Mad Hedge Technology Letter
April 12, 2021
Fiat Lux
Featured Trade:
(SHOULD I BUY THE BEYOND MEAT DIP?)
(BYND), (KR), (IMPOSSIBLE FOODS)
Beyond Meat (BYND) will most likely retrace back to $90 from its current share price of $130.
The pandemic was a nightmare for most food companies and for the ones that deliver products to restaurants, it was a catastrophe.
BYNDs net revenues of $101.9 million in the fourth quarter of 2020, an increase of 3.5% compared to the fourth quarter of 2019, were in line with expectations of atrocious numbers.
Growth companies are expected to grow 40% year over year each quarter and in a year where many tech companies experienced 5 years of digital transformation in 1, BYNDs performance was quite pitiful.
It could have been worse for BYND.
The loss they experienced in the food service channel was difficult, but sales were partly made up by growth in net revenues in the fourth quarter driven by a 7% increase in volumes sold largely aided by the retail (this is what they call eating BYND burgers at home) channel.
Q4 retail channel sales were up a full 85% year over year, which helped mitigate the 54% year-over-year decline in Foodservice.
The pandemic’s damaging effect was large on supplying places including amusement parks, sports arenas, academic institutions, hotels, corporate catering services, and others.
The 85% uptick in retail growth couldn’t compensate for the drop off in food service channels much like Uber and the Uber Eats conundrum.
Households continued to buy BYND products, and they bought them more frequently.
On average, they're spending more per household on non-meat products.
Another silver lining is in international retail, they saw a sequential acceleration of growth from Q3 to Q4.
International retail net revenues increased 139% year over year, driven mainly by distribution gains in Canada, including in the club stores, where they had no presence in the prior year.
As 2021 develops, we will see a flip in numbers as consumers start to visit their favorite eateries and are less inclined to grill BYND burgers on the patio grill.
This only injects more uncertainty into the numbers for BYNDs management and the headway they made in the retail channel could be mostly given back.
Naturally, BYND burgers just isn’t that software program that is essential, and the business of food tech is still fighting with the business of normal food like real meat such as cow-based beef and pig-based pork.
Many software programs simply do not have to duel with their analog selves which is why any sort of meaningful investments into a company like BYND is illogical.
Anyone who loves eating plant-based burgers should eat these protein-based burgers and leave the stock alone.
What’s on the horizon for BYND?
One word – competition.
Impossible Foods Inc. is planning to go public in the next year and is exploring either an initial public offering or a merger in a SPAC deal.
This would value the company at around $10 billion.
Once a hard-to-find item available at only expensive, trendy eateries, Impossible products are now on menus at national chains including Burger King.
Fast-food chains have fared significantly better than independent restaurants since the pandemic began, giving Impossible an added boost.
It has also been growing its grocery presence, cutting its suggested retail prices by 20% at U.S. grocery stores in February in its ongoing push to compete with real beef.
BYNDs management downplayed pandemic pressures to the business as “transitory”, but the problem with that is they are transiting right into fierce competition who have signaled willingness to enter into a price war against them.
Others like Kroger (KR) have bigger pockets and will have used the pandemic to plot their path against BYND.
Basically, what I am saying is that the first-mover advantage has disappeared forever, an unfortunate consequence for BYNDs future trajectory, and I don’t see a lot of upside to underlying shares in the short term.
In the short-medium term, Beyond Meat will first, need to rejuvenate their foodservice business and prove to investors that covid didn’t just knock it out.
Second, there is no guarantee that BYNDs food service will come back right away, this could be a hard slog for a few years to reach 2019 numbers and that’s still an if.
And third, they will need to prove they are better than Impossible Foods and the rest of them while most likely lowering the prices of their product.
Unluckily, the pandemic didn’t deliver 5 years of innovation in 1 year for BYND and there are more questions than answers moving forward.
Outside the internet, the presence of numerous physical inputs has the chance to go haywire which is why I sometimes believe the bore of buying Microsoft or Alphabet until death isn’t such a bad idea.
Investors might want to keep their tech investors from ever exposing themselves to real-world problems even if I think Uber is a great investment for 2021.
I would recommend investors to avoid this crowded space of food tech and let them cudgel each other down to zero. Whoever wins in the end might be worth a flier.
