Mad Hedge Technology Letter
August 4, 2021
Fiat Lux
Featured Trade:
(FINTECH CONTINUES THE MOMENTUM)
(SQ), (AFTPY)
This guy leading Square, Jack Dorsey, has accomplished some phenomenal things during his tenure in San Francisco.
But with the fast-moving tech sector, he’s venturing into uncharted territory as his outfit purchased Australian buy now, pay later provider Afterpay (AFTPY) for $29 billion in stock.
This is the largest buy-out done by Dorsey signaling a large wager on Square’s ability to catch up with more established retail banks.
Afterpay offers its 16 million users a way to get their purchases right away and pay for it in four regular, interest-free installments.
What a great deal for the poorer Millennial generation!
This is just another tool that Square will be able to integrate on its interface as another way to pull in more users and capital.
It’s almost a credit card proxy.
If payments are missed, Afterpay levies a fee and locks their accounts.
These late-payment penalties, along with fees paid by merchants, form the main sources of revenue for Afterpay. The system is popular among young shoppers who make up the bulk of bad credit scores.
Square’s popular Cash app gets another notch in its belt as it competes with Affirm and Klarna.
A secret meeting in Hawaii consummated the deal with executives reasoning that speed is paramount - banks and new entrants are aiming for a bigger piece of the buy now, and pay later services.
These offerings have boomed in the past year, as homebound consumers used them to borrow and spend online during the coronavirus pandemic.
There are reports that Apple is in the process of building a buy now, pay later feature in coordination with Goldman Sachs.
These services usually mean up to a few thousand dollars, which can be paid off interest-free.
That means such providers are not required to run background checks on new accounts, unlike credit card companies, and normally request just an applicant's name, address, and birth date. Critics say that makes the system an easier fraud target.
Executives at Square and Afterpay shared a desire to expand access to customers globally and saw combining forces as the best way to take on competitors.
Ultimately, Square has been slowly morphing into a bank, and this acquisition accelerates the process.
Square’s banking ambitions were already becoming very clear on the merchant-facing side of its business.
The company first applied for a banking license in 2017, and last year, it received conditional approval from the Federal Deposit Insurance Corporation (FDIC).
The new bank, called Square Financial Services and based in Utah, was structured as a subsidiary of Square and started offering small business loans this past March.
Even before Square Financial Services went into operation in March, Square had been giving merchants small loans, using its detailed knowledge of transaction volumes to help approve applications quickly.
These loans, though, were disbursed through a partnership with another existing bank in a 10-K filing, Square revealed it collected on these loans by automatically deducting a fixed percentage of every card payment a merchant accepted.
In this way, Square had disbursed nearly $9 billion in loans before its small business loan and banking functions came online.
Square is diligently using its vast technology infrastructure build-out to maneuver into financial services.
They have been ahead of the curve in rolling out cutting-edge services such as its crypto offerings.
Retail banks will have a hard time competing with Square since they aren’t technology companies that think of challenges in terms of the technicalities of delivering a digital experience.
The problem with retail banking now is that the people who lead them are still bankers and not digitalists in a technology-first world.
Unsurprisingly, Square’s stock cheered the news and was up 10% on the news.
This move also continues the momentum of Square massively overperforming as a stock, management team, and business model in the past 18 months.
I have been highly bullish Square ever since the inception of the Mad Hedge Technology letter and the company has only validated my calls for outperformance.
The stock is somewhat volatile and prone to 5-7% pullbacks and I do believe those are precious opportunities to wade into Square with dollar cost averaging.
After pulling back to $200 in May, the strong lurch up to $270 needs time to digest, and readers just need to wait for the next consolidation.
“An asteroid or a supervolcano could certainly destroy us, but we also face risks the dinosaurs never saw: An engineered virus, nuclear war, inadvertent creation of a micro black hole, or some as-yet-unknown technology could spell the end of us.” – Said Founder of Tesla Elon Musk
Mad Hedge Technology Letter
August 2, 2021
Fiat Lux
Featured Trade:
(ENPHASE IS WORTH A LOOK)
(ENPH)
Despite the global pandemic destroying large swaths of the U.S. economy, the solar sector has been a revelation and is one of the few industries that benefits from global warming.
Enphase Energy (ENPH) founded in 2006 has long been regarded as the world leading microinverter manufacturer.
What is a Micro Inverter?
A micro inverter is a very small inverter designed to be attached to each individual solar panel.
