“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
Mad Hedge Technology Letter
May 24, 2021
Fiat Lux
Featured Trade:
(THE MOST UNIQUE SOFTWARE COMPANY TODAY)
(MSTR)
Here is an interesting “software” company for you.
MicroStrategy Inc. (MSTR) is a tech company offering business intelligence, mobile software, and cloud-based services but is it really?
From last year, they have transformed into a de-facto bitcoin proxy because of a relatively progressive strategy of pouring their financial resources into the digital gold asset Bitcoin.
Sure, when riding high, it looks great on the balance sheet, but don’t get me wrong, this is a high-risk proposition for a tech firm that is supposed to be selling business intelligence software.
We all like short-cuts and this is the mother of them as the CEO of MicroStrategy Michael J. Saylor hatched a plan to leapfrog the crowded software scene to make a name for himself.
This is definitely an indictment on smaller software companies showing their plight. It’s not easy competing against the big boys.
In 2017, when the firm had no Bitcoin strategy, MicroStrategy earned $504 million in total annual revenue.
Fast forward to 2020, they did $481 million in revenue.
That is terrible.
A company this small and flaccid isn’t going to find an incremental buyer when they are contracting total revenue.
The game just doesn’t work like that.
It’s plausible to say that Saylor was in desperate straits and his reach for an ultra-high risk, high reward strategy has paid off handsomely so far.
If we roll the clock back a year ago, MSTR had approximately $500 million of cash assets and no expectation of any investment gain from alternative assets.
And as of their earnings report, they had $5 billion in Bitcoin assets, but more like around $2.5 billion today.
If Bitcoin grows, the company is going to benefit, the shareholders will benefit.
Clearly, if you’re a MicroStrategy shareholder and you have a negative sentiment on Bitcoin, then MSTR is not the right company for you, but if you have a positive sentiment about where Bitcoin is headed, it’s worth a look.
MSTR has aligned its balance sheet and shareholders' interests with that sentiment.
Not only does MicroStrategy benefit from the profitability of bitcoin, but they are parlaying it into favorable debt issuances like the past quarter’s convertible debt issuance.
From a revenue standpoint, total revenues in the quarter grew 10% year-over-year which is the strongest quarterly performance in five years, and it beats negative growth.
The prior years’ comp was an easy year over year beat and MSTR was up 69% in perpetual license revenue, and on the cloud side, they were up 26% year over year, and cloud billing is up 19% year over year.
These metrics are some of the best they’ve had in history, and I would say we’ve seen growth because the existing customer base is primarily large enterprises and many are still buying on-prem and obviously, MSTR is not going to turn that down.
The second key factor is they are actively moving people off of perpetual maintenance and moving them to term licenses, which will show up in product license revenue.
HyperIntelligence continues to be an important entrée into new customers and as an important indication to customers of new product innovation. MSTR’s SaaS version of HyperIntelligence has seen increased adoption, as well as serving the foundation of future enterprise business intelligence (BI) SaaS offerings.
That’s great that their business intelligence software is growing 10% year-over-year but it’s their Bitcoin acquisition strategy in the first quarter that is making headlines.
MSTR completed a second convertible notes offering, this time selling $1.05 billion in aggregate principal of notes, and got even better terms than their first convertible notes offering with a 0% coupon and 50% conversion premium.
With this new capital, on April 5, 2021, they announced the purchase of an additional 253 Bitcoins for $15.0 million at an average price of approximately $59,339 per Bitcoin, inclusive of fees and expenses. On April 12, 2021, they announced that going forward, non-employee directors will receive all fees for their services on the company's board in Bitcoin instead of cash.
Before that, they acquired an additional 19,452 Bitcoins for $1.026 billion or approximately $52,765 per Bitcoin. Overall, in the first quarter, they purchased 20,857 Bitcoins for $1.086 billion or $52,087 per Bitcoin and ended the quarter holding 91,326 Bitcoins at an average price of $24,214.
The company estimate that current market value Bitcoin holdings now exceeds $5 billion, including $3.1 billion of unrealized gains, but that amount has halved since Bitcoin sold off.
Management has said they plan “to deploy additional capital into our Bitcoin acquisition strategy.”
I understand they are doing a little “Elon Musk-esque” dip into Bitcoin to gentrify their balance sheet, but what I see is MSTR buying up Bitcoin no matter what the price is even up to the latest peak of around $60,000.
That’s borderline irresponsible.
I get it that their Bitcoin commitment has elevated their brand dramatically in the world and the Bitcoin community is adding something of the order of 10 million people a month, perhaps even more millions a week.
But, and it’s a big but, management shouldn’t be blindly buying up bitcoin with borrowed money at any price.
It’s hard to believe there is no nuance to this strategy.
Aggressively buying Bitcoin with guns blazing is a fool’s game and the balance sheet could get wrecked if Bitcoin has a few bad weeks and drops down to $10,000 which is entirely plausible.