“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 and CEO of Tesla Elon Musk
Mad Hedge Technology Letter
April 8, 2021
Fiat Lux
Featured Trade:
(SHOULD I BUY CLOUD FIRM OKTA IN APRIL?)
(OKTA), (TWLO)
The excess liquidity fueling the U.S. financial markets signal that investors are picking up the tab for heavy loss-making tech companies like never before.
Only in the U.S. can this happen at the scale it is happening as the U.S. controls its own currency, Central Bank, and possess the most reliable IPO process.
This phenomenon effectively supports a mindset of tech start-ups putting off profits for years and sometimes even decades.
Too much money chasing too few ideas and we have seen numerous examples of this with investors turning to ultra-leverage to figure out how to deliver real gains to investors.
Another heavy loss-making cloud company that I recommended buying “at the bottom” last March was identity-verification software maker Okta (OKTA) whose business was dramatically uplifted from the shift to remote work during the pandemic.
The recommendation worked like a charm with the stock essentially doubling from the time of that call.
But what’s in store for this password company moving forward?
First, let's rewind to the beginning of March when investors dumped the stock after a disappointing 2022 forecast and suffered from rumblings of the company paying too much to acquire Auth0 for about $6.5 billion.
The 30% sell-off was another example of growth companies’ ugly habit of volatility making it hard to time the entry points for heavy pocketed investors.
In the most recent analysts’ day, Okta projected sales will grow 30% in each of the next three years.
Revenue at the end of fiscal 2024 will be close to an annualized $2 billion, or about $500 million for the fourth quarter that year.
Yes, this is still a small company by any metric.
Demand for the software maker’s products, which help workers access corporate systems and consumers authenticate their identity online, has increased as more employees logged on from home in 2020.
For the 12 months through March 1, Okta was used more than 52 billion times to log into an app or website, almost 200% growth from the same period a year earlier.
Okta has retraced some of its losses when it announced it introduce 2 new products.
One, Identity Governance Administration, generates reports which show in an organization who has permission to see which parts of its systems.
The idea is to make sure people who’ve left the company or have changed roles don’t retain access to unauthorized areas.
Next, Privileged Access Management, governs who can view and change an organization’s critical systems.
The new areas expand the size of Okta’s total addressable markets to about $80 billion.
Management said these protections have become more critical as employees continue to work for home.
Many data breaches come down to server accounts that weren’t locked down when they should have been.
Admins change jobs at a rapid pace as companies look to poach talent more than ever now.
If it wasn’t the cause of the breach, it was a vector that the attackers used once they got in.
Being the cloud growth company it is, with only a market capitalization of $30 billion, the new announcements was the catalyst for Okta shares to surge 8% during intraday trading.
This is typical growth company price action.
The company is also dogged by persistent rumors it might sell to a larger tech company and I would say it’s a little surprising that the company is “buying growth” at such an early stage of its growth cycle.
But again, the subsidies keep flowing to these upstart tech guys because liquidity levels and bold risk appetites allow these types of aggressive financing that affect management decisions.
Overpaying to grow is where we are now in the tech cycle with the Central Bank effectively not allowing this bull market to die.
Okta CEO Todd McKinnon said he wants it to be one of five or six independent software clouds that every company needs.
And I also want to be one of five or six men in the world that every girl in the world wants to date.
I get it that McKinnon wants identity and access to remain Okta’s specialty rather than being subsumed into one of the other categories. Microsoft, which has identity software products that predate its cloud businesses, is already Okta’s main rival.
I would agree that Okta is prime for investors to buy the dip, but I would recommend traversing to higher waters because there are better cash burning, cloud names out there that are growing faster than Okta.
Honestly, Okta should be growing more for its small size, and “buying growth” seems like they are worried about an imminent collapse of growth which is a worrying sign.
Yes, I must agree that competition is stiff these days in the cloud ecosystem.
My conclusion with Okta is that any investor looking to buy Okta should instead buy communications-as-a-cloud firm Twilio (TWLO).
This is the communications platform operating behind the scenes of behemoths like Airbnb and Uber.
They have a 3-year revenue growth rate of 66% and grew 65% year-over-year last quarter.
That is what I call consistent!
And that is what I call cash-burning growth!
TWLO is also exactly double the size of OKTA at $62 billion and is predicting next quarter to grow 44% to 47%.
