Mad Hedge Technology Letter
October 12, 2020
Fiat Lux
Featured Trade:
(DATA ANALYTICS IS THE WAY FORWARD FOR ANY BUSINESS)
(DDOG)
As the coronavirus shows no signs of stopping in the short-term, it only delays the economic recovery that was first labeled as a “V-shaped” recession.
I do believe the negative economic news is being understated when the broader global picture is being looked at.
The sad fact is that emerging countries have taken the harder hit to relative GDP than the US and the US has financial levels in dollar-denominated debt that other countries don’t have access to.
While this macro uncertainty remains in the near term, it only gives more proof that investors need to be digital-first and agile and confirms the cloud as the best path to achieve these results over the long term.
The evidence of this transformation is growing with the overall demand in the form of new customers and new use cases existing customers.
Data analytics will facilitate this renaissance towards digital offerings and that is why, for the first time, I am recommending Datadog (DDOG) — a monitoring service for cloud-scale applications, providing monitoring of servers, databases, tools, and services, through a SaaS-based data analytics platform.
Why are they a great tech firm to buy and hold in?
Their 2nd quarter performance was nothing short of breathtaking.
Revenue was $140 million, an increase of 68% year-over-year and they ended the quarter with 1,015 customers with new client accounts of $100,000 or more — an increase of 71% from last year.
As of the end of Q2, 68% of customers are using two or more products, which is up 40% a year ago.
Can you believe that it’s going so well now that 15% of Datadog’s customers are now using four or more products?
That figure is up from 0% the year before.
The support of cloud and other ephemeral architectures is more important than ever as the rapid change from work-from-home has demonstrated the limitation of legacy infrastructure.
Recent macro events like the pandemic that have accelerated the pivot to digital will unequivocally accelerate the migration to the cloud as the economy improves.
How does Datadog become one of the outsized winners?
They offer a broader solution with end-to-end visibility from back-end infrastructure all the way through to the end-user experience and now security as well. And they win because they offer a truly integrated platform for a single paid view into the IT stack.
Analyzing the management, execution was strong, being able to uphold accounts with larger customers who already have sizable cloud environments. Given macro uncertainty, these customers look to conserve cash while they still could and therefore optimize the consumption of cloud infrastructure and those management relationships are critical to preserving client accounts in major players.
Lower quality customers with large cloud deals from AWS, Azure, or Google Cloud look for immediate short-term savings and focus less on Datadog’s management and client relationships.
These quality customers will lead to a high rate of upselling into more robust packages as the broader economy strengthens.
Customers have been highly receptive of the single platform deliverability from Datadog — the customer has been able to move from multiple disparate monitoring tools to using a single platform for all three pillars of observability.
This allowed them to refocus engineering teams on building new features, and not out of the realm of possibility to expect more than 15% in savings from consolidating disparate monitoring and logging vendors into Datadog.
Another example of a recent deal is with a large entertainment platform that continued to upgrade its Datadog packages and now pledge to commit to over $10 million in the year.
This company has decided to increase investment in observability and broader use of Datadog both with new products and by scaling up on existing products.
So now they can use Datadog to quickly drill down into any failed request and easily identify layers. This company is now using all three pillars, including Synthetics, RUM, and NPM, and has standardized monitoring on Datadog.
The pathway to profits in 2020 is now to be a digital-first business, and the cloud is the best path to achieve this outcome.
Datadog will be the primary beneficiary of this trend and remains very well-positioned to win in the market.
In the near term, the macro environment is likely to continue to cause uncertainty, but in relative terms, Datadog will have no problem in scoring new deals as the volume of companies becoming digital will not cease.
Sustaining strong growth both in the near term and over time is something of a safe bet for Datadog and growing from $100 million of annual revenue in 2017 to $200 million in total revenue in 2018, and $362 million in annual revenue in 2019 is hard evidence the parabolic trajectory will continue uninterrupted for the foreseeable future.
I am bullish Datadog and not surprised that shares of the stock are up over 300% in 2020. This is just the beginning of share appreciation.
