“Creativity is just connecting things.” – Said Co-Founder of Apple Steve Jobs
Mad Hedge Technology Letter
September 30, 2020
Fiat Lux
Featured Trade:
(AN EASY WAY TO MILITARIZE YOUR TECH PORTFOLIO)
(PLTR)
With funding from the CIA’s non-profit venture capital arm In-Q-Tel, Palantir (PLTR) is named after mystical orbs in J.R.R. Tolkien’s “The Lord of the Rings” universe that can see both the past and present and allow users to communicate over vast distances.
Palantir is effectively a secretive big-data firm co-founded by billionaire venture capitalist Peter Thiel that will make its stock market debut via a direct listing on Sept. 30 with a valuation of $22 billion.
It’s the gold standard of data mining stocks and I recommend investors consider buying and holding if you’re currently eyeing new opportunities.
The foundations beneath it could not be more rock solid with the CIA affording the company major access to recurring government revenue.
Not even a pandemic would be able to knock off this business model from the perch it sits on.
Up until now, what Palantir does and how it uses its troves of data is somewhat lost to all but the industry analysts and government officials, but that is all about to change with quarterly earnings reports.
In a nutshell, Palantir provides customized software to clients analyzing large tranches of data for reasons ranging from finding suspected criminals to improving companies’ manufacturing capabilities.
Summarizing their strategic operational zone even further, Palantir’s data platform is the go-to platform for U.S. intelligence agencies.
In the media, they have attracted significant controversy due to its work with government agencies, including Immigration and Customs Enforcement (ICE).
Palantir has yet to spin a profit, losing $580 million in 2018 and $579 million in 2019, but does that even matter when their products are so deeply embedded in the U.S. intelligence agencies’ everyday work?
As long as they are trending towards margin improvement, investors are most likely willing to give them a free pass.
Palantir's claim to fame is that its technology reportedly helped locate Osama bin Laden while zeroing in on terrorists in Afghanistan and Iraq.
The company acknowledges that government customers use its technology to kill people so investors not comfortable with the deeper meaning behind the technology should avoid this one and go with the softball versions of big tech.
Palantir gets both criticism and praise for the powerful nature of its data analytics software. For example, critics allege Palantir's profiling tools used by intelligence and immigration agencies sometimes operate under a cloak of secrecy with zero oversight.
Palantir’s tools are not just for killing bad guys, they have also signed up companies from sectors that include healthcare, energy, and manufacturing.
Another noteworthy development is the stranglehold on company decisions that the co-creators will have no matter what.
The Palantir IPO established three classes of stock, meaning the stock structure guarantees control of the company stays in the hands of creators Thiel, Karp, and Cohen.
The company’s financials are still behaving like a growth asset leading up to the IPO.
For the first half of 2020, Palantir reported revenue of $481.2 million, up 49% from a year ago. Also, it reported a net loss of $164.7 million, vs. a loss of $280.5 million year-over-year.
Palantir expects revenue to rise by about 47%, to around $278 million to $280 million for the rest of the year. For 2020, it expects revenue of about $1 billion, up 42%.
Palantir has two main services that analyze data: Palantir Gotham and Palantir Foundry.
A customized option, Palantir Gotham is used by companies, government agencies, and law enforcement to combine information to decipher previously unseen patterns and identify relationships between sets of data ranging from social media posts and addresses to license plate numbers and personal relationships.
The algorithm then summarizes content together to make broader conclusions from the data.
Meanwhile, Foundry is a ready-made solution focusing on clients ranging from pharmaceutical and automotive businesses to aviation companies like Airbus and is meant to cut down on the costs associated with Gotham, such as the need for multiple on-site engineers.
Who is the CEO?
Alex Karp.
A graduate of Stanford Law School.
Karp has been explicit in his belief for the need for Silicon Valley companies to work with the U.S. government and law enforcement agencies precisely because they are American companies.
Palantir refers to effective applications of its software such as combatting Ponzi conman Bernie Madoff to disaster recovery to thwarting cyberattacks and fighting child exploitation.
Not only that, Palantir’s software was deployed in the aftermath of Hurricane Florence in 2018 alongside Team Rubicon, an organization of military veterans that responds to disaster areas. With Palantir’s Gotham Operations module, the group identified and responded to neighborhoods in the greatest need of assistance.
Palantir also assisted the Center for Public Integrity and Georgetown University’s Journalism Program for an investigation into the death of Wall Street Journal reporter Daniel Pearl by militants in Pakistan in 2007.
The company says the software helped identify 27 individuals who took part in the kidnapping and killing of Pearl, tracking relationships and offering answers to questions surrounding his death.
How does the software directly help real-time U.S. soldiers in the field?
The firm also claims its software helped the U.S. military track insurgents in Afghanistan planting improvised explosive devices (IEDs) by finding correlations between weather patterns, command wire IED attacks, and biometric information found on explosive devices.
Palantir has also sold its software to the Salt Lake City Police Department, helping officers reduce the time it takes to perform complex investigations by 95%.
Predictive policing models that base conclusions on historical data can sometimes not work, meaning that there is the chance of a slipup or wrongfully identifying a problem that isn’t a problem.
Reading about Palantir’s business model, it’s easy to see how they could put themselves in a political mess with the software being used to “find people in the U.S. who are undocumented.”
Granted, this tech company is not for everyone which is why many global brands such as Hershey’s, Coca-Cola, Home Depot, and American Express have terminated relationships.
Lastly, there is word that their services are not exactly cheap, but that is the cost of doing business in 2020 where data analysis is the new oil.
With a roadmap of constant 40% revenue growth for the foreseeable future and a death grip on recurring revenue provided by the CIA, it’s hard to ignore the robustness of their plan moving forward.
If you thoroughly believe in the U.S. military and are okay supporting a data firm that offers software services to it, then I would suggest buying every dip in Palantir from now to eternity.
There are worse investments out there.
“The best entrepreneurs know this: every great business is built around a secret that's hidden from the outside.” – Said Venture Capital Peter Thiel
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
