“Desperation sometimes drives innovation.” – Said CEO of Uber Dara Khosrowshahi
Mad Hedge Technology Letter
August 7, 2020
Fiat Lux
Featured Trade:
(FINTECH IN 2020 IS TOO HOT TO HANDLE)
(PYPL)
I’ve been kicking myself that I missed the boat this year on a stock that I spent last year hyping like no other after I predicted a tsunami of bullish action from fintech players.
I pigeonholed PayPal (PYPL) as one of the rising stars of the fintech industry and they certainly have delivered in spades.
But even I didn’t see this coming.
PayPal has more than doubled since the tech wreck in March and shares are trading north of $200.
A quick double of the stock has more than 20 analysts raising price targets for the stock since earnings came out, and most reiterated conviction buy ratings on the shares.
PayPal’s monetization engines take from both sides of its consumer and merchant platforms.
I expect growth on the top line to speed up and margins to increase if the rapid digitization of payments turns out to be here to stay, which I wholeheartedly believe it will.
PayPal’s business model has leaned on e-commerce payments, but now is the perfect time to invest in so-called frictionless payments, as well as consumer banking.
They hope to roll out QR code functionality in the US.
PayPal recently announced a partnership with CVS Health (CVS) to roll out QR-code payment options in more than 8,200 pharmacy stores in the fourth quarter.
The better-than-expected second-quarter results were solid across the board stemming from net new additions to the client (and merchant) count, TPV growth, Venmo growth, revenue growth, margins, and cash flow.
That is a whole lot of positives to work from!
Now, there is considerable evidence of sustainability of the underlying behavioral changes that are producing the growth.
Management’s decision to raise and increase estimates it had withdrawn demonstrates the company’s confidence.
There is bullish case for an opportunity for a new margin profile for the company longer term.
PayPal is about the shrug off the end of the eBay operating agreement and start harvesting volumes from several of its multi-year investments (Paymentus, MELI, Uber, Facebook, Honey acquisition).
PayPal is well-positioned in a market that could add up to $5 trillion even excluding online bill-payment services, in-store payments, and the Chinese market.
In mid-2020, it is clearly the most atrocious macroeconomic backdrop any of us have seen, with major parts of business travel and events on the back burner, and PayPal is still pulling off miracles by producing record numbers.
I attribute PayPal’s success to a multipronged, diverse platform scaled across the world that allows users to invest in this environment and shape the outcome, rather than sitting back and being a recipient.
The number that sticks out most is the more than 21 million net new active customers across its platform in the June quarter, a bigger number than in some entire years.
The bullish case for PayPal will outlast the health crisis as consumers are now tied to using PayPal during the crisis and will continue to do so long after because the product delivers the security and convenience that others don’t.
The outperformance certainly has something to do with a high level of trust and security that goes with it to boost the legitimacy of the brand and that is especially salient for new joiners.
No doubt that PayPal is hardly the only digital payment option, and competition is fierce, but they are good at what they do.
This is an inflection point in e-commerce and digital payments; the trends were pulled forward by two or three years, but the most fundamental difference right now is the new and expanded addressable market in the offline world.
The market has increased exponentially, in a world where digital payments are a major slice of all payments, PayPal is fully expected to continue to outperform.
There is the case that shares are too far out over its skis in the short-term, but for good reason.
I would put this stock on the high alert list ready to put new money to work in shares as soon as there is a medium-sized pullback.
“When I first went into financial services, people told me not to be too over-optimistic about change.” – Said CEO of PayPal Dan Schulman
Mad Hedge Technology Letter
August 5, 2020
Fiat Lux
Featured Trade:
(MICROSOFT GOES FROM STRENGTH TO STRENGTH)
(MSFT), (GOOGL), (FB), (AMZN)
Microsoft (MSFT) is on the cusp of becoming the best tech company in America and that is the reward they get for staying out of the data privacy quagmire that the other tech titans find themselves in.
A TikTok acquisition would offer a major platform to rival Facebook and Google-owned YouTube and will revamp its image with young people.
TikTok itself will grow into a $300 billion company in the next 5-7 years just by itself.
This purchase is a massive blow to Facebook (FB) and Google’s (GOOGL) prospects as their once-fortified duopoly morphs into a 4-way race between Microsoft, Amazon (AMZN), Google, and Facebook (FB).
This would make up for all the prior missteps with Nokia’s handset business and Skype.
This could be described as the "crown jewel" snapped up at a discount.
This is essentially an asset with 100 million users, massive momentum, engagement, advertising revenue, and something they could cross-sell into the broader Microsoft base.
The treasure trove of data is what makes this deal a can’t-miss proposition.
Think about Microsoft in building software and hardware projects, and not just Xbox. For the first time, it would have proprietary data on a level that they can understand consumer behavior and not just with their enterprise customers.
Data privacy is Microsoft’s biggest selling point to the Trump administration which is concerned about TikTok’s ties to the Chinese government.
TikTok, which is currently owned by a Chinese company, has come under scrutiny and investigation in the U.S. over allegations it is supplying user data to Beijing, a charge that company officials have denied, but have no way to prove that they don’t bend to the whims of the Chinese Communist Party.
This episode follows on the heels of the U.S. effectively banning Chinese telecom giant Huawei in the U.S.
TikTok represents the dual threat of destroying America's edge in technological dominance.
TikTok has become the fastest-growth social platform in history and its inception as a Chinese technology threatens the U.S. reputation.
What specific data is TikTok able to aggregate from U.S. users?
Personal location, app usage, behavioral trends, thematic trends, and economic indicators.
This personal data could be used to take advantage of the American population through military or economic means.
