Mad Hedge Technology Letter
March 17, 2021
Fiat Lux
Featured Trade:
(THE ANYWHERE ECONOMY)
(DOCU)
DocuSign (DOCU) is a U.S. cloud company providing e-signature solutions that enable businesses to digitally prepare, execute, and act on agreements and DocuSign’s CEO Dan Springer has described the current state of the economy by calling it the “anywhere economy.”
What does this mean?
Ultimately, now and over the coming years, he believes the trend will continue toward the option of doing anything from anywhere.
Springer has labelled the products and services supporting this trend the “anywhere economy”.
He believes the company he runs, DocuSign, is a critical piece to this anywhere economy, and it's only just beginning.
Springer wants investors to know that we are just in the first period of this hockey match and there’s a lot of ice time left.
The first period has been pretty good to DOCU and last year validated that by DOCU signing off 2020 nearly 50% bigger than they were in 2019 with almost $1.5 billion in revenue.
They gained new customers, expanded their existing relationship with others, and experienced a surge in adoption of DOCU products as accelerating digital trends already underway literally caught on fire.
The digital transformation of agreements is still fluid and progressing and this transformation not only allows agreements to be prepared, signed, act on, and managed from anywhere. It also allows greater speed and efficiency than manual paper-based processes.
Ultimately, DOCU's premium e-signing tools will force companies to never go back to paper even after the pandemic ameliorates.
DOCU also does not believe life will go back to the way it was before.
Of course, many in-person activities will be welcomed back.
But when consumers discovered optimal solutions during the pandemic, DOCU believes those will continue and flourish unfettered, whether it's total or partial work from home, virtual visits to medical professionals, or getting a document notarized remotely.
People aren't going back to paper.
They're not going back to manual processing.
What is the real question then?
The thing to ask now is whether the rate of new people coming to DOCU will change with the reopening of the society, economy, and the world?
This could possibly pull back the momentum in the demand environment, but DOCU has telegraphed to investors that a potential drawback would be temporary before the digital transformation reignites.
And let me get straight at this point, yes, DOCU hasn't seen a change yet and demand is following through greasing the revenue machine as we speak.
How is performance at DOCU?
Revenue growth of 57% and billings growth of 46% year over year.
DOCU onboarded more than 70,000 new customers last year, bringing the total to nearly 892,000 customers worldwide.
Their customers even displayed the robustness of their wallet with DOCU experiencing their strongest expansion and up-sell rates yet, driving their dollar net retention to a record 123%.
New customers were tripping over themselves to join DOCU with DOCU experiencing a customer addition rate more than double that of fiscal '20, edging them ever closer to the 1 million customer mark.
The use cases for DOCUs e-signature services are growing and it’s not just HR, procurement, customer service, and in-branch onboarding needs, there is way more left in the pipeline.
DOCU transactions took less than a minute to complete on average, delivering a rapid ROI.
And DocuSign went from a crisis response solution last year to a business-as-usual solution today.
One of DOCUs pipeline is international and last year just scratched the surface with international revenue increasing a head-turning 83% year over year to $89 million in the fourth quarter.
For the full year, international revenue grew over 67% to $287 million, reflecting accelerated expansion across geographies.
To give you a sense of the magnitude of DOCUs overperformance last year, they added nearly the same number of customers this past year as they had in total at the time they went public.
As part of that, DOCU added 11,000 new direct customers in Q4 for a total of over 50,000 for the year.
A first quarter guide follows much of the same rhetoric of explosive growth and DOCU expects total revenue of $432 million to $436 million in Q1 or growth of 45% to 47% year over year.
At the end of the day, all I hear from CIOs (Chief Investment Officers) are they've got a backlog of things they need to get done because the pandemic made it very difficult for them to get certain projects done.
And at the same time, they acknowledge their achievement last year couldn’t be possible without the blind digital transformation they undertook, and they want more of it with DOCU at its core.
So as I write this tech letter, I do predict another re-acceleration of the digital transformation story once the novelty of normalizing the world takes place.
And this normalization doesn’t even need to take place for a considerable cross and up-sell opportunity this year, and those incremental customers, significant customer new additions that drive DOCU's bottom line.
Many renewals will come up after the first year of DOCUs offerings, and I believe not only should it be a great cross-sell opportunity, but they will be happy to renew DOCU's products in full without question.
Long term, this is a great tech company to buy and hold, but the tech sector is near all-time highs and trying to digest higher interest rates and higher inflation expectations.
