Mad Hedge Technology Letter
April 8, 2020
Fiat Lux
Featured Trade:
(AVOID YELP ON PAIN OF DEATH)
(YELP), (GRUB)
Tech investors should be migrating towards stocks that have high visibility of an earnings turnaround once a health solution is discovered for the current health scare. One that definitely does not fit the bill is Yelp (YELP) who has experienced negative earnings growth for the past three years.
What’s the deal with Yelp?
The company recently withdrew its first quarter and 2020 financial guidance because the coronavirus has destroyed large parts of its business probably to never return.
If you didn’t know, Yelp provides information through online communities on restaurants, shopping, nightlife, financial, health, and other services, so it’s easy to do the calculus as to why lockdowns and restrictions on public life are affecting these revenue streams.
A recent survey reported a higher average likelihood of households missing a debt payment over the next three months, meaning the consumer is in dire straits unless there is a swift 180 in circumstances.
In the longer-term, the New York Fed affirms a “persistent deterioration” in consumers’ expectations to access credit throughout the rest of 2020.
The New York Fed said the sharp decline in consumer expectations cuts across all age, education, and income groups.
Less money for consumer spending means less consumer demand on Yelp translating into lower ad revenue – it’s that simple.
On a conference call on February 13, Yelp mentioned that it expects 2020 revenues to grow between 10% and 12% year over year and adjusted EBITDA by 1 to 2 percentage points. It had also expected margins to expand again in 2020.
What a difference 4 weeks makes!
Now almost every company is in survival mode and Yelp is the weakest link.
Consumer interest in restaurants and nightlife has taken a nosedive in the new coronavirus economy.
Yelp data shows that consumer interest had declined 54% for restaurants and 69% for nightlife venues.
Cafes, French restaurants, and wineries decreased their share of daily consumer actions (down 66%, 47% and 44%, respectively) week over week.
In contrast, the weekly growth numbers favor just a select few - grocery stores interest is up 102%, fruit and vegetable shops are up 102%, fast-food joints are up 64%, and pizzerias round out the bunch up 44%.
Some hard-hit companies come in the form of bowling, yoga and martial arts services which tend to involve groups of people, declined by a respective 43%, 38%, and 33%, and these are all companies that would be spending ad money.
Even worse news on the financial side - mom and pop stores have a short leash with median cash buffer for a small business at just 27 days.
As you would assume, searches on home fitness equipment surged 344%, and interest in parks rose 53%.
Interest was also up 360% for buying guns and 166% up for buying water - breweries were down 61%.
Lawmakers and states, including New York, New Jersey, California, and Pennsylvania, have ordered a temporary closure of restaurants and bars and I can safely say that consumers probably won’t return the next day to barge down the entrance door.
The last earnings report wasn’t all that hot for Yelp who missed on revenue while spending 10% more on advertising to get to that miss.
Earnings per share also missed estimates by sliding 35% year over year validating my thesis that this is a sinking ship headed towards an iceberg.
These propped up numbers were before the coronavirus hit the company and the business model is poorly prepared for this type of phenomenon and the lasting effects.
I expect a material decrease in the growth of the number of paying advertising locations and lower advertising budgets from multi-location customers.
Paying advertising locations should drop by half just this quarter.
Materially lower traffic dropping over 50% is a trend that will perpetuate and even if there is a dead cat bounce because shares are so beaten down, this is an unequivocal “sell on the rally” type of stock.
“Culture eats strategy for breakfast.” – Said Microsoft CEO Satya Nadella
Mad Hedge Technology Letter
April 6, 2020
Fiat Lux
Featured Trade:
(AVOID THE GIG ECONOMY LIKE THE PLAGUE)
(UBER), (LYFT), (UPWK)
I assume many believe that stock-picking is the path to riches, and the post-coronavirus environment will eventually appear to offer investors new opportunities.
It’s also important for investors to avoid the rotten parts of the tech market.
The gig economy could enter the post-health crisis tech economy as huge losers, as already weak business models must absorb even more pressure.
Let me remind you that this pocket of the economy is not the gold standard of Silicon Valley and exists primarily because of the never-ending capital that propped up many poor business models.
Well, that funding is gone in this new world.
The health scare has already crushed the 2020 IPO market and the newly public companies are next in the crosshairs whom many are nothing more than labor arbitrage companies masquerading as real tech companies.
