“In business, speed is everything.” – Said Founder and CEO of Zoom Video Eric Yuan
Mad Hedge Technology Letter
August 30, 2021
Fiat Lux
Featured Trade:
(A GREAT ALTERNATIVE IN THE AD TECH SPACE)
(SNAP), (AMZN), (FB), (GOOGL), (SDC)
I know many readers gripe about certain tech stocks being too expensive like Google (GOOGL), Facebook (FB), or even Amazon (AMZN), but that’s not the case for all high-quality tech names out there.
There are still deals to be had.
An undervalued tech name in the same industry, albeit more diminutive than the three I just mentioned, is ad revenue platform Snap Inc. (SNAP).
Their story is a good one and their revenue model appears to be maturing at an optimal time while still exhibiting many elements of explosive growth.
To see what I mean — Snap grew both revenue and daily active users at the highest rates they have achieved in the last four years.
Daily active users grew 23% year-over-year to 293 million — expanding revenue by 116% year-over-year to $982 million.
This outperformance reflects the momentum in SNAP's core advertising business and the positive results of their team serving ad partners helping them to generate a return on investment.
SNAP benefited from a favorable operating environment and continued success with both direct response and large brand advertisers — continue to leverage performant ad products to grow an advertiser base globally.
Adjusted EBITDA improved by $213 million compared to last year, marking the third adjusted EBITDA profitable quarter in the last 12 months as SNAP continues to demonstrate the leverage in their business as they scale.
They are also fully absorbed in making progress against revenue and Average Revenue Per User (ARPU) opportunities, which I believe will be driven by three key priorities.
First, driving ROI through measurement, ranking, and optimization.
Second, investing in aggressive sales and marketing functions by continuing to train, hire, and build for scale.
And third, building innovative ad experiences around video and augmented reality, with a focus on shopping and commerce.
The commitment to these three priorities, along with a unique reach and large, engaged community, allows SNAP to drive performance at scale for businesses around the world.
They have proven through results in North America that with a robust team, surrounding resources, and a local focus, they can accelerate revenue.
They are now taking that model and replicating it in several markets that they have identified as having a large digital advertising market and significant levels of existing Snapchat adoption.
It’s true to say they still have a lot of room to grow in some of the world's most established ad markets outside of North America, especially in Europe.
For example, in the UK, France, and the Netherlands, SNAP reaches over 90% of 13- to 24-year-olds — 75% of 13- to 34-year-olds.
SNAP continues to invest heavily in video advertising, with the goal of driving results for advertising partners and connecting them to the Snapchat Generation.
For example, SNAP worked with Nielsen to help U.S. advertisers understand how to more efficiently reach their target audiences via Snap Ads.
The Total Ad Ratings study analyzed how over 30 cross-platform advertising campaigns reached people on both Snapchat and television.
The analysis showed that Snapchat campaigns contributed an average of 16% incremental reach to advertisers' target audiences, and over 70% of the Gen Z audience that was reached by Snapchat was not reached by TV-only campaigns.
This is especially important as people are increasingly cutting the cord, and mobile content consumption continues to grow, presenting SNAP with a large opportunity to help advertisers reach the Snapchat Generation at scale.
Augmented reality advertising is delivering a return on investment that is measurable and repeatable, which is encouraging the incremental businesses to invest in AR.
For example, Smile Direct Club (SDC) leveraged a Goal-Based Bidding Click optimization for Augmented Reality (AR), which drove 49% of Snap customer leads in Q2 and was the most effective ad unit at driving traffic for their business compared to other social channels.
The success of the Lens ultimately encouraged Smile Direct Club to include AR Lenses as part of their long-term business strategy.
SNAP is betting the ranch on efforts to help advertisers improve conversions and ROI, and recently launched optimization for AR, which allows advertisers to optimize their AR campaigns for down-funnel purchases and fits well into the broader shopping strategy.
SNAPs bread and butter region of North America is hitting on all cylinders with revenue growing 129% year-over-year in Q2, while ARPU grew 116% year-over-year as they continue to benefit from significant investments made in sales teams and sales support in the prior year.
At a 30-thousand-foot level, the global internet services market was valued at over $450 billion in 2020, the year in which the pandemic fundamentally altered how society functions, accelerating a push towards digital offerings.
