“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
Mad Hedge Technology Letter
May 17, 2021
Fiat Lux
Featured Trade:
(MULTIPLE CONTRACTION)
(QQQ), (AAPL), (GOOGL), (MSFT), (TDOC), (TSLA)
High multiple tech stocks often overshoot on the way up and overshoot on the way down.
This is predominately driven by uncontrolled momentum as investors and traders resort to margin to borrow money and add leverage to positions and trends that seem to be working at the time.
Since the start of the year, technology has had to come to grips with a sudden rerating of valuations.
For example, a bellwether stock for the future success of tech, Tesla (TSLA) has corrected 20% year-to-date after more than 700% move up in 2020.
Reliable big-cap tech has been more steadfast in 2021 such as the likes of Apple (AAPL) who have only experienced a less than 2% year-to-date decline in shares.
The biggest winner so far of big-cap tech has to be Alphabet (GOOGL) whose shares have risen around 25% since the beginning of the year.
Even with sky-high expectations, Google is hitting it out of the ballpark and then some.
Simply meeting or doing a nudge over expectations this past earnings season has proved not enough for underlying shares to surge on the results meaning we are fully priced.
Naturally, the more speculative business has felt the worst of the carnage with SPACs down half from their peaks and “artisanal” tech down 30%-50%.
This doesn’t mean tech is over.
Hardly so – It’s just resting.
But readers and investors will need to traverse through a period of multiple contraction and consolidation as high-priced tech stocks are re-rated lower until we reach appetizing multiples.
Simply put, we got ahead of ourselves and there is only so much leverage that can be taken out to chase the rainbows and feed off the momentum.
Microsoft (MSFT) has been another stout stock that is up around 12% year-to-date and a great place to hide out during the consolidation phase.
The cause of the rerating derives specifically from upper management guiding down future revenue and profitability targets.
I have read countless earnings reports that describe a comprehensive dilemma in which the overall structure of the company couldn’t be healthier yet beating prior years’ Covid performance is impossible on a year-to-year basis.
Readers need to understand this year is still priced as a Covid year, but tech companies won’t nearly do as well because the conditions that engulfed Covid like work-from-home and the absence of a vaccine are not here anymore.
There is a health solution in the U.S. and in parts of Europe there are partial solutions and certainly, no lockdown as the Chief of the CDC signals masks are not needed for the vaccinated in public.
The tech market needs to readjust its expectations that will hand off to more of a normalized metric environment and that will happen naturally as we move closer to 2022 and into it.
On a calculation basis, comparing data from 2022 and 2021 will strip out the volatility from the 2020 and 2021 comparisons.
Remember that management uses the prior year as reference points for performance and that phenomenon is now hurting the appearance of relative outperformance.
A top executive at a fintech company had this to say, “The pandemic has accelerated a digital wave of change across almost every industry by three to five years, unleashing a profound and permanent structural transformation.”
I’ll take a 5-year digital transformation in one year if the second year is a time that is needed for earnings’ expectations to consolidate for half a year or so.
I would take that deal anytime if it was my company.
The data also suggests how breathtaking companies like Google and Microsoft are if their future guidance is immune to any expectation.
They are beating whatever consensus is in a Covid year or not.
Take a look at some of the darlings of tech in the height of pandemic like Teladoc (TDOC), and shares are off around 33% year-to-date and even went through a 40% drop from mid-February to the beginning of March.
Avoid those now!
Even if it's not related to cloud software stocks, the dearth of semiconductor chips is beginning to cause pain in every nook and cranny of the global economy catalyzing many firms to delay or even cancel production let alone roll out new models.
This adds to the global malaise of a supply chain that many managements describe as “topsy-turvy.”
Not only is the bottleneck happening as we speak, but it appears as though it could last at least 2 or more years.
When the Fed talks about “transitory” inflationary pressures, at least as it relates to tech, I am not sure what they are smoking.
There has been no concrete data in which they have offered to suggest that it will be transitory unless they have a different definition of transitory from mine.