For me, this wreaks of their core products not being able to viably compete with high quality business intelligence products.
I agree that MSTR has a real product, this isn’t a pump and dump scheme, but shareholders really need to question what management is thinking by pouring more capital into Bitcoin at $59,000.
Why not use the debt issuance to build better core products to win more long-dated contracts?
At $59,000, there is a higher chance in the short-term that Bitcoin will retrace to $40,000.
MicroStrategy shareholders must ask themselves at what price will MSTR not buy Bitcoin. I would love to hear that answer.
Especially when investors have seen the asset fringes blow up like the weakness in SPACs and perceived inflation scares running riot all over the news wires.
The stock hit a high of $1,272 in the beginning of February and is down 300% from the peak today which is still 300% higher than where it was before the Bitcoin mania hit in mid-2020.
Got all that?
So again, everything is relative, and I wouldn’t touch this one unless it reverts back to $300 where there is technical support which would mean a substantial drop in Bitcoin from the current price today.
“In the startup world, you're either a genius or an idiot. You're never just an ordinary guy trying to get through the day.” – Said Venture Capitalist Marc Andreessen
Mad Hedge Technology Letter
May 21, 2021
Fiat Lux
Featured Trade:
(THE STRENGTH OF AMD)
(AMD), (INTC), (TSM), (XLNX), (SMH)
Advanced Micro Devices Inc. (AMD) is a chip stock that needs some serious attention, even more so because of their new share repurchase program that has no end date.
They are led by one of the best tech CEOs in Silicon Valley Lisa Su, who has been in charge since 2014.
She transformed the company into a profitable one, secured incremental market share from Intel Corp. (INTC) and diminished concerns that AMD has a weak balance sheet.
Strength begets strength as AMD introduced a $4 billion stock buyback plan, its first repurchase authorization since 2001, signaling the chipmaker’s robust momentum in their own business.
The buyback will be distributed through cash from operations and will total about 4% of AMD’s market value.
AMD's stock in the high $70s right here looks like a screaming buy.
Share buyback is not only something Apple and Microsoft do, but other smaller players are getting in on the action displaying the great breadth and depth of the tech market.
We don’t see this anywhere else in any other industry because profitable companies simply return money back to shareholders and tech has the luxury of accelerated future earnings and revenue growth to buttress this.
Cut it up however you want, the tech sector is responsible for the bulk of earnings as it relates to the total market and that won’t change.
AMD delivered $832 million in free cash flow in Q1 2021.
The company has now pivoted from a net debt position to a balance sheet that will harness over $3 billion in net cash by the end of the current quarter.
This strength of the balance sheets is even pertinent if you strip out the Xilinx deal which will bring in their own array of financial pluses to add on to the might of AMD's current cash flow situation.
An accumulating share count is something to be wary of in any stock and given that AMD had the opportunity to reduce share count, it was a no-brainer.
Years ago, AMD had 766 million shares outstanding, and it would have climbed to over 1.6 billion considering the Xilinix shares by the end of this year.
This obviously makes EPS metrics appear rosier in future earnings reports and inching them up is a nod to AMD CFO Devinder Kumar who usually has a big say in these decisions.
Under Su’s helmsmanship, the company’s market value has toppled the $90 billion mark from only $2 billion just seven years ago.
That was the year she was named CEO and she hasn’t looked back.
Su’s key to returning AMD to profitability was to rely on the quality of product delivered — these new products snatched market share from Intel.
As what a savvy CEO usually does, she has played down success in order to tamper down high expectations in the stock price and business by saying, “without a doubt it does not get easier.”
I don’t think it was ever easy to begin with but that’s beside the point.
Su’s AMD has gone from an inferior chipmaker building cheaper knockoffs to Intel products to a premium provider of computer processors that win orders solely based on superior performance.
AMD has already repurchased $77 million of stock in its prior buyback plan two decades ago.
Su has rejuvenated AMD’s reputation and performance at a critical juncture and as chip shortages become the norm in this boom-and-bust industry.
The public health problem triggered a crazy demand for remote work and the devices that facilitate a work from home economy.
During this sensitive period, the world’s largest chipmaker, Intel, had struggled to develop its manufacturing technology, one of the foundations of its decades-long dominance of the computer industry.
The chip shortage is an example of the periodic mismatch between supply and demand in the semiconductor market whose companies avoid dipping into capital expenditure until capacity is stretched to the extreme limit.
This is an expensive business to get into, constructing high-performance chips is time-consuming and an engineering headache, thus barriers of entry are incredibly insurmountable.
Most new chip foundries and designers don’t happen unless sovereign nations make it a national security issue which is the case lately.
Ancillary industries started to hoard chips 6-8 months ago and I believe that these pressures will begin to subside soon as supply chains start to normalize.
These longer-term contracts to secure inputs we are seeing now will eventually be reduced easing the supply crunch as demand begins to slow and capacity begins to rise.
Even Su predicts supply of AMD chips, which are built by Taiwan Semiconductor Manufacturing (TSM), will catch up throughout 2021.