The internet market is expected to grow at a compound annual growth rate of 5% through 2027 and reach a value of $652 billion. US-based equities presently control close to 30% of the total global market share in the industry.
My takeaway from this is that even though there is GOOGL and FB in this space, the pie is growing so fast that there is easily room for others like SNAP.
One must believe that if SNAP keeps operating anywhere close to its pandemic performance relative to other companies, they are surely guaranteed to be a buy-the-dip company.
In terms of price action, that’s exactly what we have witnessed as the price has zig-zagged up by 300% — the stock price goes two levels up and retraces back one — rinse and repeat.
Just view the big down days as optimal entry points into a burgeoning social media platform and deploy capital.
In the short term, on the monetization side, I have to note that the fiscal comparisons will be more challenging in the second half as SNAP begins to lap the acceleration in top-line growth that they experienced in the prior year.
Once that sell-off gets baked into the equation via a 3-5% sell-off, readers should jump back into SNAP.
“It's not about working harder; it's about working the system.” – Said Co-founder and CEO of the American social media company Snap Evan Spiegel
Mad Hedge Technology Letter
August 27, 2021
Fiat Lux
Featured Trade:
(THE NEW NORMAL)
(QQQ)
So now it’s gonna be 2 years — that’s right — the work from home world is here to stay!
And I’m not talking about just Asia being in the early innings of a disastrous delta variant explosion.
Many managers had 1 year baked into the pie, but have we come to terms with the expectations that this work from home thing is here to stay?
Ostensibly, companies will never be able to get workers to come back to the office, then after 2 years, we will be too far down this road to make a U-turn.
Then as the delta variant breathes down our neck, will this turn into year three or four and so on with all the different variants down the pipeline.
Just in the last few years, several European offices allow heat days in the summer which offer workers remote working possibilities when cities sound off official heat warnings.
Some European cities usually deliver excess heat warnings if the mercury surpasses 95 degrees which is usually in June and July and the amount of these days are rising.
Japan might have to start giving mudslide, typhoon, or torrential flooding remote work days if we really want to go deeper in the weeds.
This is just where nature stands today versus how we work from a computer.
Many tech companies might see a 99% attrition rate if the managers move boldly and recall staff for in-person 5 days per week toiling and sharing the same oxygen within the same four walls as their coworkers.
One of the biggest takeaways from the pandemic after the initial uncertainty is the handoff of power back to labor which hasn’t happened in American capitalism for 50 years.
American capitalism has been crushing labor laws as long as I can remember from lacking of maternity and paternity leave to destroying unions and the list goes on.
If you’re a simple worker, you know you finally have options!
That is raising concerns among executives who have historically ruled with an iron fist and aren’t used to workers acquiring negotiating clout.
Remember in Europe, many companies require a 3-month resignation notice after 5 years of work instead of the quick 2 weeks in the U.S.
In France, it’s almost impossible to get yourself fired.
Return dates have been postponed repeatedly. Tech companies such as Amazon and Facebook have pushed them to early next year.
Lyft said it would call employees back to its San Francisco headquarters in February, about 23 months after the ride-sharing company first closed its offices.
Already, many employees are “bombarded” with messages from recruiters and friends, attempting to lure them elsewhere, and there are jobs galore!
10 million to be precise.
Managers want workers back in the office because they say there is a broader sense of connection and familiarity to the platform, to the culture of the organization—to me, this means they love controlling workers, period.
Many surveys have shown that productivity of working remotely is significantly higher than working in the office where introverted workers are bombarded with uncomfortable office politics and extroverted colleagues’ bravado. Not to mention that many companies like to have meetings to plan the next meeting and the hours of commuting that exhaust workers.
Even if 40% of workers are introverted, it would make sense to rollout a full remote workforce because the totality of the remote work is a net benefit over in-person work for the entire staff.
Perceptions of remote work have shifted as the pandemic spiraled out of control.
When professional services giant PricewaterhouseCoopers LLP surveyed employers across the U.S. in June 2020, 73% of respondents said they deemed remote work successful. By January 2021, when PwC released updated data, that figure rose to 83%. Now, more workers also say they want to stay at home full time. In new data released by PwC on Thursday, 41% of workers said they wished to remain fully remote, up from 29% in the January survey.
