Tech Letter Archives

The New Crown Jewels of Social Distancing

The second tier of social distancing tech stocks will do well in this brave new world in which digital lives have superseded physical ones.

Sure, most of you already know that Amazon (AMZN), Slack (WORK), Microsoft (MSFT), Zoom Communications (ZM), and Teladoc Health (TDOC) are the crown jewels of current social distancing tech stocks, but there is another group that should also outperform.

Here are 4 that you should take a look at with DocuSign being the best of the bunch:

DocuSign (DOCU)

Teleconferencing and other niches have come front and center and consummating deals have migrated to one place since people cannot physically sign their name from pen to paper.

Electronic signatures were basically a cottage industry when it came out, but it is here to stay and this company has investors buzzing. Although the volume of business agreements being signed globally may temporarily slip, those that are continuing to work are enabled by DocuSign to close agreements without meeting eye to eye.

I expect resiliency in the type of products DocuSign provides and the remote implementation options.

DocuSign is well-positioned within the defensive category of digital transformation spend. Their recent acquisition of Seal Software will help boost DocuSign’s ability to leverage the power of artificial intelligence in the domain of contract analytics.

The opportunity to mitigate time spent on manual workflows through the addition of Seal to the portfolio can bolster the value proposition and drive ROI (return on investment) for customers.

The trajectory of the company was validated by DocuSign’s strong fourth-quarter earnings results with adjusted earnings increasing 12 cents per share which is a 100% increase year over year.

Just as impressive, DocuSign posted quarterly revenue of $274.9 million, an increase of 38%. As the data suggests, the signals all point to this company continuing its outperformance.

The e-document market has been monopolized by DocuSign with competition shut out, and as business goes 100% virtual in the current environment, this should have a positive network effect that will resonate when the world opens back up.

The next 3 stocks aren’t growth companies like DocuSign but are cheap stocks under $10 that might be worth a look.

Sirius XM Holdings (SIRI)

With all the extra time at home, satellite radio has hit the jackpot, making their services much more appealing.

Since Sirius and XM Radio merged in 2008, the combined Sirius XM Holdings has enjoyed a near-monopoly on satellite radio.

Sirius built on that with the 2018 acquisition of Pandora, the music streaming product, helping to fill the sails again with rapid revenue growth; its audio products now reach more than 100 million people.

Sirius' situation is appearing healthy and added a further 1.1 million subscribers in 2019 alone, bringing its total paying subscribers to roughly 30 million. The company's audacious strategy of partnering with auto manufacturers to pre-install SiriusXM in new models should help steadily grow the business.

Zynga (ZNGA)

This video game stock is cheap and could be a beneficiary of the stay at home revolution.

Zynga's portfolio of popular games, combined with hyper-charged growth, makes it one of the best cheap stocks to buy under $10.

Last quarter, the social gaming developer behind franchises like Words With Friends, Zynga Poker, CSR Racing, and FarmVille set new company revenue records up 48%.

While growth is likely to decelerate quickly from such temporary coronavirus catalysts, I expect double-digit revenue growth in 2020.

Still, Zynga is holding up remarkably well, especially in the COVID-19 era, as people increasingly turn to mobile devices for entertainment.

Nokia Corp. (NOK)

Nokia's expected earnings growth is impressive with Wall Street looking for an 8% bump in 2020 and roughly 30% profit growth in 2021.

Cheap stocks to invest in under $10 don't often come in the form of well-oiled global corporations valued at $15 billion.

The Finnish communication equipment telecom is one of the rare exceptions against the rule.

Sales have grown 14% annually for the last five years. Nokia may end up one of the 5G stocks to watch in the coming years because of the stigma of Huawei forcing many Europeans to go with brands closer to home.

Nokia pays a hefty 8% dividend as well and will never need a last-second bailout.

March 30, 2020 - Quote of the Day

Tech Letter

“Every technological revolution takes about 50 years.” – Said Founder of Alibaba Jack Ma

March 27, 2020

Tech Letter

Mad Hedge Technology Letter
March 27, 2020
Fiat Lux

Featured Trade:

(THE COMING AD HIT FOR GOOGLE AND FACEBOOK)
(FB), (GOOGL), (TWTR), (SNAP)

The Coming Ad Hit for Google and Facebook

Tech Letter

Expect lower revenues from Facebook (FB) and Google (GOOGL) because ad revenue has taken a hit.

It makes no sense to spend ad money on Facebook and Google ads for restaurants and hotels during times like this and that’s if they even still exist today.