Examples such as Uber (UBER) and Lyft (LYFT) are predatory in behavior, feasting off contractors who do not have a unified voice.
An investor wouldn’t be wrong to say these are nothing more than glorified taxi companies utilizing a functioning app.
The gig economy effectively matches the digital workforce with a suitable “tech” company, but they do not deliver anything else of value.
These types of “broker” services can be eliminated quickly if tech companies choose to hire gig workers directly.
Even tech companies that only hire gig workers do it themselves - ask Uber drivers how easy it is to start working for them.
I reference Uber because they were responsible for 58% of gig worker payouts reaching $204 billion in 2018.
Payout volume is expected to double by 2023, but that was until the worst economic recession since the Great Depression of 1929 hit U.S. shores.
Let’s quickly analyze a weak gig economy company that wasn’t doing great before the health scare called Upwork.
Upwork (UPWK), formerly Elance-oDesk, is a global freelancing platform where businesses and independent professionals connect and collaborate remotely.
Upwork’s life as a public company has only seen the share price decline -hitting a high of $24 per share in February 2019 and currently sitting at $5 today.
Why have shares declined precipitously since going public?
Wasn’t the gig economy working miracles and was a slice of life I needed to become a part of?
Even as the freelance employee hiring platform grew revenue 19% in 2019, shares have tumbled nearly 75% from their all-time high.
Granted, the market needed to reexamine the business based on current expectations, and yes, the coronavirus market sell-off hasn't helped matters.
Economic activity is about to nosedive, many businesses have already begun to cut spending and reduce staff.
The swiftest way of reducing expenditures is by eliminating business contractors or non-employee workers that get hired on a freelance basis from Upwork.
Upwork receives a commission by liaising workers with tech companies and that business is sure to be severely damaged.
Since Upwork went public, the company increased sales and marketing spend by more than 31% in 2019 to promote growth because the company is simply not relevant.
Making the story even worse, the general and administrative costs also grew 36% year over year.
Upwork's revenue is not rising at the same type of rate that justifies higher administrative and marketing spend.
This business model simply never worked and now that a monstrous recession has hit, imagine how terrible future prospects look now.
The only silver lining is that industry will migrate to digital spaces quicker but that in no way guarantees that Upwork will harvest the benefits from this massive migration.
Work-from-home just got a massive shot in the arm, and many organizations are suddenly scrambling to invest in the ability to allow employees to work remotely and could a possible use case enrich Upwork?
But why can’t these same companies hire directly?
Nobody really knows Upwork anyway and since the shortage of jobs will become acute, directly communicating about possible jobs could harvest more than enough qualified candidates without the help of unknown Upwork.
Another imminent problem is the balance sheet.
Upwork had $133.9 million in cash, equivalents, and short-term investments on its balance sheet at the end of 2019, but if that is frittered away, is this company attractive enough to receive another round of funding?
I would say probably not and if yes, only on disadvantageous debt terms.
This firm is merely treading water before it gets shot out of its misery.
Upwork overspends and under delivers; a toxic combination and that was its performance in a period of favorable economic times.
What about other gig economy firms?
There is not one I like, again, they overspend and underdeliver with illogical revenue acquisition costs, but the silver lining for Uber and Lyft is that everyone knows who they are so they will be able to survive on poor unit economics for a while until they cannot.
Time is money and the risk of not getting torpedoed in one second is valuable in the current climate as revenues have gone to 0% for hotels and bars.
These glorified taxi companies have one ace up their sleeve and that is pushing the self-driving service revolution because that is their get-out-of-jail free card.
Upwork doesn’t have that luxury as they will look to survive now before their stock becomes a zero with a brand name that doesn’t resonate with investors.
Avoid the stock of all companies that are tied to the gig economy.
“Our goal was never to create a better taxi.” – Said CEO of Lyft Logan Green
Mad Hedge Technology Letter
April 3, 2020
Fiat Lux
Featured Trade:
(THE MUST-HAVE APPS FOR NEW HOME WORKERS)
Here are a few hacks as millions enter the new world of digital nomadism – home as an office is now a sink-or-swim proposition.
I can tell you that after the 6.6 million unemployment claim number dropped like a bomb, many more people will be forced to get trained up as aspiring remote workers.
Sure, groceries stores are still hiring, but the health scare will funnel many future workers to stay in the confines and cleanliness of their own homes to generate income.