Based in the US, Enphase launched the first micro inverter, the M175 in 2008 but it wasn’t until the next-gen M190 was launched in 2009 that sales really took off.
Enphase has since established itself as an industry leader in micro inverter technology and has a huge market share in North America.
Under normal seasonality, the solar industry typically strengthens each quarter with the first quarter being the weakest boding well for the end of 2021.
The company reported revenue of $316.1 million, shipped approximately 2.36 million microinverters and 43-megawatt hours of Enphase storage systems, achieved non-GAAP gross margin of 40.8%.
The demand for microinverter systems continues to be well ahead of supply.
In Q2, Enphase experienced component constraints on the supplier AC Fed drivers, which resulted in microinverter shipment volume slightly lower as compared to Q1.
For the third quarter, Enphase continue to expect to remain constrained on microinverters, but the supply situation is better than what it was in the second quarter.
One of Enphase's critical competitive advantages is that the company operates more as a technology company than a commodity manufacturer.
While other companies do produce its main power inverter product, Enphase has market dominance in the micro-inverter segment.
For residential solar applications, micro-inverters do offer an advantageous alternative. Enphase's shipment growth over the past couple of years is the empirical evidence.
Even more salient, the company avoids ruinous capital expenditures by deploying contract manufacturing similar to peers with proprietary technology.
By leveraging these variables, Enphase has accelerated its high gross margins above 30% and now up to 40% in Q2 2021.
The company's lower margins last year were in part due to higher expedited shipping costs to satisfy demand but has solved that bottleneck and boosted gross margins.
Enphase's stable high gross margin is the x-factor.
Most solar module producers have high fixed costs which deteriorate margins and drag down utilization rates.
As a result, not only do shipments gyrate between industry cycles but also gross margin. While Enphase is also exposed to industry fiscal cliffs, high gross margins should be highly constructive even in down years.
During up cycles, Enphase's high gross margins and lower operating structure give it abnormally advantageous earnings leverage.
Enphase's earnings leverage will be even more dramatic once revenue growth reaccelerates after the pandemic filters through the U.S. economy.
Up until now, Enphase has been pigeonholed as an inverter company within the solar industry.
The company did offer a battery storage option, but it was not an overwhelming segment of total revenues.
This may change moving forward after the company's next-generation Encharge storage option released lately has shown glimpses of stardom among its competition.
Democrats hellbent on adopting clean energy might unearth an opportunity for sweeping change for US solar companies such as Enphase.
It’s already trending in that direction as a mega growth industry like technology.
Also, the Democrats are trying to crowbar in any climate-related infrastructure spending with adjacent bills.
If annual residential solar installations double with a slightly higher per home average, about one million homes would be converted to solar annually.
With over 139 million homes in the US, only a small fraction would be converted to produce solar electricity over the next decade or two, even if the US residential solar market doubled.
The main takeaway is that the solar market in the US still has huge upside under the Democrats and U.S. President Joe Biden.
Enphase has a current micro-inverter capacity of 10 million units annually and based on its per-unit assumption of 325 watts, can supply 3.25 GW annually.
Should the US solar market double due to beneficial policies, Enphase's potential market share will rise above 34%.
Ultimately, Enphase's high margins and fixed cost structure should not be underestimated especially under a systemic industry shift led by the US economy laser-focused on green infrastructure.
The secret recipe of high gross margin and low-cost structure make Enphase incredibly leveraged to top-line growth.
Lately, a new storage revenue stream and continued shipment growth in a rapidly expanding solar market should result in overperforming earnings growth.
New storage products will meaningfully add to earnings next year without diluting gross margin.
I first recommend this stock when it was trading at $120 in November 2020 and readers who bought into this story made a killing with the stock already at $189 today.
Enphase said its sales in the coming quarter should range from $335 million to $355 million, up about 1.5% from Q3 2020, and slightly above analyst expectations.
Gross profit margin, however, will move into reverse, continuing to fall below 40%, and perhaps as low as 37% therefore I would wait for a substantial correction before getting back into this one.
“Technology is a useful servant but a dangerous master.” - Said Norwegian Historian Christian Lous Lange
Mad Hedge Technology Letter
July 30, 2021
Fiat Lux
Featured Trade:
(THE BEST WAY TO STREAMLINE 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, 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 10-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
Mad Hedge Technology Letter
July 28, 2021
Fiat Lux
Featured Trade:
(THE REAL RULES OF TECH)
(MSFT), (FB), (GOOGL), (AAPL), (AMZN), (NFLX), (TSLA)
