Mad Hedge Technology Letter
December 9, 2020
Fiat Lux
Featured Trade:
(HOT TECH IPO YEAR CONTINUES)
(AIRBNB), (DOORDASH)
December’s dazzling array of fresh public companies about to hit the markets indicates how strong the tech markets really are.
Many tech firms have returned over 100% year to date.
Aside from the U.S. housing market, tech is the only industry that has strengthened in 2020; and imagine if the economy is rejuvenated by a vaccine, then 2021 could be a year to remember.
Headlining the various tech start-ups coming to market are food delivery app DoorDash Inc. and accommodation platform Airbnb Inc. ready to start trading this week in long-awaited listings.
Not only are they going public, but they also raised their price range with Airbnb valued at as much as $42 billion at the top end of the revised range.
This indicates a healthy appetite to absorb these new shares.
The price target range will be between $56-$60 and at that price, these shares are a no-brainer buy and hold for the long term.
The boosted price targets put both tech companies among the five biggest U.S. IPOs of 2020.
The two companies are hoping to raise a combined $6.2 billion at the top of their price ranges.
IPOs on U.S. exchanges have already raised a record $156 billion this year and much of that is connected to all-time low interest rates which makes sense for corporates to go on a debt binge.
Broader sentiment is starting to really turn with many investors coming back from the sidelines after the market chaos in the early days of the pandemic - and the hoopla over the final outcome of the U.S. election.
Now the uptick in demand is meeting the issuance of shares from Airbnb and DoorDash and this could quickly spiral into a huge surge in shares from these two well-known brands.
That’s not the only action coming to town.
Affirm Holdings Inc., which allows online shoppers to pay for purchases such as Peloton bikes in installments and online video-game company Roblox Corp are next.
It’s highly probable that they score valuations over tens of billions of dollars.
ContextLogic Inc., the parent of online retailer Wish, launched its share sale on Monday. It’s aiming to raise as much as $1.1 billion at a fully diluted valuation of $17 billion.
Airbnb is aiming to be valued at as much as $42 billion in its IPO, while DoorDash could hit a valuation of about $35 billion.
This valuation is more than double DoorDash's private valuation it surpassed in a summer 2020 fundraising round.
The company has been the beneficiary of the insatiable demand for meals delivered to shelter-at-home customers.
Airbnb had been valued at $18 billion after tapping the debt markets in early spring at the height of pandemic delirium.
The company was damaged by the downturn in travel spending and border bans but has recently seen a spike in customers seeking longer-term, domestic rentals.
Airbnb’s IPO is also seen as management’s way to cash out many long-term employees that have stipulations in their contracts that Airbnb must go public by 2021 to profit off their vested shares.
This has been a year to remember for tech IPOs and we are steamrolling into 2021 with a hot debt market and tech unstoppable.
Examples are plentiful such as Enterprise software Snowflake Inc., which has soared more than 200% since its listing to a $110 billion public market valuation.
December’s cohort of soon-to-be public entities - all based in the San Francisco Bay Area – lean towards consumers stuck at home with extra time and cash on their hands.
If the virus can trend downwards as the weather turns hotter in the spring, which is the most likely scenario, that could set a stage for a major reversal in the U.S. economy and tech will be one of the major recipients.
At this point, tech is holding the rest of the market up as energy, retail, transport has tanked.
Even precious metals have been replaced by the digital gold bitcoin in the safe haven trade.
Airbnb is definitely the best of the group and a solid buy on the dip candidate.
The 30% drop in revenue year to date won’t last forever and as they start to mature and rebuild their business as international borders slowly start to open again - this is a strong buy.
“AI doesn’t have to be evil to destroy humanity – if AI has a goal and humanity just happens to come in the way, it will destroy humanity as a matter of course without even thinking about it, no hard feelings.” – Said Founder and CEO of Tesla Elon Musk
Mad Hedge Technology Letter
December 7, 2020
Fiat Lux
Featured Trade:
(THE OPPORTUNITIES IN BIG DATA)
(SPLK), (WK), (MDB), (ESTC)
It’s all great knowing about the cloud, but to understand the cloud more deeply, and how it affects investment trends, we need to talk about Big Data.
This is epitomized by massive data troves.
That avalanche of data on a daily basis coming from an ever-growing variety of sources is now the genesis of all and any corporate decisions.
Data sets are now decoded by processing software tools that capture, process, and curate in a timely fashion.
Let’s take an ecommerce business, their data creation and gathering process comes from sources that include wholesale or retail transactions.
Other companies look into the shipping, audio and video logs, text messaging, internet search queries, cookies, satellite imagery, and GPS data, as well as stock-market activity and financial transactions. Data is also flooding in from the Internet of Things.
The process of analyzing data sets from numerical evidence is now coined data analytics.
