“There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.” – Said Harvard economist John Kenneth Galbraith
Mad Hedge Technology Letter
November 12, 2021
Fiat Lux
Featured Trade:
(PEAK STREAMING GROWTH ISN’T THE END OF STREAMING)
(DIS), (NFLX), (AMZN)
Peak streaming — that’s what the indicators are telling us.
It’s been a good run — lots of money made so far.
The streaming industry is resting after the pandemic pulled revenue forward a few years.
It won’t be as easy now, as the maturity of the industry means that it becomes a war inside the war, instead of the tide-lifts-all-boats type of growth.
The latter is what everyone hopes, but doesn’t always get.
The world’s largest entertainment company, Disney, posted a significant slowdown in subscriber sign-ups at its flagship streaming service in the most recent quarter.
Disney+ added only two million subscribers last quarter bringing its total to 118.1 million.
Analysts had expected this quarter’s total to come to 125.3 million. During the previous quarter, Disney+ had added more than 12 million new subscribers.
First, the follow-through from consumers just wanting to experience outside and the services attached to them ring true.
The price hikes are also another net negative, as it makes consumers less enthused about signing up.
This had to be expected and many of these streaming companies would honestly admit that they couldn’t continue the pandemic era performance.
A reversion to the mean is not the end of streaming and Disney’s streaming services.
It is still on track to reach previous guidance of between 230 million and 260 million paid Disney+ subscribers globally by the end of fiscal 2024.
Dig deeper into the streaming data and it shows that customers in India didn’t sign up because of a delay of Indian Premier League cricket games that were to air on the service.
Another indicator of the pivot to outside business is the Disney theme park revenue climbing 99%.
The trend towards outdoor activities means a slew of cancellations of the monthly subscriptions.
Netflix was the rare streaming company that bucked the trend.
Netflix streaming service added 4.4 million subscribers—or about a million more than it had forecast—on the strength of new popular shows like “Squid Game.”
Moving forward, the bar rises quite a bit for the quality of content.
Viewers are demanding more or they are riding Space Mountain in Anaheim.
Streaming companies won’t be able to pedal out mediocre shows and movies, and secondly, there is no patience for customers as the number of streaming options has multiplied.
The deeper underbelly shows us that the general trend of linear TV cancellations and streaming signups appears to be continuing even if the rate of signups is slowing.
Disney, WarnerMedia, and AMC Networks all reaffirmed previous full-year and future year forecasts. And while pandemic gains may have slowed, production slowdowns and shutdowns have also ended, which will lead to a surge of new content for all of the streaming services.
Disney investors will be zeroed in to see if the company can pump out some blockbusters, but a glut of content might mean not enough eyeballs to digest these blockbusters.
Coronavirus-related production delays continue to disrupt its pipeline of content delivery.
Disney subscriber growth could ramp back up in the latter half of 2022 when they have better titles coming to market.
Another issue for Disney is if they are willing to produce more adult content and veer away from the younger cohort they are used to entertaining.
I don’t mean X rated, but the 25-44 aged bunch, everyone is sick of the superhero movies.
When it comes to attracting subscribers to Disney+, the company in November and December will be relying on a Beatles documentary, “The Beatles: Get Back,” additional Marvel Studios and Lucasfilm Ltd. shows and films that include a new “Home Alone” feature.
In April, Jeff Bezos said more than 175 million Amazon Prime members had streamed shows and movies in the past year.
Beyond the big three — Netflix, Disney+, and Amazon Prime — things get cloudier.
In July, NBCUniversal’s Peacock reported 54 million net new subscribers and more than 20 million monthly active accounts.
Other players with potentially strong platforms include WarnerMedia’s HBO Max, with a reported 69.4 million global subscribers, and Apple TV+, which is rumored to have about 20 million U.S. subscribers.
The major streaming competitors are also actively expanding their footprint abroad to acquire more growth, but the issue I have there is that the average revenue per user (ARPU) is nothing close to what it is in North America.
Although oversees revenue could provide a little bump to earnings, it won’t recreate their earnings composition.
Which leads me to a broader take on tech, it’s slowing down because we have been in the same cycle which was essentially initiated by the smartphone, the cloud, 3G super apps, and high-speed internet.
Those super levers are showing exhaustion.
It’s not a coincidence that Facebook’s Mark Zuckerberg was desperately trotting out his vision for the Metaverse and Apple removing personal data tracking from its ecosystem.
