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
Mad Hedge Technology Letter
March 8, 2021
Fiat Lux
Featured Trade:
(A SPECULATIVE EV NAME TO CONSIDER)
(FSR), (TSLA), (NIO)
The 700% gain by Tesla (TSLA) in the past 365 days has meant that this is a Tesla world and everyone else is living in it.
Not to mention they produce a magnificent car that everyone wishes they could drive.
Just look at the unusual options activity of last Friday, and the top 10 most voluminous call activity was in TSLA and Chinese electric vehicle (EV) maker NIO.
Heavy call option buying signals that derivative traders believe the underlying stock will go up in the short-term.
EVs have leaped ahead of the cloud as a derivate of the cloud that contains ultra-growth price growth in the underlying stocks.
Fortunes are being made on speculative EV bets as we speak.
The success has spawned lookalikes, charlatans, and copycat imposters that hope to mimic the same type of trajectory and business.
Infinite attempts will be made to make a crack at the Tesla narrative and to join them as the number two or three in a group of one.
One speculative bet that has a distant shot of making headway in the short to medium term is EV manufacturer Fisker (FSR).
Fisker recently made ingenious inroads to Apple’s subcontracting partner, EV Taiwanese manufacturing specialist Foxconn Technology Group.
They agreed to develop a smartphone maker Foxconn’s hoping the manufacturer’s efforts will boost its automotive capabilities at a time when technology companies including its main customer, Apple Inc., are looking to expand in vehicles.
It’s not coincidental that Foxconn’s first try to sort out the teething pains coalesces around an unknown brand like Fisker.
If plans to fortify their skills in this relatively new industry go awry, they’ll just write this one off.
The know-how and knowledge developed on the ground could also reroute Fisker’s prospects and attach it to the back of Apple’s potential 5G car.
A three-way partnership with each entity providing expertise would certainly mean a 10-fold increase in Fisker’s underlying stock or provide the ammo needed to claim itself as number 2 to Tesla.
Of course, the road is windy and long and there is no certainty that Fisker will knock the socks out of this agreement, but the parameters have been initially set for them to do well in the short-term.
The car will be built by Foxconn, targeted at multiple markets including North America, Europe, China, and India, and sold under the Fisker brand.
Production is set to start in the fourth quarter of 2023.
There is outsized risk in producing this car because Foxconn specializes in making smartphones and not cars.
They are new to the auto business and relying on collaboration and innovative manufacturing that will either go well or unravel quickly.
Fisker founder Henrik Fisker has criticized the car industry for being outdated and said, “We still talk about adopting the Toyota manufacturing system,” referring to a production and logistics concept that was developed decades ago.
Fisker plans to design and market the vehicle while Foxconn will supply the skateboard chassis and manage supply chain and assembly.
Provided they can use their smartphone know-how and flip it into car-making mode, however, in reality, it’s a tall order for the Taiwanese giant.
“Outside the box” solutions are needed to compete with Tesla and taking a speculative bet on Fisker also means believing this Foxconn partnership will work.
Shares of Fisker rose 39% on the announcement showing there is a cohort believing the risk is worth a bet because the upside is savory.
Foxconn will build more than 250,000 vehicles annually for the Fisker partnership and Founder Fisker hatched the plan when he was reading about Apple’s plans for a car. He said he began sketching what he thought a tech company would build if one went into the car business.
“It will be like nothing you’ve seen before,” Fisker said.
With still much development yet to come, Apple will take 5-7 years to launch their car and that’s if they can get their act together while caring for their main iPhone business.
Certainly, many things need to align for Fisker to score a long-term contract designing Apple smart cars, but at least they can claim to be in the same universe as Apple, even if it is a distant planet.