Extracting all manner of data in order to draw out conclusions about the information is the competitive advantage of today. In addition, it uncovers undiscovered themes or unknown correlations within the data, or unearths emerging market trends leading companies to better understand customer preferences.
The data analytics’ industry is growing by leaps and bounds, fueled by market demand for systems that tolerate the intense requirements of Big Data.
Which up and coming, second-tier tech companies have cornered the best data analysts that could boost their stock price over the medium term?
I would include a short list of firms like MongoDB (MDB), Elastic (ESTC), Workiva (WK), and Splunk (SPLK).
Big data companies can focus on various areas, including data mining and cleaning, data analysis, machine data, visualization, and storage.
The trend has also fueled an expansion in new Big Data IPOs include Alteryx (AYX), Cloudera (CLDR), Talend (TLND), and New Relic (NEWR). Splunk was among the first to come public.
Investors who want a data analyst army to drive stock performance should look no further than these companies.
Although they don’t harness the type of intellectual property (IP) of monopolists such as Apple or Google, they add specific functions to the tech industry and are rocket boosters to many business models that already are benefiting from massive secular tailwinds.
Let’s dive into a few data-based firms that I think are worth your time and attention.
MongoDB (MDB)
MongoDB provides an open-source database platform for businesses, with a subscription-based software-as-a-service business model.
MongoDB's iconic flagship application can do pretty much anything in a relational database from Oracle and the difference between relational and NoSQL databases is that the relational model is rigidly defined and difficult to change.
MongoDB's software is more flexible than traditional database models, which allows developers to complete tasks more efficiently.
NoSQL databases are easy sells in today's software development sector, so MongoDB's sales are skyrocketing. The company isn't profitable yet because management has optimized the business model for maximum top-line growth.
The company burns cash but compensates for that with elevated growth rates. MongoDB’s underlying shares are up around 90% YTD.
Splunk (SPLK)
Splunk provides intelligence software designed to aid search, correlate, analyze, monitor, and report on data in real time. The software is deployed to analyze vast amounts of historical information. They specialize in machine-data applications.
Splunk stock took a big hit when the company reported third-quarter results, and the natural consolidation of many big data stocks that have come too far, too fast will offer optimal entry points for tech investors.
Splunk reported lower-than-expected bookings and annual recurring revenue due to a drop in the rate of closing deals, especially large-sized transactions.
Poor revenue forecasts and deal weakness could be a great buying opportunity.
Elastic (ESTC)
Elastic harnesses a set of software products that ingest and store data from various sources and formats, as well as perform search, analysis, and visualization.
The company uses a cloud-based software-as-a-service business model. It has 12,900 subscribers, which accounted for 93% of total revenue in the quarter.
Elastic expects fiscal third-quarter sales in the range of $145 million to $147.0 million, above Wall Street views of $139.8 million.
Elastic stock is up over 120% this year validating the use of big data tools.
I believe this is a great buy the dip stock if shares come back down to the $120 range.
Workiva (WK)
Workiva offers a cloud-based and mobile-enabled platform used by companies to collect, analyze, and manage business data. Customers use Workiva's software to streamline complex business and reporting processes by connecting teams, documents, and data from initial sources to final reports.
The company offers Workiva platform that offers controlled collaboration, data linking, data integrations, granular permissions, process management, and full audit trail services.
They specialize in data integration and preparation tools that enable customers to connect data from enterprise resource planning, governance risk and compliance, and customer relationship management platforms.
Revenue for its third quarter climbed 19% to $88 million. It has more than 3,580 customers. The company also raised its guidance for its fourth quarter.
The underlying stock is up around 75% this year and the company is on the cusp of producing positive earnings for the first time.
Aside from Splunk boasting annual revenue of $2.5 billion, the other three are diminutive in annuals sales.
Elastic, MongoDB, and Workiva only procure annual sales of less than half a billion so the jury is still out on them, where Splunk is more grandfathered into their position in the tech ecosphere.
My pick of the bunch is Workiva because their profitability and margins are trending in a better direction than MongoDB and Elastic, but I do believe that the secular trend of digital migration will help all of these companies even if management isn’t being as efficient as they could be.
“My aim is to develop affectionate robots that can make people smile.” – Said CEO of Softbank Masayoshi Son
Mad Hedge Technology Letter
December 4, 2020
Fiat Lux
Featured Trade:
(THE NORMALIZATION OF CRYPTOCURRENCY)
(BITCOIN), (SQ), (PYPL)
The price of Bitcoin mushrooming to an all-time peak of just south of $20,000 is a seminal moment for digital currencies.
Although the Mad Hedge Technology Letter rarely wades into these types of waters, crypto must be addressed because the recent legitimization of digital currencies cannot be diminished.
