“There are a lot of politicians who are just obstructionists.” – Said CEO of Salesforce Marc Benioff
Mad Hedge Technology Letter
November 30, 2020
Fiat Lux
Featured Trade:
(THE GREEN LIGHT FOR E-COMMERCE)
(AMZN), (W), (OSTK), (WMT), (TGT), (MELI), (EBAY), (CRM), (ADBE)
Data from Adobe Analytics is in and it suggests that e-commerce is delivering on its expected domination over retail.
I can’t ignore the helping hand of the pandemic which has deemed pedestrian shopping malls too dangerous to set foot in and for analog businesses that survive, it is essentially coming down to whether a digital footprint has been developed or not.
There is only so much a PPP loan can do to paper over the cracks of a non-digital business.
At some point, CEOs will need to wake up and understand that survival means a migration to digital.
Forecasts show that Black Friday online sales will register between $8.9 billion and $10.6 billion, which represents growth of up to 42% year over year.
The data firm expects Black Friday and Cyber Monday to become the two largest online sales days in history as consumers shift more spending toward e-commerce amid the public health crisis.
By last Friday morning, Salesforce projected online sales in the U.S. for Black Friday to spike 15% to $11.9 billion.
The truth is that many shoppers got their shopping done even before Thursday and Friday with digital sales in the U.S. spiking 72% year over year on Tuesday and were up 48% on Wednesday.
E-commerce companies front-ran the actual holidays to eke out more profit in the anticipation of competitors offering earlier sales.
According to Adobe, Thanksgiving sales hit a record $5.1 billion, up 21.5% over 2019 and this aggressive growth rate can be considered the new normal.
Smartphones continued to account for an increasing segment of online sales, with this year’s $3.6 billion up 25.3%, while alternative deliveries — a sign of the e-commerce space maturing — also continued to grow, with in-store and curbside pickup up 52% on 2019.
Shopify said that over 70% of its sales are being made using smartphones.
What are the hot gift items?
Electronics, tech, toys, and sports goods being the most popular categories — at the right price will help retailers continue to experience elevated sales volume.
Adobe said a survey of consumers found that 41% said they would start shopping earlier this year than previous years due to much earlier discounts.
This season is headed for record-breaking levels as consumers power online sales for both holiday gifts and necessities.
Not all big-box retailers were open over the holidays and getting that extra surge from the likes of daily needs such as paper towels, cleaning products, and garbage bags has boosted the top-line growth as well.
We have seen the perfect storm of elements fuse together to help the bottom line records of the likes we have never observed.
Comps will be difficult to beat next year if the vaccine solution starts coming online by next winter and considering that the worst economic damage is behind us.
Next year, the U.S. consumer will have more to spend setting up a tough but possible beat to next year’s numbers along with the high likelihood that tech stocks will experience another leg up.
There will be a lot happening in between, such as a new U.S. administration that is primed for a different economic polic; but it’s impossible not to love the narrative of certain e-commerce companies such as Shopify (SHOP), MercadoLibre (MELI), Target (TGT), Walmart (WMT), Etsy (ETSY), Wayfair (W), eBay (EBAY), Overstock.com (OSTK), Amazon (AMZN) and the companies that measure their data like Salesforce (CRM) and Adobe (ADBE).
If we ever could anoint when a year became the year of technology, then this would be it in 2020.
The base case for next year is that the borders and states will still grapple with the virus and the knock-on effects to society, economy, and politics as the capacity to produce the virus won’t meet demand for at least a year.
Tech stocks are primed to outperform non-tech next year and even though multiples are high, the momentum suggests that this group of stocks will be the gift that keeps giving as the Fed has offered generous liquidity conditions to tech investors.
“Life's too short to hang out with people who aren't resourceful.” – Said Jeff Bezos
Mad Hedge Technology Letter
November 25, 2020
Fiat Lux
Featured Trade:
(A COMPANY AT THE CROSSROADS OF HEALTH CARE AND TECH)
(SDGR)
For those speculative tech investors, I have an early-stage tech company that could be of interest to you.
This one is a big loss-maker just like in the mold of most growth companies, but they have the stereotypical revenue growth trajectory that is prevalent in strong tech stocks.
It might be a while before this one turns a meaningful profit but this company also sits at the intersection of healthcare and software cloud computing which is an ideal place to be in the 2020s.
