Mad Hedge Technology Letter
November 20, 2020
Fiat Lux
Featured Trade:
(DON’T STRIKE OUT WITH THE CLOUD)
(WCLD), (EMCLOUD)
Success in 2020 is predominantly decoding complicated data and finding perfect solutions for it; and trading in technology stocks is no different.
Investing in software-based cloud stocks has been one of the overarching themes I have promulgated since the launch of the Mad Hedge Technology Letter in February 2018.
Now as we cruise into 2021, the bull-case for technology stocks has never been more relevant.
Instead of racking your brain to find the optimal cloud stock to invest in, I have the idiot’s way to just deploy money and sit back and relax.
Invest in The WisdomTree Cloud Computing Fund (WCLD) which aims to track the price and yield performance, before fees and expenses, of the BVP Nasdaq Emerging Cloud Index (EMCLOUD).
What Is Cloud Computing?
The “cloud” refers to the aggregation of information online that can be accessed from anywhere, on any device remotely.
This is the idea that is powering the “shelter-at-home” trade which has been hotter than hot in 2020.
Cloud companies provide on-demand services to a centralized pool of information technology (IT) resources via a network connection.
Even though cloud computing already touches a significant portion of our everyday lives, the adoption is on the verge of accelerating due to advancements in artificial intelligence and the Internet of Things (IoT).
The Cloud Software Advantage
Cloud computing has particularly transformed the software industry. Over the last decade, cloud Software-as-a-Service (SaaS) businesses have dominated traditional software companies as the new industry standard for deploying and updating software. Cloud-based SaaS companies provide software applications and services via a network connection from a remote location, whereas traditional software is delivered and supported on-premise. I will give you a list of differences to several distinct fundamental advantages for cloud versus traditional software.
Product Advantages
- Speed, Ease, and Low Cost of Implementation – cloud software is installed via a network connection; it doesn’t require the higher cost of on-premise infrastructure setup and installation.
- Efficient Software Updates – upgrades and support are deployed via a network connection, which shifts the burden of software maintenance from the client to the software provider.
- Easily Scalable – deploying via a network connection allows cloud SaaS businesses to grow as their units increase, with the ability to expand services to more users or add product enhancements with ease. Client acquisition can happen 24/7 and cloud SaaS companies can more easily expand into international markets.
Business Model Advantages
- High Recurring Revenue – cloud SaaS companies enjoy a subscription-based revenue model with smaller and more frequent transactions, while traditional software businesses rely on a single, large, upfront transaction. This model can result in a more predictable, annuity-like revenue streams making it easy for CFOs to solve long-term financial solutions.
- High Client Retention with Longer Revenue Periods – cloud software becomes embedded in client workflow, resulting in higher switching costs and client retention. Importantly, many clients prefer the pay as-you-go transaction model, which can lead to longer periods of recurring revenue as upselling product enhancements does not require an additional sales cycle.
- Lower Expenses – cloud SaaS companies can have lower R&D cost because they don’t need to support various types of networking infrastructure at each client location.
I believe the product and business model advantages of cloud SaaS companies have historically led to better margins, growth, free cash flow, and efficiency characteristics as compared to non-cloud software companies.
How does the WCLD ETF select its indexed cloud companies?
Each company must suffice critical criteria such as they must derive the majority of revenue from business-oriented software products, as determined by the following checklist.
+ Provided to customers through a cloud delivery model – e.g., hosted on remote and multi-tenant server architecture, accessed through a web browser or mobile device or consumed as an application programming interface (API).
+ Provided to customers through a cloud economic model – e.g., as a subscription-based, volume-based or transaction-based offering Annual revenue growth, of at least:
+ 15% in each of the last two years for new additions
+ 7% for current securities in at least one of the last two years
Some of the stocks that would epitomize the characteristics of a WCLD stock are Salesforce, Microsoft, Amazon-- I mean, they are all up, you know, well over 40% from the lows they saw in March and contain the emerging growth traits that make this ETF so robust.
If you peel back the label and you look at the contents of many tech portfolios, they tend to favor some of the large-cap names like Amazon, not because they are “big” but because the numbers behave like emerging growth companies even when the law of large numbers indicate that to push the needle that far in the short-term is a gravity-defying endeavor.
We all know quite well that Amazon isn't necessarily a direct play on cloud computing, but the elements of its cloud business are nothing short of brilliant.
