Mad Hedge Technology Letter
July 1, 2020
Fiat Lux
Featured Trade:
(HOW THE “SPLINTERNET” IS TAKING OVER)
(TIKTOK), (FB), (GOOGL), (TWTR), (AMZN)
The balkanization of the internet is spiking in the short-term, knocking off the value of multiple Fortune 500 companies in one fell swoop.
In technology terms, this is frequently referred to as “splinternet.”
A quick explanation for the novices can be summed up by saying the splinternet is the fragmenting of the Internet, causing it to divide due to powerful forces such as technology, commerce, politics, nationalism, religion, and interests.
What investors are seeing now is a hard fork of the global tech game into a multi-pronged world of conflicting tech assets sparring for their own digital territory.
The epicenter of balkanization is now heart and center in West Asia polarizing the Indian and Chinese tech economy after a skirmish along the shared border.
This is fast becoming a winner-take-all affair.
India had to do something after 20 dead Indian soldiers felled by the Chinese Army stoked a wave of national outcry against regional rival China.
The backlash was swift with the Indian government banning 59 premium apps developed by China citing “national security and defense.”
The ban includes the short-form video platform TikTok, which counts India as its biggest overseas market.
TikTok was projected to easily breeze past 300 million Indian users by the end of 2020 and was clearly hardest hit out of all the apps.
India is the second biggest base of global internet users with nearly half of its 1.3 billion population online.
The government rolled out the typical national security playbook saying that the stockpiling of local Indian data in Chinese servers undermines national security.
The ruling will impact roughly one in three smartphone users in India. TikTok, Club Factory, and UC Browser and other apps in aggregate tally more than 500 million monthly active users in May 2020.
Highlighting the magnitude of this purge - 27 of these 59 apps were among the top 1,000 Android apps in India last month.
China dove headfirst into the Indian market with their smartphones, apps, and an array of hardware equipment. Now, that is all on hold and looks like a terrible mistake.
Chinese smartphone makers command more than 80% of the smartphone market in India, which is the world’s second largest.
One of the reasons Apple (AAPL) could never make any headway in China is because they were constantly undercut by predatory Chinese phone makers with stolen technology.
TikTok is also being eyed-up for bans in Europe and the United States recently as it constantly curries to Beijing’s every whim by banning content unfavorable to the Chinese communist party and rerouting data back to servers in China.
I am surprised it hasn’t happened yet with an abundant phalanx of Chinese hawks in the conservative administration.
To be fair, China has rolled out the same playbook before when the state spews out nationalist narratives triggering local furor that resulted in bashing Japanese-made cars or shuttering Korean supermarket.
Chinese tech is clearly the main loser for their government’s “distract its own people at all costs” campaign to shield themselves from the epic contagion of the lingering pandemic.
What does this mean for American tech?
For one, India will strengthen ties with the U.S., being the biggest democracy in Asia, meaning a massive foreign policy loss and loss of face for the Chinese communist regime.
The resulting losses for Chinese tech will usher in a new generation of local Indian tech with Silicon Valley being the next in line playing the role of a wingman.
Even though the U.S. avoided the carnage from this round of balkanization, the situation in Europe is tenuous, to say the least.
Fault lines will compound the problem of a multinational tech revenue machine and the relationship with France is on the verge of becoming fractious.
I believe if the relationship worsens with the Europeans - France, Germany, and Britain could ban big tech companies like Facebook (FB), Twitter (TWTR), Google (GOOGL).
This would be a massive blow to not only revenue streams but also global prestige for American tech.
The U.S. is still licking its wounds after the EU announced a travel ban on American tourists who hoped to re-enter the Schengen Zone on its reopening on July 1st.
Not only do Silicon Valley leaders see a murky future outside its borders, but digital territories are also getting carved out as we speak domestically.
Amazon (AMZN)-owned Twitch and Twitter have clamped down on U.S. President Donald Trump’s account.
This could quickly spiral into a left-versus-right war in which there are competing apps for different political beliefs and for every subgenre of apps.
This would effectively mean a balkanization of tech assets within U.S. borders and division is the last thing Silicon Valley wants.