The accumulation effect of these pressures is why the tech-heavy Taiwan stock market, FTSE TWSE Taiwan 50 Index, comprised of tech stalwarts like Taiwan Semiconductor Manufacturing (TSM) and Hon Hai Precision Industry, declined over 2% today after losing over 8% last week.
Ultimately, investors are moving to higher ground and seeking predictable profitability and raw size over elevated growth rates and loss-making EPS figures.
When the goalposts move, we must move with them and that is what has happened.
Tech investors are more conservative than last year and until the goalposts widen a bit as I expect as we move into Q3 and Q4, we need to be aware of the new rules of the game or who gets penalized for them.
“Technology is cool, but you've got to use it as opposed to letting it use you.” Said American Singer/Songwriter Prince
Mad Hedge Technology Letter
May 14, 2021
Fiat Lux
Featured Trade:
(THE GOLDEN ERA OF CYBERSECURITY SPEND)
(PANW), (FTNT), (CRWD), (AMZN), (GOOGL), (ORCL), (MSFT), (IBM)
The tech sector and the U.S. government are poised to engage in a more transactional relationship than ever before after the cybersecurity attack on Colonial Pipeline and the U.S. President’s executive order that followed it.
This doesn’t mean just servicing an email account, but this will incorporate broad-based networking cloud infrastructure from the top-down and the bits in between.
Technology is just getting too good, too fast, and applicable to the point that it allows nefarious actors to wield it in a way that could damage and permanently set back sovereign nations and global business.
Don’t get me wrong, this was already in the works, and U.S. President Joe Biden has signaled his intent to ramp up the IT spent, but this cyberattack that is causing gas hoarding in parts of South Eastern United States is just the event to really kick this initiative into overdrive.
Colonial Pipeline paid the almost $5 million ransom payment that will encourage similar type of behavior in the long-term.
The Cyberattack also means that the relationship between U.S. tech and government could swerve from net negative of a relentless anti-monopoly narrative to one in which big tech will be anointed as the saviors to the foreign cyber-criminals and paid handsomely to defend the operations of private and state U.S. business.
The latter sounds much better to Silicon Valley than the former and the bigwigs in Silicon Valley might ostensibly push this marketing dynamic of internet protection to save their bacon and get the regulatory heat off their back.
Polarizing figures such as U.S. Senator Elizabeth Warren have made it a point to bash big tech whenever she sees fit which is more often than not.
CEOs like Facebook’s Mark Zuckerberg have tried a disingenuous approach of blaming China’s marginal data privacy policies as a way to protect its Instagram business and prevent growth monster TikTok, a Chinese app, from cannibalizing its cash cow business.
The origin of the Colonial Attack is purportedly to be Russian which would offer more fuel to the fire and create a ready-made reason for U.S. government to pour incremental billions into Silicon Valley and its array of almost multi-trillion dollar heavy hitters while protecting their business moat.
This event also means Tesla is toast in China.
Officials in China banned Tesla vehicles from military bases and housing compounds amid concerns that potentially sensitive data from its onboard cameras could be collected and stored on Tesla servers.
Once the data privacy genie is out of the bottle, it’s hard to contain the fallout and Tesla will need to adopt a whack-a-mole strategy in China which often proves futile in the long-term.
The United States faces persistent and increasingly sophisticated malicious cyber campaigns that threaten the public sector, the private sector, and ultimately the American people’s security and privacy.
This is all just the beginning, a little taste of what’s on the menu.
Collaborating with U.S tech companies to improve its efforts to identify, deter, protect against, detect, and respond to these actions and actors is now a must.
The Federal Government must also carefully examine what occurred during any major cyber incident and apply lessons learned.
Incremental improvements will not offer the security Americans need; instead, the Federal Government needs to make bold changes and significant investments in order to defend the vital institutions that underpin the American way of life.
It’s the authorities’ job and to offer resources to protect and secure its computer systems, whether they are cloud-based, on-premise, or hybrid.
The scope of protection and security must include systems that process data (information technology (IT)) and those that run the vital machinery that ensures our safety (operational technology (OT)).