Mad Hedge Technology Letter
October 9, 2020
Fiat Lux
Featured Trade:
(INCHING TOWARDS A KICK IN THE TEETH),
(TECH ANTITRUST)
House Democrats have proposed a massive overhaul of U.S. laws that will take the air out of big tech, or will it?
We are seriously inching our way to a meaningful change in anti-trust regulation in the U.S.
The conclusions offer a legislative road map for congressional Democrats — something that could become an even poignant threat to Silicon Valley if the party regains full control of Congress and a major overhaul could be in the cards.
The House Judiciary antitrust subcommittee is in the midst of a 16-month bipartisan investigation that analyzed the dark practices of Facebook, Google, Apple, and Amazon.
These companies have used their dominant power to abuse the spirit of competition and the side effects have been widespread, often negatively affecting U.S. society.
A major strategy at preventing competition is the “catch and kill method” acquiring up-and-coming rivals because of their financial advantage.
Unfairly favoring their own products on the online storefronts they operate, such as Amazon's Marketplace and Apple's App Store is another trick they have perfected.
There have been calls to ban major tech platforms from acquiring future startups or potential rivals and barring them from both owning marketplaces — such as Amazon’s broad-based e-commerce hub — and selling competing products on them.
Either way, there will be some sort of actionable legislation once Congress returns in 2021 — this is ultimately negative for tech stocks because most of the investor capital is overweight in the biggest tech names.
Democratic hopeful Joe Biden is currently the favorite in the polls and if he wins, the pressure to expedite this cause will grow. Trump hasn’t moved on this issue in 4 years and it could get bogged down if he were to be re-elected.
Senators are pushing to rewrite antitrust law and advocate breakups of the largest American tech companies.
Tech companies wouldn’t be able to hide behind some outdated law infamously called Section 230.
This 1996 statute became known as "a core pillar of Internet freedom" and "the law that gave us modern Internet" — a critical component of free speech online. But the egregiousness of Section 230 flows through some of the darkest corners of the Web. Most glaringly, the law had been used to defend the now-defunct Backpage.com, a website featuring ads for sex with children forced into prostitution.
Section 230 would be on the top of the heap to get rewritten, meaning Facebook would now have to pay monetary damages to harmful content posted on their platform which they have proven they cannot moderate.
This opens up an avalanche of potential lawsuits and compliance issues which ultimately adds up to higher costs.
At this point, it’s even a question mark whether these companies will be allowed to acquire any more start-ups to cement their gains before the regulations kick in. Just look at Europe’s blocking of Google’s purchase of tech wearable company Fitbit.
Besides China, this is one of the few bipartisan issues both parties agree on, and if they get their act together the pipeline of regulation could even be started before the end of 2020.
The pandemic has only helped highlight the diversion of fortunes between tech and non-tech as millions of Americans are out on the street with no food to eat.
Biden has already launched a scathing attack on Facebook calling it “the nation’s foremost propagator of disinformation about the voting process” last month in a letter to Facebook CEO Mark Zuckerberg.
Punitive actions against some of the world’s most valuable companies will most likely come in droves, not to mention that the balkanization of global tech revenues will translate into a lower future income trajectory.
There is still a chance that this is all bluster and no bite but only time will show what the politicians truly intend to do in terms of meaningfulness and duration.
Big tech has had a history of seizing uncanny ways to get around regulation; and just look at rideshare company Lyft who is hoping to pass legislation to avoid paying their employees as employees with an upcoming vote on Proposition 22.
This is definitely not the end of the road for big tech, but they are confronted by a situation where even if they are broken up, the value of those companies would be even greater than they are now.
But why not play it safe when you don’t need to compete with yourself?
That’s the essential problem as just a few CEOs harvest the fruit from the success of tech; and the San Francisco Bay Area has been a symbol of this, with an island of rich people among a sea of homelessness.
The last card up their sleeve is charging more for services such as Gmail and Facebook while increasing fees for digital ads. There are ways to fiddle with the structure to keep it intact, and although regulation is now staring us right in the face, I still believe in the big tech narrative.
On the flip side, this paves the way for the “2nd tier” tech firms to catch up with the entrenched.
