“In the old world, you devoted 30% of your time to building a great service and 70% of your time shouting about it. In the new world, that inverts.” – Said Founder and CEO of Amazon Jeff Bezos
Mad Hedge Technology Letter
December 14, 2020
Fiat Lux
Featured Trade:
(NVIDIA’S SHOW OF FORCE)
(NVDA), (AMD), (APPL), (OTC:SFTBF), (INTC), (QCOM)
One of the best buy and hold tech stock has to be Nvidia (NVDA).
They are positioned at the vanguard of every major cutting-edge technology in the world such as self-driving technology, data center, and artificial intelligence.
Their cash cow business of manufacturing GPUs (graphics processing unit) which are essential to video gaming has been bolstered by the shelter-at-home movement.
Video games as an activity or something to just pass the time has never been so popular and Nvidia is the best of breed in this department.
The key takeaway from Nvidia’s asset portfolio is the diversity.
They aren’t beholden to any one division and I wouldn’t bet anytime soon that video games are going to go out of fashion because of the generational tailwind occurring.
In fact, the underlying Nvidia stock has risen more than 120% in 2020 and semiconductors have proven to be an astute place to put your money in during the pandemic.
The same goes for competitive rivals such as Advanced Micro Devices (AMD), Intel (INTC), and Qualcomm (QCOM) who explore some of those same markets.
Nvidia counts Amazon (AMZN) Web Services as a customer for data-center chips. It is partnering with VMware (VMW) and Amazon on an AI-driven cloud platform for big businesses.
Be mindful that semiconductor stocks are volatile because of the boom-bust nature of their business cycle.
Global chip sales cratered in late 2018 and fell 12% in 2019.
They rallied early this year on signs of an industry recovery and on a U.S.-China trade deal, then sold off on coronavirus fears.
The trade war has also thrown a spanner in the works of global chip production.
Production was first halted in China and then put global economies under strain.
Despite the pandemic, the semiconductor industry will return to growth in 2020.
Chip sales will rise by 5.1% to $433 billion this year and accelerate to 8.4% in 2021.
The spread of 5G wireless networks is a key catalyst.
Moving forward, it’s highly likely that U.S. lawmakers maintain an anti-China doctrine, and Nvidia and AMD derive only 1% to 2% of revenue from Huawei.
In fact, other companies are more exposed like Cisco and Intel.
How well is Nvidia doing?
They increased revenue by 57% year over year in the third quarter predominately due to its data center business, which grew revenue by 162% over the same period.
In Q3, the data center division accounted for $1.9 billion of the company's $4.7 billion of revenue.
Nvidia is also growing through acquisitions with its blockbuster pending $40 billion acquisition of chip design licensor ARM Holdings from Softbank (OTC:SFTBF).
ARM’s acquisition will help NVIDIA maintain the best of breed quality through 2021 and beyond.
That is important because the semiconductor industry is becoming more cutthroat with many big players sourcing chips in-house after deeply investing in this technology.
Apple (AAPL) recently unveiled its own stable of Mac processors, the M1, making its debut in late 2020. Manufacturing chips is historically a capital-intensive activity, and new chips don’t roll out that fast. In any case, cash-rich companies the size of Google and Apple have the firepower to pull this off.
ARM holds many unique patents forcing many companies to license from them, Apple can customize those designs, and the actual fabrication is outsourced to Taiwan Semiconductor (TSM), the largest and most technologically advanced semiconductor fabricator in the world.
In this specific case, Intel is the direct loser from the production of Apple M1 chips and at this point, this is becoming an existential crisis for Intel.
The acquisition of ARM is a gamechanger, and not just because NVIDIA would gain access to new markets like CPUs for mobile as early as 2021.
Integrating with ARM signals NVIDIA's future shift toward licensing of technology - a far more stable business model than the traditionally cyclical nature of semiconductor industry sales driven by upgrade cycles.
It all comes down to the quality of NVIDIA's chips which remain highly competitive in secular growth areas of tech, such as data centers and artificial intelligence. This alone should keep NVIDIA high up investors' list for years to come.
Demand for the new Nvidia GeForce RTX GPU has been “overwhelming” and the company completed its Mellanox acquisition, a tech firm that sells adapters, switches, software, cables, and silicon for markets including high-performance computing, data centers, cloud computing, computer data storage, and financial services, in April, helping it to double down on their revenue drivers.
Sales for Nvidia's chips remain robust across some of the most desirable end markets and there is nothing meaningful out there to suggest that Nvidia won’t continue its overperformance next year even if the shelter-at-home economy stops.
I am highly bullish on Nvidia stock into 2021 and beyond.