But with ETF funds like WCLD, what they look to do is to cue off pure plays and include those that are growing faster than the broader tech market at large. So you're not going to necessarily see the vanilla tech of the world in that portfolio. You're going to see a portfolio that's going to have a little bit more sort of explosive nature to it, names with a little more mojo, a little bit more risk because you're focusing on smaller names that have the possibility to go parabolic and gift you a 10-bagger.
In a global market where the search for yield couldn’t be tougher right now, right-sizing a tech portfolio to target those extra-ordinary tech growth companies is one of the few ways to produce alpha without overleveraging.
No doubt there will be periods of volatility, but if a long-term horizon is something suited for you, this super-growth strategy is a winner.
Mad Hedge Technology Letter
November 18, 2020
Fiat Lux
Featured Trade:
(HOT TECH STOCKS GOING INTO THE RECOVERY)
(YELP), (EXPE), (TRIP)
It’s hard to be net short these days when we are staring at an imminent recovery and by this, I mean not a recovery like the past 6 months where extreme optimism was surrounded by the ceaseless spreading of the virus.
Multiple companies such as Moderna and Pfizer have announced the successful creation of Covid-19 vaccine meaning that consumer behavior and the global economy will come back to normal earlier than first thought.
This is great news for a digital ad company like Yelp (YELP) because they rely on the high volume of businesses open.
Their model is based on consumers offering free reviews and they sell digital ad space on their platform.
With one fell swoop, the virus crushed their business model which was why shares halved during the worst bits of the pandemic.
Sentiment has revered and Yelp stock has been on a remarkable tear, gaining ground for nine straight days and rallying 53% in the process.
The rally started a few days ahead of the company’s better-than-expected third-quarter earnings report, gained momentum when the numbers were released.
Yelp is one of the tech sector’s most outsized profit chances on the reopening of the economy—and investors have jumped aboard.
In my estimation, Yelp is a $40 stock masquerading at $30 today.
Travel-related internet stocks given the potential for a Covid-19 vaccine will feel the same tailwinds and stocks that come to mind are Expedia Group, Inc. (EXPE) and TripAdvisor, Inc. (TRIP).
The beaten-up cyclicals have re-rated over the last several days, Yelp is a standout as a name that should have a clear path towards both multiple and estimate upside from here.
In fact, Yelp’s revenue decline hasn’t been as bad as that of the travel sector, thanks in part to stronger-than-expected restaurant demand.
Even though we have experienced stringent lockdowns, Europeans largely traveled in the summer inside of Europe and Americans still found a way to domestically travel even if more localized.
If the market supports a return post-vaccine for the travel industry, it is clearly confirmation that Yelp’s business will recover fast even if not to the peak of summer 2019.
At these price levels, Yelp has a relatively attractive valuation and improving fundamentals.
When a Covid-19 vaccine is developed and comes available, the company should benefit substantially in terms of foot traffic for businesses on its platform as well as its app volume.
Yelp recently reported a net loss of $1 million, or 1 cent a share, compared with profit of $1 million, or 14 cents a share, in the year-earlier period, and although down, it could have been much worse.
Revenue dropped 16% to $220.8 million from $262.4 million.
"Yelp’s third-quarter results demonstrate our business’s considerable resilience, highlighted by positive year-over-year revenue growth in two key areas of our long-term strategy: home and local services and our self-serve sales channel," Co-Founder and Chief Executive Jeremy Stoppelman said in a statement.
Even though travel and retail outlets were affected, Stoppelman indicated new businesses are being created to serve this new type of economy where the home is the center of businesses.
No doubt there will a surge of new services that will support technological infrastructure for the home and home maintenance.
Yelp’s strong balance sheet and increased sales efficiency will allow Yelp to return to sustainable growth in the new year while still managing the impacts of the pandemic.
The company has clearly shown they are on top of the ball, they use their agility to morph with their times and at this price level, Yelp is an unequivocal buy.
“I fear the day when the technology overlaps with our humanity. The world will only have a generation of idiots.” – Said German-born Theoretical Physicist Albert Einstein
Mad Hedge Technology Letter
November 16, 2020
Fiat Lux
Featured Trade:
(THE GOLD STANDARD OF U.S. SEMICONDUCTOR COMPANIES)
(NVDA)
Tech investors who want a sure-fire way to sleep well at night while holding tech stocks should consider one semiconductor stock that is a generational gamechanger.