Investors who can absorb higher risk and volatile price action should take a flyer on Schrödinger, Inc. (SDGR) who provides a computational platform to accelerate drug discovery and materials design for biopharmaceutical and industrial companies, academic institutions, and government laboratories worldwide.
Their most recent earnings reports offer us a brief snapshot of this burgeoning software company with software revenue underpinning top line of $22.9 million, an increase of 42% compared to the third quarter last year.
Schrödinger continues to see deeper engagement within the platform by customers, leading to robust year-over-year growth in software revenue.
They also have a talented team of scientists and software developers that continue to make significant progress in advancing the science that undergirds the computational platform.
Schrödinger recently published several papers describing advances in FEP+, including improved methods for accurately modeling binding affinities in metalloenzyme inhibitors, improved support of macrocycle design and optimization, and improved approaches to optimizing binding selectivity, which is a major way of reducing potential toxicity of drug molecules.
Schrödinger also adopted active learning workflow for structure-based hit discovery, which can screen massive libraries of compounds with greatly improved computational efficiency.
The firm has seen new drug candidates discovered in their collaborative programs progress into IND-enabling and first-in-human studies.
I believe these advancing programs represent examples of the impact of Schrödinger’s physics-based methods, not just in achieving broad exploration of chemical space, but more importantly, on the optimization of high quality development candidates, with balanced properties for clinical testing.
As an example, Morphic's MORF-057 for inflammatory bowel disease, which initiated a clinical trial in the third quarter, is one of several examples where Schrodinger Technology-enabled solutions to their health partner's preclinical design challenges.
In this case, the design of selective compounds for the integrin alpha 4 beta 7 was enabled by an important advancement to properly treat the receptor's metal centers.
Schrödinger recently reported a significant increase in the number of collaborative programs that had reached the latest stages of drug discovery.
I expect to see many of the collaboration programs and lead optimization into preclinical development over the next year.
What about the internal pipeline?
Schrödinger launched five oncology programs targeting solid tumors and hematological malignancies.
The preclinical data packages assembled to date include mechanistic validation and anti-tumor activity data.
I believe, based on the data generated to date, that each of these assets could have monotherapy activity in specific populations, as well as utility, in combination with other approved and late-stage oncology products.
Looking forward, Schrödinger has also prioritized several new program opportunities, with genetic support in human cohorts and emerging pharmacology data, in oncology and immunology.
In addition to strategic hires in preclinical and early clinical development, they have also expanded the drug discovery team, adding key seasoned immunology expertise.
All of this translates into a meaningful rise in software revenue because of the increased adoption of solutions by large customers, as well as the addition of new customers.
Schrödinger continues to experience strong uptake in live design, and their enterprise solution for drug discovery.
Live design integrates discovery workflows and can be especially powerful in fully remote work environments that many of us are still experiencing.
Software gross margin was 81% this quarter, unchanged from the third quarter of 2019.
Schrödinger’s business model has not been impacted by the health pandemic, and neither is its future runway of potential revenue.
The only drag from the pandemic is on the drug discovery side, it could cause temporary delays in some programs. In any case, I do not envision a long-term impact from the public health situation on Schrödinger’s ability to execute and deliver on its strategy.
In summary, Schrödinger’s outperformance stems from its brilliant execution across its array of businesses, resulting in strong revenue growth, increasing collaboration equity value, progress in internal and collaboration programs, continued scientific advancement of in-house technology, and the successful IPO and follow-on financings that strengthen their balance sheet and provide strategic optionality.
Annual revenue still is under an annual run-rate of $100 million and as software revenue growth still displays robust plus-40% growth rates and a juicy gross margin of 81%, it’s only a matter of time before institutional investors start deploying capital in this up-and-coming tech name.
“AI will not replace physicians. However, physicians who use AI will replace those who do not.” – Said The Mad Hedge Fund Trader John Thomas
Mad Hedge Technology Letter
November 23, 2020
Fiat Lux
Featured Trade:
(COMMUNICATIONS HAS NEVER BEEN MORE IMPORTANT)
(TWLO), (TWTR), (CRM), (SQ), (AMZN), (OSTK), (W)
Growth is not dead as last week’s tech rally shows that tech stocks still have their allure.
