Tech Letter Archives

The Contrarian Play

How about a tech contrarian play focused on one of the more primitive areas of technology?

And did I say it’s cheap?

Among the discounted tech equities out there is security specialist, ADT (ADT), that is increasingly using technology as solutions for its customers.

This time, I am talking about normal folks just wanting to live their lives, the collective desires certainly trend towards investors buying security home solutions ADT stock that use technology to protect your home.

Yes, this isn’t a sexy tech stock, but not all are.

And contrary to initial thought, crime has gone down nationally during the pandemic because more people working from home meant less opportunity for trouble to come about the home.

The US set records for decreases in residential burglaries last year, but we all know that it will be different when the freedom of autonomy picks up and we are out of our houses on Friday and Saturday night.

Even in the Great Recession of 2008, crime increased presumably to financial desperation and need.

This sets the stage for ADT to experience more buying as we press into 2021.

What is the bull case as we dig into the weeds?

The ability to get on-premise security solutions today is markedly better than what it was a year ago or the ability three or four months ago.

The strength in execution resulted in ADT finishing Q3 with strong backlogs, the highest of the year.

They had solid sales in install in October as well.

So it's broadly diversified, much of it tied with getting access to the premises.

I’m optimistic about the commercial business with total revenue up sequentially in Q3.

The business includes a largely recurring revenue base of 35%.

It's buoyant and durable, highly diversified stuff. ADT is just shy of 250,000 customers in the commercial business.

There is upside in new and growing verticals, healthcare, education, government, critical infrastructure.

ADT also boasts the best service in the space, and that's the most critical source of differentiation.

Even though the total reported revenue in the quarter was essentially flat year-over-year, 2021 should translate into a “growth” year.

Installation and other revenue increased by $46 million, driven mainly by higher reported residential outright sales revenue resulting from the Defenders acquisition.

This increase was partially offset by lower installation revenue to commercial customers resulting from pandemic-induced economic challenges.

Monitoring and services revenue was up slightly year-over-year.

ADT generated $127 million of adjusted free cash flow during the third quarter. And through the first nine months of 2020, their adjusted free cash flow of $532 million is up more than 15% from the $459 million during the same period in 2019.

The strong year-to-date cash performance comes from a myriad of factors that more than offset the higher cash interest, including subscriber acquisition cost efficiency and the benefits from some favorable cost base trends in the current operating environment, along with some timing items.

First, the new direction with Alarm.com includes the launch of a first-generation ADT + Google offering developed through the commitment by Alarm.com that will result in several tailwinds.

First, it leverages the foundation and extends Command and Control until the end of 2022, and then beyond that, allows that platform to support end customers for the long haul.

I believe customers with integrated Google Nest product and services will perform well on an attrition basis because the product will be one of the superior ones.

The second benefit, integrated Google Nest services and Google Video services will be available and accelerate go-to-market with a co-branded offering in the second half of 2021 instead of mid-'22.

At a high level, ADT will capture efficiencies as a result while navigating a unique product road map to create differentiation.

Leveraging Google's prowess in machine learning and Artificial intelligence to fuel what Google calls ambient computing is the next-gen of home security solutions.

In computing, ambient intelligence (AmI) refers to electronic environments that are sensitive and responsive to the presence of people. Ambient intelligence was a projection on the future of consumer electronics, telecommunications, and computing that was originally developed in the late 1990s by Eli Zelkha and his team at Palo Alto Ventures for the time frame 2010–2020.

And if you can imagine for a moment, in today's world, to leverage this machine learning supported system in different ways with rules and automation, this will only increase the prestige and revenue drivers of ADT’s brand.

Another positive data point was the attrition rate, a record low 12.9% that was widespread across geographies, all categories, across all business areas. SMB was flat but residential and core commercial improved.

As 2021 plays out, I believe a combination of positive macroeconomic and macro-environmental factors will stick with ADT helping to continue to drive improvements in the business through the uncertainty of the end of the health crisis and beyond.

Although I wouldn’t put my life savings into ADT, it is worth a flier at $9 today.

January 20, 2021 - Quote of the Day

Tech Letter

"It has become appallingly obvious that our technology has exceeded our humanity." - Said Albert Einstein.

January 15, 2021

Tech Letter

Mad Hedge Technology Letter
January 15, 2021
Fiat Lux

Featured Trade:

(THE CHIP BONANZA)
(MU), (QCOM), (TSM)

The Chip Bonanza

Tech Letter

Cutting edge smartphones and uncontrollable demand for more data-center processing power means equipment manufacturers will need to include significantly more dynamic random access memory (DRAM).

