“When I was first getting started, I told myself that there's two people in the world when it came to technology: There's the people who created it and there's everybody else.” – Said Tech Investor and Owner of an NBA Franchise Mark Cuban
Mad Hedge Technology Letter
June 2, 2021
Fiat Lux
Featured Trade:
(WHEN TO GET BACK INTO SALESFORCE?)
(CRM), (SONO), (HON), (SAP)
Looking for that optimal balance between growth and profitability is the ideal but of course if a tech firm in that state is also leaning towards driving growth...
That company is Salesforce (CRM) and it looks attractive now after pulling back from its peak.
Investing in growth, especially in this insatiable demand environment, is simply the best thing a tech firm can do for a company.
That said, I am also a staunch believer that a focus on discipline makes for a stronger and more durable company.
Over the long term, I believe tech firms need to be able to deliver both revenue acceleration and versatility in its revenue acceleration.
That shows up for Salesforce in the $3.2 billion in cash flow on $5.96 billion in revenue which adds up to being up 74% year over year.
CRM’s numbers reflect a strong performance since the onset of the public health situation and their operating margin is producing almost as if it was completely redesigned from the bottom up.
CRM has raised its operating margin to 18% and they are on track to doing $50 billion by 2025.
Then there are unbelievable stories to digest that make readers understand the true power of CRM.
The Sonos (SONO) story is just one to absorb — they just had this 84% growth when they went to consumer using CRM products.
More importantly, how to integrate operations with a cloud platform is at the forefront of every CEO’s thinking.
This takes looking at the trends of this past year and again, the individual stories where CRM has made that big difference, like the Honeywell (HON) story when they shifted 7,000 salespeople from in-person to virtual customer meetings — customer meetings aren't going back to conference rooms only.
Then when the business environment dictates that CRM is helping through the Service Cloud, together with Field Service and Experience Cloud to enable Honeywell to seamlessly dispatch technicians for on-site product maintenance and proactive asset management, connected service partner experiences, and customer experience for scheduling appointments and instantly solving troubleshooting problems.
It’s field service capability that helped CRM to amplify an already close-knit relationship with Honeywell, and that's when management started to collaborate and say, wow, we could bring this to the aviation business in Honeywell to transform and streamline the work they do via the cloud.
To succeed in the all-digital work-anywhere world enabling you to digitize your entire customer experience and get back to growth is the overarching goal in this incredible 2021 economy.
The outperformance really stretches across the portfolio. When we talk about the fact that of the seven-figure deals, they, on average, included more than four of CRM cloud services, meaning they are not selling individual products.
CRM’s AI Einstein started doing over 100 billion predictions per day. And it's a great example of these platform investments that CRM did multiple years ago that customers and the whole economy go digital are benefiting from.
It means every email is more personalized and every e-commerce you paid for is suited to your interest and your needs, driving growth and success for customers.
MuleSoft is now doing 4.86 billion integration transactions every day. That is up 28% quarter over quarter.
Integrating these legacy systems so customers can move faster in the face of an economy that’s shifting more rapidly than ever before shows the importance of CRM’s acquisitions as it relates to the overall value proposition of Customer 360.
Total revenue for the first quarter was $5.96 billion, up 23% year over year and CRM’s vertical strategy continues to align products to strategic industries.
In particular, we saw strength in the public sector, which continues to accelerate as governments around the world turn to Salesforce Solutions. Service Cloud demonstrated another quarter of incredible growth at scale with Q1 revenue of $1.5 billion, growing 20% year over year, and Tableau continues to perform well.
In Q1, Tableau was in eight of CRM’s top 10 deals for the company and in more than 60% of seven-figure plus deals.
The company expects Q2 revenue of $6.23 billion or approximately 21% growth year over year and CRM even raised annual revenue guidance by $250 million.
They are about to pass SAP as the largest enterprise applications company in the world. And all the analysts have their models. I know they track SAP and Salesforce.
It really shows the whole world is going digital, and customers are connecting with their customers in a new way, and everyone needs CRM to do it or get left behind.
They also need CRM’s analytics — they need integration and CRM just happens to be the leader in that area.
CRM has undergone an M&A consolidation after heavily paying for acquisitions. This earnings report signaled to investors to expect these headwinds to drop off towards the end of the year and since the stock market is forward-looking, CRM will start to transform into the buy the dip tech firm it was once before these expensive acquisitions took place.
Readers should keep an eye out for Salesforce for really any substantial pullback and long-term, this software company is a reliable revenue accumulator with a strong brand name.
“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
Mad Hedge Technology Letter
May 28, 2021
Fiat Lux
Featured Trade:
(THIS CUTTING-EDGE CHIPS STOCK IN HYPERGROWTH MODE)
(NVDA)
Nvidia (NVDA) is another multilayered business with revenues coming from east and west and basically everywhere and really at a time when the gaming market is the largest ever.
Let’s make this clear: Nvidia isn’t a gaming stock, but its best business is centered around the secular gaming trend.
They have this massive installed base of GeForce users (Nvidia branded graphics processing units).