These are late cycle signs that shouldn’t be missed.
Big tech has become a great deal more mercantilist during the latter half of this bull market, yet we aren’t at the point of cannibalization, but I do envision that moment 5-7 years out from now.
Until then, high quality tech will grind higher while slowly raising their monthly prices, and the low-quality tech products will fall by the wayside because they lack the killer content.
“I know that you must be passionate, unreasonable, and a little bit crazy to follow your own ideas and do things differently.” – Said CEO and Founder of Salesforce Marc Benioff
Mad Hedge Technology Letter
November 10, 2021
Fiat Lux
Featured Trade:
(DATA ANALYTICS AT ITS FINEST)
(PLTR)
Investors shouldn’t stress too much about the drop in Palantir stock.
It’s still a great company that is on pace to do what it promised — achieve annual revenue growth of 30% or more through 2025.
In fact, they will easily surpass those projections, and any of these mini pullbacks that we are seeing now is just a matter of not fulfilling sky-high expectations and coming in a tad below that.
I can accept that and so should you.
Why is this data analytics company so great?
It is the connective tissue that connects analytics to operational systems which leads to winner business decisions.
Such architecture offers enterprises with action APIs that allow first model and simulate, and second, orchestrate and execute complex cross-functional transactions.
As the health crisis limited visibility and indicators, many started to trust the power of Palantir’s platforms and installed the technical infrastructure, to translate that into coordinated, orchestrated actions in the operations of their business.
Credit should go to Palantir’s developers who created a secret sauce to supercharge earlier-stage companies, enabling them to deliver a central operating system for their data and to scale rapidly from day zero.
These companies, they're not just managing their data and their operations, they are wielding them to blitz, scale, and conquer at a devastating rate.
Palantir’s clients originate from a diverse set of industries and continue to partner with innovative companies across industries such as automotive, biotech, healthcare, media, and the government.
Now, they are generating major product innovation that extends the openness and flexibility of their infrastructure for developers calling it Operational APIs or OPIs for short.
This liberates the ontology to serve as a nervous system, the cardiovascular system of the enterprise as a unified action and orchestration layer.
This manifests itself in a way that inventory can be allocated, production can be scheduled, orders can be fulfilled. To accomplish these deceptively simple actions requires communication with potentially tens of source systems transactionally.
Palantir allows you to orchestrate complex cross-system decisions to win and turn market disruption into competitive glory.
For example, a large industry company is unlocking value by integrating Microsoft Power apps with the Palantir Foundry platform. This powers workflows and writing data back to external operational and transactional systems
State defense contracts have been hyper-lucrative to PLTR.
PLTR has demonstrated its usefulness in the production of the A320 of RAM pickup trucks, auto parts, PPE, and tractors. PLTR can leverage its technology so customers can do it better, faster, and cheaper.
It’s a win-win for everyone.
And the defense industrial base is seeing that it can have the same impact on the production of fighter jets, naval ships, and land vehicles.
Lastly, their dealing in healthcare is shooting through the roof with cornerstone partnerships with the NHS, MD Anderson Cancer Center, 70 academic medical centers through the NIH's N3C, the Department of Veteran Affairs, and even more regional US providers means that PLTR is helping to manage over 300 million patient lives and growing.
Complex clinical care continues to be the recipient of cutting-edge products and continued innovation.
It’s not surprising that PLTR’s US commercial revenue growth accelerated once again to 103% year over year and this flavor of business offers the longest runway for PLTR to grow.
They more than doubled their commercial customer count.
Palantir management guided us to 34% growth in government revenue during the third quarter, while this segment was up 66% in the second quarter, but I believe this is highly misunderstood.
Just the nature of working with the government, the bureaucracy, and the single entity nature of it, deals aren’t going to be flying in left and right.
There is a processional nature to working with the US government because its such a monolith.
The more salient story here is the in-roads of the commercial business which will turn into its core identity.
The commercial business will be the x-factor driving PLTR into surpassing its revenue promises, and investors will acknowledge that as commercial revenue begins to overpower the defense contracts.
Revenue for the full year is expected to be about $1.53 billion or 40% year-over-year growth which conspicuously gets over any bar that tech growth companies are expected to jump over.