After we absorb this, the next move is up.
Mad Hedge Technology Letter
March 15, 2021
Fiat Lux
Featured Trade:
(2020 MADE THIS TECH COMPANY)
(PINS)
Do you want to invest in a tech company that added 100 million new accounts in 2020?
Well, you’ve meandered down the right alley and I will show you the way.
Clearly, in the year 2020, the pandemic obviously threw a massive wrench in everything and for a second, I too held my breath for tech companies.
But it luckily shook out the right way for us, as I understand it, tech firms throughout the mayhem evolved to drive incremental use cases for the users and that was what won out.
Pinterest (PINS), a U.S. media sharing and social media service designed to enable saving and discovery of information on the internet, was an unheralded beneficiary of this outsized pivot to lockdown and quarantines.
In fact, it was only just before the public health crisis that I believed this firm was languishing big time, unable to outperform against the big boys, but good enough to be faintly relevant.
Well, they became comparably relevant on a global scale from March 2020, and they have taken their path of opportunity and ran down it.
So how successful are we talking about?
Pinterest grew total revenue 76% year over year in 2020 with adjusted EBITDA margins of 42%.
That’s homerun stuff right there after only being able to expand in the high teens pre-virus environment.
The huge gap up in performance is also here to stay with upper management envisioning the next quarter as growth of “low 70s percent range year over year in the first quarter.”
Not too shabby, right?
Certainly, it’s an understatement to say that 2020 was the ultimate acid test to whether a public tech company could stand on its two feet or not.
No doubt they were aided by a giant sea swell of stimulus money which they are more than happy not to apologize for.
So, what’s the game plan now for the Pinterest crew?
The public health crisis uncorked the pathway to international revenue after focusing on “mature” markets for the first part of its history.
In 2020, international business grew 145% year over year on the back of strong advertising demand. International markets now represent 17% of total revenue.
The company rolled out a function able to take advantage of the “insight” into selling to consumers.
Sales and marketing teams built an insights-led go-to-market program over the course of 2020 that helped Pinterest deliver against Q4 seasonal comps.
This development helps make Pinterest more attractive to advertisers because they can understand their verticals better.
Let’s run down a few examples to show the use cases.
The LEGO Company created a holiday campaign based on popular search terms on Pinterest, seeing increasing search trends for creative kids’ gifts allowed the LEGO company to optimize and serve ads at the right moment ahead of the holiday season.
Another example is the luxury coffee company, Nespresso. They partnered with Pinterest teams to unearth key consumer trends around the holiday season, including search trends and consumer habits around holiday gifting, coffee recipes, and seasonal flavors.
With a better understanding of both auction dynamics and Pinner behavior, Nespresso delivered effective advertising campaigns that also showed positive results in a third-party brand study.
As 2021 does feel like another shelter-at-home year, I would warn investors to keep their powder dry for this one because the comparisons for mid-end 2021 will be tough to beat.
I do believe after a period of consolidation; Pinterest’s stock price will be back in full-out bullish mode.
There is just too much runway out there if you consider, these are the early innings of Pinterest transforming from an image company to a video-centric company.
There has been a significant uptick in video views and uploads. And PINS is beginning to expand that by enabling users to publish directly onto the platform.
This change will drive digital experiences for users, both in the U.S. and internationally, with some of the less mature web content ecosystems the U.S. relied upon.
That's a significant focus and makes the product more useful.
And they certainly did make the platform more useful in 2020 with enormous surge in product search that went up about 20 times last year alone.
PINS is also at the stage of supporting a diversified advertiser base and is really focused on making it easier for mid-market advertisers to manage SMBs to scale their spend.
But as they fine-tune automation, these SMB and mid-tier contracts will turn into Fortune 500 contracts like many of the larger tech sharks out there.
On the risk side, privacy issues could disrupt their rise as privacy measurements are diminished which could lessen their attractiveness to ad buyers.
This company is still a pure ad seller company where the user is the product ala Facebook.
Also, there is the risk that lockdown and quarantine measures are dismissed, and the world opens up which could damage the incremental use case for PINS that was so strong during lockdowns.
It’s hard to view that new sneaker in the shop window when the shops are closed, and I predict a 10% correction if investors feel the world is about to open up unfettered.
However, the long-term runway is healthy for PINS and I do expect a slow grind up as the company switches to predominate video and ad companies pile money into their platform because of the “brand safety” of PINS in a world where the internet is increasingly becoming a murkier place to deploy capital blindly.