Short-duration trades in chip companies are susceptible to major selloffs because of the inherent boom-bust nature of the chip market.
Combine that with geopolitical headwinds that make consistent contract negotiations a possible one-off activity making it difficult to decode the short-term movements of the underlying shares.
Even with all the difficulties, Nvidia (NVDA) is a must-own stock for anyone that has any ambition to overperform deploying a basket of tech stocks.
This is the gold standard of technology buttressed by a plethora of secular growth drivers.
There are not many companies out there recreating a significant smorgasbord of multiple long-term growth segments.
Nvidia’s cash cow is its secular growth in gaming and graphics chips plus the data center business.
But it also has skin in the game in AI and machine learning, autonomous driving, and professional graphics.
Not only do they participate in these segments, but they are downright beasts in every segment they take part in which validates the firm as a high-quality operational outfit.
Basically, the company’s GPU (graphics processing unit) offerings are the best in the business.
I tell my high school nephews to find a job at Nvidia in the future.
Even though competition has increased—how could it not?—we know Nvidia’s products are top-notch because its margins are better, and they are able to command a higher premium with no push back.
Accelerating growth is really the common denominator found across the myriad of segments.
I expect 44.6% total revenue growth this year to $15.8 billion.
This estimate stood at just $10.8 billion at the beginning of the year and thus, I have moved up my revenue forecasts by about 50%.
Revenue estimates increasing by $5 billion for this year confirm that Nvidia is one of the tech titans of the world.
Constant revenue upgrades are the hallmark of a healthy tech company and its parabolic rise is in the early innings.
And can you believe that this was a supposed down year because of the macroeconomic weakness?
Imagine what they could do during a “good” year?
Earnings are forecast to grow an even more stellar 57% to $9.11 per share this year.
This year, 2020, isn’t just a demand-driven event due to the novel coronavirus.
The runway is long on the supply side and the elevated demand for its products is just one piece of the puzzle.
Soon enough Nvidia (NVDA) will report quarterly results on Wednesday, November 18, and they will most likely confirm my hunch that the overperformance in 2020 will spill over into 2021 and beyond.
The company has been a prime beneficiary of the “shelter-at-home” driven secular trends such as gaming and data center.
The underlying stock has doubled to over $530 this year and I forecast Nvidia to deliver a solid beat and model above any extreme estimate, driven by an expectation of an extra week of revenue that may not be fully accounted for.
The unparalleled growth due to the renaissance in video games cannot be understated and now that a third wave in the U.S. and second wave in Europe is inevitable, gaming will be thrust into the limelight again.
Some of the segments that I see expanding rapidly are 153% year-over-year growth for Datacenter and a 27% year-over-year increase for Gaming, with the two segments making up 41% and 47% of sales, respectively.
Even though they continue to hit on all cylinders in an otherwise challenging macro environment, I feel the overall premium is reflected in its share price.
Even though operational execution is likely to be perfect, I don’t see much upside in the stock in the short-term and investors will need to use any 10% dip to buy and hold Nvidia long-term.
I don’t recommend short-duration trades in Nvidia because of the volatile nature of the price action.
This is a transformational tech institution and is absolutely worth owning.
“The AI technology will keep you out of harm's way. That is why we believe in an AI car that drives for you.” – Said CEO of Nvidia Jensen Huang
Mad Hedge Technology Letter
November 13, 2020
Fiat Lux
Featured Trade:
(HOW TO STOP THE E-CRIMINALS)
(CRWD), (AVGO)
Cybersecurity is not a discretionary purchase for corporates.
This must-have product soothes the minds of every cybersecurity executive in the world.
I’ll explain how this point of strength is capitalized on by major growth security tech company CrowdStrike (CRWD).
Let me put my stamp on this indispensable service keeping cloud services afloat.
I can say with conviction that this is the beginning of a multi-year trend being driven by the industry consolidation that took place last year along with the seismic shift to cloud technologies.
Fortune 500 companies are increasingly choosing CrowdStrike as their security cloud platform.
CrowdStrike customers have never been larger and have never bought more modules and the same type of optimism appears in the stickiness of the number of new customers that surpass annual recurring revenue (ARR) of over $1 million.
Cybersecurity is mission-critical to both the public and private sectors.
Endpoint or workload security is also essential to protecting a remote workforce and as many of you know, the global remote workforce has never been bigger because of the pandemic.
While the damage to the macroeconomy from the coronavirus is gyrating at an accelerated pace, it is forcing companies to conduct business differently and rapidly shift to a remote workforce.