They have reinvented computer graphics as well as resetting the install base — created a pipeline of profits that take advantage of the boom in gaming which many as you know went gangbusters because of the shelter-at-home conditions.
There has been substantial development on the gaming front — at a time when gaming market is expanding fast, and peeling back the layers it sports — eSports — it's infused into art.
It is infused into social.
And so, gaming has such a large cultural footprint now, even to the point that it’s the largest form of entertainment in the world.
The emphasis of this experience is going to resonate for the long term and not only that, the phenomenon called crypto — Nvidia’s Crypto graphic cards named CMP will funnel GeForce supply to gamers.
The Nvidia CMP 30HX is a dedicated crypto mining card. The CMP 30HX is essentially a mid-range graphics card powered by Nvidia’s TU116 processor.
There is strong demand for this product, and I expect to see elevated sales for quite some time because of the dynamics of crypto and the avalanche of capital gravitating towards it not only institutional but from retail too.
And hopefully, in the combination of gaming, crypto, and data, Nvidia is primed to experience strong growth in core businesses through the year.
The data backs up Nvidia’s ambition with Q1 exceptionally strong with revenue of $5.66 billion and year-on-year growth accelerating to 84%.
They set a record in total revenue in Gaming, Data Center, and Professional Visualization, driven by their best product lineups and structural tailwinds across our businesses.
Starting with Gaming, revenue of $2.8 billion was up 11% sequentially and up 106% from a year earlier.
Channel inventories are still leading and Nvidia expects to remain supply-constrained into the second half of the year.
Now Laptops continue to drive strong growth this quarter with all major PC original equipment manufacturers (OEM) launching GeForce RTX 30 Series laptops based on the 3080, 3070, and 3060, as part of their spring refresh.
This is the largest ever wave of GeForce gaming laptops, over 140 in total as OEMs address the rising demand for gamers, creators, and students for NVIDIA's powered laptops.
They believe gaming also benefited from crypto mining demand, and Nvidia is separately addressing mining demand with cryptocurrency mining processors or CMPs.
The crypto CMP revenue was $155 million in Q1, reported as part of the OEM and other category. And our Q2 outlook assumes CMP sales of $400 million.
Data Center continues to be a growth driver with revenue topping $2 billion for the first time, growing 8% sequentially and up 79% from the year-ago quarter, which did not include acquisition Mellanox.
And then lastly, supercomputing; supercomputing centers all over the world are building out and Nvidia is in a great position to fuse together time simulation-based as well as data-driven-based approaches, which are called artificial intelligence.
Across the board, data center is gaining momentum and is the largest segment of computing and will continue to train deep neural networks with rising computational intensity led by two of the fastest growing areas of AI; natural language understanding.
Demand is booming across Nvidia’s markets and readers can expect increase in CMP, but they still expect the lion share of growth to come from Data Center and Gaming.
In Data Center business, their product lineup couldn't be better and they have a strong overall portfolio both for training and inferencing and they are experiencing strong demand across hyperscales and vertical industries.
The foundation has been laid to be a three-chip data center scale computing company with GPUs, DPUs and CPUs.
Fortunately for Nvidia, AI is the most powerful technology force of our time.
Nvidia partners with cloud and consumer Internet companies to scale out and commercialize AI-powered services.
They are democratizing AI for every enterprise and every industry.
With pre-trained models for conversational AI, language understanding, recommender systems, and broad partnerships across the IT industry, Nvidia is removing the barriers for every enterprise to access state-of-the-art AI.
From gaming, metaverses, cloud computing, AI, robotics, self-driving cars, genomics, computational biology, Nvidia is engaging in important work and innovating in the fastest-growing markets today.
Now to look at our outlook for Q2, revenue is expected to be $6.3 billion, and remember that the prior year when Q2 revenue was $3.87 billion.
This company is mesmerizing, growing from $11 billion in annual revenue to $16.68 billion in just one year says it all.
Growing revenue in the mid-80% means it will easily surpass the $9 billion in the first two quarters of the year paving the way for an almost $20 billion per year business.
Sure it’s not Apple or Microsoft but for what it does, they are best in show in an industry that is going through a massive supply headwinds.
The quarterly performance only reinforces the thesis that chip companies are a great place to allocate funds to and the support is there for a buy the dip investor attitude because of growing EPS which promotes share buy backs and capital returns to shareholders.
It’s hard to believe that investors could put their money elsewhere because tech still secures the vast majority of earnings in the business world and that train isn’t slowing down and the bullet train is clearly the chip sector in 2021.
“One machine can do the work of fifty ordinary men. No machine can do the work of one extraordinary man.” - Said American Writer Elbert Green Hubbard
Mad Hedge Technology Letter
May 26, 2021
Fiat Lux
Featured Trade:
(SHOULD READERS DIP BACK INTO AIRBNB AT $135?)
(ABNB)
Airbnb (ABNB) was disproportionately affected by the public health crisis because tech firm relies on travelers booking accommodation on their platform which they pocket a substantial commission.
To learn they only lost revenue of 22% over the past year was quite extraordinary because it could have been worse.