India was first to ban TikTok and didn’t allow a sale of the Indian data to a local firm. They didn’t want money flowing back into Chinese hands.
China is notorious for the mishandling of data and most of the data is resold infinitely inside of mainland China.
How will Microsoft earn dollars from TikTok?
Digital ads.
TikTok would boost Microsoft’s share of the U.S. digital display ad market.
This year, eMarketer predicts Microsoft to hold just 1.5% of that market, slightly ahead of Snapchat but well behind Facebook’s 42% and Google’s 10.4%.
That is about to change.
Just how popular is TikTok?
TikTok is a disruptive force in social media and video.
In the second quarter, TikTok had 30% penetration of U.S. respondents 18 and older in a survey of 2,500 U.S. consumers.
Among respondents 18 to 24, TikTok's popularity is even greater, at about 42%, versus 65% for Facebook, 78% for Instagram and 63% for Snapchat.
Along with this, Microsoft finally gets the “cool factor” they have been missing for generations.
What are the chances of Microsoft buying TikTok?
I would put it at 85%-90%.
ByteDance needs to seal a deal or they leave the table with zilch and at the same time kicked out of America.
The company, a massive social media player in China, is valued at about $100 billion, half of which is due to TikTok.
The deadline gives Microsoft the added effect of increased negotiating leverage and it will be interesting to see what concessions they get from TikTok.
No other major tech company has been given the green light to make the deal and Microsoft has plenty of cash available to make this deal happen.
The deal could be especially beneficial for Microsoft because the TikTok business in the U.S. is valued in the $40-billion range but could eventually reach $300 billion if they nurture it properly.
I would be shocked if Microsoft flubs this golden opportunity to add a trophy asset to put in their trophy cabinet.
CEO Satya Nadella is too shrewd to let this once-in-a-lifetime chance to cement Microsoft as the top dog go to waste.
I was highly bullish on Microsoft before this news, and I can easily say now that this is not only the best American tech company but the best company overall in the world.
“Our industry does not respect tradition – it only respects innovation.” – Said Current CEO of Microsoft Satya Nadella
Mad Hedge Technology Letter
August 3, 2020
Fiat Lux
Featured Trade:
(THE MASTERY OF TIM COOK)
(AAPL)
Apple (APPL) is a $2 trillion company and their latest jaw-dropping earnings report was by far beyond a best-case scenario.
They crushed top-line revenue beating estimates by over $7 billion and profitability was just as impressive beating estimates by over half a dollar.
Going into the iPhone 12 product cycle, the results mean that moving forward, the company could benefit from 20% growth as the momentum becomes a true tailwind of sorts.
Surely, this was the quarter that Apple could have taken a quick siesta, they even had an out with the pandemic and all, right?
But no, they stuck to their guns and delivered another resilient earnings report.
Some investors were wary even second-guessing the company going into these earnings because of the health crisis forcing 25% of Apple stores to close.
But that proved immaterial and physical store sales actually only comprise 6-7% of sales.
The data was undeniable showing that customers went online to buy Apple’s products in droves.
Not offering guidance, second quarter in a row, plays into Apple’s hands.
This gives them the leeway to never give forward guidance again.
Apple has done enough that they are afforded the wiggle room from investors that feed into the “buy the dip” mentality.
This will be the biggest iPhone refresh cycle since iPhone 6 and it will come thick and fast.
Supply chain might bottleneck, and iPhone might delay by a month, but that is splitting hairs.
In a digital economy where wielding a smartphone is king, consumers will tough it out and upgrade to the iPhone 12.
It’s easy to cut out vacations, but impossible to get rid of your phone or car.
Other tech is stalling, such as the likes as Google who recorded 2% declining revenue growth for the first time ever.
Not all tech has been created equally.
Apple’s overperformance is just a taste of what we will likely see in performance over the next 9-12 months. It is highly unlikely they will botch the new iPhone distribution, servicing, and production of it.
The company was able to beat iPhone revenue projections by $4 billion last quarter and this segment comprises 46.6% of the total revenue now.
I see this number sliding down as services pick up more. In 2021, iPhone revenue could be in the high-30s which is a number management is more comfortable with.
Hardware isn’t the future and propping up and servicing the apps and software is where the real premiums hide.
Apple also did its best to prove it's not just an “iPhone company” anymore.
Air pods and Apple watch are doing particularly well. Air pods project 90 million units in 2020 after 65 million the year before, and 19 million in 2018.
Ironically, the earnings report was disclosed after Tim Cook’s government testimony to avoid the wrath of the politicians.
Granted, Apple didn’t want to offer more ammunition to the interrogators timing the blowout earnings report after the testimony ended.
Apple’s App store is the crown jewel of the business model and the 30% commission is something Cook and the company will defend at all costs.
Regulatory risks are mostly tilted towards Facebook and Amazon, and I do not think there is enough evidence against Apple to meaningfully penalize them.
The argument that if developers do not wish to agree to Apple’s 30% commission has always had the freedom to switch to Android hold water no matter if one likes it or not.
Investors are not viewing anti-trust problems as a major risk and that was evident in the price action last Friday when the stock rose over 10%.
The path to profits has been smoothed over and this clears the way for any dip to be bought until 2021.
The stock usually does not have major corrections, therefore, any 3-4% dips can be described as optimal entry points.
Apple continues to under promise and overdeliver.
If more companies did this, there would be fewer bankruptcies.
I am highly bullish Apple and the rest of big tech.
“You can converge a toaster and a refrigerator, but those things are probably not going to be pleasing to the user.” – Said CEO of Apple Tim Cook
