“We also welcome any regulation that helps the marketplace not be a race to the bottom.” – Said CEO of Microsoft Satya Nadella
Mad Hedge Technology Letter
October 27, 2021
Fiat Lux
Featured Trade:
(WHY I SUCCESSFULLY PREDICTED STELLAR ALPHABET EARNINGS)
(GOOGL)
Alphabet is a company whose tentacles effectively reach into every pocket of human life and commerce, and businesses of all kinds are increasingly adopting tools like AI-driven automation and insights to connect with customers no matter what stage of the recovery they're in.
Take 150-year-old Dutch luxury retailer, de Bijenkorf, that turned to Google Clouds’ local insights and automation to speed up cross-border expansion beyond the Netherlands and Belgium to Germany, France, and Austria.
With a multipronged approach, including shopping campaigns, de Bijenkorf drove substantial growth throughout the pandemic.
This is just one example of thousands that crystallize the impact Alphabet and its array of services can provide companies.
Returning visitors to online stores were up fourfold in the first half of 2021 versus 2020, and retail had another stellar quarter.
This is just one little snippet into how Alphabet does $65.1 billion of revenue per quarter, which is up 41% year over year.
I cannot sit here and describe every use case, but broadly speaking, Alphabet has been the beneficiary of explosive growth in digital over the last 20-some months.
As the world begins to reopen, shoppers are returning to stores.
Brick-and-mortar isn't dead. Instead, omnichannel is in full force.
Searches for open now near me are up 4 times globally versus last year.
Strong growth in local shopping queries means people are researching their visits to stores more often before they go. As a result, Google has seen more advertisers include in-store sales alongside e-commerce goals to drive omnichannel growth.
Adoption has nearly doubled over the past year.
Of course, these insights are all possible with a robust search system that almost all of us use — Google Search.
The company also experienced continued momentum in the Google Cloud with Q3 revenue growing 45% year-over-year to $5 billion last quarter.
At Cloud Next two weeks ago, Google unveiled hundreds of new capabilities, services, and solutions.
They also announced 20 new and expanded partnerships to support the growth and scale of Google customers around the world.
Google Cloud provides real-time data, analytics and AI is winning customers like Carrefour Belgium, Deutsche Post DHL, and Wendy's, who are unlocking data to deliver unique business outcomes.
More examples are GE Appliances, a Haier company that is integrating Vision AI into their next-generation smart home appliances. And iCare Retail is using recommendations AI to drive a 30% increase in customer click-through rate.
Customers see value in Google’s open scalable infrastructure that enables them to run workloads anywhere, on Google cloud, at the edge, or in their data centers.
Alphabet recently surpassed 50 million music and YouTube premium subscribers, including those on trial period, and YouTube Shorts continues to see higher adoption rates. In the past year, the average number of daily first-time creators more than doubled.
YouTube's reach is increasingly supplanting TV.
Advertisers and brands of all sizes continue to buy YouTube ad inventory at both ends of the funnel to create future demand while they convert existing demand. They're seeing upside.
A few recent launches include easier ways for businesses to show the local services they offer from hair extensions to auto repair across Search and Maps.
Second, local inventory ads that highlight which products are in stock and when to pick them up.
Third, instantly shoppable images with Google Lens and a new visual browsable experience on Google Search.
YouTube will offer shoppable live stream experiments with retailers like Sephora, Target, and Walmart directly from their favorite creators’ videos.
Lastly, what really caught my attention in the Q&A session with management was the plan to equip YouTube in terms of making it work well with VR, AR.
Management outlined that initiative as a major area of investment in terms of how to put the software and hardware together for this platform.
Naturally, my mind spins when I try to add up what type of revenue tailwind this might be, and at the bare minimum, it’s a game-changer.
Alphabet has separated itself from the rest of the pack and is one of the best tech companies today. Investors need to jump at the chance to buy shares if any discounts present themselves.
This revenue story has legs, and anyone would be a fool to write off Alphabet who clearly has a rock-solid plan going forward.
Alphabet should be bought on any dip or just held long term because their cash cow businesses are in-tact, and their strategic plans are as good as any other firm.
“If you are a big company, a big website, and lots of users come to your website, you will have attacks, and you have to deal with that.” – Said Founder and CEO of Baidu Robin Li
Mad Hedge Technology Letter
October 25, 2021
Fiat Lux
Featured Trade:
(HOW TO PLAY THE TECH EARNINGS SEASON)
(MSFT), (FB), (GOOGL), (AAPL), (SNAP)
The big guns of tech are coming up to the plate for earnings and they could use a strong showing as big tech’s narrative is on the ropes.
They are still the apex warriors of the stock market, and that position is hardly under threat, but there are whispers of a slowdown.
A recipe of high expectations mixed with cruddy forecasts could give us a dip to buy into.
This is what our portfolio would love to be gifted.
Don’t forget we have already seen some misses from tech companies like Snap (SNAP) which plunged 27% after warning that customers are cutting back on digital advertising spending.
The fallout sent other ad tech companies like Twitter and Google significantly lower.
This never used to happen to these companies and that’s important to point out because we just exited an era where ad tech companies could do no wrong.
Now it almost seems like they can’t do no right.
Readers got spoilt, earnings after earnings, these tech companies used to knock it out of the park and much of that high expectation is still leftover, perhaps a legacy concept from the bull market from 2008 to 2021.
These are the bellwether stocks of the broader market that have single-handedly put the rest of their market on their back and carried it higher.
Everyone wants to know if they can still hack it?
Technology companies in the S&P 500 Index are projected to report revenue growth of roughly 19% for the third quarter such as Alphabet at 38% growth, followed by Facebook at 37% and Apple (AAPL) at 31%.
