Tech Letter Archives

Not the Sexiest Tech Stock -- But Highly Reliable

Readers of this tech letter know that I have been wildly bullish on ecommerce company eBay (EBAY) precisely when vulture hedge fund Elliot Management acquired it in January 2019.

Alongside fellow activist fund Starboard Value LP, Elliott pressured eBay to revamp its operations. At their urging, the company pledged to sell off its Stubhub ticketing and its internationally-focused classifieds businesses, and replace its CEO.

My recommendation was spot on, and shares are up 220% since Elliot forced massive changes to first, the crappy management, and second, to the business model.

Luckily, those changes have staying power as Elliot exited their investment at the end of last year at then — all-time highs.

Elliot’s legacy will inherently be one of turning around eBay into what it is now, and I write to you today to say that eBay is coming into its own even after Elliot’s exit.

It’s not only about discontinued legacy tactics that led to low value, infrequent or one-and-done buyers.

Such an unsustainable strategy makes you want to tear your hair out.

But now, a fledgling buyer base is starting to evolve based on a re-optimized strategy.

These high-volume buyers are growing compared to a year ago and their spend on eBay is growing even faster.

This higher-quality mix of buyers increases value for sellers and will lead to improved health of eBay’s ecosystem over the long term.

Payments and Advertising initiatives continue to deliver a simpler product experience and meaningful benefits for sellers, buyers, and shareholders.

Managed Payments is now live in every market globally, and the transition is progressing faster than expected.

eBay management is now driven via a multiyear journey to become the best global marketplace for sellers and buyers, through a tech-led reimagination.

Their priorities are to grow the core, become the platform of choice for sellers, and cultivate life-long trusted relationships with buyers, by turning them into enthusiasts.

They finally completed the transition of eBay's Classified business, which was initiated by Elliot, to Adevinta.

This deal was originally valued at approximately $9.2 billion, but a closing in June had appreciated to $13.3 billion.

In June, eBay announced the sale of over 80% of their Korean business to Emart for approximately $3 billion, bringing together two leading e-commerce and retail companies that can unlock significant potential in Korea.

Revenue grew 11% driven by the acceleration in the Payments migration and advertising growth.

Luxury watches are also sustaining double-digit growth. Improved buyer trust is leading to strong cross-category shopping behavior similar to what eBay has experienced in sneakers. The next luxury category eBay is focused on is handbags.

They also expanded the My Garage feature to Canada, Italy, France, and Spain, which allows buyers to store their vehicle data, leading to a more tailored shopping experience. eBay plans to launch more technology-driven innovations in this category later this year to further build on their success.

To sum it up, eBay delivered strong short-term results, ahead of expectations, while transforming the company for the longer term.

Obviously, the moves they are making at the top level to create over $20 billion of shareholder value give the company capital to intensely focus on growing the core.

Now the focus is laser-like to grow that central engine of ecommerce and the Covid bump forced a realization to the executive level here that it’s a no-brainer to double down at the core when the revenue runway is there.

To migrate into something else while the green, lush vegetation is right there for them to harvest would be nothing more than lunacy.

Management even felt confident enough to spin the cash from the Korean, Classified, and StubHub deals into an increased 2021 share buyback program to $5 billion for an initial $2 billion.

Granted that eBay isn’t a YOLO growth company to throw money at and its implied Q2 guidance between $2.58 billion and $2.63 billion of revenue growing 8% to 10% isn’t going to make you do cartwheels in the street, nor is the 11% Q2 revenue expansion, but this is a solid tech bet whose stock will grind up.

Management is also on a run of profitable deals that are meaningfully segueing into higher share buybacks.

Sometimes readers don’t need to focus on the sexiest tech stock, and just go with old reliable.

Quote of the Day - September 24, 2021

Tech Letter

“The technology keeps moving forward, which makes it easier for the artists to tell their stories and paint the pictures they want.” – Said American Filmmaker George Lucas

September 22, 2021

Tech Letter

Mad Hedge Technology Letter
September 22, 2021
Fiat Lux

Featured Trade:

(SHOP UNTIL YOU DROP)
(SHOP), (ZM), (TDOC), (TIKTOK)

Shop Until You Drop

Tech Letter

E-commerce is now happening absolutely everywhere except the pipes in your house, and Shopify’s (SHOP) plan is to ensure that merchants using Shopify can sell pretty much everywhere.

That’s just how it is these days.

The internet town squares of modern day are social media and that corresponds to everywhere as people take social media to the streets in droves.

And so, it's important that wherever consumers could be potentially looking to purchase that Shopify merchants continue to show up there.

And from a merchant perspective, that it all neatly feeds back into a centralized back office where they can run their business.

