Mad Hedge Technology Letter
April 24, 2020
Fiat Lux
Featured Trade:
(WHERE THE ACTION WILL BE IN TECH)
(MSFT), (AMZN), (APPL), (GOOGL), (FB)
Today’s tech newsletter might be the most important one you will ever read.
It’s my job to pinpoint exactly what is going on in tech and disburse this information in a way that readers can take advantage of.
The tech market is all about striking when the iron is hot.
The five largest stocks in the S&P 500, Microsoft, Amazon, Apple, Google, and Facebook have accrued a combined valuation that surpasses the valuations of the stocks at the bottom 350 of the index.
This means that if you weren’t in tech the past few years, chances are that your portfolio significantly underperformed the broader market.
Even in August 2018, many active managers could have thrown in the towel and said the late economic cycle was way too frothy for their taste and time to take profits.
Little did they know that betting against it would equate to self-firing themselves because to retrieve the same type of performance would have meant staying in tech through the coronavirus scare.
Many in the trading community would even go as far as to say to wait for the bear market, then big tech would get hammered first and deepest because of their lofty valuations.
These tech companies were in for a rude awakening and shares had to consolidate, right?
Well, anyone who doesn’t live under a rock is seeing the exact opposite happen with Amazon, Microsoft, and Apple valuated above $1 trillion and still soaring as we speak.
This goes to show that betting against something because they are “too expensive” or “too cheap” is a fool’s game.
Just take oil that many retail investors bought because they came to the conclusion that oil could never go below zero.
Then playing oil through an ETF with massive contango means that the index is likely to go down even if the price of oil is up.
Not only do investors bear insanely high risk in these trading vehicles, but also a systemic risk of oil ETFs blowing up.
Oil is cheap, and it can get cheaper, while tech is expensive and can get a lot more expensive.
Until there are structural changes, there is no point to bet on a sudden reversal out of thin air.
Betting against things that an individual perceives as unsustainable and secretly hoping that they cannot continue to go on is probably the worst strategy that I have ever heard of in my life.
The reality is that these things are sustainable and tech shares will keep moving higher uninterrupted until they don’t.
Active managers are the ones who set market prices and they help the momentum accelerate in tech with full knowledge that if they miss out, there is likely no other solution to hit yearend targets.
What active manager doesn’t want their year-end bonus?
Even analyze the value investors who in a normal world would not even consider tech companies because they avoid the traditional “growth” profile.
Funnily enough, these “value” investors have Microsoft in their portfolios now even though it is not even close to a value stock.
So what has Microsoft accomplished recently?
CEO of Microsoft Satya Nadella has rebuilt a company Microsoft that is now equal in value to The Financial Times Stock Exchange 100 Index, the share index of the 100 companies listed on the London Stock Exchange with the highest market capitalization.
That’s right, one American company is just as valuable as the top 100 public companies in England.
An even broader view of tech would give us an even more stunning snapshot of tech showing that the Top 5 tech stocks are now worth more than the entire developed stock market outside the U.S. such as Europe, Canada, Japan, Hong Kong combined.
Then take into consideration that these companies are on the cusp of penetrating high margin industries like medicine and healthcare which will translate into another golden decade of accelerating revenue and elevated profits relative to the rest of the S&P index.
The U.S. is a place where unfettered capitalism is promoted and implemented, and tech’s outperformance manifests itself by underscoring the winner-takes-all mentality.
Americans like winners and the rules are no different in corporate America.
These 5 tech names have contributed 23% of the gains in the past month and until they falter, there will be no tech sell-off.
“Your margin is my opportunity.” – Said Founder and CEO of Amazon Jeff Bezos
Mad Hedge Technology Letter
April 22, 2020
Fiat Lux
Featured Trade:
(HERE’S A MINI AMAZON TO BUY)
(SHOP)
This company is “handling Black Friday traffic every day” during the era of Covid-19 and it “won’t be long until traffic has doubled or more.”
Those were words right out of Shopify's CTO (Chief Technology Officer) Jean-Michel Lemieux while having one of the best seats to the biggest migration from offline to online in human history.
Investors are out there scrounging for the best coronavirus tech stocks, there never has been a time when losers lose more than ever, and winners win more than ever.
Take a look at Shopify (SHOP) if you want to associate yourself with the great coronavirus tech stocks.
The name does exactly what it sounds like and shares have almost doubled in the past 30 days to $600 per share.
In short, Shopify is a cloud-based commerce platform for small and medium-sized businesses in Canada.
Shopify was founded in 2004 by Tobias Lütke, Daniel Weinand, and Scott Lake after attempting to open Snowdevil, an online store for snowboarding equipment.
Lütke decided to do it himself after he was unable to find the right snowboarding gear online and launched it after two hasty months of development.
The platform grew wildly and was named Ottawa’s Fastest Growing Company by the Ottawa Business Journal in 2010.
Like so many other tech companies, the success was parlayed into more funding with $7 million from an initial series A round of venture capital financing in December 2010 and another Series B round raised $15 million in October 2011.
