Mad Hedge Technology Letter
October 23, 2020
Fiat Lux
Featured Trade:
(PLAYING THE DIGITAL KLEPTOMANIA BOOM)
(SAIL)
I’ve got another one for you.
Yes, one of those early-stage tech growth companies that you should sock away in your tech portfolio only to peek at how much you are making every now and then.
This one is in the cybersecurity industry where business is booming.
Who would have thought that a pandemic crushing the global economy would stoke a mad rush into digital kleptomania?
Well, that is exactly where we find ourselves in late 2020 and that is why I undoubtedly need to recommend SailPoint Technologies Holdings, Inc. (SAIL) to my subscriber base.
Why should they be bought?
SailPoint Technologies Holdings, Inc. designs, develops, and markets identity governance software solutions.
Identity has become a critical part of the technology foundation businesses need to secure today's modern workforce.
A tech company that understands how to stoke the rate of adoption into higher SaaS platform numbers has my ear already and when you crossbreed this with customer interest and comfort in deploying their identity program in the cloud, then we are onto something.
Specifically, all signs flash green when increased adoption among larger enterprises this quarter has resulted in total revenue of approximately $92 million, representing 47% growth year-on-year.
Let’s list all the winner events that have made this company relevant recently.
For example, a large manufacturing company turned to SailPoint as part of their digital transformation efforts, shifting the majority of their business to the cloud, including their identity governance solution.
They chose SailPoint SaaS identity platform to help them govern their 65,000 users in an efficient, streamlined method while removing the nuisance of managing software updates and upgrades.
It’s clear to everyone that Sailpoint’s financial results in the quarter reflect broad-based accelerating adoption of the SailPoint platform and highlight the increasing criticality of the identity platform to today's distributed digital enterprise.
SailPoint stands out as the modern SaaS-native identity platform that can evolve with business, helping companies to sharpen decision-making and to support the workforce with greater velocity and efficiency.
Insatiable SaaS growth among Sailpoint’s existing customer base is a hallmark of Sailpoint as firms start to introduce a growing number of some of the newest SaaS services such as identity analytics and cloud governance.
Many companies are eager to extend and automate key areas of their identity program, giving Sailpoint another leg of growth within their SaaS business.
Another example is a large U.S. government agency that recently extended its identity program with SailPoint to ensure strong governance over the increasing number of cloud applications and infrastructure they manage across the business.
They selected SailPoint's cloud governance SaaS services to better protect and govern access over their various cloud resources, including their Azure cloud environment.
This is a critical next step for them in their journey with Sailpoint as much of their work relies on these cloud resources and needs to be properly governed and secured.
Deals were consummated at breakneck speed as of late, including many where Sailpoint replaced one of the large legacy vendors.
Closing this unbelievable volume of deals in the current precarious environment validates the criticality of Sailpoint’s products.
One of the world's largest multinational conglomerates that serve both commercial and government markets shifted to next-generation identity governance with Sailpoint. Sailpoint replaced a legacy identity vendor that could no longer meet their need for a much more dynamic, agile, and comprehensive approach to governing their 165,000 users worldwide.
These results were driven by strong bookings throughout the quarter and revenue upside in the next quarter is primarily in licensing, which for Sailpoint, comes primarily from sales of IdentityIQ.
Sailpoint IdentityIQ integrates provisioning and compliance features into a single solution. This product is able to address all the needs related to Identity and Access management such as access certifications, policy enforcement, account provisioning, and user life-cycle management.
A multitude of several large IdentityIQ deals was made in the quarter, and some of those were Sailpoint’s largest deals ever.
Most of the license outperformance was driven by term licenses that are effective subscriptions, just like Sailpoint’s SaaS and maintenance contracts.
Sailpoint also outperformed on SaaS bookings, driven primarily by SaaS first focus with IdentityNow and by sales of Sailpoint’s AI offerings to both IdentityNow and IdentityIQ customers.
Both sales to new logo customers and sales to existing customers helped subscription revenue increase by 36% year-over-year to $45.9 million or 50% of total revenue in the quarter.
Renewal rates remain strong across both maintenance and SaaS, and in a year where the pandemic has weakened sales, total gross margins for the quarter were 83% compared with 78% in Q2 of 2019.
The increase in gross margin was largely driven by the increased mix of license revenue in the quarter, although gross margins for other revenue lines continue to move in the right direction.
The cybersecurity company now expects total revenue to be between $341 million and $345 million with approximately $190 million driven by the subscription line, which represents 32% year-on-year subscription revenue growth.
