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Tech companies wouldn’t be able to hide behind some outdated law infamously called Section 230.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.
Mad Hedge Technology Letter
October 2, 2020
Fiat Lux
Featured Trade:
(THE JEWEL OF FOOD TECH)
(BYND), (WMT), (DIS)
I don’t get into food tech that often but one company that I have been highly bullish on that keeps delivering month over month is plant-based meat provider Beyond Meat (BYND).
The deals just keep rolling in for Beyond Meat as it announced that it had expanded its distribution deal with Walmart (WMT).
The all-American supermarket will now carry Beyond Meat in 2,400 of its stores, up from 800 before, and is a decisive victory for Beyond Meat whose non-animal-based meat is quickly becoming ubiquitous all over the U.S.
Their footprint is really expanding at a rapid clip because Walmart is actually the biggest grocer in the U.S. by sales. Now, Beyond Meat products will be in about half of the retailer’s U.S. stores.
The plant-based burger company has had a breakout year and has rallied nearly 120% as we speak and I recommended buying this stock in the low 70s.
That stock has made a double from that recommendation.
The first-mover advantage combined with the health pandemic has worked wonders for this company that hopes to supplant animal-based meat as the staple food for decades to come.
Now we are grappling with problems that every publicly traded company hopes to have – high valuations.
The current valuation is perceived as high because the growth engine powering Beyond Meat is clicking on all cylinders.
For companies like Beyond Meat, expanded distribution can immediately boost revenue because the capacity to deliver meat increases in an instant.
Beyond Meat typically recognizes revenue when products are delivered to retail and food-service locations, not when they finally sell through to the end consumer, so they have incentives to get their product in as many places as possible.
Beyond’s expanded distribution deal with Walmart validates the growth story to outside investors and legitimates the road map that management has aggressively targeted.
Beyond Meat’s latest move to expand the distribution of Beyond Burger meshes well with the company’s efforts to make its products more accessible across grocery chains.
It's rumored that Walmart and Beyond have cultivated an extremely healthy working relationship setting the stage for more collaboration in the future and, of course, more products in the store window.
Beyond Meat’s frozen products were first launched at Walmart’s stores in 2015. Since then, the company has expanded its in-store offerings at Walmart to include Beyond Burger and Beyond Sausage in the in-person fresh meat section, while the Beyond Breakfast Sausage patties were recently added in the freezer aisle.
This is all while consumers haven’t absorbed the full scope of health benefits incurred by eating substitute meat products.
The pandemic has created a new generation of health-obsessed consumers and Beyond Meat is well placed to cater to such growing interests.
In fact, Beyond Meat has doubled down on being a leading provider of healthy plant-based meat alternatives whose products are made from simple ingredients.
The numbers speak for themselves as Beyond Burger contains 35% less saturated fat and has no added cholesterol, antibiotics, or hormones. It is also free of GMOs, soy, or gluten. Beyond Burger — made out of peas, mung bean, and rice — closely mirrors the taste of a traditional beef burger.
The stay-at-home food preparation revolution was catalyzed by the pandemic, relative deliveries to dining establishments have been killed off.
During the second quarter, strong retail channel sales volumes drove the company’s top line that surged 69% year on year.
The company’s efforts to expand and diversify retail channel offerings are likely to bear fruit. Last week, the company announced the expansion of its frozen Beyond Breakfast Sausage patties to more than 5,000 additional stores across the United States. The added distribution locations include grocery chains like Kroger KR, Harris Teeter, Target's TGT Super Target stores, Publix. Earlier this month, the company launched Beyond Meatballs across grocery stores. Markedly, Beyond Meatballs marks the company’s third new retail product introduced in 2020, following the launches of Beyond Breakfast Sausage and Cookout Classic.
The one potential headwind to keep note of that could dampen enthusiasm for Beyond is the growing competition right around the corner that has led to various analysts to downgrade the stock.
JPMorgan was one of them citing market share loss at grocery stores to its biggest competitor, Impossible Foods Inc.
Analysts also cited waning volume at restaurants, which are slower to add “complexity” to the menu during the COVID-19 pandemic.
Other brands getting in on the fun are Morningstar brand, expanding its Incogmeato line of plant-based proteins with help from Walt Disney Co. (DIS), with the launch of Mickey Mouse shaped Chick’n Nuggets.
The item is meant to appeal to families and could create a market of lifelong plant-based meat eaters.
Dr. Praeger’s launched beef and chicken plant-based sliders this week.
Meatless Farm, a British-based food company, has landed in the U.S. And another global plant-based food company, Chile-based NotCo, is planning to bring its products to the U.S. after recently closing an $85 million round of funding.
Beyond is still a true growth stock and putting money in the early innings will harvest alpha.
Keeping tabs on the competition is something that any trader can’t ignore, and even though the moat isn’t that wide, if Beyond keeps operating at a high level, shares should be bought and held.