I do believe that they will achieve these lofty estimates but they won’t overperform to the point where buyers line up in spades.
We aren’t in that type of environment now.
These companies have pricing power, and combined with underlying growth drivers, they generate high returns and reinvest in the business and perpetuate that strength.
The price action backs up my concerns with 85% of tech companies having beaten profit estimates, but the stocks have fallen an average of 2.4% the following day.
The lack of response means we are long in the tooth.
If this does become a “buy the rumor, sell the news” type of event, this will give us plenty of discounts to cherry-pick the next day.
The challenge of justifying their valuations means these companies aren’t getting their “free pass” that they used to pocket and manipulate.
They aren’t the darlings of the business world anymore — that title goes to cryptocurrency and bitcoin.
Facebook will tell us how badly Apple’s privacy changes are affecting its ad revenue model.
Consensus is looking for revenue growth of nearly 40% this quarter in Alphabet which in a normal year wouldn’t be that hard to beat but it’s a new normal now.
Ongoing monetization improvements in search advertising through product/AI-driven updates, along with greater-than-expected contributions from businesses like YouTube and Google Cloud can seem them meet their forecasts.
Microsoft (MSFT) expects revenue to grow around 20% in the quarter and we need to look out for if their cloud-computing business maintains strong demand.
Year-over-year comparisons get progressively tougher throughout the year which is an obstacle for MSFT’s durable growth portfolio of Azure/Security/Teams.
Apple could deliver great iPhone sales, but semiconductor shortages are a limiting factor, and the China risk is another big quagmire.
At what point will the Chinese Communist Party stop giving Apple such an easy go of it in China?
Regulatory uncertainty is an overhang — implications of the App Store ruling remain a wild variable.
Amazon is dealing with supply-chain challenges and labor shortages.
Last quarter, revenue missed expectations for the first time since 2018, and the company warned of the reverse of the pandemic-related tailwind for online retail.
Revenue is expected to grow a little more than 16%, the slowest pace since 2015.
The stock has been dead weight this year, which is unlike Amazon.
I do believe we will get a sprinkling of fairy dust that includes margin expansion, but some of these companies will experience a pullback and I will be waiting to aggressively take advantage of these deals.
“It is only when they go wrong that machines remind you how powerful they are.” – Said Australian Writer Clive James
Mad Hedge Technology Letter
October 22, 2021
Fiat Lux
Featured Trade:
(BOMBSHELL HITS AD TECH)
(SNAP), (FB), (GOOGL), (AAPL)
So, first the good news — SNAP expanded revenue by 57% year-over-year.
It was only a few years ago that this tech company was the backwater of social media, but it’s done its bit to catch up with the crowd.
SNAP targets the 18–29-year-olds and although not minted, there are pathways for a lifetime of revenue generation from this cohort.
In a rough environment battling Google (GOOGL) and Facebook (FB) and despite these challenges, they crossed $1 billion in quarterly revenue for the first time.
That was the good news and now you might want to cover your ears so put on those earmuffs.
The reason SNAP missed guidance by $3 million was because there have been changes to advertising tracking in Apple’s iOS system.
These ongoing changes to digital advertising were introduced as part of iOS 14.5 and were announced ahead of time, and now that move is started to suppress the bottom line for the social media giants.
SNAP anticipated some degree of business disruption, and unfortunately, their provided measurement solution did not scale as expected.
Basically what’s happening is that it’s more difficult for advertising partners to measure and manage ad campaigns for iOS.
Advertisers are no longer able to understand the impact of their unique campaigns based on things like the time between viewing an ad and taking an action or the time spent viewing an ad.
Real-time campaigns and creative management are hindered by extended reporting delays and advertisers are unable to target advertising based on whether or not people have already installed an app.
Without these business analytics, SNAP’s platform is less attractive because sale conversions are a great deal lower.
This impact was compounded by the ongoing macroeconomic effects of the global pandemic with advertising partners facing a variety of supply chain interruptions and labor shortages.
The ongoing magnitude and duration of these global supply and labor disruptions are inherently unpredictable.
Also, businesses do not have the inventory or operational capacity to support incremental demand.
SNAP expect customers to cut marketing budget given the diminished need to drive incremental demand at a time when supply chains are not able to operate at peak capacity.
This in turn that reduces their short-term appetite to generate additional customer demand through advertising at a time when their businesses are already supply-constrained.
The big question is: how bad will the Apple changes impact SNAP in the future?
SNAP is down 25% in today’s trading and that’s just them.
Facebook is down around 6% and Google is also off 3%.
Apple has signaled that they aren’t willing to accommodate the tracking techniques of the social media companies.
Clearly, investors are worried about the magnitude of the drop in shares, and this does a great deal to kill the momentum in the stock.
This isn’t the end of the world because I would like to point out that these changes happened in June and July, yet SNAP was still able to grow revenue by 57% year over year.
But I will say this will crimp the growth elements in the business model and lower the ceiling.
Growth rates of high 50% could start trending towards the lower 40% and investors hate that.
The company is still quite small — less than $90 billion of market cap.
This is exactly what SNAP didn’t want because comparatively speaking, Google and Facebook will be able to absorb this better with their war chest of capital readying itself to plug in the gaps.
The stock essentially gave back a year of performance in one morning, but I do view this as a buying opportunity and readers who have a long-term view will certainly profit once SNAP work itself through this problem, but it will be closer to a crawl up than big gaps up in prices.
“In the old world, you devoted 30% of your time to building a great service and 70% of your time shouting about it. In the new world, that inverts.” – Said Founder and CEO of Amazon Jeff Bezos
