Mad Hedge Technology Letter
June 26, 2020
Fiat Lux
Featured Trade:
(GETTING READY FOR THE SECOND WAVE)
(DOCU), (TDOC), (NFLX), ($COMPQ)
The coronavirus is dangerously inching towards knocking out the main street economy which would finally land a heavy blow to the tech sector because of the knock-on effect of a substantial drop in future tech budgets.
This leads me to believe that tech stocks are overvalued in the short-term and are due for consolidation.
Daily coronavirus cases have more than doubled from 18,000 to 45,000 as of June 24rd as Americans reclaim the streets and the summer heatwaves kick into gear.
Florida, California, Arizona, and Texas appear to be the new ground zero of the coronavirus and 26 states are experiencing an explosion in cases compared to the prior week.
The blatant disregard for human safety after the reopening means that deaths are likely to spiral out of control in the short-term boding ill for the Nasdaq index but great for shelter-in-place tech stocks.
DocuSign (DOCU), Netflix (NFLX), and Teladoc Health (TDOC) could be in for another run-up.
The jolt in death levels is not baked into tech shares yet, and if things get out of hand, Americans could voluntarily resort back to a shelter-in-place existence.
From March until today, the Nasdaq index has done nothing but sprint upwards due to the eclectic mix of the “re-opening” trade and copious amounts of fiscal stimulus.
If the re-opening trade is killed, the tech market will then go through another contentious referendum to test whether Jay Powell and the Fed are willing to save the equity market yet again.
Propping up the markets ultimately means propping up the tech markets.
If U.S. coronavirus cases re-accelerate from 45,000 to 70,000 then 100,000 per day, the streets could empty out in 1-day.
The risks are certainly to the downside now and the mushrooming of U.S. coronavirus cases could be the catalyst for mass profit-taking in tech names.
Saying the Nasdaq is a little frothy does not mean that tech shares can’t still go higher from here.
They certainly can and there is a legitimate base case surrounding the enormous amount of liquidity sloshing around in the system, meaning that every dip will be bought up.
Then we look forward to the next earnings and news like Apple re-closing 18 stores in coronavirus hot spots doesn’t help.
However, even in the throes of the pandemic, Apple is as innovative as ever - announcing plans to cut ties with Intel during its virtual Worldwide Developers Conference on Monday, saying that it will phase out the use of Intel’s chips in its Mac line of computers over the next two years to use its own in-house chips.
That’s a big deal.
Big tech has so many levers at its disposal.
This goes a long way in a pandemic when specific revenue avenues are blocked off.
Tech is nimble as ever.
Another prime example, after the success of video conferencing software Zoom Communications (ZM), Facebook, Google, and Microsoft posted replica software in a matter of weeks.
Even if their video communication replicas do not catch on, it shows you the vast resources they can muster to harness in whichever direction they please in a blink of an eye.
Many firms are confronting some harsh realities, but investors aren’t penalizing tech firms by selling.
Facebook has seen an ad boycott because of not doing enough against extremism and racism on their platform.
Their algorithms often pit two opposite opinions against each other stoking engagement and more hatred.
Companies including REI, The North Face, Magnolia Pictures, and Upwork have said they won't buy ads on Facebook at least through July as part of a boycott.
The boycott is mostly all bark and no bite and earnings won’t change in a meaningful way.
Uber is a less robust tech firm in the regulatory crosshairs with the state of California about to file court documents that could force Uber and Lyft to reclassify drivers as employees in less than a month.
This could wipe out a small tech company like Uber which is only a $53 billion company.
If the courts rule against Uber, the law would require them to grant drivers employment status while they await the outcome of a pending lawsuit over the issue which would crush the bottom line.
They are having a tough time figuring out how to become profitable.
Investors are doing their best to analyze what the tech industry will look like post-Covid-19 and the assumption is that tech and big tech will dominate which is why any sell-off is temporary.
Every big tech name will survive the pandemic with its business models intact.
Throw in that news of a vaccine and treatment inching forward to fruition and there is a solid bottom for any temporary dip.
It is irrelevant if big tech loses 10% or 20% of revenue this year just as long as they don’t structurally break.
“Technology is now part of the social fabric; it is what is causing dislocation. It is the cause of fear amongst all of us.” - Said Indian-American web and technology writer Om Prakash Malik
Mad Hedge Technology Letter
June 24, 2020
Fiat Lux
Featured Trade:
(WHY I WAS WRONG ON SNAP)
(SNAP), (ZNGA)
Snap (SNAP) is a stock that I have bashed relentlessly from the onset of the Mad Hedge Tech Letter.
But things are different now.
Recent events have made me stand back and take notice.
This company has really turned the proverbial corner.