According to IDC, investments in digital transformation will nearly double by 2023 to $2.3 trillion, representing more than 50% of total IT spending worldwide, and it’s clear to me that more of this capital will flow into TWLO than OKTA.
OKTA is just a one-trick pony, but TWLO is a complex integrated system that Uber can’t live without. Many companies can live without Okta and plug in a substitute. The revenue is just way stickier with TWLO, and the strategic position is superior.
OKTA is a solid buy the dip candidate, but just buy TWLO instead.
“Bitcoin will do to banks what email did to the postal industry.” – Said Founder of the Swedish Pirate Party Rick Falkvinge
Mad Hedge Technology Letter
April 7, 2021
Fiat Lux
Featured Trade:
(THE DISAPPEARING U.S. RETAIL STORE)
(SQ), (PYPL)
As vaccine shots hit a peak of 4 million on Easter Weekend, this means the return of the mall and retail, right?
Surely, a reopening bounce for retail is in the cards?
Think again.
A new report from a major bank suggests that 80,000 retail stores will close in the U.S. over the next few years.
This is not a wild guess or speculative bet on what will happen, this is starting to become a consensus.
By 2026, the worst-case scenario is 200,000 stores closing and by 2030, the worst-case scenario entails 300,000 stores closing highlighting the impactful nature of the situation.
As I took a fine-tooth comb to the latest earnings’ data, I can’t help but see that every tech CFO sees the accelerated digital transformation as one of the legacies of the pandemic.
But it will not be an invisible virus keeping shoppers away from the mall in the future, consumers are just satisfied with ordering from home and this economic behavior will become embedded in the new post virus world.
In 2020, 17 major retailers filed for bankruptcy – including Lord & Taylor, Century 21 and Brooks Brothers.
Countless are on the verge of defaults underscoring the pitiful shape of many retailers.
On the other side of the pandemic, blighted malls and unpaid rental payments is what will be left for much of retail.
Many of these malls won’t be able to rent out spaces for pennies on the dollar.
Many stores have gone 100% digital, even restaurants, that haven’t been able to offer dine-in options.
Online retail’s market share of the full retail landscape climbed from 14% in 2019 to 18% in 2020, and by 2025, that number will grow close to 30.
Average household spending online has grown the past five years from $5,800 to $7,100 from 2019 to 2020 highlighting how U.S. shoppers are increasingly comfortable ordering volume online.
Now armed with more stimulus money, I highly doubt there will be a renaissance in brick-and-mortar retail.
One possibility in the future is that many brick-and-mortar stores will double dip, both selling and fulfilling online orders from the same location.
Also, some goods simply aren’t made for click, order, and collect at home like shoes and dresses but others are such as home improvement, grocery, and auto parts.
The silver lining is awfully thin for the retail sector and odds are, if retailers don’t have a digital footprint by now, they are already toast.
The mall vacancy rate rose to 10.5% in the fourth-quarter 2020 from 10.1% in the third quarter and 9.7% a year ago.
This is unlikely to reverse in the short, medium, or long term and another concept for malls will need to be carefully thought out.
Considering further deterioration of non-digital retail, this should directly lead many investors to conclude that pouring money in ecommerce and fintech companies is the right thing to do.
It absolutely is.
The thesis for outperformance is so obvious that many tech investors need to seriously capture part of this sustainable megatrend.
On top of my list of fintech firms are Square (SQ) and PayPal (PYPL).
Square expanded sales 141% year-over-year last quarter and have been profitable for the past two quarters with EPS growing 39% year-over-year last quarter.
PayPal has a much bigger business meaning the law of numbers start to work against them.
They expanded sales 23% year-over-year last quarter and improved EPS by 30% year-over-year.
These two fintech stocks should be considered on every substantial dip because profitability increases have a clear path for the foreseeable future and the robustness of in-house products have not disappointed over time.
“You can’t stop things like Bitcoin, it’s like trying to stop gunpowder. It will be everywhere, and the world will have to readjust. World governments will have to readjust.” – Said Founder of McAfee Inc. John McAfee
Mad Hedge Technology Letter
April 5, 2021
Fiat Lux
Featured Trade:
(CHIP MANUFACTURERS — A WAY TO PLAY 5G)
(AMAT)