The accumulative effect of the bankruptcies in other parts of the economy will shrink Google and Facebook’s ad dollar coffers.

The two internet giants together could see more than $44 billion in worldwide ad revenue evaporate in 2020, but that doesn’t mean these companies won’t be profitable.

For 2020, Google's total net revenue is now projected to be about $127.5 billion, down $28.6 billion for the year.

Facebook’s management said there was “a weakening in the ads business in countries taking aggressive actions to reduce the spread of COVID-19.”

Facebook’s overall usage has increased during the pandemic, with data up more than 50% over the last month in countries hit hardest by the virus, but the spike in volume isn’t in a form in which they can monetize it.

In 2021, Facebook’s advertising business is projected to recover growing 23% year-over-year to $83 billion.

I now expect Google to generate $54.3 billion in operating income (43% adjusted EBITDA margin) and Facebook will make $33.7 billion (49% margin), in 2020.

Digital platforms have felt the abrupt halt in spending, given the relative ease of stopping ad spend.

Secondary ad companies are also performing worse than expected with forecasted revenue for Twitter (TWTR) down by 18% (to expected revenue of $3.2 billion) while Snap (SNAP) ad revenue is expected at $1.66 billion, 30% lower.

Amazon’s ad business boasts a fortified moat because their revenue comes from product searches and those have experienced a surge in demand because of the coronavirus.

Facebook-owned WhatsApp has increased by 50% and that number is up 70% in Italy as the Italians go through a severe outbreak and lockdown.

Another side effect from the virus is the reduction of video streaming quality to ease the strain on internet networks, as YouTube and Netflix (NFLX) have also done.

Facebook is monitoring usage patterns in order to make the system more efficient, and add further capacity as required.

To help ameliorate potential network congestion, they temporarily reduced bit rates for videos on Facebook and Instagram in certain regions.

Facebook is conducting tests and further preparing to respond to any problems that might arise with network services.

Facebook and Google’s weakness proves that even the largest of Silicon Valley tech companies are battling with revenue restructuring while waiting for the U.S. economy to open up.

Although this is terrible news for Facebook and Google, the Nasdaq index is in the process of bottoming out.

The 3.28 million U.S. jobless claims were unprecedented but could very well represent a flushing out of the horrible news as the Nasdaq index spiked by 4% intraday.

Tech shares have had this job claim number baked into the share price for quite a while and we knew it was going to drop like an atomic bomb.

Some estimates had 4 million unemployed and the pain on main street is real, just search on Twitter – hashtag #lostmyjob.

The anecdotes stream down about individuals coming to grips with a sudden sacking and new reality of zero income.

This is just the first phase of job removals and the silver lining is that tech companies largely avoided the worst of the firings partly because many tech jobs can be moved remotely unlike many hospitality jobs.

The other silver lining is that the health scare is supercharging the digital ecosystem as society has effectively been moved online.

Any short-term weakness in tech companies will only be brief as tech stock will lead the recovery as the economy starts to open up again and the record amount of fiscal stimulus breathes life into hobbled companies.

Tech investors should prepare to pull the trigger.

March 27, 2020 - Quote of the Day

Tech Letter

“The thing that we are trying to do at Facebook is just help people connect and communicate more efficiently.” – Said Facebook Co-Founder and CEO Mark Zuckerberg

March 25, 2020

Tech Letter

Mad Hedge Technology Letter
March 25, 2020
Fiat Lux

Featured Trade:

(ALGORITHMS RUN WILD)
($COMPQ), (TWTR)

Algorithms Run Wild

Tech Letter

Don’t underestimate trading algorithms.

The “Buy the Dip” psychology is broken and computerized trading has completely flooded the market with its personality.

That is exactly the dynamic of the current tech market, and it will mountain of generous offerings to reverse the trend in the form of monstrous stimulus and cash handouts.

As we entered 2020, the sentiment was sky-high, geopolitical tensions relatively calmed and three recent interest-rate cuts from the Federal Reserve drove tech stocks to record levels.

For 10 years, traders and the algorithms they harnessed were handsomely rewarded by aggressively betting against elevated volatility.

Cogent chart trends are the algorithms’ lustful partner in bed and now that every single short-term model is flashing sell, sell, sell - there isn't much bulls can do to fight back.

Many tech hedge funds have settled on similar conclusions - the best defense right now is unwinding portfolios to return to cash.

Incessant margin calls roiling any logical strategy has struck fear into many traders who levered up 10X.

What you could possibly see is the Minsky moment: That stability ultimately breeds instability because the only input in which becomes the difference make is volatility producing massive violence on upside and downside moves.