2020 MADE PINS RELEVANT
“The thing that we are trying to do at Facebook is just help people connect and communicate more efficiently.” – Said Facebook Co-Founder and CEO Mark Zuckerberg
Mad Hedge Technology Letter
March 12, 2021
Fiat Lux
Featured Trade:
(SERVICENOW IS NOW)
(NOW), (PYPL)
After a deluge of positive vaccine news, the bottom line is that there will be more work in 2021.
It has always been about the work.
As much as it seems recently that social media is taking over and that the marketing of work will solve economic problems from Guatemala to Zanzibar instead of the work itself, I have news for you: it won’t.
It is still about the work, and for tech newsletters like this one, it’s about the content and always will be.
Vaccine-based health solutions will release a torrent of new work opportunities, and tech stock readers need to jump into this workflow automation cloud stock called ServiceNow (NOW).
Digital investments are at an all-time high and are expected to continue expanding.
This is the best place to park investment money betting on future digital-based work growth.
According to IDC, worldwide digital transformation investments will total more than $7.4 trillion by 2044.
The digital economy is firing on all cylinders and ServiceNow is the platform company for digital business.
A quick review of 2020 indicates outperformance.
They significantly beat expectations across the board, bringing heightened momentum into 2021 and beyond.
NOW delivered over 30% organic top line growth, 25% operating margins and $1.4 billion in free cash flow.
Their achievement is a testament to ServiceNow’s strong work culture.
The secular tailwinds of digital transformation, cloud computing, and business model innovation have all intersected at a perfect moment in time.
A paradigm shift is occurring worldwide.
In 2020, for the first time in history, digital transformation spending accelerated despite GDP declining globally.
ServiceNow is enabling a comprehensive solution for the schedule and reporting of vaccination for Scotland's most vulnerable citizens.
Within 12 hours of rollout, the NHS (National Health Service) in Scotland booked over 220,000 appointments.
NOW is literally all about the business workflow maximizing enterprise digital transformation with how every organization in every sector in every location.
Workers are adapting, growing, creating new business models, and empowering themselves to be productive in any environment and in condition.
NOW grew billings by more than 40% year over year organically.
They delivered 89 deals greater than $1 million and now have close to 1,100 customers paying over $1 million annually.
This bounty of sales included landing the largest deal in NOWs history and deal sizes overall keep getting larger.
NOW's renewal rate remained best in class at 99%.
In 2020, they added nearly 700 net new customers, ending the year with almost 6,900 enterprises.
The number of giant deals continues uninterrupted with customers paying NOW $5 million or more in annual contract value (ACV) grew over 40% in fiscal 2020.
One of the U.K.'s big four banks is using multiple ServiceNow products, including a purpose-built new financial services operations product to help transform the way it operates and to deliver better customer experiences.
The bank has seen a 70% uptick in efficiency and improvement of payment processing by integrating the Now Platform into its core banking systems.
These bankers moved from cut and paste, swivel chair manual processes to efficient, automated workflows.
In one case, employees went from managing 10 requests an hour to 10,000 requests in three minutes on the Now Platform.
PayPal (PYPL) recently expanded their relationship with ServiceNow as a key partner for elements of their digital transformation.
Nike is another big name who is using the Now Platform to create better customer and employee experiences.
Other additive deals that are noteworthy are in key sectors such as Booking.com in travel and hospitality, BP in energy, Santander U.K. in banking.
Most cloud stocks are high growth and trot out even higher losses, but now NOW!
They run a tight ship with Q4 operating margin of 22%, a 100-basis-point beat versus guidance, fueled by strong top line outperformance.
For full year 2020, operating margin was 25%, up 300 basis points year over year.
Looking forward, only optimism can be described in the corridors of NOW and for Q1, the company expect subscription revenues between $1.275 billion and $1.28 billion, representing 28% to 29% year-over-year growth.
The cloud revolution is still in the early innings and this company has guaranteed $10 billion in annual sales representing a more than doubling of revenue from the $4.52 billion in 2020.
NOW has a strong product portfolio, a deep focus on building deep customer relationships, and a robust commitment to enabling digital transformation.
This cloud company must be in your top 20 of ones to own and the stock price will benefit from this dynamic business.
Mad Hedge Technology Letter
March 10, 2021
Fiat Lux
Featured Trade:
(2 FINTECH BETS TO JUMP ON)
(PYPL), (SYF), (V), (MA)
I cannot overstate the importance of digital financial innovation to the success of PayPal (PYPL) and Synchrony Financial (SYF).