By 2014, Shopify supported 120,000 online retailers and was doubling revenue every year.
Most people don’t know this, but they have been public since 2015 and became so successful that Amazon integrated with them to allow merchants to sell on Amazon from their Shopify stores.
The stock exploded 10% on this news and they have been largely unstoppable as Canada’s go-to online platform even licensing out the software for online cannabis sales in Ontario when the drug was legalized in October 2018.
Shopify's software was also integrated with in-person cannabis sales in Ontario when it is legalized in 2019.
They have really touched on many bases and pivoted nimbly when they announced that 5,000 staffers would work remotely from home due to the global pandemic.
Shopify keeps marching towards profits and not even a pandemic can knock them off their perch.
Shopify has two routes of making money - subscription fees and transactional fees for services like payments or shipping.
Transactional fees are part of its merchant solutions segment and connected to merchants' success incentivizing merchants to sell more.
Growth has been breathtaking with compound 65% annual growth rate (CAGR) since 2015 and its merchant solutions segment growing faster at a 76% CAGR.
Shopify management projected first-quarter revenue to increase 38% year over year and 2020 full-year growth at 42% to $2.145 billion, but that was in February before they could take into consideration a world that involves online buying first.
59% of total revenue are fees tied to merchants' sales and volume has mushroomed.
The company will smash revenue projections and even though valuation is sky-high, the momentum suggests that shares will go higher.
Buyers should wait for the next big dip as the next entry point into Shopify.
“I discovered Buddha did not set out to found a world religion.” – Said CEO of Microsoft Satya Nadella
Mad Hedge Technology Letter
April 20, 2020
Fiat Lux
Featured Trade:
(THE HYPER-ACCELERATION OF 5G)
(AMZN), (5G), (CCI), (MSFT), (NFLX), (APPL)
I will explain to everyone why a wonky side effect of coronavirus is supercharging the 5G revolution.
Market valuations reflect the state of expected future cash flows in a company.
Under this assumption, some could argue that most tech companies with staying power are almost a good buy at any price.
No brainers would include a list of Microsoft, Amazon, Apple, and Netflix.
The health scare and the carnage associated with it have brought forward the tech industry as a whole to the forefront of the global economy.
When you mix that with the Fed hellbent on saving everything that has a heartbeat, it sets up conditions for heavy buying in an industry that is going to be king of the global economy anyway.
It is not a question of if, but when and the health phenomenon has accelerated the dramatic migration to tech by showing how business will be conducted in about 15 years.
The change took place in a blistering 4 weeks.
The clearest signal of who is really calling the shots in the equity market is looking at which companies are dragging it up.
Technology is shouldering the responsibility of the equity market by outperforming the broader market with many software companies’ share price higher than before the crisis.
For every Amazon or Microsoft, there is also a Macy’s or JC Pennys showing that this is really a stock pickers market.
We have not only learned that tech companies are critical to our functioning as a society, but that large tech companies will be even more central than before even if they are currently losing gross revenue.
The relative gains to tech stemming from the coronavirus is equal or greater than an innovation of a game-changing product and will double the effect of 5G.
We are setting up for the Golden Age of 5G with tech poised to invade even more of the broader equity market.
One rough estimate notes that the 5G industry is expected to add about $40bn in incremental revenue to the semiconductor industry, add 5X growth in mobile data monthly traffic by 2024, and a $4.2tn boost to global economies from revenue streams connected to 5G in the next ten years.
I do agree that currently, the network effect is working in reverse order, but the positive force multiplier, when the economy is riding high again, cannot be emphasized enough.
Digital revenue streams will effectively be pumped into every nook and crevice of the digital economy because of current modifications to the business environment.
When business does come back online, investors of physical assets will sell what they can at discounted prices to get into the digital ecosystem causing asset prices to explode as investors chase prices to the sky.
Do you remember commercial real estate guru and Colony Capital’s CEO Tom Barrack?
The company hoped to sell as much as 90% of its $20 billion property portfolio of hotels, warehouses, and other commercial real estate by the end of 2021.
They are also another big investor in nursing homes.
A real-estate pioneer who founded Colony in the early 1990s and is the firm’s chief executive and executive chairman, Barrack said he wanted to go “all digital.”
Rejigging the 29-year-old investment company represented an extreme response to the way technologies have been dismantling cash flow for most every type of commercial real estate, and Barrack was met with fierce backlash from entrenched stakeholders regarding the new direction.
Commercial real estate and hotel operators have had to fight against the triple whammy of office sharing WeWork, short-term hotel platform Airbnb, and the coronavirus - a lethal three-part cocktail of malicious forces to the “traditional” model.
The coronavirus has proven Barrack was spot-on with his synopsis, but he wasn’t able to get rid of Colony’s inventory of commercial real estate in the expeditious way he desired.
Other companies have taken a direct hit like 24-Hour Fitness who are pondering filing for bankruptcy, but I could say the same for a slew of companies like Colony Capital.
Another key manifestation of the current economic malaise is that regulators, antitrust, tax, foreign and all of the above are less likely to disrupt big tech companies moving forward considering they may be the only ones able to get us out of a similar crisis in the future.