That doesn’t mean offices can’t have a once per quarter team bonding activity, but the verdict is clear, workers like waking up never to leave their house and get paid for that lifestyle.
The bigger deal now is workers are busy brainstorming how to upgrade or upsize their remote offices to become even more efficient.
They are even thinking how to upgrade their coffee and tea game, personally, I love my Made in Italy Bialetti stovetop espresso maker.
It hits the spot with high quality Arabica coffee beans.
On a personal level, if a company does commit to the in-person faux pas, I am in favor of only in-person every other month and the in-person portion should only be a maximum of 2 days per week that aren’t Monday or Friday.
That’s how little negotiating leverage managers and bosses have these days — I just don’t see how they can push the narrative more than that.
Also, if they want 5 days per week of in-person work, they will have to pay extra to get what they want and that’s not including the hike in salaries that have happened because of the recent inflationary pressures.
Ultimately, there is possibly no way to justify full in-person work in 2021 for a company that can function without it.
And think about it, any company searching to expand a workforce with 100% in-person work will be viewed as a company that has more red flags than a Chinese communist parade.
And I haven’t even talked about the disgust for people ditching their business casual clothing to work in their pajamas, then forcing them to clothe up again.
What a kick in the teeth!
There’s a whole host of reasons we haven’t even mentioned yet like young mothers who must consider a young child and proper child’s care or a worker who is tending to an elderly relative daily.
We can’t just sweep all this under the rug like we used to — these are real issues we must grapple with.
What does this mean for the Nasdaq index that the Mad Hedge Technology Letter predominately follows?
It goes higher.
It means we are fully reliant on tech for longer and this will seep into the share prices.
A broad swath of companies will benefit from this, and the bigger will get bigger because of the network effect.
Another year of this will solidify tech ecosystems and digital infrastructure will become better and stickier.
Companies like Google, Apple, Microsoft will bask in the glory of being highly desirable companies with earning accelerated revenues while stationed at the avant-garde of the U.S. economy.
And in the winner-takes-all tech economy, everyone else is second.
THIS IS THE NEW NORMAL!
“When something is important enough, you do it even if the odds are not in your favor.” – Said Founder and CEO of Tesla and Neuralink Elon Musk
Mad Hedge Technology Letter
August 25, 2021
Fiat Lux
Featured Trade:
(THE BEST WAY TO ALPHA YOUR TECH PORTFOLIO)
(MU), (PLTR), (AMD), (AMZN), (SQ), (PYPL)
Overperformance is mainly about the art of taking complicated data and finding perfect solutions for it. Trading in technology stocks is no different.
Investing in software-based cloud stocks has been one of the seminal themes I have promulgated since the launch of the Mad Hedge Technology Letter way back in February 2018.
I hit the nail on the head and many of you have prospered from my early calls on AMD, Micron to growth stocks like Square, PayPal, and Roku. I’ve hit on many of the cutting-edge themes.
Well, if you STILL thought every tech letter until now has been useless, this is the one that should whet your appetite.
Instead of racking your brain to find the optimal cloud stock to invest in, instead of scouring the grains of sand to find a diamond, I have a quick fix for you and your friends.
Invest in The WisdomTree Cloud Computing Fund (WCLD) which aims to track the price and yield performance, before fees and expenses, of the BVP Nasdaq Emerging Cloud Index (EMCLOUD).
What Is Cloud Computing?
The “cloud” refers to the aggregation of information online that can be accessed from anywhere, on any device remotely.
Yes, something like this does exist and we have been chronicling the development of the cloud since this tech letter’s launch.
The cloud is the concept powering the “shelter-at-home” trade which has been hotter than hot since March 2020.
Cloud companies provide on-demand services to a centralized pool of information technology (IT) resources via a network connection.
Even though cloud computing already touches a significant portion of our everyday lives, the adoption is on the verge of overwhelming the rest of the business world due to advancements in artificial intelligence and the Internet of Things (IoT) hyper-improving efficiencies.
The Cloud Software Advantage
Cloud computing has particularly transformed the software industry.
