Mad Hedge Technology Letter
March 16, 2020
Fiat Lux
Featured Trade:
(HOW AIRBNB BLEW IT)
(AIRBNB)
The dumbest feeling person in tech right now has to be CEO and Co-Founder of Airbnb Brian Chesky.
The short-term accommodation platform was valued at $31 billion in its last funding round in 2017 and this year was the year that Chesky and Co. had earmarked to go public.
The company were the beneficiary of a secular tech tailwind aided by missteps from a dinosaur hotel industry and carved out a unique product linking hosts and travelers for the purpose of filling in short-term accommodation.
Airbnb pockets a commission of 6% of the total booking amount, meaning they are overwhelmingly reliant on volume to build sales.
There are more than 7 million homes in 220 countries and regions that have earned over $80 billion since the company started.
Like many things in life – a window of time is all you get.
Last year was that window of time when a smorgasbord of private tech unicorns delivered public markets new tradable assets such as Uber, Peloton, Pinterest, and Lyft.
Even though these stock shares performed worse than expected, it offered long time employees and shareholders a chance to finally cash in.
After going public, any loss from underperforming shares would be absorbed by the public.
Chesky gloated that a need for cash wasn’t driving the company to go public, but rather a desire to give investors the option to sell their stock now that Airbnb is more than ten years old.
Airbnb’s management even had enough time to observe ex-CEO of Uber Travis Kalanick sell off $1.7 billion in stock following the end of the company’s IPO lockup period highlighting the ample period of time Airbnb had to come to the public markets if they wanted to in 2019.
The 2019 loss of $322 million in the first nine months was no big deal and mainly attributed to ramping up of the marketing side of the business to add the final gloss to the lips before finally delivering dollars back to the stakeholders.
Then the coronavirus suddenly took the world by storm and the world changed.
It is highly probable that Brian Chesky’s lack of urgency means that Airbnb management has botched the best and last window of opportunity to go public – the window is now officially closed.
No tech company will go public in 2020 unless there is a sudden 180-degree turnaround in market sentiment which will only happen if the coronavirus disappears tomorrow - which it won’t.
Airbnb’s investors and long-time workers will still be patiently waiting for their big payday.
Even if you hit on the argument that the travel industry will rebound with zeal within 24 months, industry competition and the dynamics in this sphere will likely be more cutthroat, and not less.
The next “disruptor” of Airbnb could appear in 24 months as well – who knows?
Operations will cost more in 24 months and not less, and a healthy supply of units are not guaranteed to be the same if hosts mass foreclose on properties or a mirror image competitor who attempt to undercut Airbnb appears.
It is rumored that close to 1 out of 3 Airbnb hosts are reliant on their monthly Airbnb income to pay mortgages which would suggest a poor formula in this type of souring economic climate.
This entire short-term rental industry buttressed by tech platforms could be due for a wholesale washout.
How bad is the situation now?
Airbnb took a hit to the tune of over $50 million in booking revenues over the past several weeks in strategic cities that are close to coronavirus hot zones.
The home-sharing startup’s booking revenues cratered across 17 key international cities over a span of five weeks starting at the beginning of February, and the pain isn’t over yet as cities and countries go into full-blown lockdowns and crisis mode.
At first, it was just China, whose Airbnb’s booking revenues dropped 25%, losing $17.6 million, but that was just the canary in the coalmine.
And that poor number comes in the context of expected growth of roughly plus $30 million if booking revenues had continued growing at the same pace of nearly 35% the firm saw in those markets over the same period last year.
In total, the China business registered a negative swing of nearly $48 million because of the virus.
Even though the virus originated in Wuhan, the contagion quickly spread to Shanghai, Beijing, Seoul, Singapore, Hong Kong and Tokyo wreaking havoc on Airbnb listings.
Western cities are going through the same barrage of Airbnb cancellations and non-bookings in the tourist meccas of Paris, London, Prague, Barcelona, Milan, Rome, and New York.
Airbnb has now enacted an extenuating circumstances policy allowing guests to cancel eligible reservations without charge, and the host is required to refund the reservation, irrespective of the previously contracted cancellation policy.
February’s numbers make March’s numbers look radiant as the company is staring in the face of revenue down 85-90% in many important markets for the month of March.
And just to put the stake through the heart, it’s not only Airbnb dealing with the downturn in bookings. Expedia Group, which owns VRBO, Hotels.com, has revealed it expects a $40 million hit to operating profit in the first quarter.
The damage is broad-based and the worst of the contagion has not hit U.S. shores yet, which could culminate in a lockdown of strategic U.S. cities as well worsening Airbnb’s fiscal outlook.
I unquestionably blame Chesky for the bleak situation Airbnb is grappling with in terms of bringing the company to public markets.
He failed to do what many unicorn leaders accomplished, which was, by hell or high water, transfer risk to the public market during the late innings of the economic cycle (or before) which we can almost convincingly say ended in January 2020.