One of the most influential DRAM manufacturers is Micron (MU) and they are poised for a breakout, which is why I executed a call spread with a February expiration.

Micron just so happens to be the best of breed for DRAM which should elevate the stock to higher highs.

Micron’s DRAM is a must-have input into fueling artificial-intelligence and machine-learning applications, next-generation videogame consoles, and in 5G phones, which typically contain more storage and memory than the prior generations of handsets.

The sudden surge for DRAM and other semiconductor products is setting up a year in which capacity is failing to keep up with demand.

End manufacturers are piling on heaps up pressure on the chip companies to procure the chips they need to produce everything from cars to consumer electronics.

The uptick in demand means that prices for semiconductor products are skyrocketing and this could start to turn into a bottleneck for chip companies that cannot fulfill orders.

There is no panacea to the situation.

There is no switch to turn on to add new chip-making machinery.

It’s an expensive and time-draining exercise that includes ordering half a year out, and even longer now.

There has been a deal-making bonanza lately with Qualcomm (QCOM) acquiring NUVIA for $1.4bn and other deep pockets investors looking to pick off the next chip company to flip.

Taiwan Semiconductor Manufacturing Co. (TSM), the world’s largest contract chipmaker, said it was working with the car industry to address critical shortages.

This will mean a wave of capital investment into new factories that can produce chips.

The boom – bust cycle is starting up again.

The pandemic has had a helping hand in the supply crunch with the demand for laptops because of remote work exploding.

There is simply a heightened appetite for cloud-computing services and the data centers behind them.

U.S. restrictions on Chinese telecom giant Huawei Technologies Co. led competitors to hoard chips and charge excessively for highly sought for parts.

With a severe lack of chips, automakers and consumer-electronics manufacturers are competing for every bit of limited manufacturing capacity.

Corporations are starting to feel the domino effect with Ford Motor Co. announcing it would temporarily furlough a factory in Kentucky this week because of chip shortages that has also led some competitors to change production plans.

The situation is getting so bad that companies are now asking for as much as they can get demanding two years’ supply of chips; and General Motors Co. last month asked suppliers to stockpile a year’s worth of chips.

Bulk orders are normal, but companies are asking for a larger delivery as the availability of chips disappears.

It has literally become a free-for-all triggered by desperation.

Lead times across the industry have risen to six months, from eight to 10 weeks before the pandemic,

For some niche chips, the lead time is up to 20 or more weeks.

Chip sales are expected to grow 6% this year, reaching a record high.

Don’t forget also that the application of chips in automobiles is still a relatively new industry.

Cars didn’t need chips before, but as Tesla has shown you, cars are now iPads on wheels, tricked out with the latest gadgets.

Powerful entertainment systems and driver-assistance functions like rear cameras can’t function without chips.

This all means more demand in a world where companies are fiercely on the prowl for more chips.

Production cycles are long, the development cycles are even longer and there are reliability requirements that increase the cycle times.

Companies can’t just slot in older, weaker chips to power these high-octane systems without reducing the quality significantly.

Chip companies have rung the alarm bells and admitted this dearth of supply won’t be fixed this year.

The demand is so high that the shortage could last until 2023.

Of course, some companies are nimbler than others but in general, this capital-intensive process is like a monolith and moves incredibly slowly.

The bottom line is that these confluences of external and internal forces mean that chip stocks will go higher in 2021.

dram

January 13, 2021

Tech Letter

Mad Hedge Technology Letter
January 13, 2021
Fiat Lux

Featured Trade:

(HYDROGEN FUEL CELL TECHNOLOGY FOR DUMMIES)
(PLUG), (RENAULT), (SK), (GS), (TOYOTA)

Hydrogen Fuel Cell Technology for Dummies

Tech Letter

Hydrogen fuel cell technology goes like this: electricity is generated from an onboard supply of hydrogen.

That electricity powers the electric motor.

When hydrogen gas is converted into electricity, water and heat are released.

A FCEV (Fuel Cell Electric Vehicle) stores the hydrogen in high-pressure tanks.

Non-toxic, compressed hydrogen gas then flows into the tank when refueling.

Did you get all that?

This is an industry that Goldman Sachs’ (GS) says is a $10 trillion industry just waiting to happen and that is one of the plethora of reasons to look at Plug Power (PLUG.)