Contracts will be signed with IT and OT service providers to conduct an array of day-to-day functions on Federal Information Systems. These service providers, including cloud service providers, have unique access to and insight into cyber threat and incident information on Federal Information Systems.
Increasing the sharing of information about such threats, incidents, and risks, and enabling more effective defense of agencies’ systems and of information collected, processed, and maintained by or for the Government are necessary steps to accelerating incident deterrence, prevention, and response efforts.
The executive order signed by Biden shows that within 60 days, the Director of the Office of Management and Budget will hash out “language for contracting with IT and OT service providers and recommend updates.”
The U.S. must take decisive steps to modernize its approach to cybersecurity and must increase the Federal Government’s visibility into threats while protecting privacy and civil liberties.
Money will be spent to accelerate movement to secure cloud services, including Software as a Service (SaaS), Infrastructure as a Service (IaaS), and Platform as a Service (PaaS); centralize and streamline access to cybersecurity data to drive analytics for identifying and managing cybersecurity risks; and invest in both technology and personnel to match these modernization goals.
Prioritizing money spent on addressing “critical software” will translate into huge paydays to many cloud providers and not just the big guys.
Most recently, The Central Intelligence Agency awarded its long-awaited Commercial Cloud Enterprise, or C2E, contract to five companies—Amazon Web Services (AMZN), Microsoft (MSFT), Google (GOOGL), Oracle (ORCL), and IBM (IBM).
No doubt they will be vying for more government procurement contracts since they already have one hand in the honey jar.
At a lower level, readers should consider buying cybersecurity companies Fortinet (FTNT), Palo Alto Networks, Inc. (PANW), and CrowdStrike Holdings, Inc. (CRWD), but these smaller names come with more volatility.
This event really anoints the impending future as the golden era of IT cybersecurity spend and it will never go back to what it once was.
Paying for IT protection is here for the long haul and this goes for private companies and public institutions.
Nearly 80% of senior IT and IT security leaders believe their organizations lack sufficient protection against cyberattacks despite increased IT security investments made in 2020 to deal with distributed IT and work-from-home challenges, according to a new IDG Research Services survey commissioned by Insight Enterprises.
There will be a huge boom in IT cybersecurity spend because CEOs don’t want to be the idiot that allowed cybercriminals to hijack their whole business.
That’s the fastest way to end a management career.
Last time I checked, it’s a hard slog up the corporate ladder to land a prime CEO gig and it’s not getting any easier.
“Technology is a useful servant but a dangerous master.” - Said Norwegian historian, teacher, and political scientist Christian Lous Lange
Mad Hedge Technology Letter
May 12, 2021
Fiat Lux
Featured Trade:
(THE EXPLODING PROGRAMMATIC AD SPACE)
(TTD)
Annual advertising budgets are often being reset and reconsidered in Q1, but as the economy is roaring back, digital ad deliverers are set to make hay.
The Trade Desk (TTD) specializes in programmatic ad buying.
What is it?
It’s the deployment of software to buy digital advertising.
Previously, the traditional way included requests for proposals, tenders, quotes, and human negotiation, but programmatic buying uses machines and algorithms to purchase display space.
Humans now have more time for the optimization and evolution of ads.
Ad agencies will always need to optimize advertising to meet consumers’ needs on a deeper level.
Programmatic-centric software will deliver a better set of tools to plan, optimize and target advertising effectively.
Since TTD doesn’t make anything physical, margins are usually a lot higher and that certainly showed with Q1 producing adjusted EBITDA of a record $70.5 million.
This Q1 record is on both an absolute basis and a percentage of revenue basis.
As TTD continues to grow and represent more large brands and a larger percentage of ad agencies' brands, they will continue to become an accurate bellwether for the open Internet and advertising spend.
When you consider their performance in the context of the health of the overall advertising industry, you can see how they continue to outperform the industry and gain market share.
WPP's GroupM predicts worldwide advertising revenue will increase 10% in 2021. Publicis Groupe's Zenith expects overall U.S. ad spending to rise 3.2% in 2021, following a drop of 5.4% last year. GroupM also predicts digital advertising will surge 14% to nearly $400 billion.
Almost all major content owners put more premium inventory online.