Was it worth eking out the extra year or two of growth for another 10% “growth” of incremental value?
The greediness has been exposed and now briskly punished.
Apparently, the risk was worth it in his eyes and now the company has most likely lost over half its value in 2 weeks.
Now the company has no room to fail while going into full-on damage control for the foreseeable future and hopes it can still go public during the next window of opportunity, whenever that will be.
It is yet to be determined if Airbnb will have illogical management at the helm next time around.
This is really the death of the tech IPO for this economic cycle – put a fork in it.
“Build something 100 people love, not something 1 million people kind of like.” – Said Co-Founder and CEO of Airbnb Brian Chesky
To minimize risk to our staff while continuing to provide an excellent service to our customers, the Mad Hedge Fund Trader is going completely virtual. Of course, the fact that we are already a global virtual company makes this really easy.
All work will be done from home. Everyone has to lay in a two-month stockpile of food. If you have to leave the house, you must wear a 3M N-95 Respirator Mask (click here for the link). Make sure your Netflix account is paid up. Stay on good terms with your family. You are about to get to know them really well.
My bet is that most US companies will adopt the same policies in the coming weeks. The major Bay Area technology companies already have. The Internet was built to cope with a nuclear war. We got a biological one instead.
As long as the Internet and our key applications keep working, we should have no problem delivering our investment and trading advice several times a day as usual. Now, you have more time to read it. We have just suffered the most rapid bear market in market history with only modest trading losses. Making money from here should be like shooting fish in a barrel.
Again, thank you for supporting my research. Let’s make 2020 our best year ever!
Good Luck and Good Trading. And stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Mad Hedge Technology Letter
March 13, 2020
Fiat Lux
Featured Trade:
(Here's Another Tech Corona Play)
(TDOC)
Here is a great health-tech name for you that is up 10% in the past 30 days – Teladoc Health, Inc. (TDOC).
The fallout from the coronavirus has been brutal and we will see the first round of bankruptcies in a few weeks for companies who get hit with that debt service payment tsunami.
The Nasdaq is now down almost 30% in just 3 weeks and I can proudly say that the tech letter avoided the bulk of the carnage.
But aside from the fallout, the pandemic has underscored the desperate societal need and use case for health tech.
The unpreparedness of the U.S. administration has been cringeworthy, to say the least, essentially pigeonholing the virus as a non-American issue or an unreliable media ruse.
The consequences are a government and society bereft of a real health solution, not to mention testing kits.
Our policymakers are reeling.
As the administration has found out, this is not something that a 50-basis rate cut can solve.
Exposing the holes in our health system isn’t fun to do but this is where the use case for technology cross-pollinating with healthcare to create products and services to buttress these types of health scares comes into play.
Seeking alternatives to face-to-face health solutions is becoming a pressing issue.
Remote diagnoses through telehealth services could become an important tool, although physical testing for the virus would have to be done in person.
Influenza pandemics are the perfect environment to enlist services from these types of telehealth services that could disseminate important and crucial guidance and consultation to sick patients.
Especially in the initial screening process of judging whether patients’ needs - immediate action or not - could improve the efficiency of hospitals and clinics.
At the outset of the virus spread, many clinics globally were refusing to test potential sick people because the doctors themselves did not want to take the risk of getting sick.
The lack of ICU hospital beds in the U.S. has been highlighted as an Achilles heel and reducing the numbers of hospital visitors by categorizing them into different need-based groups would help the healthcare professional community on the ground.
We have been swamped by images from Wuhan, China of nurses and doctors being overworked and overwhelmed to sometimes death.
That must be avoided in the future.
Virtual patient traffic at privately held telehealth company American Well has risen about 11% since the first U.S. coronavirus death and an infusion of demand has been recorded at similar companies as well.
If it’s just the basic knowledge of whether going to the supermarket is safe or not or if flying on an airplane or not is feasible, people need to know.
Knowledge is power and knowledge is safety.
Some might get nervous about early viral symptoms and some might seek more information on how to stay safe.
Brad Younggren, Chief Medical Officer of 98point6, offering private text-based diagnosis and treatment via a mobile app, said their physicians were encouraging patients diagnosed with influenza to communicate if they do not improve.
Teladoc said it has been partnering with the Centers for Disease Control and Prevention (CDC) to provide near real-time surveillance data on the spread of the virus.
An $8.3 billion U.S. bill signed into law on Friday to fund the coronavirus outbreak response includes $500 million to waive certain restrictions on Medicare telehealth coverage. That provision is aimed at encouraging senior citizens to choose at-home virtual healthcare services.
Analyzing the tech markets today – they are showing signs of extreme stress.
Tech stocks have been utterly decoupled from fundamentals as the radioactive waste effect from the health scare floors any inkling of optimistic sentiment.
The drawdowns have been heavy which validates the tech letter going 100% cash for the short-term.
The policy missteps have added more turbulence to an already sensitive situation akin to lighting a match and throwing it into the tinder box.