And when you consider that 20% of European recovery stimulus will be spent on hydrogen fuel cell technology, it seems like a no-brainer.

French automaker Groupe Renault and U.S.-based Plug Power just told us that they signed a memorandum of understanding to establish a joint venture that will develop, build and market electric fuel cell light commercial vehicles (LCVs).

The progress is real, even with German automaker BMW saying it would produce an X5 SUV with its second-generation hydrogen fuel cell powertrain by 2022.

This move pushes the narrative along for technology automakers who once hoped would replace batteries as the power source for electric vehicles, only to be thwarted by a lack of refueling infrastructure and safety surrounding the use of flammable hydrogen.

“Hydrogen fuel cell vehicles are superior driving machines compared to traditional vehicles” said Jackie Birdsall, senior engineer on Toyota's fuel cell team.

Plug Power, headquartered in Latham, N.Y., outside Albany, has emerged as the leader in developing fuel cell systems, the proverbial “best in show” having deployed more than 40,000 such systems, and has built 110 hydrogen refueling stations.

That’s essentially why Renault has made the executive decision to partner with Plug Power as it looks to create fuel cell-powered light commercial vehicles for business-to-business customers in Europe based on its Master and Trafic truck platforms.

The more practical reason to go with hydrogen fuel cells is because in electric vehicles, batteries simply cannot carry payloads of more than four tons with 20 cubic meter volumes.

There is no solution for light commercial trucks because you would need a lot of battery on board, a lot of energy, more than 100 or 120-kilowatt hours and that doesn’t make any sense in terms of cost or in terms of weight.

The attractiveness in this asset consists of perpetual operation, fast charging, fuel cells that can fill up in 5-6 minutes, can get twice the range and you also have greater density for packaging.

The target is to capture more than 30% of the fuel cell-powered European light commercial vehicle market.

The initiative goes a long way to commercializing fuel cell LCVs in Europe with a pilot fleet.

The deal with Renault is a boon for Plug Power and comes a few days after announcing a $1.5 billion investment from SK Group, a South Korean conglomerate.

It all amounts to new energy for fuel cells—not as competitor to batteries, but as an additional and supplementary source of electric power more suitable for certain applications.

The venture will start commercializing fuel-cell light commercial vehicles in Europe starting in 2021 with pilot fleet deployments and the partnership will also create a hydrogen vehicle ecosystem solution company that offers vehicles, hydrogen fueling stations, and hydrogen fuel.

The project will finish by mid-2021.

Indeed, while sentiment has grown fairly sour for using fuel cells in passenger vehicles, Plug Power CEO Andy Marsh says the technology is a perfect fit when it’s not feasible to wait around for a battery to recharge, which is why the B2B market is embracing it.

The commercial market sits entirely adjacent to the private vehicle market and traction has been slow to pick up for that segment.

Hydrogen fuel-cell cars remain low in volume, expensive to produce, and restricted to sales in a few niche regions that have built hydrogen fueling stations.

Passenger cars won’t scale up on this technology unless policies change.

I am not a believer of FCEVs for passenger cars. It costs tens of billions of dollars to set up a hydrogen fueling network that requires industrial-strength compression equipment.

However, Plug Power is the best of breed and its technology is well suited for a specific application and I do believe other countries will be interested in partnering with them to introduce it into their business-to-business segment.

Wait for a pullback to purchase shares.

January 13, 2021 - Quote of the Day

Tech Letter

“It takes 20 years to build a reputation and few minutes of cyber-incident to ruin it.” Said Global Chief Information Security Officer at Société Générale International Banking Stéphane Nappo

January 11, 2021

Tech Letter

Mad Hedge Technology Letter
January 11, 2021
Fiat Lux

Featured Trade:

(STRIKE WHILE THE IRON IS HOT WITH CLOTHES TECH)
(SFIX)

Strike While the Iron is Hot with Clothes Tech

Tech Letter

Stitch Fix and its updated prognosis from management predicts 2021 results to look something like sales growth of 20% to 25% and that’s pretty damn good considering the less-than-ideal backdrop that corporate America is facing.

Even though I am not a big clothes guy personally, this tech apparel company is delivering value to customers by sending individually picked clothing and accessories items for a one-time styling fee. Customers fill out a survey online about their style preferences. A professional stylist at the company picks five items to send to the customer.

