“Inadvertent creation of a micro black hole, or some as-yet-unknown technology could spell the end of us.” – Said Founder and CEO of Tesla Elon Musk
Mad Hedge Technology Letter
December 1, 2021
Fiat Lux
Featured Trade:
(TAKE A REST FROM FINTECH)
(PYPL), (SQ), (BNPL), (AMZN), (TWTR), (AAPL)
The fintech trade is tiring — that is what the underperformance of stocks like PayPal (PYPL) and Square (SQ) is telling us.
Jack Dorsey’s Square has retraced around 25% from its peak and is bang on even from where it was 365 days ago.
Not what you want to hear if you’re a fintech trader.
The pullback from PYPL is even more precipitous declining around 40% from its peak.
Certainly, it would be cliché for me to say that the low-hanging fruit is gone from the fintech trade, but that’s exactly what is happening here.
Not only that, but I would also like to point out that most companies without a home-field advantage ecosystem are getting penalized for exactly that — not having an ecosystem.
Wasn’t it weird how the whole tech sector literally gave us a rip-your-face-off selloff the other day yet, Apple was one of the only tech stocks that reacted positively?
As we move into the late stages of the economic cycle, the goalposts are certainly narrowing for the tech companies, and that’s bad news for SQ and PYPL.
Another way to get penalized is to let that moat narrow which is effectively what has happened to PYPL and SQ.
And that’s the thing with PYPL, it’s just a way to pay, and not an ecosystem.
It plays second fiddle to that of wall gardens and the user trapped in it who is spending and can’t find a way out.
Another point I would like to make is that Twitter (TWTR) at these levels is an ideal buy-the-dip candidate precisely because it’s a great walled garden whose potential has yet to be untapped.
And readers shouldn’t let the mismanagement of the company by former CEO Jack Dorsey turn you off from a great long-term investment.
PYPL would kill for a platform like Twitter and instead needs to grovel to other strategic platforms to allow them to use PYPL’s technology.
PYPL is finally exposed, and I guess more accurate would be to say they are getting undercut by stickier technology that is more convenient to the consumer.
And what does that get you in late 2021?
Downgrades and slews of them which cut blocks the stock at its knees.
We just got one from Bernstein the other day and then it almost becomes a self-fulfilling prophecy with other analyst outlets doing the same thing in a copycat league.
Instead of catching a falling knife in SQ and PYPL, traders need to let these stocks breathe and find support where we know buyers will come in to breed confidence in an upward trajectory.
Easier said than done.
What has been all the rage so far denting PYPL and SQ’s model?
Enter Buy Now Pay Later (BNPL).
Naturally, the differentiated mechanism around which this technology revolves around is the delay in paying, which is never a good concept for a fintech player who rather gets paid ASAP.
Delayed payment is one headache, but then the downward force on fees is another monumental concern, if not downright scary.
This will no doubt trounce margin expansion moving forward and evidence of slowed growth in the latest quarter does not portend well for the company, especially as pandemic tailwinds continue to fade.
Another talking point is BNPL’s lack of credit checks meaning the quality of purchasers will naturally decline, may I even say attract fraudsters as well, and the companies will need to build up loss reserves to compensate for a riskier purchaser profile.
Klarna is another major BNPL company, and they were part of this new industry that took in around 20% of all sales on Cyber Monday.
That rather high number bodes poorly for PYPL in the short term.
Reinforcing the strategic hole of a lack of walled garden is that PYPL is desperate to cultivate partnerships like PYPL’s Venmo joining forces with Amazon (AMZN) — Starting next year, you'll be able to use the money anybody Venmo’s you to buy products directly from Amazon — so long as you live in the US.
But again, Amazon is infamous for replacing outside technology with its own in-house solution over time.
PYPL’s counter solution for BNPL is to enter the BNPL lovefest as well which will effectively trigger a race to zero.
Stopgap solutions will inevitably cannibalize its own business model.
Then let’s point to another walled garden — Tim Cook’s Apple with its Apple wallet.
It’s getting better and with the Apple Card, do they ever really need to spend one second considering a partnership with PYPL or SQ.
There is an inquisition going on in the fintech industry and big body blows will need to be landed for some clear-cut solutions that will ultimately lead to consolidation.
In this precarious environment, don’t get too fancy while fintech is getting elbowed out the way, head to higher ground where balance sheets can absorb just about anything.