“A founder is not a job, it's a role, an attitude.” – Said CEO of Twitter Jack Dorsey
Mad Hedge Technology Letter
October 7, 2020
Fiat Lux
Featured Trade:
(THE HOTTEST TECH GROWTH INDUSTRY)
(DKNG), (LVS)
One of the most lucrative untapped industries in the U.S. is sports betting, and in 2020, that means online sports betting.
The numbers have confirmed this with largely the male audience under 60 being avid sports gamblers and precisely tuning into sports matches just to put down a bet.
Online sports betting is a duopoly and I recommend investors look at DraftKings (DKNG), the other member of the duopoly is FanDuel.
Legislation has backed up this premise with instances nationwide and the pace of liberalization is picking up speed such as the state of Tennessee conditionally approving licenses for its first three online sports betting operators Wednesday, bringing the state one step closer to its proposed Nov. 1 launch date.
The Tennessee Education Lottery Board's Sports Wagering Committee approved licenses for FanDuel, BetMGM, and DraftKings.
The committee also approved its first supplier application and 26 additional vendor applications, according to a news release, adding to the 13 vendors approved in previous months. It will convene again on Oct. 5 and Oct. 16 to review more applications and additional information from the sportsbook companies that received licenses.
DraftKings provided third-quarter revenue guidance on National Football League betting.
The guidance was disclosed simultaneously with an equity offering of 32 million class A shares. Half the shares will be sold by the company and half by selling shareholders.
In its S-1 filing, DraftKings expects to report third-quarter revenue of $131 million to $133 million, a 41% gain relative to the third quarter of 2019.
The company said its total amount wagered is expected to have risen 460% in the third quarter year-over-year and that internet betting revenue was expected to be up 335%.
DraftKings expects its monthly unique players to be about 1.02 million in the third quarter, up 64% from the same period a year earlier.
As major sports resumed in the third quarter and amid keen investor interest in online sports betting, DraftKings stock had rallied more than 70%.
It is currently the second-largest U.S. gambling company behind only Las Vegas Sands (LVS).
The equity offering is being led by Credit Suisse and Goldman Sachs and the underwriters have the option to purchase an additional 4.8 million shares.
The deal follows an equity offering of 40 million shares—16 million by the company and 24 million by selling shareholders—in June at $40 a share.
The online sports betting industry has been hot and that is reflected in the M&A market last week with Caesars Entertainment announcing a $3.7 billion deal to acquire UK betting company William Hill. That deal is expected to be consummated during the second half of 2021.
Caesars and William Hill currently operate a U.S. joint venture with 20% and 80% equity ownership, respectively. Through this joint venture, William Hill runs online sports betting operations in each state and retail sports betting operations in Caesars’ properties.
Even though the in-person aspect of casinos has fallen off the face of the earth, the online sports segment hasn’t been stronger and I fully expect accelerated revenue growth in the mid-term.
I expect DraftKings and FanDuel to overperform in the short and long term and they look forward to long runway in front of them.
One caveat with its underlying stock is that traders will need to deal with volatility because of the immature nature of this industry and the stock being a fresh entrant into public markets.
Expect 5-7% volatility on most days which makes it better for a long-term buy and hold if one cannot bear the heightened volatility.
“The sidelines are not where you want to live your life. The world needs you in the arena.” – Said Current CEO of Apple Tim Cook
Mad Hedge Technology Letter
October 5, 2020
Fiat Lux
Featured Trade:
(THE AMAZON OF LATIN AMERICA)
(MELI), (AMZN), (ASML)
If you thought you missed profiting off of Amazon then you’re in luck; you still have another chance with the South American iteration of Amazon – MercadoLibre (MELI).
This e-commerce and payments platform in Latin America boasts presence in 18 countries within South and Central America but derives the bulk of its revenue from three countries: Brazil, Argentina, and Mexico.
MELI is the entrenched e-commerce player in the region and has multiple retailer solutions such as MercadoLibre Marketplace (an online platform for the buying and selling of merchandise), Mercado Pago (an online payments solution), and Mercado Envios (a logistics solution).
The company's market-leading position revolves around a strong network effect that has allowed it to expand its exploding user base as well as its gross merchandise volume (GMV).
In 2015, MELI had around 145 million registered users, and that number has more than tripled by 2020.