Over the last decade, cloud Software-as-a-Service (SaaS) businesses have dominated traditional software companies as the new industry standard for deploying and updating software. Cloud-based SaaS companies provide software applications and services via a network connection from a remote location, whereas traditional software is delivered and supported on-premise and often manually. I will give you a list of differences to several distinct fundamental advantages for cloud versus traditional software.
Product Advantages
Speed, Ease, and Low Cost of Implementation – cloud software is installed via a network connection; it doesn’t require the higher cost of on-premise infrastructure setup maintenance and installation.
Efficient Software Updates – upgrades and support are deployed via a network connection, which shifts the burden of software maintenance from the client to the software provider.
Easily Scalable – deployment via a network connection allows cloud SaaS businesses to grow as their units increase, with the ability to expand services to more users or add product enhancements with ease. Client acquisition can happen 24/7 and cloud SaaS companies can easily expand into international markets.
Business Model Advantages
High Recurring Revenue – cloud SaaS companies enjoy a subscription-based revenue model with smaller and more frequent transactions, while traditional software businesses rely on a single, large, upfront transaction. This model can result in a more predictable, annuity-like revenue stream making it easy for CFOs to solve long-term financial solutions.
High Client Retention with Longer Revenue Periods – cloud software becomes embedded in client workflow, resulting in higher switching costs and client retention. Importantly, many clients prefer the pay-as-you-go transaction model, which can lead to longer periods of recurring revenue as upselling product enhancements does not require an additional sales cycle.
Lower Expenses – cloud SaaS companies can have lower R&D costs because they don’t need to support various types of networking infrastructure at each client location.
I believe the product and business model advantages of cloud SaaS companies have historically led to higher margins, growth, higher free cash flow, and efficiency characteristics as compared to non-cloud software companies.
How does the WCLD ETF select its indexed cloud companies?
Each company must satisfy critical criteria such as they must derive the majority of revenue from business-oriented software products, as determined by the following checklist.
+ Provided to customers through a cloud delivery model – e.g., hosted on remote and multi-tenant server architecture, accessed through a web browser or mobile device, or consumed as an application programming interface (API).
+ Provided to customers through a cloud economic model – e.g., as a subscription-based, volume-based, or transaction-based offering Annual revenue growth, of at least:
+ 15% in each of the last two years for new additions
+ 7% for current securities in at least one of the last two years
Some of the stocks that would epitomize the characteristics of a WCLD component are Salesforce, Microsoft, Amazon-- I mean, they are all up, you know, well over 100% from the nadir we saw in March 2020 and contain the emerging growth traits that make this ETF so robust.
If you peel back the label and you look at the contents of many tech portfolios, they tend to favor some of the large-cap names like Amazon, not because they are “big” but because the numbers behave like emerging growth companies even when the law of large numbers indicate that to push the needle that far in the short-term is a gravity-defying endeavor.
We all know quite well that Amazon isn't necessarily a pure play on cloud computing software, because they do have other hybrid-sort of businesses, but the elements of its cloud business are nothing short of brilliant.
ETF funds like WCLD, what they look to do is to cue off of pure plays and include pure plays that are growing faster than the broader tech market at large. So, you're not going to necessarily see the vanilla tech of the world in that portfolio. You're going to see a portfolio that's going to have a little bit more sort of explosive nature to it, names with a little more mojo, a little bit more chutzpah because you're focusing on smaller names that have the possibility to go parabolic and gift you a 10-bagger precisely because they take advantage of the law of small numbers.
One stock that has the chance for a legitimate ten-bagger is my call on Palantir (PLTR).
Palantir is a tech firm that builds and deploys software platforms for the intelligence community in the United States to assist in counterterrorism investigations and operations.
This is one of the no-brainers that procure revenue from Democrat and Republican administrations.
In a global market where the search for yield couldn’t be tougher right now, right-sizing a tech portfolio to target those extraordinary, extra-salacious tech growth companies is one of the few ways to produce alpha without overleveraging.
No doubt there will be periods of volatility, but if a long-term horizon is something suited for you, this super-growth strategy is a winner, and don’t forget about PLTR while you’re at it.
“When we launch a product, we're already working on the next one. And possibly even the next, next one.” – Said Current CEO of Apple Tim Cook