One tech growth stock that I am absolutely in-love with is communications-as-a-platform cloud stock Twilio who services Airbnb and Uber as the software that connects the users to their staff.
The ability to communicate with customers in real time has never been more urgent in a fast-paced world, especially in the software-centric economy.
From food delivery to booking hotels, from customer service to password resets, literally anything revolves around the ability to connect reliably and rapidly.
Many people in 2020 still do not even know what Twilio (TWLO) does!
They are the dark horse cloud company that nobody has heard of.
The company provides the software building blocks that lets developers embed Twilio's communication technology in their apps, messaging systems, emails, and more. It also streamlines the process so it can be accomplished in a matter of hours, rather than weeks or months.
Here’s an insanely applicable example: The update you received from Lyft regarding your ride, the text messages and reservation confirmation you got from Airbnb, the customer service interactions with Disney's Hulu, and the booking confirmation from your restaurant via Yelp? These were delivered by Twilio's technology.
In pandemic third quarter, Twilio's revenue climbed 52% year over year, while also avoiding a loss, swinging from a loss in the prior-year quarter.
The company reported 208,000 active customers, up 24% year over year.
There is no mistake that these types of cloud stocks are in the vein of Twitter (TWTR), Salesforce (CRM), Square (SQ), and so on and at the vanguard of the hullabaloo of growth stocks.
Why are growth stocks so popular?
Growth stocks are companies that increase their revenue and earnings faster than average.
A growth company relentlessly develops an innovative product or service or at the top of the pack of fastest-growing industries and unsurprisingly that is technology, and that fact won’t change for generations.
Firms growing faster than average for long periods tend to be rewarded by the market, and this is why there has been a massive migration to growth stocks that has enriched shareholders of Apple (APPL), Facebook (FB), Netflix (NFLX), and so on.
Growth also begets additional growth and the faster they grow, the bigger the returns can be.
They are also more expensive than the average stock in terms of metrics like price-to-earnings, price-to-sales, and price-to-free-cash-flow ratios, but investors look past this in an age of expanding liquidity which is the catalyst that breathes even more momentum into these stocks.
US growth stocks secure a premium just for the possibility they will fulfill their parabolic growth potential.
Capitalizing on powerful long-term trends can grow their sales and profits for many years, and the following are a list of seminal trends that all involve technology data points as the secret sauce.
- E-commerce: The massive migration to online shopping is here to stay and the coronavirus has acted like a supercharger to e-commerce company like Amazon (AMZN), Overstock (OSTK), and Wayfair (W).
- Digital advertising: The digital ad market is moving marketing budgets from TV and print to online channels.
- Digital payments: Contactless payments and fintech (through a smartphone) will eventually replace physical card transactions.
- Cloud computing: Computing power is migrating from on-premise data centers to cloud-based servers. Amazon’s (AMZN) and Alibaba’s (BABA) cloud infrastructure services help make this possible, while Salesforce.com (CRM) provides some of the best cloud-based software available.
- Cord-cutting and streaming entertainment: Millions of people are only paying for internet services that offer on-demand content and provide access to premium packages. This trend has been supercharged by the Millennial generation.
These powerful trends will last decades giving you plenty of time to claim your share of the profits they create.
Rank growth companies with strong competitive advantages. Otherwise, their business might fail.
Some competitive advantages are:
- Network effects: Facebook is a valid example that built its usership by offering other assets like WhatsApp and Instagram to snowball into a 2 billion number usership. The synergies are plentiful with the ability to cross-sell its products across platforms and aggregating data to deploy the intel in the best way it can make money.
- Scale advantages: Size can be another powerful advantage. Amazon is a great example here, as its massive global fulfillment network is something its smaller rivals will find extremely difficult to replicate.
- High switching costs: Switching costs are expenses and difficulties involved in switching to a rival product or service. Once a company begins to use e-commerce company Shopify as the core of its online operations, they are unlikely to absorb the burden of switching to another competitor.
Pinpointing large addressable markets means a larger opportunity to secure higher revenue and Twilio is occupying a spot at the intersection of generational, long-term trends and almost unfair competitive advantages.
The underlying shares have rocketed this year as communications has never been more important. This is a great buy and hold stock for the long term because trading short term is difficult with its elevated volatility.
“I don’t want to fight old battles. I want to find new ones.” – Said Current CEO of Microsoft Satya Nadella