The tectonic shift toward digital transactions network caused by the pandemic means the number of items sold jumped 66% year over year to 284 million, and the number of unique active users climbed 27% year over year.
It’s undeniable that the company has strong tailwinds backing its overarching story.
MELI was already primed for a strong growth trajectory before the pandemic crushed the global economy.
The company was savvy in introducing new and useful services over the years to solve digital bottlenecks, and its suite of services made customers stickier toward its platform.
Hosting an integrated e-commerce and payments platform meant an unrelenting buildup of new vendors and users coming on board over time.
MELI looks set to take the next step in e-commerce penetration.
Although its growth has been phenomenal over the last decade, I believe the company may be on the cusp of doubling its growth rate because of the rapid digitalization by businesses.
A share repurchase program has been set in motion and I do believe they will dip into this financial tool once the global economy stabilizes.
Getting into the weeds, MELI expanded its category-take rates to Chile and Mexico in Q2 2020, with Brazil and Argentina set for last half of 2020.
For online marketplaces like what Amazon and eBay offer, the take rate refers to the fees and commissions that the companies collect on sales by third-party sellers which is critical to overall revenue.
The successful take rate rationalization could drive sellers to list more of their inventory and reduce prices.
With this increased supply, MELI should be seeing the cascading benefits of an improving shopping experience and rising conversion rates.
Scaling this beautifully translates to lower per-unit logistic costs such as sequential 23% decrease in unit shipping costs.
Ala Amazon, its drive to step up the buildout of its own logistics network to take down the dependency on Correios in Brazil is yielding meaningful results and also places the company to potentially buttress a greater amount of free shipping subsidies as the unit cost of deliveries continues to swan dive.
Logistics transforming into a higher reliability, faster shipping times, and greater cost savings offering can be passed along to the consumer upgrading the quality of service.
Soon, MELI is expected to invest in Consumer Electronics and price competitiveness could see the company grab market share taking down yet another adjacent industry.
At some point, like Amazon, MELI will target the grocery market and will have the logistic infrastructure in place to do the same type of 1-day “free” shipping that Amazon guarantees.
On the digital payments side of the business, MELI has sold over 1 million mobile point-of-sale (mPOS) devices, versus 900,000 during Q1 2020, driven primarily by smaller merchants.
The individual bull case for MELI is rock-solid but feeling out the global state of affairs is a must in a quickly changing environment.
With an onslaught of stimulus in Europe and the U.S. to deal with the pandemic, China’s economy beginning to recover, and a weaker dollar, foreign markets are becoming more attractive to U.S. investors.
Emerging markets could turn from stock market pariah to darling in a nanosecond and if investors are comfortable with targeting companies in higher growth markets, then MELI should be an option.
Emerging markets broadly have lagged behind developed market peers over the past decade, even as some fund managers have found investing in domestically-oriented companies in India, China, or Brazil hugely rewarding—just look at the outperformance by foreign brand names like Alibaba Group (BABA), Meituan Dianping and HDFC Bank (HDFC) in India just to name a few.
It’s true that more developed markets have the advantages of greater trading liquidity, minimal systemic risk, better corporate governance, and greater access to dollar-denominated debt that emerging markets’ companies don’t benefit from.
Therefore, investors seeking a conservatively biased portfolio should only focus on U.S. tech brand names that have moats around their business model.
Another second derivate play would be to find U.S. tech companies that siphon a big chunk of sales in emerging markets and are U.S. companies like Apple (AAPL), Nvidia (NVDA), and Mastercard (M).
Each secures between one-third and two-thirds of sales from emerging markets. But with those companies vulnerable to the geopolitical trip wire between the U.S. and China, proportioning a small amount of the portfolio to a Latin American tech growth firm could produce alpha.
Another quick recommendation is ASML, a semiconductor chip company from the Netherlands.
It’s an option generating outsized sales coming from emerging markets but is headquartered in an economically responsible country.
This Dutch tech firm boasts positive free cash flow yields, a sign the company is generating ample cash to operate and also reinvest in itself.
Investors who can stomach greater risk levels and desire growth should take a serious look at MELI, plus the myriad of other tech recommendations I offered if MELI doesn’t suit your appetite.