So whether it's Google Search or it's on Instagram or it's on all the other channel integrations Spotify has, that is essential.

Now, again, over time, you are going to see more of these surfaces show up where commerce is happening, and Shopify is also integrating there to make sure that merchants can access those customers.

It’s SHOP’s job to stay one step ahead and that’s what they are exactly doing.

And of course, as more of those services come to life, that increases the complexity of commerce and running a business, a modern-day business, and that also increased the value Shopify provides to their customers.

Shopify and its platform do internet selling at a world-class level.

And yes, there are sometimes where it's faster, better, and more effective for them to partner with another technology company. They’ve developed a solid reputation for being a company that builds incredible software and particularly are renowned for having trustful partners.

But there are other times where SPOT needs to build it themselves because it's just mission-critical, and I have full confidence in them that they can actually deliver the best product on the planet.

This story and numbers are backed up by the latest short-term performance showing that SHOP is turning into an e-commerce juggernaut.

The latest earnings showed that year-over-year GMV growth in the rest of the world actually outpaced North America in Q2 2021.

We are seeing more international merchants that are joining and are succeeding on Shopify.

And fortunately, SHOP is stepping up its growth marketing, sales, and support efforts in places like Brazil and all over the world.

It isn't necessarily any particular focus on Brazil per se, but there are merchants around the world who are looking for a retail operating system and Shopify certainly is the priority.

Revenue in the second quarter was up 57% year over year to $1.1 billion, marking the first time Shopify exceeded $1 billion in a single quarter.

This was driven by strong performance from subscription solutions and merchant solutions segments.

The combined strength in revenue, improved margin profile, and lower overall opex spend as a percent of revenue contributed to strong adjusted operating earnings in Q2 compared to the same period last year.

Adjusted operating income was $236.8 million in the second quarter compared with adjusted operating income of $113.7 million in the second quarter of 2020, as revenue growth outpaced growth in spend.

Echoing the bit I said about social media being the townhall of ecommerce — this is something management takes personally, which is why they announced a partnership with TikTok to launch new in-app shopping features.

The deal will allow a select group of Shopify merchants to add a shopping tab to TikTok profiles and link directly to their online stores for checkout.

The understanding of buying things is now transforming shopping into an experience that's rooted in discovery, connection, and entertainment, creating unparalleled opportunities for brands to capture consumers' attention.

TikTok is uniquely placed at the center of content and commerce, and these new solutions make it even easier for businesses of all sizes to create engaging content that drives consumers directly to the digital point of purchase.

Social commerce is a rapidly booming market.

Sales on social media apps will surge 34.8% to more than $36 billion in 2021, according to eMarketer.

Partnering with the wildly popular short form video platform TikTok is a brilliant move for Shopify — one that’s likely to pay off quite quickly.

Back to the stock market — the stock today sits at $1,450 and has gone through a time correction shifting sideways for the past 3 months.

These levels still mean that SHOP is trading at PE levels around 75, but they are a growth stock so who cares about PE levels!

The past quarter’s sensational performance translated into expanding revenue by 57%.

No doubt that beating the comparable data from a covid year is turning out to be arduous with almost the effect of turning 2021 into a consolidation year.

That has certainly been the case for Zoom Video (ZM) and Teledoc (TDOC).

Management indicated that revenue won’t be growing at the same pace as last year, but readers shouldn’t stress because this lack of pace doesn’t suggest anything is wrong with the business model.

As long as Shopify sustains a growth rate of over 40% for the next few years which is easily attainable for a company accruing only $3 billion of revenue per year, the stock will go up.

That will surely happen, and I am guessing they can maintain a 50% growth rate.

Once the lower growth rates are digested, I envision this stock turning the corner and will rise to $1,800 by the middle of 2022.

Quote of the Day - September 22, 2021

Tech Letter

“Creativity is just connecting things. When you ask creative people how they did something, they feel a little guilty because they didn’t really do it, they just saw something.” — Said Co-Founder of Apple Steve Jobs

September 20, 2021

Tech Letter

Mad Hedge Technology Letter
September 20, 2021
Fiat Lux

Featured Trade:

(CHECK OUT THE SCARCITY VALUE OF THIS TECH STOCK)
(MP)

Check Out the Scarcity Value of This Tech Stock

Tech Letter

Rare earth elements shaped modern society into what it is today — just take a look at the silky-smooth touch screens on our Android phones to the Air Force’s newest fighter jets — rare earths are the building blocks of these products.

America's only rare earth mine, Mountain Pass is owned and operated by MP Materials (MP).

This open-pit mine of rare-earth elements on the south flank of the Clark Mountain Range, southwest of Las Vegas, Nevada supplied 15.8% of the world's rare-earth production last year.