“Virtual reality, all the A.I. work we do, all the robotics work we do - we're as close to realizing science fiction as it gets.” – Said CEO of Nvidia Jensen Huang
Mad Hedge Technology Letter
December 11, 2020
Fiat Lux
Featured Trade:
(THE DIGITAL AD INDUSTRY COMEBACK)
(TTD), (GOOGL)
It’s been a helter-skelter year for tech investors and The Trade Desk (TTD) is one of those examples of a company whose fortunes have gone from rags to riches.
The spring started off with unrelentless economic pressure forcing companies to slash their marketing budgets to preserve capital.
One of the victims were digital advertisers.
The Trade Desk's shares cratered 40% but has since reversed course and is up more than 200% so far this year.
That’s not to say that in today’s digital marketing world, we have utter clarity – we don’t.
But uncertainty around the pandemic and the notion that digital marketers have seen the worst of is starting to get baked into the pie which is why we are seeing this massive share appreciation into the end of the year.
The light is starting to appear at the end of the tunnel and companies that slashed their marketing budgets or advertising budgets are starting to ramp up spending as they plan their budgets for 2021.
Through all of this, I am thoroughly impressed with the robustness of The Trade Desk's business model, evident in its third-quarter 2020 results.
While most companies faced enormous headwinds, The Trade Desk reported record revenue of $216 million, up 32% from last year.
Net income more than doubled to $41 million thanks to the company's revenue growth and operating leverage.
This demonstrates the nimbleness of the business, which continued to profit during a once in a 100-year recession.
Consensus was expecting $181 million, and overdelivering by these wide margins is one of the catalysts shepherding the incremental investor into The Trade Desk.
It was only in the 2nd quarter that year-over-year revenue was actually down 13% and then to go from down 13% to up 32% is quite outstanding.
Last year when the company was mushrooming, revenue was up 38% for the year pointing to more signs that the company is back to where it was pre-COVID.
That in itself is a huge victory in the digital ad world.
Breaking out some of the segments, Connected TV was one of The Trade Desk's biggest growth markets.
Connected TV revenue grew over 100% year-over-year, and that was from a strong quarter last year.
Mobile video spending grew 70%, and audio spending grew 70%.
The Trade Desk obviously has its mojo back.
The Trade Desk will go from strength to strength as the vaccine starts to roll out to parts of the developed world and consumers start to return to spending behavior that looks more pre-COVID.
Another bullish sign is that founder Jeff Green is still CEO of the company and owns more than $5 billion of The Trade Desk stock.
As an owner-operator, Jeff has the incentive, as well as the clout to lead the company toward success.
He has a stellar track record.
TTD’s revenue rose 14-fold between fiscal 2014 and fiscal 2019 and has been profitable since 2013 all while many “growth” companies have been burning cash.
TTD is well-positioned to improve on its growth on the back of two major secular trends: the continued migration toward digital advertising and the transition to programmatic advertising.
Data suggests it owns around 1% of the total global ad market - the total addressable market stands at $725 billion.
Clearly, the runway for a company like this is long if they can execute which they have shown consistently is the case.
Compare this with Google (GOOLG), a firm that has mature businesses that rely on ad revenues, and they have had an interesting year enduring some of the elements like TTD because it's a sudden major recession out of the blue.
Companies have used the opportunity to cut their ad spend and rightly so because that’s what happens in recessions, but the interesting fact about TTD is that the TTD is in the sweet spot for where ad money is going to go.
It's throwing the ball to where the wide receiver will get open in the back of the endzone and that's a game-changing takeaway about this company.
In terms of recent cash spend in the U.S., around $600 million to $700 million of the $1 billion that's been spent on this presidential election for advertising goes to TV. It goes to TV ad spending, and that's fourth-quarter ad spend, not third-quarter. Most of that money has been spent in October, and not only that, that big chunk of ad spend goes into just one week.
There is no doubt in my mind that a significant chunk of that flowed through to TTD.
When you think about programmatic advertising next year that goes on TVs, even smart TVs, we have got the Summer Olympics in Japan along with the European soccer tournament that starts in June 2021.
This means huge revenue bumps as big events bring in many unique opportunities.
These are just some of the whispers going on in the industry and I also believe that 2021 will be a year to remember for the digital ad companies.
Remember that consumers are spending, but not on travel, people aren't flying to Bali or Phuket, but they are consuming content online.
I can truly say that the Trade Desk isn’t just a flash in the pan company and that long term, the prospects are incredibly positive for this company, and obviously, that is starting to reflect in a quickly appreciating stock.
“An MBA is a bad idea. It teaches people all sorts of wrong things. They don't teach people to think in MBA schools.” – Said Founder and CEO of Tesla Elon Musk
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
