“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)
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