With CrowdStrikes’ cloud-native platform, this lightweight agent is easily deployed at scale and its frictionless go-to-market engine, CrowdStrike is uniquely positioned to meet any type of cybersecurity requirement.
The financial performance of the company is as healthy as ever as the company added a record $99 million in net new ARR and year-over-year, they increased the number of net new subscription customers by 116%, achieving 90% subscription revenue growth and 89% total revenue growth.
There were three outsized achievements this year: CrowdStrike delivered exceptional growth at scale, significantly improved margins, and achieved positive free cash flow for the fiscal year.
The seismic shift to cloud-native technologies and cloud workloads including containers has created an environment with massive greenfield opportunities.
Many competitors are dragged down by the complexities of integrating acquired technologies, rationalizing their workforce, or retooling their on-prem offerings.
Another positive tailwind is when Broadcom (AVGO) began integrating Symantec, there was a nice increase in inquiries among both customers and partners because they simply didn’t like Broadcom’s new products and vacated them to move towards CrowdStrike’s offerings.
This dynamic will contribute to an expansion in CrowdStrike’s pipeline, an acceleration in the overall customer adoption and increased engagement with partners.
Several partners in the United States and abroad have launched Symantec replacement campaigns as well but I believe CrowdStrike offers some of the most robust products.
One company submitted a list of several thousand of their customers that will be migrating away from Symantec in the next year and there was very little overlap between these prospects and CrowdStrike’s existing customer base.
The customer base has more than doubled and now protects the safety of 5,431 customers.
870 net new customers in Q4 joined CrowdStrike, which is up 136% year-over-year.
Chief Information Officers (CIOs) and Chief Information Security Officers (CISOs) are looking for a strategic partner to help them bridge this skills gap and simplify their operations, while at the same time, reducing cost.
They are also looking for ways to leverage enhanced automation in their security operations to increase efficacy and free up resources.
These organizations are increasingly rotating capital to CrowdStrike’s Falcon platform to protect an array of workloads, stop breaches, and restore system performance.
All new customers increased average number of modules in every quarter this past fiscal year.
The percentage of all subscription customers with four or more modules once again increased and those that adopted five or more cloud modules grew to one-third of their customer base.
As customers adopt more modules that span a wide array of workloads, it strengthens the customer relationship and increases CrowdStrike’s strategic position with the customer.
Companies who pay for other security alternatives keep running into the same roadblock of patchwork vendors who are largely ineffective and bureaucratic.
The burden is then directly placed on their resource-constrained IT security team eroding performance and souring team morale.
Another big problem is that a large percentage of the corporate platforms are not on the latest build of Windows, they could not update to newer versions exposing them to malware and security malfunctions.
This result is a cumbersome, manual remediation process and often requires the security team to reach out to users directly dragging out any possible IT solution.
CrowdStrike simply has this covered and can replace all three endpoint security solutions with the Falcon platform and offer seven modules providing firms with comprehensive protection and visibility in their environment and freeing up internal resources.
Existing legacy vendor failing is a common problem, and they fall victim to malicious activity shutting down production at major international facilities.
The ability to deploy the solution quickly can save the customer millions in manufacturing line productivity losses.
Beyond the immediate value provided by remediating a breach, there is significant value realized by streamlining a security stack. With the Falcon platform, firms can eliminate more than ten legacy tools and considerably improve their visibility and security posture.
CrowdStrike is collecting customers across diverse industries, geographies, and size because of proven efficacy and stopping breaches, and its cloud-native platform and lightweight single agent that is easily deployed at scale.
The predictive power of AI-driven threat graph that gets smarter the more data it consumes means the products get better with age.
The coronavirus has done nothing to dent the insatiable trend of companies searching for better security solutions.
While the coronavirus is having an impact on the global economy, it will not stop cyber adversaries. Cybersecurity provides business resiliency and meets compliance requirements.
In times of crisis, adversaries will try to exploit the situation, prey on the public's fear, and escalate new attacks.
I know it's difficult to fathom, but we've already seen nation-state adversaries from rogue regimes and e-criminals launch phishing campaigns using coronavirus marketing as clickbait entrance mechanism.
The world of global business is certainly not naïve in 2020 and tech investors shouldn’t be too.
CrowdStrike is still a small company but its growth trajectory is a sight to behold and every dip should be bought on the back of their solid business model.