“Our goal was never to create a better taxi.” – Said CEO of Lyft Logan Green
Mad Hedge Technology Letter
November 29, 2021
Fiat Lux
Featured Trade:
(THE FUTURE LOOKS BRIGHT FOR THIS AD TECH STOCK)
(TWTR), (FB)
Founder Jack Dorsey's stepping down as CEO of Twitter (TWTR) is great news for the stock.
Let’s not beat around the bush — it’s been brewing for some time.
It was only just before the pandemic that he announced his intentions to work remotely from Africa for 6 months.
Who does that?
Part of his job as CEO of a major Silicon Valley company is to deduce the pulse of the industry in real-time, and on the ground while rubbing shoulders with the rest of his kind.
Six-month African Safaris are romantic but don’t cut it when you are a top CEO of a Silicon Valley company and when major hedge funds are relying on advanced expertise to guide the company through a labyrinth of strategic and regulatory issues.
Whether he stepped down by his own will or was effectively forced out by activist shareholders, either way, the future stock price appears prime to shake off the years of mediocrity.
Why does Twitter need change at the helm?
Simply put, the stock has grossly underperformed the broader market for not only the last year but also the past 3 and 8 years.
The stock was trading around $70 in December 2013 and fast forward to today and the stock is around $50.
The underperformance comes under a backdrop of a cyclical bull market in which tech has been the leader with growth constantly reaccelerating.
Not only that, but Twitter also has a unique asset in which it has accrued massive scarcity value because no other technology company has anything like it.
Dorsey has mishandled the operation.
The nail in the coffin was certainly the user growth numbers in which Twitter was only able to grow the user base by 3% last quarter in North America.
Twitter announced earlier this year some major long-term goals in which one of them was to have 315 million monetizable daily active users by the end of 2023.
That number stands at 211 million users reported last quarter and is underwhelming.
Another objective was to surpass annual revenue of $7.5 billion by 2023 and as of last quarter, management said they were still on pace to achieve that, but I do not see that.
I agree they are on pace to hit that revenue target, but Twitter announced a highly disappointing forecast expecting $1.5 billion to $1.6 billion in revenue for the fourth quarter, which will be up 24%.
Twitter will need to maintain revenue growth in the mid-30% to achieve the numbers they promised, and Dorsey has proved that he is prone to botching forecasts.
How many fumbles will management let him get away with?
Granted, Dorsey was forced by activist shareholders to state explicit targets, and true, they were ambitious from the start.
However, much of the nudge in the backside stems from Dorsey largely underachieving as a CEO especially during the golden years of ad tech.
Investors saw when Founder and CEO of Facebook (FB) Mark Zuckerberg was able to release animal spirits for his ad technology platform and it’s fair to question why Dorsey can’t do the same for his company.
Even though harsh, comparing your company to Facebook is not everyone’s cup of tea, but Twitter is in the same exact industry as Facebook deploying the same exact products, so they can’t really complain about comparing.
In the last 10 years, Facebook has returned shareholders 17X their investment and Zuckerberg was agile enough to rotate from a stale Facebook platform to a booming Instagram platform.
The last major Twitter forecast called for a long-term target of 40% to 45% adjusted EBITDA margin.
For the fourth quarter, Twitter is looking for operating income in the $130 million to $180 million range. That would be down 29% the prior year.
Profitability per unit is decelerating.
As it stands, I do not envision Dorsey achieving his 2023 targets if he stayed and on top of that, changes to the iOS system have made ad targeting more difficult to extract the necessary monetizable data.
In an environment where data visibility is reducing, and other regulatory changes could be coming down the pipeline, the shareholders most likely felt they needed a change at the top.
Dorsey is by and large the legacy of what was left over after Twitter was created, and many investors know, it’s hard to kick out these tech CEOs that usually possess super-voting shares which makes it so they must vote themselves out to leave as CEO.
Dorsey didn’t have that level of moat around his position and eventually, the underperformance caught up to him.
Twitter will insert Parag Agrawal, the company’s chief technology officer, as new CEO in hopes of supercharging revenue, user, and margin growth that shareholders have been patiently waiting for.
If Agrawal can fix Twitter, then Twitter is easily an $80 stock.
Remember that Dorsey is still the CEO of Square and hasn’t been shy in expressing his passion for cryptocurrencies, and it’s likely there that he will finally be unshackled from the annoyance of running Twitter and get to focus on his favorite company.
