Mad Hedge Technology Letter
September 28, 2020
Fiat Lux
Featured Trade:
(THE SIMPLE WAY TO SUPERCHARGE YOUR TECH PORTFOLIO)
(WCLD), (EMCLOUD)
Superiority is mainly about taking 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.
Well, if you thought every tech letter until now has been useless, this is one that should whet your appetite.
Instead of racking your brain to find the optimal cloud stock to invest in, I have a quick fix for you.
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 to accelerate 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 is nothing short of brilliant.
But ETF funds like WCLD, what they look to do is to cue off of pure plays and include pure plays 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.
“Learning to fly is not pretty but flying is.” – Said CEO of Microsoft Satya Nadella
Mad Hedge Technology Letter
September 25, 2020
Fiat Lux
Featured Trade:
(CASHLESS PAYMENTS ARE HERE TO STAY)
(SQ)
Cashless payments have gained a major foothold into consumer’s lives all brought about by the pandemic, according to a new consumer survey.
This transformational trend is just another reason traders should look at Fintech firm Square (SQ) which has been one of my favorite tech stocks for the past 2 years.
The never-ending pandemic has accelerated the trend toward cashless transactions and the digit economy.
Conversely, the non-cashless society has taken the brunt of the pain in the form of job losses and the jobless rates remain stubbornly high in the Northeast and West trending above 10% in 10 states in the U.S. last month.
It’s clear which area of the economy to invest in and that’s digital payments.
Before the pandemic, in February 2020, 5.4% of Square sellers in the US were cashless, which Square defines as any business accepting more than 95% of their sales by in-person credit or debit card payments, online payments, or contactless payments.
Moving to April, that number soared to 23.2% and by August, when many stay-at-home restrictions were lifted, it was 30%.
To highlight the trend away from a hard currency society, for payments transacted by Square sellers, the share of cash transactions dropped from 37% in February to 33% in April at the height of the lockdown.
Square delivered an analysis indicating it would take over four years to achieve this oversized cashless drop.
That is the underlying story of the pandemic – multiple years of digital transformation and acceleration scrunched into 7 months.
Not only have the secular trends strengthened tech’s fundamentals, but the employees themselves have collaborated to deliver new products such as On-Demand Pay which will allow Square merchant employees to take a cash advance of up to $200 with no fee. The second service is Instant Payments which allows sellers to fund their payroll from their Square Seller account, speeding up the transaction.
Both services take advantage of the increasing number of consumers using Cash App, delivering wider access to cash for both employers and employees. The synergies between Square's consumer and seller ecosystem is a significant competitive advantage for the company that should drive continued adoption of its products and services.
Scaling the individual ecosystem, cross-selling services within each ecosystem, and finally connecting the ecosystem has been an effective three-prong strategy for Square’s management.
These are services that minimize business risk and an example of how it can disrupt the old way of handling something like payroll. As the two ecosystems grow, Square may find other areas where it can create value between them.
The new products will improve adoption for Payroll among merchants while boosting Cash App adoption and the direct-deposit feature in particular.
Both services will boost increased balances in seller and Cash App accounts. That should increase the appeal of other Square services like the Square Card or Cash Card. It could also lead to more Cash App users investing or sending cash to friends.
It would make sense that greater balances in seller accounts would produce similar results on the seller side. And as Square merchants use more than one service from the company, Square can start offering even better deals to sellers.
In the future, other products that could be rolled out include avenues like loyalty programs, lending products, or other ways to facilitate commerce. Square is just getting started, but the fintech company's new Payroll products show the potential to create significant change in the small business financial services industry and seize market share.
Contrast the bustling activity happening in the fintech space with brick and mortar stores and the difference couldn’t be starker.
The follow-through has been vivid with Square’s shares lurching higher by 150%.
Not only do Square’s engineers work together to create more revenue-building products at scale, but Square is feasting from a once in a generation pivot to mobile digital payments.
Square’s formula has been a recipe for success proving that the road to Damascus is shorter than it seems.
I am highly bullish Square.
“You don't have to start from scratch to do something interesting.” – Said CEO of Twitter and Square Jack Dorsey
Mad Hedge Technology Letter
September 23, 2020
Fiat Lux
Featured Trade:
(THE HOT CLOUD IPO OF FALL 2020)
(SNOW), (ZM), (ORCL)
The good news is that investors are thirsting for new cloud IPOs boding well for tech firms like Airbnb who plans to go public later this year.
The long-term health of the U.S. tech sector is on solid footing.
Most recently we had Snowflake (SNOW) who is a cloud provider and has an impressive enterprise business.
The public cloud is the data storage unit which literally everyone stores their operations on that has benefited from a massive wave of digital migration.
Many of the cloud-targeted tech firms of recent years have been 10-baggers and have dominated the overall market's returns.
Typically, these companies trade at high premiums, and rightly so, because of the corresponding growth trajectories and Snowflake is no different.
The stock has doubled after less than half a month as a tradable market-moving instrument.
Even by the standards of the most expensive software companies on the Nasdaq index, Snowflake is not cheap, although it’s a growth monster.
Snowflake was valued at $12.4 billion in February and even has investor Warren Buffett, the Oracle of Omaha, among its investors.
Buffett dove headfirst into tech investments in Apple and even some Indian fintech firms as well.
Snowflake is the largest software IPO on record and the largest since Uber's $8.1 billion IPO in May 2019.
The firm was striving for a valuation of $20 billion. In total, Snowflake has raised $1.4 billion from investors including Sequoia and Iconiq Capital.
Snowflake even makes the high-flying Zoom (ZM) Video Communications look cheap which is hard to do.
Zoom is growing three times faster than Snowflake, but trades at roughly half of Snowflake's price-to-sales ratio.
Zoom is also profitable, whereas Snowflake is a huge loss maker and that is a staple of many tech startups. This is an economic environment that is more conducive to profit drive companies instead of the tech model of promising future growth.
Snowflake is over four times more expensive than cloud company Datadog.
Snowflake's market is thought to be bigger than most other niche software applications, and therefore it may have a longer runway. In the regulatory filing, Snowflake claimed its total addressable market was around $81 billion.
Along with many other growth companies, Snowflake's ultimate margin potential is still hard to fathom and more passengers are starting to arrive in the sector than drivers.
Even worse, Snowflake not only competes with legacy data warehouse companies such as Oracle (ORCL) and Dell but also with products from the cloud infrastructure company it collaborates with.
Since shares have already doubled, I do believe that investors will need to wait for a pullback to put money to work in Snowflake.
The company said it had about 3,100 customers, including 56 clients that contributed about $1 million in a 12-month period.
Even with the pricey valuations, Snowflake is the pre-eminent cloud listing of the second half of 2020 and its enterprise business is sustainable.
If a broader sell-off drags this name down into the $180s, pull the trigger and start wading into this one.
The stock is currently priced as such that it represents flawless execution quarter after quarter for many years, and they would have to live up to lofty expectations to grow into its valuation.
While the management is stellar and is known for its execution, the odds of Snowflake's stock faltering are high because of the high bar.
Keep this one on your hot list because with all the variables waiting to pull down the market, there will be a time when the price is right in Snowflake.
“If someone asks me what cloud computing is, I try not to get bogged down with definitions. I tell them that, simply put, cloud computing is a better way to run your business.” – Said Founder and CEO of Salesforce Marc Benioff
Mad Hedge Technology Letter
September 21, 2020
Fiat Lux
Featured Trade:
(WHAT’S NEXT FOR THE TECH MARKET)
($COMPQ)