An impressive feat in a year with outsized downward pressure on the macro environment.
To summarize, SailPoint Technologies Holdings, Inc. (SAIL) is a small player in the field with annual revenue south of half a billion dollars but growing revenue in the mid-30% range in a bad year and closer to 50% in good years.
The pathway to $1 billion annual revenue couldn’t be clearer for this company and is a buy on any dip.
“It is only when they go wrong that machines remind you how powerful they are.” – Said Australian Writer Clive James
Mad Hedge Technology Letter
October 21, 2020
Fiat Lux
Featured Trade:
(WILL ANTITRUST PROBLEMS UNLEASH GOOGLE?)
(GOOGL), (AMZN), (FB), (AAPL)
The Department of Justice and 11 U.S. states filing an antitrust lawsuit against Google isn’t as bad as it seems.
Abusing its monopoly power to make Google the default search service on browsers, mobile devices, computers, and other devices has meant quarter after quarter of cash cow growth.
Alphabet’s cash reserves are to the point where they can fritter away capital on loss-making divisions like autonomous driving technology Waymo.
Yes, it’s true that Google is no longer the scrappy start-up that they once were, but that doesn’t matter, and they certainly have the financial balance sheet to deal with any litigation that might or might not take place.
Part of the Google shares not selling off was validation that they are resourceful enough to get through this unscathed and they certainly have had years to prepare how to defend itself through the courts.
Google let their position known publicly by tweeting that the “lawsuit by the Department of Justice is deeply flawed. People use Google because they choose to — not because they're forced to or because they can't find alternatives.”
The standard corporate speak that Google uses is just a sign of the times where big tech has dwarfed the banks, is too big to fail and of pure clout in American government, business and society.
This has been a long time coming as the firm has been under investigation by the Justice Department, the Federal Trade Commission, and state attorney general that its search engine and digital advertising businesses may operate as illegal monopolies.
The specific lawsuit will likely reference competitors like Bing for denying them access to user data, as well as targeting Google’s “search advertising.”
It was only in July, Alphabet CEO Sundar Pichai, along with the CEOs of Amazon (AMZN), Apple (AAPL), and Facebook (FB) appeared before a hearing of the House Judiciary Committee’s Subcommittee and were made to look bad for their dominant position in the digital ad game.
Google has repeatedly pointed to earlier antitrust investigations by the FTC and state attorney general into its display search business that concluded in 2013 and 2014 without incident but they surely have known that this issue would pop back up time and time again.
The knock-on effects have been drastic with American innovation sapped of its incubatory juices.
In the modern age of tech, it’s almost impossible to build a unicorn from scratch without getting your business model hijacked from one of the anti-competitive tech firms.
And now — there are 6 tech firms that use their scale and power to drag down innovation.
The consequences have been higher share prices for big tech because if they can’t scare competition out of place, they will either buy them or find internal ways to sabotage their business ala Yelp.
Google’s digital advertising business has faced accusations due to its unrivaled size and volume which is also why it makes so much money.
The company controls some of the most important links in the online advertising chain, centrally its DoubleClick platform, a premier tool for online publishers, helping them to create, manage, and track online marketing campaigns.
This is why the “internet” or the companies that have access to tracking technology know everything about you and can front run the marketing process to cater towards you.
Acquired in 2007, DoubleClick was cited by Senator Elizabeth Warren (D-MA) as one of the major acquisitions Google should be forced to unwind to improve competition in the advertising space.
If DoubleClick were to unwind itself from Google, they would be an instant unicorn out of the gate.
And that isn’t just the only unicorn in the stable, there are many stand-alone unicorns in Google’s umbrella of assets — from Gmail, Google Cloud, Google Maps, YouTube, and even Google’s hardware division that manufactures phones such as the Google Pixel line.
I believe in the argument that the sum of the parts is dragging down each segment meaning once broken from the Alphabet death grip, each unicorn would be able to pursue decisions that are best suited for their own division and not just the parent company Alphabet.
There is only so long that each unicorn is willing to play for the team and once they go out into the wild, each will become its own unique growth company.
One possibility is Google’s search business spun out while the other businesses stay inside under parent company which is also viable since the investigations specifically pinpoint Google search.
Google search controls more than 90% of the world’s search traffic market share and most notably, Yelp complain about Google favoring its own products in search results.
In July, a Wall Street Journal investigation found Google’s search algorithm biased towards its own YouTube videos in search results over those of other services.
Google’s repeated abuses would likely be mitigated just by spinning out Google search and not allowing them to favor itself.