Looking forward, this is an intriguing stock that is trading around $135 today which is a more reasonable valuation from the $220 it was trading at after its direct listing.
I am net positive on Airbnb because the business is dramatically improving with the rollout of vaccines and the easing of some travel restrictions.
While conditions aren’t back to what they were, they are improving.
People's desire to travel combined with tightly managed expenses drove a return to positive top-line growth and materially improved adjusted EBITDA last quarter when Airbnb did quarterly revenue of $887 million.
It was an increase of 5% year over year, and it exceeded Q1 2019 levels as well.
Their business improved without the recovery of two of the strongest historical segments: urban travel and cross-border travel.
They expect the return of urban and cross-border travel to be significant tailwinds over the coming quarters.
What are some of the new trends from the travel data?
Travelers are visiting smaller cities, towns, and rural communities. And when people do travel, they’re staying longer. 24% of nights booked in Q1 were for stays of 28 nights or longer. People are not just traveling in Airbnb, they’re now living on Airbnb.
In New York City, in Los Angeles, they had almost as many nights booked for stays longer than 28 days as they had stays under 28 days.
Why do I see sustained health in this business?
Listing growth has stayed strong with more than 5.6 million listings which is more than 1 million more than they had this time in 2019.
The growth is in nonurban listings.
Their host churn in Q1 is actually lower than host churn in the same period in 2019.
The 30% growth in nonurban and vacation rental listings is a harbinger for growth to come and shows that Airbnb was able to build out more capacity for the future travel mania once borders open up.
One interesting thing to note is that business travel appears to be never coming back because many employees are working remotely. They're going to need to go back to headquarters occasionally. You're going to see longer stays going in cities and accessing offices in a hybrid sort of way.
But the bigger trend is going to be flexibility. I think that most of us working around the world if we are privileged enough to say this, are more flexible than we were before the pandemic. Because the world of Zoom means a world where we can work anywhere, it is a world where many people are also choosing to live anywhere.
As hosts begin to ramp up for the summer travel season, Airbnb is seeing Average Daily Rates (ADRs) in Q1 up 35% year over year. That was after being up 13% year over year in Q4. But the year-on-year comparable data were up against March 2020 that had a catastrophic performance.
Right now, 80% of nights booked in Q1 were domestic, and with domestic travel being consistent is now the main strength all around the world.
The rebound has been drastically earlier in the U.S., which has a higher average daily rate.
The incremental growth is in the non-urban single-family home and even larger homes, and those are just, on average, a higher ADR because bigger homes go for higher prices.
The problem I have is that the business model has changed away for this cash cow of cross-border travel where it used to be 50% of total nights were cross-border nights.
International travelers are usually willing to pay a premium when they go to different countries compared to domestic travelers who understand the local pricing better.
If net cross-border nights don’t come back to pre-2020 numbers, and I don’t think they would completely, it’s clearly a net negative for the company.
Management has kept saying, “Our model is inherently adaptable”, yet what is the game plan if the blur between work and life corresponds to more 6-month and 1-year leases signed which would cut out the need for Airbnb?
Is Airbnb so adaptable they can slug it out in the property management business?
Management kept saying that trends are a “little hard to pinpoint” but it's clear that if these 28 days or more stayers get more comfortable with a location and start dabbling more with long-term leases or even long-term property ownership, or might I even say, for the elite to purchase multiple vacation homes, then the use case for using Airbnb is minimized greatly.
What I understood from this public health crisis is that consumers have become a great deal savvier in how they allocate money to housing and that means vacation housing too along with what they demand and expect from it.
This new machination inherently means that servicers and listings will need to increase the quality of their listings since workers who work from home will be living in the home more and not just drop their bags upon entrance and go to the beach for a day or 2.
Many listings have incomplete kitchen equipment and the lowest option internet and other ugly shortcuts.
Yes, I do believe there will be a revision to the mean via the “tailwind to urban travel and cross-border” but that mean has a lower ceiling than before 2020 which will cap the underlying shares’ potential appreciation.
I also believe that non-urban, suburban homes won’t be able to meet capacity for the U.S. demand because of HOA rules and stringent enforcement of them. Just read about the Lake Tahoe ordinances to get a little flavor about how difficult it is to put Airbnb places where they don’t fit naturally. It’s easier to get away with it in big cities when entire buildings and even blocks are Airbnb investment properties, but not in suburbia.
Travel will come back hardcore and even 8% of Google search today is travel-related.
I do believe Airbnb is a good stock to buy right now, but the world has forever changed, and their business model has been damaged by it.
I’ll go for the low-hanging fruit now in Airbnb, but their growth story has been in fact pulled backwards instead of forward, and that wasn’t supposed to happen to “tech” companies.
That being said, they are good for a short-term trade today, but I would have said it was a buy-and-hold before the pandemic.
Enjoy this recovery story but remember to take profits when momentum fizzles out.
“The Internet is so big, so powerful and pointless that for some people, it is a complete substitute for life.” - Said English Journalist Andrew Brown