Last year, e-commerce could do no wrong and many stocks in the industry performed sensationally even hitting triple-digit percentages.

Employment is having a tough time coming back, the latest data suggest a long road to recovery and the vaccine rollout has been a pitiful exercise in efficient logistics.

This all means that 2021 will be more or less another year of click and collect from the confines of your abode made possible by ever-improving digital portals.

One of the disastrous industries last year, among many, was apparel, especially brick-and-mortar clothing and department stores.

Shelter-at-home lifestyles didn’t necessarily encourage consumers to handpick expensive dresses and suits, but as the economy slowly trends favorably, it can’t really get much worse than 2020, Stitch Fix should be one of the few winners in apparel among many losers.

Cutting to the chase, retail sales for apparel and accessories ended 2020 down nearly 30% year over year and you couldn’t make up what happened last year if you tried.

Restaurants experienced a 20% drop in sales because consumers simply evaporated highlighting the plight of many foundational industries.

Remote jobs and a wave of fresh self-employment are transforming consumer behavior in this shopping category, and I would bet that apparel consumption will never come back in the form it once was pre-pandemic which is why the use case of Stitch Fix's data-driven shopping experience could never be stronger.

That’s not to say that Stitch Fix had a record year in 2020.

They certainly didn’t.

Stitch Fix still had a bucket of problems in 2020 with a 9% year-over-year revenue decline during its fiscal 2020 third quarter (the three months ended May 2, 2020).

But even with such poor performance, it still represented a massive outperformance relative to other competition and finding those silver linings can be the most important for forward guidance.

This sets up Stich Fix for a massive rebound as consumers got used to the new lifestyle and sales returned with a reported 10% year-over-year growth in the first quarter of fiscal 2021 (ended Oct. 31, 2020).

And throughout the pandemic, Stitch Fix has continued to grow its client base around 9% to 10%.

The forecasted sales growth of 20% to 25% represents a substantial acceleration suggesting that 2020 was a “one-off” even likely to never reoccur.

Their total active clients stood at 3.76 million as of Oct. 2020, up from 3.42 million a year ago, and the company will improve on this growth while retaining past clients.

E-commerce is here to stay as consumers become conditioned to purchasing items in this fashion and a game-changing reason why Stitch Fix's own outlook is so rosy.

Looking forward the company's growth strategy revolves around acquiring new customers and entering new markets like many tech stalwarts before them.

Longer-term, Stitch Fix's data and machine learning capabilities, which helped the company get to where it is today, could be a real competitive advantage if it decides to make a foray into new clothing categories and beyond.

One issue to be aware of is that Stitch Fix generally caters to a pretty specific clientele and its services are only targeting specific price points.

The lower end of that range is still higher than what thrifty consumers may choose to spend and might even be considered a luxury for many.

The lower income tier of America simply won’t be able to make this work in its current form, and margins would drop if Stitch Fix ever accommodated this consumer group.

Despite the convenience Stitch Fix offers, many consumers like the idea of hand-picking clothing and trying it on in stores, where they have the option to instantly swap in and out a size for a better fit.

Stitch Fix does its best to estimate sizing based on user inputs and algorithms, but people are sized in different odd shapes and sizing can still miss the mark.

I don’t think Stitch Fix’s popularity will start to wane if working from home becomes the status quo in 2021 and 2022 and the need for higher-end wardrobes begins to decline because the company will simply need to adapt and focus more on pajama or comfortable clothing if the environment forces them to do so.

Believe me, I have noticed the uptick in the preference for outdoor sweatpants as the crisis went from bad to worse.

People simply don’t have time to dress up in these conditions, but consumers still need to wear clothes every day unless I am totally missing something.

Stitch Fix, in its current iteration, won’t replace department stores because it is too big of a swath from a low-income group that needs to access these services, but as scale terms into a positive input for the company, they can start looking at lower-income tiers for a revenue grab.

As Stitch Fix focuses on higher-end business, the runway is still mind-numbingly long and the optionality they possess is the envy of others.

They have too many good problems to have.

Stitch Fix looks like the cutting-edge apparel company that brings an innovated technology-based model to a stale industry.

It’s working and the first-mover advantage really means something here.

I would wait for a pullback to the low $50s range from the current $56.50 as shares are a little over their own skis.

January 11, 2021 - Quote of the Day

Tech Letter

“Often you have to rely on intuition.” – Said Founder and Former CEO of Microsoft Bill Gates