It is the only rare-earth mining and processing facility in the United States, and it should be the bulwark of any long-term technology portfolio.

This is not a stock one should day-trade or even trade with a 4-week time horizon — put it deep inside your portfolio and watch it appreciate over the long haul.

One of the first things to know about rare earths is that their name is a bit of a misnomer. While their importance to consumer electronics, renewable energy, and national defense makes these materials very costly, rare earths are actually plentiful in the Earth’s crust.

The problem is that much like oil or gas, these metals can only be found in select locations around the world, hidden away inside mineral deposits that did not form with country borders or trade wars in mind.

MP has a mission to achieve restoring the full rare earth supply chain in the United States.

We are at the point where the Stage II project, the optimization of the Mountain Pass site, is moving beyond today's profitable concentrate production to separating rare earth oxide.

The success is critical to the global industry and supply chain security since today nearly 90% of all rare earth separation is done in China.

To contribute additional layering on why the global backdrop makes me highly bullish, I would like to analogize today's pandemic shock with the 1973 oil shock.

The ultimate takeaway is that an unexpected and significant global economic supply shock can end up reverberating for decades, not months.

In fact, the misunderstanding of transitory or short-lived events downplays the effects to the long-term cost structures.

Rare earths have experienced a rapid shift in psychology around prices in the supply chain meaning substantially higher and that’s here to stay.

Rising prices and fear of oversupply have become a further self-fulfilling prophecy across the economy.

The pandemic shock has happened under the backdrop of an already weary geopolitical environment with respect to supply chain security.

This industry has been crushed by demand backlogs for some things that stretch into next year and of course that assumes limited incremental demand in the coming months and no acceleration from an infrastructure bill.

I believe that if you do the math on some of the quantities implied by these projected investments, shortages and shocks are here to stay for quite some time despite the hundreds of billions of dollars of projected investment across new and legacy OEMs on EVs alone in the next few years.

Truthfully, I can say with audacity that at some point in the next five years, we will see at least one major global household name auto original equipment manufacturer (OEM) as well as many other small ones, fail or need a bailout due to failure to gain access to a critical material.

The last scaled and vertically integrated domestic magnet producer ceased operations and relocated to China in 2003.

Needless to say, MP is taking a concrete step towards representing a full rare earth supply chain in the United States.

Long term, are there other incremental potential customers aside from the EV supply chain expressing more interest in supply agreements?

It's broad based — not just EVs — I can tell you this with conviction.

Other spots of demand include wind turbines, drones, and many types of IoT (industry of thing) products.

I would highlight the industrial customers as chomping at the bit to get a solid pipeline of rare earths into their workshops — to get their engineers testing it in real time — it’s just not happening with this dearth of supply.

Then when you step back further and understand the semiconductor shortage — it’s a major headache — created chaos in terms of many tech companies not able to meet production deadlines simply because they have to stop production.

Investors should double down in terms of supply chain security, the first mover advantage is nothing to diminish for MP, and they are partnering with the U.S. Department of Defense due to rare earths being a national security issue.

They often host the DoD to discuss these critical issues and for the potential of future funding.

Therefore, for investors, the idea of investing in MP should be more about can I buy this whole company rather than just buying a few shares because their strategic position, tech knowhow, and revenue pipeline has a sort of unrelenting stranglehold that isn’t mirrored anywhere else in the U.S. tech ecosphere.

Then after one considers that the Chinese dilemma of protecting U.S. tech interests isn’t going anywhere anytime soon, investors must feel that any major dip in MP shares can be considered a premium buying opportunity into one of the building blocks of U.S. tech and pretty much the entire world at this point.

Quote of the Day - September 20, 2021

Tech Letter

“I’d rather be seen as evil than incompetent.” — Said German-American billionaire entrepreneur and venture capitalist Peter Thiel

September 17, 2021

Tech Letter

Mad Hedge Technology Letter
September 17, 2021
Fiat Lux

Featured Trade:

(AVOID THE SOFTBANK VISION FUND OF EUROPE)
(PRX.AS), (NPNJn.J), (9984.T), (LSE:MAIL), (CTRP),
(GOOGL), (APPL), (MSFT), (FB), (AMZN)

Avoid the Softbank Vision Fund of Europe

Tech Letter

Readers should stay away from investing in Prosus NV (PRX.AS).

Who is Prosus NV?

They are Europe's answer to Japan’s SoftBank (9984.T) and its Vision Fund, and they invest in tech startups all over the world including India, Latin America, and Europe.

To get more technical, they are essentially a registered Dutch company trading in Amsterdam as the international Internet assets division of South African multinational, Naspers.