“Stock market bubbles don't grow out of thin air. They have a solid basis in reality, but reality as distorted by a misconception.” – Said Hungarian American billionaire investor George Soros
Mad Hedge Technology Letter
November 8, 2021
Fiat Lux
Featured Trade:
(HOW SOFTBANK GOT GLOBALIZATION ALL WRONG)
(SFTBY), (DIDI), (BABA), (CPANG)
Softbank’s Vision Fund, a technology-biased venture capitalist fund, is basically a leveraged massive bet on synchronized bullish behavior on the future earnings of global tech companies.
It assumes that technology is one of the critical underpinnings to global business and it's more or less a wager on an increased rate of harmonic globalization.
I get what they are trying to do, but in 2021, globalization is far from harmonic, and there are many in the camp that the world is wrought by a current phase of deglobalization.
This past quarter, Softbank presided over a precipitous drop in the Net Asset Value of their technology investments from $244 billion to $187 billion.
The -24.6% return and the pain from it were mainly induced from Softbank’s vast array of Chinese investments specifically dreadful performance from its bellwether leader Alibaba (BABA) whose stock has halved since the crackdown started.
CEO of Softbank Masayoshi Son, an ethnic Korean with a Japanese passport, described its current predicament as being “right in the middle of a storm.”
The problem with that is not being in a storm per se, but the timeline into transitioning into sunnier climate because just 1-2 quarters out from now, prospects appear bleak.
If one might remember, DiDi Global Inc. (DIDI), the Chinese ride-sharing platform, was the big shebang going public at a valuation that pegged the company at $68 billion.
Since then, not much has gone right as it was later found out that (DIDI) went public without the tacit approval of the Chinese Communist Party.
Falling out with the good graces of their overlords has meant a halving of the stock and Softbank has taken a loss of $6.1 billion on DiDi.
Even worse for the firm, there appears to be no savior or “next DiDi” IPO to save their Net Asset Value in the upcoming quarters.
That means we could be staring at the high-water mark which occurred 2 quarters ago.
Thank God for the outperformance in Europe and the United States that, in effect, accomplished some damage control for the bottom line.
And their recent short-term track record has been overwhelmingly poor.
Let’s take a glimpse into the other investments that have been chop blocked at the knees.
The losses keep rolling off the tongue with Uber-like trucking startup Full Truck Alliance Co. down $1.2 billion.
KE Holdings Inc., which runs the Beike online property service, lost $2.2 billion of value — the stock is down more than 70% from its peak and is trading below the IPO price.
And the failings weren’t just in China, take a stock that I have extensively bashed on — the biggest ecommerce company in South Kora — Coupang (CPANG).
Their poor past quarter’s performance meant that Softbank booked a quarter performance of a horrific -$6.7 billion.
I told readers to stay away from this one not because it is a bad company.
It was crystal clear in the underlying data that its business was saturated in Seoul, and there are no other big cities in South Korea, and I couldn’t see where the next phase of incremental growth would come from.
The idea was to grow abroad but everywhere else in Asia has been monopolized by local or brand-named ecommerce companies.
That was the bad news, and the silver lining is that ex-China, particularly the United States, they have been doing well and are highly profitable.
Slippage from this Vision Fund is quite notorious, from its misallocation of funds of shared office space company WeWork to overpaying for many other companies with a vanilla idea that technology will overcome any obstacle.
I would say that at a management level, not a lot is well thought out at Softbank.
I would like to remind readers that many of these new China investments by Softbank have just plain out ignored the geopolitical tensions.
They have nobody to blame but themselves because they certainly had time to divest from China and take profits which would have been the right move to do at that time.
Softbank’s parent company’s stock is basically half of what it was in March 2020 thanks to China and the Vision Fund will need to rely on its ex-China investments to pull itself out of this “storm.”
Another big plus is that the China losses are unrealized, but China has offered zero indication that their monumental crackdown on private business is over, and no amount of kowtowing will sway them from their lofty perch.
This could just be the start of their reign of terror over private business and that’s a scary thought right there.
Honestly, I opt for the more conservative stance of never buying Chinese stocks.
Why invest in Chinese tech when United States tech is so much better?
Not enough growth for you?
Then use options.
Softbank should and could have just poured all their investments into Silicon Valley, or just one company like Google, or even the digital gold of Bitcoin.
Good thing there is no ETF that tracks the performance of Softbank!
Invest at your own peril.
“Almost everything is like a machine.” – Said Hedge fund Manager Ray Dalio