What started out as an exogenous event has morphed into a broad set of externalities crushing whole industries such as travel, energy, banks, airlines, hospitality, and hotels.
Dealing with an oil crisis, health crisis, and interest rate crisis doesn’t just work itself through in a matter of days and tech companies are being repriced accordingly.
Teledoc is one of those companies to keep in mind once the chaos blows over.
“A squirrel dying in front of your house may be more relevant to your interests right now than people dying in Africa.” – Said CEO of Facebook Mark Zuckerberg
Mad Hedge Technology Letter
March 11, 2020
Fiat Lux
Featured Trade:
(THE BEST LEAPS IN MID-SIZED TECH)
(TWTR), (EBAY)
Successful investors rarely disclose their modus operandi.
The truth is that success comes in all shapes and sizes.
Many take the volatility index and aggressively short it until death hoping to avoid the “big one” that wipes them out.
Picking up pennies in front of the steam roller on steroids works until it doesn’t.
Conversely, long-term investors with an eagle-eye view of the underlying trends in the economy, society, and the tech sector will let the market crash come to them only to slip in a few long-dated long-term equity anticipation securities (LEAPs) in their favorite names.
The reasons are very obvious. The risk on a LEAP is limited. You can’t lose any more than you put in. At the same time, they permit enormous amounts of upside leverage.
Two years out, the longest maturity available for most LEAPS, allow plenty of time for the world and the markets to get back on an even keel.
Depressions, pandemics, tsunamis, oil shocks, interest rates going to 0, and political instability all fall away within two years and pave the way for dramatic stock market reversals.
You just put them away and forget about them. Wake me up when it is 2022.
There is a smarter way to execute this portfolio. Put in throw-away crash bids at levels so low they will only get executed on the next 1,000 point down day in the Nasdaq Index which could happen any day.
You can play around with the strike prices all you want. Going farther out of the money increases your returns but raises your risk as well. Going closer to the money reduces risk and returns, but the gains are still a multiple of the underlying stock.
Committing to risk when there is blood in the streets seems scary at the time, but is often the origins of fruitful trades that get fully harvested down the road.
I am zeroing in on two companies that aren’t the vaunted FANGs but are positioned right behind their back shoulder and whose share prices are poised to shoot higher long before the January 2020 expiration.
Considering we have just had an eye-gouging 20% sell-off in tech shares, there is the argument that tech shares are on discount in the shop window as we speak.
The two companies who fit the bill are Twitter (TWTR) and eBay (EBAY).
What do they have in common?
Both are being bullied and cajoled by Elliott Management, the vulture fund who cut its teeth on profiting off of distressed debt but have now ventured into the realm of public markets to only bring the same type of aggressiveness and bottom line mentality to the octagon cage.
They exist solely to deliver shareholders higher returns and brutally squeeze growth out of underperforming assets.
There is no empathy or feel-good factor at Elliot.
They have identified Twitter and eBay as low-hanging fruit in the tech ecosystem and have adamantly demanded that management get their finger out and improve its execution.
I agree with Elliot that Twitter and eBay have failed to find the parabolic growth that something like a Facebook has experienced.
Elliot Management is here to set things straight, after they quietly acquired a 4% stake in Twitter, and that couldn’t be more evident when they tried to oust CEO of Twitter Jack Dorsey a few days ago.
The vulture fund was already peeved that Dorsey was splitting time with his other company Square and imagine how they felt when Dorsey announced he would seek to spend the year in Africa working remotely.
The outcry and backlash were considerable, and the strong-arm tactics have worked out beautifully for Elliot Management who scored an extra 3 seats on Twitter’s board for agreeing to allow Dorsey to keep his job.
On top of that, Dorsey agreed to expand Twitter’s user base by at least 20% this year, achieve accelerating revenue growth, and gain market share as a digital advertiser.
In effect, Elliot Management put Dorsey in his place, and they have had the same type of end result in eBay’s management ranks as well.
Under almost any scenario, it’s hard to fathom that these two tech companies will have share prices lower by January 2022.
Granted, short-term gyrations are ripe for volatility as the coronavirus wreaks havoc on the sensitive minds of investors and traders, but the risk/reward in these two LEAPs are overwhelmingly favorable.
I would suggest looking at the $23 strike price for Twitter and eBay and executing a limit order near the bid price.
At the $23 strike price, 7 contracts would cost around $10,000 for Twitter’s LEAPs and 8 contracts for eBay.
Executing limit orders is necessary otherwise you will get gouged on the spread nullifying the leverage that is critical to making this trade a homerun.
If the market swan dives, there is a high chance of getting an order filled at the price you are comfortable with.
There is a strong likelihood of cashing out in January 2022 – what’s not to like about that?
Twitter’s Jan 2022 LEAP:
Twitter’s Jan 2022 LEAP:
“If you're gonna make connections which are innovative... you have to not have the same bag of experiences as everyone else does.” – Said Co-Founder of Apple Steve Jobs