Now I can say with conviction that Snap is a buy and hold.
The snapback in shares of more than 110% from March lows is no joke as well and could be the beginning of a roaring melt-up in share appreciation that won’t stop until the next “big” macro event.
Much of this has to do with the average revenue per user climbing as they have not been able to ramp up the volume of the userbase which is a headwind that many of the social media companies are currently facing.
I fully expect annual revenue per user to jump around 22% by the end of 2020 because of Snap’s new ad technology called Dynamic Ads.
Initial data suggests that ad buyers are clamoring for this new technology.
The new design allows clients to upload their product catalogs to Snap and automatically generate ads, versus manual versions that fit Snapchat’s vertical ad format.
Snap has also delivered optimal analytic tools to better understand how effective ad dollars are.
They have also rolled out a new ad format for the map component of Snapchat that target small and medium businesses.
Digital ad delivery, design, and maintenance is really the deep core of these social media platforms and how they earn revenue, but the attractiveness of gaming to social media brought to us from the side effects of the coronavirus cannot be underestimated as well.
As lockdowns and second waves reared its ugly head, mobile gaming popularity went through the roof.
Snap didn’t hold back - they attacked this opportunity by layering themselves deeper into the gaming ecosystem.
Snap entered into a multi-game partnership with mobile game giant Zynga (ZNGA) that integrated the niche gaming asset into Snap resulting in more time spent for each Snapchat user.
Zynga has performed handsomely since the pandemic hit.
Shares have doubled since March lows and the firm stayed aggressive by acquiring gaming company Peak for $1.8 billion.
Zynga has mastered a full steam ahead acquisition strategy for the past several years that includes the purchases of Gram Games and Small Giant Games.
These two buys meant that Zynga effectively topped up with another 12 million gamers.
This strategy makes sense considering that Silicon Valley has had access to cheap capital for the last generation and is incentivized to keep users paying around in their unique walled gardens.
Zynga has also turned into quite a trendy buy call from stock analysts lately after being in the doldrums for years.
The company has parlayed its gaming machine into an ad juggernaut and expects to take in $90 million in ad sales just through one of its popular titles called Peak in 2020.
I do believe that gamers won’t bolt from the stable after the summer sun draws people out of their homes.
There is staying power in the cross-pollination of video games and social media. They complement each other quite well to the point where they are a match made in heaven for computer junkies.
I am from a different breed where I throw up ad blockers at each digital turn, but not everyone is averse to digital ads.
Social media and internet gaming had no retention problems before the pandemic, and the health crisis has exaggerated every single digital trend from cloud adoption to remote working, and social media gaming is no exception.
“Over the next 10 years, we’ll reach a point where nearly everything has become digitized.” – Said Current CEO of Microsoft Satya Nadella
Mad Hedge Technology Letter
June 22, 2020
Fiat Lux
Featured Trade:
(IS ROKU BREAKING OUT?)
(ROKU)
Roku (ROKU) is another tech growth stock that is a conviction buy in my eyes.
Never sell this company if you plan to be in this long term.
The only way a sell would make sense is if digital ads stopped existing or Roku’s platform somehow managed to blackball itself out of the digital ad landscape.
Both scenarios are highly unlikely.
What does Roku actually do?
This is the company that is single-handedly destroying linear television and is laughing all the way to the bank – or at least the shareholders are.
Roku is a leader in advertising-supported video-on-demand streaming services.
In layman’s terms, they basically run commercials on its own Roku Channel and other third-party channels.
A minor part of their business is involved in making set-top boxes and streaming sticks to plug into internet video services such as Netflix and Hulu.
Plus, it sells licenses to an operating system that is thrown up smart TVs.
To beef up its products and move up in the quality food chain, the streaming platform outperformer Roku (ROKU) has agreed to a data exchange agreement with supermarket giant Kroger (KR).
Roku will apply data from the supermarket chain in its recently launched shopper data program.
The tech firm will finally get a peek deep inside the psyche of the American consumer.
I also believe this is the beginning of a massive wave of data-sharing partnerships as companies desire to understand their consumers deeper at a time when the coronavirus shut their consumers inside their house with nowhere to go.
So, how will Roku parlay this partnership into more revenue?
As people cord cut, the main goal is to seduce advertisers away from linear TV.
Juicing up its targeting abilities by using Kroger’s leading data science KPM (Kroger Precision Marketing) program, Roku will be able to move closer to the customer’s digital wallet enabling them to anticipate what they buy and how much of it they want.
The ads will be pricier because Roku will be able to hyper-target specific audiences due to a higher quality set of data they will have to work with.
From the CPG marketers’ perspective, supermarket brands will apply the data from Kroger’s KPM platform to better target the approximately 40 million and growing households using Roku, thus enabling them to better gauge which ads viewers are more likely to respond to.