Consumers are rapidly adopting technologies that enable contactless commerce and expect engagement along their digital purchase journeys.
These fintech firms are leveraging robust digital assets and continuously investing to ensure their partners are well-positioned in this rapidly evolving dynamic.
These investments include the capabilities to empower SaaS and seamless integration with partners' digital assets, enable customer choice at the point of sale, enhance contactless experiences, facilitate a seamless and easy application process, bring the in-store experience to a customer's digital devices for applications and payment, and integrate financing office throughout the entire digital shopping experience.
They also continue to make headway in digital penetration of all aspects of the customer journey.
Lockdown requirements and 14-day quarantine are forcing consumers to resort to online transactions for payment networks, online lending, money transfers, business-to-business payments, personal finance, banking, and more.
The key factor driving the growth of the fintech market is high investments in technology-based solutions by banks and other financial institutions. In addition, infrastructure-based technology and APIs (application programming interface) are reshaping the future of fintech.
The behavioral changes induced by the pandemic, such as online shopping and cashless payments, are here to stay and will continue to propel fintech’s growth this year and beyond.
PYPL is one of the most entrenched digital payment operating technology platforms that enables digital and mobile payments on behalf of consumers and merchants worldwide.
It has more than 361 million active users globally and is available in more than 200 markets around the world, enabling consumers and merchants to receive money in more than 100 currencies.
The overperformance of late is not a fluke, in just the last quarter, PYPL added more than 15.2 million new accounts. Its top-line has increased 25% year-over-year to $5.46 billion.
The company is now doing total payment volume (TPV) of $247 billion, growing 38% from the year-ago quarter.
Profitability is another check off the list with EPS for the third quarter coming in at $0.86, rising 121% year-over-year.
The company has been propelled by a spike in e-commerce sales and is one of the preeminent fintech stocks in the U.S.
A less entrenched name but worth a speculative look is Synchrony Financial (SYF).
SYF delivers a wide range of specialized financing programs as well as innovative digital banking products across key industries including retail, home, auto, travel, and pet care.
They have a private labeled credit card business with around 60% of SYF applications done digitally during the fourth quarter and grew 18% in mobile channel applications. In Retail Card, 51% of total sales occurred online. Finally, approximately 65% of payments were made digitally.
Synchrony is the 10th-largest credit card issuer in the U.S., with a roughly 2% market share.
But unlike other issuers, Synchrony primarily issues store credit cards, which offer users rewards and benefits.
Synchrony offers more than 100 of these store cards, including the Amazon.com Store Card, which can only be used for Amazon purchases, as well as cards from Lowe's, Banana Republic, Ashley Furniture, and Sam's Club.
Synchrony also offers about 30 store-branded cards that can be used on the broader Mastercard (MA) or Visa (V) network. Among them are the Nissan Visa card and the PayPal Cashback Mastercard.
Synchrony saw earnings plummet to $286 million in the first quarter, down from $731 million in the fourth quarter of 2019. Then, earnings dropped to a low of $46 million in the second quarter before climbing back up to $313 million in the third quarter.
But they rebounded in the fourth quarter of 2020 with earnings surging to $738 million signifying an expansion from pre-pandemic performances.
The Venmo card is also a huge growth opportunity and the possibility of linking up with other fintech groups to create attractive products.
Synchrony added 25 new relationships in 2020, including two major deals that should drive growth in 2021 and beyond.
One was with PayPal to launch the Venmo credit card fueled by Visa.
Venmo is PayPalʻs hugely popular mobile app to send and receive money.
The Venmo credit card, which can be used virtually, provides Venmo users with cashback on purchases and comes with a QR code that allows contactless payments.
Synchrony also signed two other major credit card deals with Walgreens and Verizon.
The Walgreens relationship gets Synchrony into the health space, which allows people to pay for health and wellness expenses at some 225,000 different healthcare providers.
The company also acquired Allegro Credit, a provider of point-of-sale consumer financing for audiology products and dental services, to be part of the growing CareCredit network.
The other big move last year was launching the Verizon Visa card, which offers benefits and discounts for Verizon customers.
Synchrony and PayPal are dynamic fintech companies with savory futures.
PayPal is the bigger and safer bet of the two, but Synchrony will benefit more if their risks turn out well because the law of large numbers isn’t counting against them yet.
“I am not trying to chase what other people are doing.” – Said Softbank Founder and CEO Masayoshi Son