Government officials will be under rapid pressure to boost GDP levels and crimping big tech is counterintuitive to this overall goal.
I don’t agree with the glass half empty crowd who believes Amazon needs to be clamped down because of dominating retail during the time of the virus - if Amazon didn’t exist, the panic could have accelerated to an uncontrollable level creating anarchy in the streets.
The big boys have pushed soft power as a legitimate policy tool with Apple sourcing over 20 million face masks and is now building and shipping face shields.
Big tech is becoming like a mini-government in its own right.
Granted that thousands of bankruptcies from restaurants, nail salons, and yoga studio will be swept into the dust bin of economic history, but once the next iteration of the economic cycle turns up, tech is about to go gangbusters in a way many never thought imaginable.
Then if you bake a little 5G into the pecan pie, investors are justified to be salivating about the tech industry’s prospects.
Any deep-pocketed investors should be cherry-picking every quality 5G tech play possible because they will be the most supercharged sub-sector of tech once the economy is reset.
Any long-term investor with a pulse should buy Crown Castle International Corp. (REIT) (CCI) on any and all dips.
They are the largest owner of cell towers owning over 40,000 in the U.S.
Mad Hedge Technology Letter
April 17, 2020
Fiat Lux
Featured Trade:
(WHY YOU SHOULD SELL THE UBER RALLY)
(UBER), (LYFT)
Nimble tech firms like online taxi company Lyft will be penalized in the coronavirus economy as it de-globalizes for a period of time.
If you read the Mad Hedge Technology Letter, you already know that I believe rideshare business models will never become profitable.
Fast forward to today and ask yourself how can these companies make profitability headway when the state mandates shelter in place policies?
The answer is they cannot.
It is not exactly the type of foundational policy that promotes more ride-sharing volume, so bad news for Uber and Lyft.
Uber CEO Dara Khosrowshahi told investors that ride volume has gone down by as much as 60%-70% in ground zero cities like Seattle, and that’s before you consider the pauses in some of its secondary services and the dubious distinction of becoming one of the earliest proof-of-concepts of just how fluid this virus really is.
But Khosrowshahi also told investors that Uber is “well-positioned” to ride the troubles out even in the worst-case scenario of rides down by 80% for the year. And even as ride volume crashes, it is also considering leveraging its network for delivering other things, such as medicine or basic goods.
Basically, Uber specializes in losing money and lots of it.
Then imagine how demoralizing it is for the inferior version of Uber, it’s little brother Lyft.
Lyft has no “other” businesses such as food delivery service Uber Eats, leading me to conclude that this massive retracement in shares must be a bear market rally that will run out of steam.
Finding entry points to short growth stocks is an imprecise endeavor but I do believe that poor revenue reports in the upcoming earnings season is going to cap this bear market rally in Lyft’s shares.
What do we know already?
A global and tech recession will be sharp and it will be worse than the global financial crisis possibly by a factor of 4.
Investors still cannot wrap their head around whether this contagion will spill over into being a depression.
Tech investors will need to respect the “new, new normal” following the pandemic, in which corporates make aggressive cuts to their spending side-- again, bad news for Uber and Lyft.
This type of scenario is especially problematic for Lyft who must spend illogically just to stay in business.
Lyft burned $463.5 million in the third quarter of 2019, which was almost twice the amount that the company lost over the same period of time the previous year.
The fourth quarter net loss includes $246.1 million of stock-based compensation and related payroll tax expenses as well as $86.6 million related to changes to the liabilities for insurance.
That translates into an adjusted net loss of $121.6 million, which is better than the adjusted loss of $245.3 million over the same period last year.
Considering the elevated amount of cash burn to Lyft’s model pre-virus and aware that nobody knows how long the cash burn will accelerate beyond Lyft’s earnings – investors are staring into a black hole of infinite losses moving forward as Lyft’s business model looks worse every day.
I must conclude that the post-coronavirus economy is highly likely to not be kind to marginal companies like Lyft who is a glorified taxi service.
Uber controls about 60% of the ride-sharing market in the US and managed to accomplish this by losing $5.2 billion in the Q2 2019.
Lyft has already slashed its R&D budget by deleting the autonomous vehicle development program.
Yes, the very program that was supposed to be the x-factor in its quest for real profits.
Laughably, Lyft’s executives emphasized that they believed the company will turn a profit in the fourth quarter of 2021, a year earlier than they had previously projected, but that forecasts looks foolish in hindsight.
The one miniscule silver lining for Lyft - fewer discounted rides than it did a year ago.
Lyft is also trying to boost the number of more-profitable rides, which are premium trips such as “airport” or “business” trips.
It’s a shame these premium trips have gone to zero.
The narrative has quickly pivoted to “grow at all costs” to “survive at all costs” and it’s not surprising to see Lyft grossly underperform the Nasdaq index in relative terms and most quality cloud stocks are in the midst of a v-shaped recovery.
Lyft is a sell on a rally type of stock.