Naspers (NPNJn.J) spun out this division from South Africa in 2019 and owns stakes in consumer internet companies in online marketplaces, educational software, food delivery, and fintech.

They were once heralded for their 28.9% stake in China’s Tencent (0700.HK) but that investment has backfired as Chairman Xi has cracked down on local tech practices including data handling and youth video gaming.

Much like the Softbank Fund, which has seen its share of shocking investments, they are playing the long game through themes of accelerating artificial intelligence and achieving stakes before many companies ever go public.

Prosus has other meaningful investments in Russian tech services Mail.ru (LSE:MAIL), China’s Ctrip.com International Limited (CTRP), and Germany’s DeliveryHero.

I can’t say I scratched my head when I heard that Prosus NV has agreed to acquire Indian online payments service BillDesk for $4.7 billion, making its largest global acquisition to date in the South Asian nation.

It’s typical behavior from Prosus.

The rapid growth of the payments industry worldwide has been helped by rising demand during the pandemic.

PayU processed $55 billion in payments in the year ended March 31, 2021, a 51% increase on the previous year.

BillDesk processed $92 billion of payments in the same period suggesting an acquisition price of more than 100 times earnings.

Prosus plans to combine BillDesk with PayU, its existing global fintech and payments business, which already has a strong presence in India.

The issue I have with this is the price that was paid, and the lack of value received; and Softbank has been guilty of the same cocktail of crimes.

Overpaying for Indian fintech — at about 20 times revenues.

I just don’t get it, to be frank.

But there should be significant synergies in combining the two businesses, as well as relatively high growth to come, given the attractiveness of the Indian payment market.

The deal to buy BillDesk, which was founded in 2000, is subject to regulatory approvals, including by the Competition Commission of India.

And that’s the thing; Indian regulators have almost adopted a hostile attitude towards foreign tech acquisitions, and rightly so.

India, aside from China, boasts the biggest army of tech workers in the world and regulators are increasingly viewing foreign takeovers as foreigners hijacking a domestic growth story before Indians can harness tech they built themselves.

Deals that have been pulled off run into red flags right away just from the owners not being locals, and this risk is real.

Prosus said Tuesday's acquisition brings the total it had invested in the Indian market to more than $10 billion.

Doubling down right here I feel is a little tone-deaf as to what’s happening in the broader balkanization of the global internet.

But I am not surprised that it’s Prosus, because their most notable investment is Tencent Holdings Ltd., and getting in on an Indian payments arena on the cusp of taking off looks good from far, but is it really when the Chinese tech industry has been crushed short-term?

More than 200 million more people will adopt digital payments there over the next three years, fueling a 10-fold increase in annual transactions per person to 220, Prosus said, citing Indian central bank estimates.

Investor interest in India is accelerating as Beijing pursues a campaign to rein in tech sectors from online commerce and fintech to gaming.

Opportunities in online shopping are particularly attractive, as e-commerce accounts for less than 3% of retail transactions. Tech startups in India are still paying to build a supply chain and delivery networks.

India had a record $6.3 billion of funding and deals for technology startups in the second quarter, while funding to China-based companies dropped 18% from a peak of $27.7 billion in the fourth quarter of 2020, according to data from research firm CB Insights.

The 2020 U.S. market sell-off was met with a double for U.S. tech stocks and from that moment in time, Prosus went from a peak of €109 to €67, which is a drop of around 40%.

Even on news of this Indian takeover, there was a 5% pop met with a 5% sell the news reaction that took the stock back to 2-year lows.

Investors are not convinced of this tech start-up story and the stock has become a sell-the-rallies type of stock which is tough to shake off in the short term.

Overpaying for emerging tech while Prosus’ largest investment Tencent is down 35% from its February 2021 peak smacks of desperation and seems like they are grasping for straws.

Let me remind readers that the stock is only up 9% from its 2019 public listing and certainly when we cross-examine and compare this to U.S. tech, the only conclusion I can come up with is that performance is pitiful.

I would rather moderately overpay for Alphabet (GOOGL), Apple (AAPL), Microsoft (MSFT), and Facebook (FB), and Amazon (AMZN) than grossly overpay for Prosus.

The U.S. simply takes better care of its tech companies from a regulatory point of view, as well as stock market, business models, capital markets, desirability to be employed here, tax benefits, etc. And there’s a synergistic effect where the sum of the parts is times more.

The deal murderer is that we are inching towards a rising rate environment which couldn’t be a worse backdrop for these exotic tech investments in a murky regulatory environment.

Conversely, big tech will be able to stomach any rate rise on the backs of their robust balance sheets.

Avoid Prosus unless it drops to €50 — that’s another 19% from current prices — that would be only for a quick trade because I’m not sold on this company long term.