Honestly, he hasn’t seemed interested in Twitter for a while, so it’s a win–win for both companies.
“Once things start moving, Uber will, too.” – Said Current CEO of Uber Dara Khosrowshahi when asked about the fallout from the coronavirus
Mad Hedge Technology Letter
November 24, 2021
Fiat Lux
Featured Trade:
(ONE OF THE BEST METAVERSE STOCKS)
(RBLX), (FB)
There aren’t that many metaverse stocks out there as of now, but I do feel that is about to change in the next few years.
The same thing happened with cryptocurrencies, and now not only do we have single stocks that offer pure crypto exposure, but we also even have crypto ETFs.
The natural path the metaverse will take is to enter through video gaming because of the ease of transition it will facilitate once the real thing is up and running.
There’s a fit right there because video gaming already possesses the parameters of a world set up for virtual activity; and yes, even though one could call Facebook a “world,” much of that is done through logging onto a webpage.
Populating a webpage is out of date technology and the new internet version 3.0 will be vastly different.
Enter Roblox.
Roblox (RBLX) is what Facebook (FB) would have wanted to already become but spent most of their time developing Instagram — essentially a juiced-up version of Facebook with historical videos and old photos.
That’s old news and old tech.
It won’t cut it as the metaverse guarantees a real-time, on-demand experience in virtual 3D form with humans controlling avatars that guarantees to become a more immersive experience with our 5 senses.
In short, it’s better than opening a web page. A lot better.
Roblox already relies on computer graphics and programmed virtual experiences. And with 49% of users under the age of 13, its demographics are a massive competitive moat because young people embrace new technologies quickly and are more prone to relying on digital tools to facilitate all parts of their lives.
The company is already building on its expertise in creating virtual reality experiences.
Last year, the platform hosted a virtual performance by rapper Lil Nas X that was attended 33 million times.
In November, it announced a collaboration with apparel company Nike to create Nikeland, a virtual space allowing gamers to play Nike-themed games and try on products.
Nike is preparing to hawk its products in the metaverse, which could open up revenue opportunities for platforms like Roblox.
What takes my breath away about Roblox is not the long-term vision of the company, although I have no complaints, but its short-term metrics which are blistering hot as revenue increased 102% over Q3 2020 to $509.3 million.
Find me a company of this type of magnitude expanding by over 100% per quarter and one will soon realize that they are few and far between.
To expound more on their overperformance — Average Daily Active Users (DAUs) were 47.3 million, an increase of 31% year over year
Roblox’s 3Q results highlight its early leadership in the metaverse and continued innovation to capitalize on materially higher long-term monetization opportunities.
Its premium is appropriate given the advertising optionality on top of their existing in-app purchase revenue streams.
Long term, the vision for brands is the exact same as games or play experiences in that I imagine an ecosystem where there are thousands and thousands of these personal hands-on experiences. They are created in concert between brands and possibly creators and developer communities.
It was 16 years ago, games and play experiences were new on Roblox. That has all led us to the beginning stages of the metaverse.
The high-level vision Roblox has is just as print and just as video have been and continue to be interesting ways for brands to interact with their audience.
Let’s look at the example of Vans World, which had over 40 million visits on Roblox, people who visited Vans World were able to wear Vans, go skateboarding, check out the shop, see what new items Vans had for sale.
It’s a deep way for brands to connect with their fans and is essentially the precursor before the metaverse exists but through a video game platform.
The bear case for Roblox until now has involved its primary reliance on a younger demographic, as there have been questions on its post-lockdown growth prospects, in an environment where it could be arduous to match the covid era success. But that is an argument that doesn’t hold water, as the userbase is aging up, with 17-24 year-olds currently the fastest-growing age group.
Strategically, Roblox has positioned itself as the tech firm at the forefront of the metaverse and we all know how first-mover advantage is critical in holding off competition with firms with stronger balance sheets and an army full of agile developers.
Roblox’s inroads with kids spending time in the virtual 3D worlds the gaming platform offers is a firm lock on future cash flow if the company can do its part to develop the metaverse and make sure its revenue becomes sticky.
The stock will grow 10X if the metaverse is a moderate success, and if it is not, investors will only gain about 200% in share appreciation. Not too bad.
“If the Starbucks secret is a smile when you get your latte... ours is that the Web site adapts to the individual's taste.” – Said Founder and CEO of Netflix Reed Hastings