That’s not to say they will be the de facto monetary instrument tomorrow morning, but the concept of digital currencies and development of it this year has been far and wide-reaching.
The price of Bitcoin has gained more than 170% this year, with most of the price action coming since September.
Why has it been so successful?
Riskier assets are back in vogue as the unprecedented fiscal and monetary stimulus means there are fewer places to achieve any sort of proper yield.
Then consider recent mainstream acceptance that is coming to full fruition such as payment companies including PayPal (PYPL) and Square (SQ) which have recently incorporated digital currencies into their business model.
Government and Central Banks are the largest reason for the short-term elevated attention as their fumbled virus response has led to lockdowns and a massive loss of trust in their leadership.
The global debacle has led many investors to search for alternative routes to fiscal safe havens seeking shelter from rapidly increasing central bank quantitate easing and the rampant asset inflation that everyone agrees is already taking place.
Much of the money printing has not been done responsibly with mainly only corporations and their offshoots benefiting from an unprecedented, pandemic-marred market reality in which stocks are trading at nosebleed prices while bond yields are hovering around zero.
Moving forward, the risk of protests, revolution, and war has increased significantly in large swaths of the developed and undeveloped world and higher societal and systemic risk makes the idea of digital currencies that are out of the reach of taxable authorities more conducive to storing savings and for-profit trading.
Bonds have no yield EVERYWHERE at this point and keeping wealth in cash is dangerous.
Investors used to put their money in gold, but gold is going down because it is being replaced by digital gold called bitcoin.
It was only in 2017 when the bitcoin surge lost momentum and caused the price of Bitcoin to lose half its value within days of reaching an all-time high.
What is the difference today?
Today’s bull market is resting upon more solid foundations and in 2017, the bubble was artificially propped up by Initial Coin Offerings (ICOs), which saw charlatans sell mostly worthless new currencies to the naïve retail investor.
It’s true that today, Bitcoin is regulated tighter translating to less dumb money circulating in the system.
Bitcoin’s foundations are also more firm in 2020 because its adoption base has increased meaning more people have skin in the game and aren’t going to dump the asset at the first sign of consolidation.
A company called Grayscale has been quite intelligent in pitching Bitcoin as an alternative to gold and selling it to millions of millennial investors in the form of shares.
The large avoidance of corporate bitcoin adoption has changed 180 degrees in the year of the pandemic with PayPal announcing last month that it will soon allow users to buy cryptocurrency within its app.
Next year, PayPal will allow users to draw from cryptocurrency accounts to pay for goods and services at 28 million merchants that use the company's platform.
PayPal will also enable customers to use Venmo, its popular peer-to-peer payment service, to buy and shop with cryptocurrencies.
CEO Dan Schulman implied that the size of the waiting list for last month's crypto offering for access to crypto was two or three times as great as what the company anticipated.
Obviously, this is setting up a shortage of bitcoin in more corporates needing access to its supply.
Schulman also argued that companies and central banks are experimenting with cryptocurrencies and the utility of digital wallets.
“Digital wallets are a natural complement to all forms of digital currency,” said Schulman, adding that PayPal is in close talks with central banks and regulators to explore new uses for these wallets.
Schulman said PayPal views cryptocurrency systems as cheaper and more efficient than ACH, which is the network that supports the existing banking system.
He also said that the current financial system is “not working” for many low-income people meaning that there is a huge untapped audience that would find crypto more useful.
Last week, cryptocurrency giant Coinbase announced a debit card that can be used at ordinary merchants, while MasterCard in September announced a service to let central banks test out digital currencies.
There are strong rumblings by investors that gold will eventually be displaced by “digital gold” and abandoning the sinking ship early could lead to all gold investors diverting their capital into bitcoin.
This would massively expand the user base as well and the valuation could be 25 times higher than it is today.
Institutions have taken the baton from the retail-driven pandemonium of 2017 and in 2020, many liquid investors will look at any crash or dip in bitcoin as a buying opportunity.
What a change from just 4 years ago!
I hate to say it, but as central banks go even more off the deep end to prop up a decaying financial system riddled with conflicts of interest, the price of bitcoin will gain in strength resulting in much higher prices.
Not only that, but the adoption rate could also go into overdrive opening up pathways for secondary coins like Ethereum to gain widespread adoption as well.
At this point, it appears that this overarching trend is unstoppable, and in the future, historians will look at this 2nd bull run to $20,000 in 2020 as just another data point in its meteoric rise to jaw-dropping prices of $30,000 then $40,000.
“Bitcoin is probably rat poison squared.” – Said Legendary U.S. Investor Warren Buffett
Mad Hedge Technology Letter
December 2, 2020
Fiat Lux
Featured Trade:
(SALESFORCE TRIES TO STAY RELEVANT IN THE CLOUD)
(CRM), (WORK), (MSFT), (GOOGL)