As the tech consolidation rips through chip stocks, I see this as an unequivocal buying opportunity for the strongest of names.
If AMD continues to build on their strong financial position — continue to offer more share repurchases and even a sweet dividend — it clearly means they are building premium products buyers want and that satisfaction not only filters down to the end-user of their chips but the owners of the stock.
I first recommended this stock at $18 at the advent of the Mad Hedge tech letter in 2018, and I am still bullish AMD long term period.
It was a great company in 2018 — it’s gotten even better in 2021 — don’t miss out.
“Science and technology are a propellant for building a thriving country, and the happiness of the people and the future of the country hinge on their development.” – Said Supreme Leader of North Korea since 2011 Kim Jong Un
Mad Hedge Technology Letter
May 19, 2021
Fiat Lux
Featured Trade:
(THE CURRENT STATE OF U.S. ECOMMERCE)
(AMZN), (WMT), (KR), (COST)
Was 2020 a one-hit-wonder for U.S. ecommerce sales?
Hardly so.
US retail ecommerce sales grew 33.6% in 2020, reaching $799.18 billion.
As the public health situation fizzles out, in-store shopping will refresh itself, and a share of consumer spending will revert away from retail and toward services like travel and live entertainment.
Consensus has it that U.S. ecommerce will grow 13.7% this year, reaching $908.73 billion, and although that would be a great year under normal circumstances, annualized growth of 13% appears pitiful compared to the pandemic numbers.
It was only at the beginning of 2020 that ecommerce was expected to grow 13.2% from 2019, but the health crisis ignited ecommerce sales to $799.18 billion.
Ecommerce growth from a much higher base is a hard endeavor as all the low-hanging fruit has been harvested and it’s just harder to push the needle higher.
What does this all mean?
Ecommerce represents a larger piece of the pie than ever before and that comes with greater influence.
I now expect ecommerce sales will account for 15.5% of the $5.856 trillion in total retail sales this year.
Ecommerce sales will surpass $1 trillion next year.
It also means that digital commerce has never been so strong in terms of a percentage growth basis, net total basis, and clout.
However, growth rates will need to moderate first before they can reaccelerate.
Looking at the financial year, look for sales to rise by a low single for the big-box retailer Walmart (WMT) showing that numbers are getting ahead of themselves.
Walmart is an accurate bellwether stock that gives us deep insight into the state of ecommerce, and they said it sees earnings rising by a high single-digit percent.
Guidance aside, Walmart had a great quarter.
Every segment performed well, and I am encouraged by traffic and grocery market share trends.
But customers clearly want to get out and shop which is why growth rates will most likely drop around 13% for ecommerce instead of staying north of 30%.
Walmart’s ecommerce continues to grow and stimulus in the U.S. had an outsized impact, and the second half has more uncertainty than a typical year because the reopening is a once-in-a-lifetime phenomenon and it’s hard to pinpoint the shake out.
Remember, there most likely will not be any broad-based stimulus payments in the 2nd half of 2021 and 2022 that will be rolled into Walmart ecommerce sales.
Walmart is clearly chasing the leader of the pack Amazon.
Amazon is on track to become the largest retailer in the United States within the next four years, followed by the aforementioned Walmart and Kroger.
Kroger has been a fashionable pick amongst hedge fund managers in the beginning of 2021.
Amazon (AMZN) gross merchandise value sales (GMV) will top $631.6 billion by 2025, representing a compound annual growth rate of 14% between 2020 and 2025.
The same report showed us that Walmart’s ecommerce sales are set to grow at a five-year CAGR of 14.9% from $43.6 billion in 2020 to $87.5 billion in 2025, accounting for 16.7% of total retailer sales in 2025.
Ecommerce is the only channel that will grow in the next 5 years, everything else, such as offline retail will contract or go sideways at best.
It’s a death by a thousand cuts type of dilemma for anyone that isn’t in ecommerce.
Costco (COST), the fourth largest U.S. retailer, is expected to invest heavily in its digital business, with its online sales set to increase by 47% over the same period, reaching $15.3bn in 2025.
Over the next few years, Generation Z will age into adulthood and bring with them a digital wallet and firms will need to focus investment online and engage with the digital ecosystem in order to win market share.
Gen Z doesn’t use cash.
Online grocery is set to stay even in healthy times, but the pace of growth for online grocery will level off after the 2020 explosion.
Fresh grocery ecommerce is still expected to grow at 13.3% CAGR between now and 2025 which is why you see many retailers like Walmart investing in the fresh foods’ delivery business.
Habits are hard to break and it’s clear that digital add-ons are here to stay, and brands must cultivate digital platforms to win.
“Our intuition about the future is linear. But the reality of information technology is exponential, and that makes a profound difference. If I take 30 steps linearly, I get to 30. If I take 30 steps exponentially, I get to a billion.” – Said American inventor and futurist Raymond Kurzweil
