the ballpark in its latest quarterly performance.
For a company that’s been burning cash for years, such as 2021’s performance of negative $950 million, analysts expected another few years of losses.
That’s not the only loss, the years before were saddled with unprofitable times like the $490 million burnt in 2020 and they still haven’t recorded a single profitable year yet.
So for Chief Executive Officer of Twilio Jeff Lawson to tell us that he expects Twilio to be profitable in 2023 is a gamechanger.
This guy has elevated Twilio to the dominant provider of business-to-consumer communications tools, powering messages such as the Uber notification you receive after ordering a ride, into an estimated $79 billion market for software to help optimize customer experiences.
Busting out the “P word” when many analysts were expecting to count the losses is a big deal for growth tech and TWLO can expect a new breed of institutional investors to enter the fold because of their positive signaling.
It’s not only them.
They have been tactical in a series of aggressive moves adding new companies to their core like Segment.
Segment, the customer data platform provider that Twilio purchased in 2020 for $3.2 billion is one of the reasons why the juice might be worth the squeeze.
It was the company’s biggest acquisition to date and the most-watched by investors.
The integration of Segment is expected to enhance the bulk of Twilio’s product portfolio.
It effectively functions as a repository of continually updated first-party customer information that businesses can use to improve marketing and support, with the goal of fostering loyalty and higher sales.
The timing of the deal was critical given Apple’s (AAPL) stricter data treatment and Google’s (GOOGL) narrowing of its web-tracking software.
At the same time, the acquisition of Segment nudged Twilio towards the direction of competing with Silicon Valley stalwarts like Salesforce (CRM) and Adobe (ADBE).
A key difference between Twilio and its rivals is the ability for developers within businesses to conveniently build customized programs on top of the company’s base tools.
Not only did management indicate that profitability is arriving next year, but they signaled strong revenue growth of over 30% for the next three years.
Easily said, TWLO is morphing into an indestructible force that is harnessing soon-to-be profitability, growth, and future success all wrapped into one company.
In this era, it’s hard to get all broad strategies working simultaneously because most tech firms will sacrifice profits for growth.
On top of that, management shared that they fully expect gross margins to surpass 60% in the long-term translating into a highly profitable company.
That’s the beauty of the software as a service (SaaS) model, the scalability works well inside the financial parameters which is why companies like Adobe and Salesforce bust out such great metrics.
Three other acquisitions Lawson believes will make a difference are Engage for the marketer, which is still very early in its cycle, most recently, a software called Frontline, which can be used by frontline workers and even sales teams to be more efficient, and lastly, Flex for the contact center.
All indications show this is nowhere near a “pandemic stock” and the fourth-quarter revenue jumping to 54% to $842.7 million while guiding for $865 million next quarter validates that.
This communication as a software company is sticky as can be and has a valid use case in many different apps that need to link the back-end interfaces with customer functionality.
TWLO will move from strength to strength going forward and this software company has a real chance to make its mark as not just a company considered second tier, but even a flight to safety type of tech stock which are few and far between.
The stock is still highly volatile which makes it easy to add on the big dips, but readers should avoid the small dips.
I am bullish TWLO.
“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)