Silicon Valley wants products sold to the largest addressable market possible.
The balkanization of the internet is now turning into an equally high risk as the antitrust and regulatory issues.
The issues keep piling up, but nothing has been able to topple big tech yet as they lead the broader market out of the pandemic.
The key point to understand is that these are growing risks until they blow up in front of your eyes and become the next black swan like Covid-19.
Let’s hope that never happens.
SUPERCHARGING THE BALKANIZATION OF THE INTERNET
“Men have become the tools of their tools.” - Said U.S. Author Henry David Thoreau
Mad Hedge Technology Letter
June 29, 2020
Fiat Lux
Featured Trade:
(TIME TO DO SOME SHOPPING AT ETSY)
(ETSY), (AMZN)
The ecommerce story just keeps getting brighter and Etsy (ETSY) is one of those companies that are at the leading edge of the movement.
Out of the same vein of Amazon (AMZN), I am increasingly optimistic about Etsy’s long-term prospects aided by monstrous secular tailwinds.
Heralded for its vintage and handmade goods, I have upped my targets to $150 which is a no brainer for a company that grows revenue more than 30% and one I believe will grow 80% in 2021.
The growing pie of ecommerce tells just part of the story.
In the throes of a hysterical once-in-a-century multi-faceted crisis, consumers have gravitated towards trusted and reliable retailers.
As a result, we can expect the top 10 ecommerce retail businesses to expand at above-average rates of 21.8% in 2020.
Amazon will gain even more US ecommerce market share this year, while Walmart's accelerating ecommerce success will put it directly behind Amazon for the first time.
Even though Etsy is no Walmart or Amazon, they are a known commodity with a growing number of repeat and loyal buyers which goes a long way in today’s ecommerce climate.
They have effectively elbowed their way clearing out a niche in personalized handicrafts that cannot be copied on a large scale.
In the U.S. alone, ecommerce will account for 19% of retail by 2024, up from 11% of domestic sales last year, totaling some $1.1 trillion.
Simply put, the bronco is out of the barn, and many consumers are not inclined to return to the physical store experience.
Ecommerce has also validated themselves as models that work as good as the in-store experience or better.
Before the sushi hit the fan in March, most ecommerce outfits were projecting unspectacular ecommerce growth of 2-3% to $6 trillion in total US retail sales by the end of 2020.
After updating models, we now expect there's to be a 10.5% decline in total retail spend, with a 14.0% drop in brick-and-mortar.
Ecommerce has performed admirably and is poised to grow 18% following a 14.9% gain in 2019, further signaling the pivot towards digital.
Consumers have downloaded Etsy’s app at rapid rates further hinting that this boost in revenue has staying power.
Shares of Etsy have more than tripled from a March low and are trading at record levels. The stock is up more than 130% this year easily outperforming the broader Nasdaq index.
Etsy's quarterly revenue grew 32% year over year to $1.4 billion and when The Centers for Disease Control recommended the use of face masks to thwart the spread of the coronavirus, masks flew off the digital shelves.
CEO Josh Silverman aptly described the situation in Etsy's Q1 earnings call saying, “It was like waking up and discovering that it was Cyber Monday.”
Even excluding face masks, April sales were still up 79% from April 2019. All told, the company expects upcoming Q2 results to show an 80% to 100% year-over-year gain for gross merchandise sales. And it anticipates revenue growth of 70% to 90%.
As masks become mandated by state governments because of record coronavirus cases, Etsy is the go-to platform for personalized masks.
It goes to show that a native digital strategy might be the best of the bunch in 2020 and as masks are mandated by state governments, Etsy will harvest the low-hanging fruit with its army of personalized mask sellers on its platform.
This will truly be a year Etsy will never forget tattooing them firmly in the digital realm as a legitimate ecommerce juggernaut.
“We live in a society exquisitely dependent on science and technology, in which hardly anyone knows anything about science and technology.” – Said American astronomer, planetary scientist, cosmologist Carl Sagan
Mad Hedge Technology Letter
June 26, 2020
Fiat Lux
Featured Trade:
(GETTING READY FOR THE SECOND WAVE)
(DOCU), (TDOC), (NFLX), ($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)
