Tech Letter Archives

Put the Kibosh on Tech Stocks?

Whether Russia has actually produced a vaccine or not takes a backseat to the upcoming uncontrollable avalanche of media content about delivering a North American vaccine that news wires will disseminate.

It could be the case that the tide rises all boats in the equity world, but the pathway for a serious rotation into laggards is the more likely case.

Russian President Vladimir Putin claimed Russia has become the first country in the world to grant regulatory approval to a virus vaccine after less than two months of human testing.

Establishing an initial marker for a vaccine being realized is bullish for the overall stock market, but tech stocks might participate less in the rally as the capital is funneled into the catch-up trade.

At the very minimum, tech stocks, short term, are at risk of being slightly discounted to the overall market as the “shelter in place” trade that has benefited the strongest cloud plays has a weaker case than it did before.

Expect a bevy of upcoming announcements from North American and European pharma firms describing their unique pathway to a vaccine.

The European and North American scientific community will not want to be outdone by the Russians.

Don’t forget that the Nasdaq is at market tops and it's normal to have a phase of digestion.

Naturally, the Russian vaccine news has been met with a wave of general skepticism concerning its efficacy.

Putin chose to give a personal anecdote citing his daughter’s involvement with the trials as concrete evidence that she is fully vaccinated from the coronavirus.

The development of the vaccine has been put on an accelerated schedule raising concerns among some experts at the speed of its approval, but the Russian business conglomerate Sistema has said it expects to put it into mass production by the end of the year.

Regulatory approval is the precursor to mass inoculation of the Russian population and the government is desperate to revive the economy after a synchronized health crisis, economic crisis, and oil crisis wrapped into one.

The vaccine will be marketed under the name 'Sputnik V' in foreign markets and is already been offered for sale to other countries.

The jury is still out on this potential vaccine and a larger trial involving thousands of participants, commonly known as a Phase III trial hasn’t started yet meaning the approval is quite premature.

Such trials, which require a certain rate of participants catching the virus to observe the vaccine's effect, are normally considered essential precursors for a vaccine to receive regulatory approval.

“You need a large number of people to be tested before you approve a vaccine,” said Peter Kremsner from the University Hospital in Tübingen, Germany currently testing biopharmaceutical company CureVac's vaccine in clinical trials.

So aside from the uncertainty that this could be a ploy to generate revenue for the Russian state, what does this mean for tech stocks?

A real vaccine that will save people from the dreaded coronavirus would mean the “re-opening trade” is alive and well.

A fake vaccine means rhetoric about finding a vaccine which is also positive for the tech market too.

Capital will rotate into the neglected industries of hospitality, retail, transport, and energy.

It’s been a meteoric rise up in 2020 for cloud, software, and tech’s monopolistic juggernauts.

This was due to happen at some point just like the elevated virus risk will eventually dissipate whether it takes six months, two years or five years.

My base case is that tech will be spared from any major carnage and will be range bound in the short to medium term with few catalysts to take them higher.

Earnings certainly isn’t the force multiplier for tech it once was pre-virus.

This Russian vaccine could be indeed a head fake as well leading to another “buy the dip” moment that is so ingrained in the current psyche.

Portfolio managers have a hard time dumping tech stocks full stop because they are hard to get back into on the next move up.

Not to mention they should already be the cornerstone out of any major portfolio and that the opportunity cost of missing out on tech’s supercharged run-ups will limit any broad-based selling and far outweighs the risk of downside price action.

This wasn’t the greatest news for tech stocks, but it could have been worse.

Ultimately, the secular bull market in tech is as healthy as ever.

August 12, 2020 - Quote of the Day

Tech Letter

“Most Americans agree that technology is going to eliminate many more jobs than it is going to create.” – Said American entrepreneur and former presidential candidate Andrew Yang

August 10, 2020

Tech Letter

Mad Hedge Technology Letter
August 10, 2020
Fiat Lux

Featured Trade:

(SCRAPING THE BOTTOM OF THE TECH BARREL WITH UBER)
(UBER), (LYFT), (FB), (AMZN), (GOOGL), (NFLX), (AAPL), (MSFT)

Scraping the Bottom of the Tech Barrel with Uber

Tech Letter

The coronavirus and the resulting effects from it have had the single most sway on tech companies since the 2001 tech bust.

Marginal tech companies or even quasi-fraudulent ones have been exposed for what they are, while the secondary effects from the virus have supercharged the behemoths of the industry.