Today, TV providers are fighting for consumer attention and there is more competition than ever.
The gap in cost-adjusted efficacy between linear and Connected TV (CTV) has stayed strong. However, as advertisers embrace CTV to leverage data and relevance, the power of data-driven targeting is quickly becoming more apparent.
Only effective data-driven targeting can achieve the value sought after by advertisers.
In other words, TV advertisers now have a choice. They have the ability to differentiate between content across channels more than ever. And that's critical to a healthy and competitive CTV market.
Now just to put the CTV market scale in perspective, according to Omdia's latest research, there are now more than 200 million active Advertising-Based Video on Demand (AVOD) users in the U.S. alone.
By 2024, Omdia predicts that annual CTV advertising revenue will top $120 billion, outperforming subscription revenue by more than 20%.
More and more of the world's top advertisers are making programmatic buys a larger component of their upfront commitments.
Advertisers want more data-driven flexibility in TV advertising campaigns. They believe their digital buys should be a core element of their upfront commitment. And the networks are adapting to that demand.
Ultimately, this will lead to the development of a new programmatic forward market for CTV inventory.
Broadcasters are also applying the same innovation focus to the world of identity. Recently, TTD has announced collaborations with OpenAP and Blockgraph.
This discussion on identity is bigger than cookies. It's bigger than any company or any channel. Cookies are not present in CTV. However, a privacy-safe identifier for CTV will be a major factor in driving relevant ads and managing reach and frequency across apps, channels, and devices.
CTV needs this kind of approach in order to maintain pricing power in a way that helps fund the high quality content that has kept most consumers binge-watching during this pandemic.
The current TV content arms race cannot be financially sustained for providers or consumers without relevant ads.
UID or user ID number is the identification number of your user account.
Remember how UID works, consumers sign in once with their email address and then opt-in site by site, just once per site or app, or channel.
This is a significant improvement to the consumer Internet experience today, where intrusive toasts or cookie pop-ups appear on almost every premium content site and seemingly every time you go there.
It's a common ID that can be used by many different advertisers and publishers.
It often originates from publishers with existing sign-on systems.
Consumers can then engage with privacy settings and opt out directly from the services they know.
The Wall Street Journal reported 50 million UID authenticated users in the U.S. a couple of months ago.
There's no point in building walls around it. Brands will, over time, always gravitate to places where they can be deliberate and where they can measure ad impressions across channels.
There are some companies, mostly those with a dominant walled garden approach, that believe the Internet can be controlled by a few.
Then there's the rest who believe that an open, competitive Internet marketplace is the only real viable approach that preserves value and opportunity for all participants.
And that has meant that cord-cutting in linear or cable television has accelerated and that people are looking more and more at Internet-fueled TV.
Because there are also more apps than there have ever been, content discovery is tougher in CTV than it’s ever been.
TTD’s Q1 revenue was $220 million, a 37% increase from a year ago and TTD benefited from improvement in the digital advertising environment from both agencies and brands.
Video, which includes CTV, again, led growth during the quarter followed by audio.
While improving, the travel and entertainment verticals still lag compared to others, but both are showing signs of a rebound so far in Q2. There is still a massive recovery ahead in these segments and starting to see green shoots.
TTD estimates Q2 revenue to be between $259 million and $262 million, which would represent growth of between 86% to 88% on a year-over-year basis because Q2 last year was the nadir of TTD’s Covid problems to the ad buying industry.
That said, in the second half of 2021, TTD expects year-over-year total revenue growth rates to decelerate significantly on a sequential basis because comparable data will be hard to beat from Q3 and Q4.
This was the cue for a massive selloff in TTD shares.
Don’t forget that the 2020 U.S. Election produced a tsunami of ad buying in the 2nd half of 2020.
The company is still firing on all cylinders, justifying the move from $160 in March 2020 to $950, but price action in shares is volatile.
The stock has pulled back to around $500 and has technical support at $450, I would look for an entry point around there if the broader market calms down.
“Everybody gets so much information all day long that they lose their common sense.” – Said American novelist, poet, playwright Gertrude Stein