Kroger will be able to understand more about their audience by assessing what commercials they consume and how they can adjust and expand their supply of goods to better capture the demand of their shoppers.
Getting more bang for their buck is a winning strategy for Roku as they delve deep into the mystical art of artificial intelligence to offer a better ad funnel.
Kroger Precision Marketing (KPM) spans 60 million US households which is not shabby itself. Marrying the 60 million with the 40 million to create a 100 million data analytics treasury trove means that Roku has just become 20% more valuable in a blink of an eye.
Roku's international growth could experience the same type of meteoric rise as what Netflix had.
If Roku can accumulate 82 million active accounts by 2025, it should have $4.5 billion in annual platform revenue.
This would mean that Roku's market cap would be around $40 billion to $50 billion in 2025. Its current market value is about $16.5 billion.
Roku still has its share of headwinds and are still loss-making.
The company reported a 45-cent loss per share for the first quarter, in-line with analyst expectations and revenue of $321 million beating the estimates by $13 million.
Since the company is still a “growth” company, investors still look through the losses to glorify growth, and Roku reporting 39.8 million active accounts, up 37% from a year ago, means they are on track.
Another concern is the higher-than-normal number of cancellations in the short-term even though its long-term runway is still solid.
However, I would say the biggest problem Roku faces is that the stock is just too hot pricing around many investors looking to put new money to work in shares.
The stock has doubled since the March lows.
In short, unless the government bans digital ads, Roku is poised to harvest the lion’s share of the spoils of the streaming revolution.
I am highly bullish on Roku shares.
Mad Hedge Technology Letter
June 19, 2020
Fiat Lux
Featured Trade:
(BET THE RANCH ON SQUARE),
(SQ), (XRT)
Square (SQ) is one of those fintech companies that you buy and never sell.
The company’s recent stock performance has eclipsed many of the other cloud stocks that have done almost as well.
Shares of Square are up from the March lows of $36 and now trading a smidgeon below $100.
It is just a matter of time before the stock breaks $100 and this company is easily a $200 stock in the future.
Let us look at the reasons why shares have rebounded with extra zeal from the nadir.
First, they are an overwhelming recipient of the “re-opening” trade which is in full effect even with a reboot of coronavirus cases in the U.S.
The government has been adamant that there is only a way forward and not backwards - shutting down the economy again is not an option.
With people out of their houses, data points are up from zero like May’s retail sales numbers showing a sharp rise of 18% month on month. The SPDR S&P Retail ETF (XRT) is up 2.4%.
Square is a fintech payment service provider among other things and their addressable market worth $160 billion is expanding and they are perfectly positioned for sustained expansion in the years ahead.
The digitization of the economy has played into Square's hands and the pandemic has acted like a supercharger to a trend: the steady migration of most everyday banking activities to mobile apps and online portals.
Why is Square a legitimate long-term threat to the traditional banking system?
Square has siphoned accounts from banks and add up to 14 million in total including customers who direct deposited their stimulus checks and/or tax refunds and not necessarily their paychecks.
Square Capital’s 75,000 PPP borrowers give Square real skin in the game and combined with a growing base of larger merchants, intimate knowledge of their revenue flows, Square will win a good amount of new small business loan activity.
Its small business loan portfolio is already approximately 75,000 loans and were facilitated during the quarter with a total value of $548 million - an increase of 8% year-over-year.
One of Square’s massive growth drivers is its accessibility to buying bitcoin and the commission of payments on the Cash app.
Square’s bitcoin revenue now accounts for 22% of total quarterly revenue.
In Q1, Cash App gross profit grew 115% year over year and gross profit on Cash App is dominated by Square’s $222 million in non-bitcoin revenue, $178 million of that was profit.
The bad news is already behind the fintech companies with the post-pandemic which saw Square’s payment volume crater 39% last month.
Even with such terrible data, Square still posted a positive earnings report with revenue for the quarter up 44% year-over-year. Gross Payment Value (GPV) was up 14% year-over-year. Gross profit was up 36% year-over-year.
Square also offers an online retail capability with Square Online Store, which competes with Shopify.
The company is a hotbed of new fintech innovation rolling out new products every quarter.
If a new product fails, management is quick to put out the flames and try something new.
They are not just a one-trick pony like Facebook and are one of Silicon Valley’s true innovation firms.
It is refreshing to see a company led with a bold CEO in Jack Dorsey who isn’t 99% marketing and 1% substance like many who make the decisions at these ultra-powerful firms.
Volatility in this stock makes this a terrible stock to trade – 6% down days are common.
Buy this stock and it will no doubt cross $200 in the next 3 years.