The ones who can absorb elevated risk are nibbling and unleveraged hoping to time the turn when stocks finally react positively to good data.

The current battle in the fog of war is that of two different economic scenarios that have direct influence in which ways the algorithms flip – either shutdown the country ala Wuhan, China for an extended period of time or send the troops back to work.

Hedge fund billionaire Bill Ackman gave his 2-cents restating his passionate plea for a 30-day-shutdown to fight the coronavirus pandemic.

Former Goldman Sachs CEO Lloyd Blankfein is in favor of sending back the asymptomatic younger generation workers sooner than later.

Initially, Blankfein gave his backing for “extreme measures” in order to flatten the curve, but promoted healthy workers returning “within a very few weeks.”

Blankfein's argument rests on that if people don’t go back to work, the economy might become too damaged to recover from inciting another crash.

This contrasts starkly with Ackman’s idea of “testing, testing, testing”, which would theoretically dismantle the potency of the virus but take longer for the economy to restart.

U.S. President Donald Trump has relayed his desire to open up business by Easter Sunday.

So as mostly professional politicians hash out a towering aid package of over $2 trillion, firms will get more of an indicator of how and when the business world opens up again.

Trading algorithms are on a knives edge because of the uncertainty – until they are illegal – it is something we are stuck with.

These trading formulas are preset based on biases that start with a series of inputs and the most critical input is volatility or better known as the fear index.

If the lockdowns are extended, the flood of negative news will force algorithms to sell on the extra volatility.

When things go bonkers, many of these preset formulas sell which exacerbates the down move further simply because more than enough people have the same preset algorithm.

Cutting position size when market volatility explodes is not a farfetched theory and is quite a common trading nostrum.

Even if many of these trades would be good long-term bets, many trading algorithms are focused on short-term trades and by this, I mean milliseconds and not days.

Another input into trading algorithms are Twitter feeds.

The platform is scraped for keywords from mass media news sources and synthesized into a specific output that is fed into a computer algorithm.

These headlines offer insight into what the sentiment is for the trading day – negative, positive, or neutral.

This scraping of data is especially relevant in today’s chaotic trading world where 10% moves up or down in one day is the new normal.

Because of Dodd-Frank Wall Street reform, many of the big banks have shuttered trading operations hurting the market’s liquidity situation causing spreads to widen and down moves to accelerate.

But now that the Fed has landed the Sikorsky UH-60 Black Hawk on the helipad and the money is waiting to helicopter down as they have announced “unlimited” asset buying and guaranteeing of corporate bonds to aid financial markets.

How does computerized trading roil markets?

Here is an example. A recent trading day included more than $100 billion of selling, the worst week since the financial crisis and was triggered by a hedging strategy called “vol targeting”—using volatility as a central input in trading decisions—and other systematic tactics.

Funds making decisions based on volatility, including some with names such as volatility-targeting funds and risk-parity funds, have risen in popularity.

Risk-parity funds manage an estimated $300 billion.

Risk parity is an approach focused on allocation of risk, usually defined as volatility, rather than allocation of capital.

That is what we have now – a cesspool of risk parity hedge funds layered by high frequency funds layered by short/long vol funds layered by arbitrage funds all levered 15X.

The take into consideration that they are supercharged by massive volume-based computer algorithms and trying to head for the exit door at the same time.

Ironically, this could be one of catalysts for shares to recalibrate and head back up north as traders start to front-run the peak of the health crisis.

Let’s hope that it happens sooner than later and that the government doesn’t manage to screw up delivering the helicopter money.

March 25, 2020 - Quote of the Day

Tech Letter

“If you can't make it good, at least make it look good.” – Said Co-Founder of Microsoft Bill Gates

March 23, 2020

Tech Letter

Mad Hedge Technology Letter
March 23, 2020
Fiat Lux

Featured Trade: (THE CORONA DRAG ON 5G)
(VZ), (T), (AAPL), (NFLX), (NVDA), (XLNX), (QRVO), (QCOM)

The Corona Drag on 5G

Tech Letter

It will be inevitable – the 5G shift in 2020 will be delayed.

Last year, 5G was available on only about 1% of phones sold in 2019 and demand has cratered this year because of exogenous variables.

Up to just recently, Apple (AAPL) was the bellwether of the success of tech with wildly appreciating shares due to the expected ramp-up to a new 5G phone later this year.

Well, things are more complicated now.

I will be the first one to say it - the new Apple 5G iPhone will be delayed until 2021 – the project has been thrown into doubt because of a demand drop off and headaches with the supply chain in China.