Another lasting effect will be supercharging the digital economy by forcing both supply and demand onto the internet.
Think about how much the cloud has helped us already and now the industry has developed to the point where digital nomads are using these services to underpin their daily operations.
First, I will make a few assumptions such as businesses have already discovered certain “can’t miss” services such as Microsoft Teams Office 365 that delivers us the beauty of Microsoft Word, Excel, PowerPoint.
G Suite’s array of highly powered instruments are another assumption I will imbed into this discussion as most people have integrated them into their lives.
These tools consist of Google Docs, a cloud-based Microsoft Word alternative; Google Sheets, a cloud-based Microsoft Excel alternative; Google Slides, a cloud-based Microsoft PowerPoint alternative; and Google Drive, a cloud storage app.
Google Docs and Google Drive are particularly useful collaboration software for remote teams who need storage and teamwork rolled into once set of services.
Many businesses are reliant on Facebook to sell their physical products, therefore, taking advantage of a News Feed Eradicator for Facebook will come in handy.
After the Facebook’s login, users are thrown into the insane vortex of streaming jargon that is now Facebook’s news feed and hours can be wasted for months on end.
Sure, it’s nice to catch up with a high school girlfriend, but that won’t generate outperformance.
Klokki for Mac is an automatic time-tracking app that will boost productivity by maximizing the thing we never have enough of - time.
With its ability to create custom tracking rules, you will be able to track time by automating this process.
Besides the Auto-Tracking technology, Klokki delivers the power of a massive tool packed in one small and beautiful Mac app that lives and breathes on your menu bar.
Also, these functions can be useful for upper management who can track employees who are now all working at home.
It’s not a secret that this migration to 100% digital work from home doesn’t sit well with many managers who thrive by micromanaging, this software puts the control back into the managers’ hands.
1Password is a name that's representative of password managers. It's been around since 2006, offering support for a growing list of devices.
Right now, you can access your 1Password and the software will store and fill your passwords.
Even for a company of 10 people, management will not want crucial passwords floating around gifting hackers an easy way into their fortress who then might destroy the inner workings of a business.
vidIQ is a robust tool for the creative companies out there since many media products have offshored onto YouTube to leverage uploading free videos to a monetizable audience.
Of course, Adobe photoshop is great for those who actually need to create the media content, but with the vidIQ Competitors Tool, you’ll get a unique peek behind the curtain at what your competitors are doing to rank highly and attract those golden views and subscribers.
That’s the beauty of data analytics and this hack will enable you to measure up your rivals.
You’ll be able to instantly track the video creators who are important to your channel, whether they are big influencers setting trends in your sub-sector, or channels delivering breakthrough content.
The Competitor Tool allows you to piggyback on the competition and leverage what they do right for your own YouTube strategy.
Weirdly enough, tracking others to keep tabs on the competition is important to understand the changing dynamics of the internet and sub-sectors in it.
And the best way to track your own keywords are by Google Alerts – if a news article trends with selected keywords then an email it sent with direct links to the relevant article.
Email Hunter is another app that is self-explanatory.
If you cannot find someone’s email, then plug in the name and this app will scrape the internet to find public places that could retrieve this information.
In a digital world where email is the best way to get to know a customer, this app is a diamond in the rough.
Since every company is now turning into a media company, cloud storage and ample space is needed to import and export big media files.
Services that are reliable are Dropbox, Box, Google Drive and many others.
Slack is a potent app that is email on steroids and is more widely used than ever. Another alternative is Microsoft Teams that has also been easily integrated into its set of products.
Lastly, video conferencing apps are the closest service that can provide a meeting to hash out those hard-to-quantify issues.
A company can almost not function if it doesn’t have Zoom and at the end of December last year, the maximum number of daily meetings conducted on Zoom was approximately 10 million, according to the company. In March this year, they recorded more than 200 million daily users.
Zoom is now ranked as the number two app in the UK and number one in the US, after its surge in popularity.
With these optimal apps supporting remote business, many will be able to survive this deep recession and even up-skill themselves and enjoy a fruitful recovery as they work from home.
“I'd rather Apple cannibalize Apple than somebody else cannibalize Apple.” – Said CEO of Apple Tim Cook
Mad Hedge Technology Letter
April 1, 2020
Fiat Lux
Featured Trade:
(BROKEN GLOBAL SUPPLY CHAINS AND YOUR PORTFOLIO)
($COMPQ)