The stock market has no earnings growth in the past 5 years without the earnings from Microsoft (MSFT), Facebook (FB), Apple (AAPL), Google (GOOGL), Amazon (AMZN), and Netflix (NFLX). That means that without the Republican corporate tax cut, there has been negative earnings growth in the past five years.

One of those tech companies at the bottom of the barrel has been chauffeur service company Uber (UBER) and their latest earnings report is a glaring indictment of a shoddy business model that operates in a gray area.

The only reason this stock is at $33 is because of the piles of easy money printed by the central bank.

Uber needs all the help they can get, and shares are still trading 20% below the IPO price.

Competitor chauffeur service Lyft (LYFT) is doing even worse registering a 50% decline since the IPO.

Let’s do a little snooping around to see why these companies are doing so poorly and why you shouldn’t even think about investing in these companies long-term.

No matter how you dice it up, Uber’s core business, the one where they refuse to properly compensate their drivers, had a disaster of a quarter with gross ride volumes down 73% year-over-year.

Before we go any further with this one, I would like to point out yes, other areas of the business grew substantially, the problem is that the “other” part of the business is only 30% of total revenue.

Therefore, when 70% of your business that relies on pure volume to scale out crashes by 73%, it doesn’t really matter what else is in the report.

The only sensible idea now is capturing a snapshot of the silver linings, of which there were a few.

Delivery volumes through Uber Eats were up 49%, but the problem here is that first, it’s not profitable per delivery and second, it’s still a small part of the business.

Uber acquired Postmates who is another loss-making delivery service and the idea behind this is to achieve significant cost savings by scaling out these powerful assets.

The problem here is that it is essentially throwing good money on top of bad money because it’s proven that deliveries don’t make money per ride and that won’t change in the near future.

CEO of Uber Dara Khosrowshahi is on record saying Uber will become “profitable on an adjusted earnings basis before interest, taxes, depreciation, and amortization before the end of the year.”

This is almost like saying we won’t lose as much money as before and ironically, Dara Khosrowshahi has withdrawn this statement as the ride-sharing model has been repudiated by the consumer during the coronavirus.

Nowhere in the earnings report is the explanation of how Dara Khosrowshahi plans to attract people to share a car ride with a stranger during a global pandemic.

He didn’t share a solution because there isn’t one, hence the 73% decline in ride volumes.

If we assume this company is semi-fraudulent, then the silver lining would be that ride volumes didn’t decline by 100%.

That is where we are now with U.S. corporate companies such as the airlines that fired their employees but have subsidized them to stick around even though there is no work.

Instead of re-imagining itself through bankruptcies, the Fed has encouraged many marginal companies by breathing life into their finances through cheap loans.

This gives failing firms a last chance to enrich management with the capital and “cash out” before they hand the business off to someone who will essentially plan to do the same.

I will say that traders might have a trade or two in this one, because it’s hard to imagine Uber posting another 73% loss in ride volume and a dead cat bounce trade could be in the cards.

Long term investors should steer clear of this one and allow Uber to struggle on its own and just maybe in 5 or 10 years, it might just be “profitable on an adjusted earnings basis before interest, taxes, depreciation, and amortization before the end of the year.”

With so many high-quality tech companies and even one that is about to add super growth elements like TikTok into its portfolio, there are so many superior names to deploy capital in the tech ecosphere.

Either you must be galvanized by a gambler’s mentality to invest in Uber, or losing money is something that is habitual in your routine.

uber

August 10, 2020 - Quote of the Day

Tech Letter

“Desperation sometimes drives innovation.” – Said CEO of Uber Dara Khosrowshahi

August 7, 2020

Tech Letter

Mad Hedge Technology Letter
August 7, 2020
Fiat Lux

Featured Trade:

(FINTECH IN 2020 IS TOO HOT TO HANDLE)
(PYPL)

Fintech in 2020 is Too Hot to Handle

Tech Letter

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.

Paypal

August 7, 2020 - Quote of the Day

Tech Letter

“When I first went into financial services, people told me not to be too over-optimistic about change.” – Said CEO of PayPal Dan Schulman

August 5, 2020

Tech Letter

Mad Hedge Technology Letter
August 5, 2020
Fiat Lux

Featured Trade:

(MICROSOFT GOES FROM STRENGTH TO STRENGTH)
(MSFT), (GOOGL), (FB), (AMZN)

Microsoft Goes from Strength to Strength

Tech Letter

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.