The phenomenon of 5G cannot blossom until consumers can upgrade to 5G devices.

Concerning all the media print of China Inc. going back to work, don’t believe a word of it.

People of the Middle Kingdom are sitting at home just like you and me by navigating around top-down government edicts.

Instead of the perilous commute in a country of 1.4 billion people, Chinese workers are fabricating attendance figures per my sources.

Overall data is grim - global smartphone shipments dropped 38% year-over-year during February from 99.2 million devices to 61.8 million - the largest fall ever in the history of the smartphone market and that is just the tip of the iceberg.

The new data point underscores the magnitude of how the coronavirus is sucking the vitality out of the tech ecosystem in China and thus the end market for global consumer electronics.

The statistic also foreshadows imminent trouble in the smartphone market as other regions have now shut down not only in China but the manufacturing hubs of South East Asia.

The outbreak squeezes both supply and demand.

Factories in Asia are unable to manufacture phones as usual because of obligatory government shutdowns and complexities securing critical components from the supply chain.

5G has been hyped up as the great leap forward for wireless technology that will usher in unprecedented new use cases supercharging global GDP — from driverless transport to robotic automation to smart football stadiums.

And coronavirus is just that Godzilla destroying 5G momentum down.

Mass quarantines, social distancing, remote work, and schooling have been instituted in American cities, meaning that the current network carriers are swamped and overloaded with a surge in data usage.

The Verizon’s (VZ) and the AT&T (T) Broadbands of America are currently focused on maintaining their current core customers, adding extra broadband to handle the increased load, and making sure the health of the network stays intact.

This is a poor climate to upsell products to beleaguered Americans who have just lost income and possibly their house because they cannot pay mortgages.

Services such as YouTube and Netflix (NFLX) have even decreased the quality of streaming on their platforms to handle the dramatic spike in extra usage in Europe with the whole continent locked down.

The Chinese consumer was the Darkhorse catalyst to ramp up the global economic expansion during the last economic crisis, picking up world spending in 2009.

On the contrary, this group of super spenders is less inclined to save the global economy this time around because they are saddled with domestic debt.

Just as unhelpful to Silicon Valley revenues, the technology relationship at the top of the governments are poised to worsen because of the health scare.

The U.S. administration has already banned the use of Chinese components in the U.S. 5G network amid suspicions the devices would be used for espionage.

Back stateside, I believe the U.S. telecoms will explicitly detail a sudden slowdown in the 5G network rollout during their next earnings report.

The telecom companies have been able to successfully handle the extra incremental load, but it has had to allocate resources to service the extra volume.

In the meantime, companies will shift to doing infrastructure and site preparation in anticipation of the re-build up to 5G, but that could be next to be put on ice if crisis management moves to the forefront.

Considering every 5G base station is being manufactured in Asia, one must be naïve in believing all is well and they will probably need to do what the 2020 Tokyo Olympics will shortly do – postpone it.

It’s not business as usual anymore.

This time it’s different.

The world just isn’t ready to digest such a shift in global business as 5G until the fallout of the coronavirus is in the rear-view mirror.

The 5G phenomenon underlying effect is to supercharge globalization into smaller networks of interconnectivity and that is not possible during a black swan event like the coronavirus which is the antithesis of globalization and interconnected business.

Just take the situation across the Atlantic Ocean in Europe, UBS Group AG, and Credit Suisse Group AG required clients to post additional collateral, and money managers in New York are preparing term sheets for ultra-rich Americans to urgently meet margin calls.

Many people are scurrying back to their doomsday’s shelter and that does not scream global business.

If you thought gold was the safe haven – wrong again – it experienced back-to-back weekly losses as margin pressures force fire sales of gold to raise cash.

Another glaring example are the assets of Eldorado Resorts Inc., controlled by the founding Carano family, which burned $28.7 million of stock in the casino entity to meet a margin call to satisfy a bank loan.

Things are that bad now!

Sure, telecom players might argue that a sudden influx of workers from home necessitates more investment in 5G, but if they have no income, all bets are off.

The capacity of 4G home broadband has proved it is good enough for today’s demands and it means the last stage of 4G will be a high data consumption longer phase before business lethargically pivots to 5G in 2021.

Verizon’s CEO Hans Vestberg said last year that half the U.S. will have access to 5G by the end of 2020, and I will say that is now impossible.

This sets up a generational buy in the Silicon Valley chip names involved in 5G after coronavirus troubles peak such as Nvdia (NVDA), Xilinx (XLNX), Qorvo (QRVO), and QUALCOMM Incorporated (QCOM).