It is highly unlikely that a stand-alone Google search business would cede market share because they are simply the best search engine by a country mile.
They would most likely expand on the lead they already have.
In either case, if Google isn’t broken up, they win, and the share price will rise.
If they are broken up, the victory will be even more emphatic while supercharging each individual asset ending up in an even higher share price.
This could finally offer a jolt of innovation into the stagnant tech space which honestly has too many too-big-to-fail companies that are focused more on financial engineering at this point.
“Wear your failures as a badge of honor.” – Said Current CEO of Alphabet Sundar Pichai
Mad Hedge Technology Letter
October 19, 2020
Fiat Lux
Featured Trade:
(ROLL OUT THE OVERSTOCK.COM PLAYBOOK)
(OSTK), (AMZN)
As the virus engulfs the U.S. once again — I can’t help but think it’s time for the 2nd wave of Overstock.com (OSTK) going ballistic again.
Highlighting the insanity of 2020, Overstock.com shares were trading at a pitiful $2 on March 11 and then lockdowns happened, and the stock never looked the same again.
To say that underlying shares went parabolic is an understatement, the meteoric rise from $2 to $115 in a 5-month span is stuff of legends.
Remember that Overstock.com was just a middling backwater stock almost as Myanmar’s mediocre geopolitical status is to the Asian continent.
In fact, shareholders were in the process of searching for a buyer — in a way waving the white flag as a resentful ending to a half-hearted try to catch Amazon’s (AMZN) e-commerce business.
Overstock.com sells everything from baby toys to wrought iron firepit décor.
If it’s for the home or something related, they probably have it in store for you and as Covid has throttled the population’s go-to shopping places from strip malls to the shopping lanes of America, Overstock.com has become an outsized winner.
Let’s get into the weeds of their business.
With the tectonic shift to e-commerce likely permanent, shares can keep rallying specifically because the risk of another lockdown is increasing and the virus spreads again.
Multiple catalysts, both on the macro and micro level that can drive continued upside to revenue meaning high estimates for Ebitda (earnings before interest, taxes, depreciation, and amortization).
Bricks-and-mortar stores will continue to bleed market share to online competition even if the virus is handled, providing a tailwind for Overstock into 2021.
The company’s improved pricing model will shoot margins higher, while it also works to broaden its target audience and expand marketing.
Overstock has evolved in recent years, thanks to new management and a new strategy, which includes a timely focus on home goods, a retail standout during the pandemic. It also has blockchain-based ventures that bulls say the market is ignoring.
The one-sentence answer to why the stock has gone ballistic is easy — 109% revenue growth year over year.
The company ended the quarter with a healthy balance sheet that included a cash balance of over $300 million.
Overstock Retail's exceptionally strong second-quarter performance was on fire supporting a 200% increase in new customers, and profitability, as measured by adjusted EBITDA, improved by $51 million year over year.
A key takeaway here is the scalability of Overstock’s pure-play e-commerce model and efficiencies created through partner drop-ship program.
Overstock’s overarching goal is to create operating leverage by growing top line at a faster pace than operating expenses.
Overstock is profitably gaining new customers and making progress toward achieving sustainable, profitable growth long term.
Last quarter, revenue from their Retail business was a record $767 million and customers are increasingly finding and purchasing products in core home furnishings categories.
Compared to the second quarter of 2019, new customer growth increased by over 200%, and Overstock has experienced strong customer purchase repeat behavior.
Gross margin improved by almost 3.5% year over year and the margin improvements were fueled largely by operational efficiencies, as well as several onetime items unique to the second quarter of 2020.
The onetime items included lower costs from being understaffed in the customer care organization as Overstock adjusted to increased sales volumes, a benefit from fulfillment-related charges as part of the service level agreements to protect customers' experience, and lower discounting activity as they strategically balanced marketing efforts against product availability and stockouts.
Operating expenses improved 5% as management was able to leverage technology expenses, illustrating the strong operating leverage inherent in an e-commerce business.
Overstock is one of a slew of internet companies that will harvest the fallout from another spread of the virus.
I believe it’s time to roll out the Overstock playbook again and buy and hold shares.
For short time traders, this is a beast of a stock to execute short-dated trades on because of the elevated volatility, but in general, I am bullish on this company through 2021.
“Almost everything is like a machine.” – Said Hedge fund Manager Ray Dalio
Mad Hedge Technology Letter
October 16, 2020
Fiat Lux
Featured Trade:
(CELL TOWER INDUSTRY IS PRINTING MONEY)
(CCI), (SBAC), (UNIT), (VNQ), (LMRK), (VMI)