“Once things start moving, Uber will, too.” – Said Current CEO of Uber Dara Khosrowshahi when asked about the fallout from the coronavirus
Mad Hedge Technology Letter
March 20, 2020
Fiat Lux
Featured Trade:
()
(AMZN), (W)
Social distancing signals the death of business in March and April 2020. Enter online shopping and E-commerce.
E-commerce’s greatest strength is pulling ahead of its competition while Millennials have also been the catalyst in turning the general shopping experience into a seamless digital affair.
And now that the world is at the mercy of an invisible virus, the use case for e-commerce business models has never been brighter, more appealing, and contactless.
That’s not to say that there are still net negatives from worker’s losing their jobs and being unable to buy goods, whether online or not. The overall damage to tech companies as a result of the pandemic cannot be ameliorated with a simple panacea.
The pain is just starting as the tech market searches for a bottom.
Covid-19 cases have mushroomed to over 11,200, and investors need to digest that continued underperformance lies ahead in the short-term.
But, the long-term migration towards digital models is looking better by the second.
Essentially, the e-commerce method is being supercharged by the coronavirus and the positive unintended consequences harvested by the e-commerce business models are directly correlated to increasing fatalities.
The health scare is ushering in a giant wave of new long-term customers who are just starting their digital experiences, making investing and e-commerce a topic worth discussing.
Astonishingly, the work environment has truly metamorphosized the past two weeks - any worker who can work at home is now working at home.
No longer do we have the hesitant boss who thinks working at home is all fantasy and no production.
Local policies have been so drastic in some cities that lockdowns of schools and restaurants have become commonplace.
People in those cities have also begun shunning public, crowded places in the name of health and survival.
How bad is it out there on the streets, and how poorly are U.S. tech firms doing?
The economic pain caused by the escalating coronavirus pandemic will be worse than the Great Financial Crisis of 2008.
The Chinese economy is contracting at a 15% annual rate, while the European economy is already in severe recession because of the drop off of China revenue.
In the U.S., they are shutting down restaurants, schools and major events; people are going to be without a paycheck, and this doesn’t set up nicely for consumers to pay for tech services that aren’t utilities.
Unless there are major policy moves soon, a downward spiral will usher in something akin to a global tech recession, and U.S. Secretary of the Treasury Steve Mnuchin is already ringing the alarm bells by saying unemployment could spike to 20%.
Tech won’t avoid the carnage in this drastic scenario, and it's still not “buy the dip” time.
Many industries are already queued up at Washington’s front door for a bailout and even though tech firms are better positioned than say, the oil industry, the overall slide in demand from consumers will hit come next earnings report which is just around the corner.
The bill Washington will need to foot appears upwards of $3 trillion and it’s easy to understand why when, according to a March 2020 YouGov survey, over a quarter (27%) of those in the US and 14% in the UK said they avoided public places and that number has to be closer to 80% now.
What's important to note when it comes to investing in e-commerce, is that some tech firms are a little bit luckier than others, such as Amazon, who can’t find enough workers and is raising wages and opening 100,000 new positions across the US to ensure its delivery network can service the coronavirus pandemic.
Not only do they need full-time positions but also part-time positions will be made available to meet historical seasonal labor demand in its fulfillment centers.
Management promised to inject $350 million to raising wages by $2 per hour in the US throughout April.
Amazon announced it would limit its warehouses to critical items such as medicine and household staples to ensure they meet demand.
Right now, investing in e-commerce means the companies that provide currently popular goods, such groceries, pet supplies, beauty and personal care products, health and household items, baby products, and industrial items.
Other e-commerce companies haven’t fared as well as Amazon, such as furniture e-company Wayfair who reportedly relies on mainland China for half of its merchandise and sell only one type of product - furniture.
Wayfair’s supply chain disruptions are hurting the company’s ability to deliver furniture, but it also coincides with a massive drop off in demand as consumers shun furniture for household items and groceries.
Shares of Wayfair have dropped over 400% since January partly because the company has never been profitable and is now entering into a worsening climate to sell furniture which equated to an optimal signal for investors to dump the stock in bucketloads.
I have been bearish on Wayfair since last year and envisioned an imminent wealth-destroying effect for their business model, but I am shocked that shares dropped this rapidly.
Three weeks ago, the Boston-based company fired 500 people to help “lower costs,” validating my hypothesis.
The exorbitant cost of acquiring each additional customer was the reason I hated this company in the first place.
Uncertainty is the message of the day, and certain e-commerce companies will enjoy the turbocharging or discharging of their models.
Tech shares hate uncertainty and investors must brace themselves with regards to investing and e-commerce.
“We've arranged a civilization in which most crucial elements profoundly depend on science and technology.” – Said American astronomer and cosmologist Carl Sagan
Mad Hedge Technology Letter
March 18, 2020
Fiat Lux
Featured Trade:
(LOOK FOR A “V” WITH TECH EARNINGS)
(BABA), (BKNG), (EXPE), (TRIP), (NFLX), (SPOT)
(AMZN), (GOOGL), (TWTR), (SNAP), (PINS)
Expect poor earnings results for almost every tech company as a result of the coronavirus.
The base case for the tech industry is that we are already in the middle of a recession.
The main reason for this is the expected demand/supply disruptions in the wake of Covid-19 that will dramatically drive a wedge in the profit potential which could last through mid-summer.
The silver lining is that the recovery will be robust; but we most likely won’t experience that until the 3rd quarter.
In the short-term, the path of least resistance is more weakness in tech shares, as the U.S. has failed to find enough test kits for possible coronavirus positive patients.
This means that the number of patients infected with coronavirus will be backloaded and as the test kits finally find their way to the masses, the number of sick patients will mushroom.
The Norwegian University of Science and Technology has urged all Norwegians to return home citing a “poorly developed healthcare and infrastructure” as the specific reason to vacate U.S. soil.
It is not possible for tech shares to bottom until there is a strong surge of coronavirus, which is almost a given because of the lax preparation and policy missteps beforehand.
The U.S. is now registering over 1,000 cases per day and growing.
My negative assessment was validated by the U.S. Central Bank, who chose to cut interest rates by 100 basis point and the market opened down 12% following the announcement.
The tech market is now pricing in a slew of bankruptcies and the realization of more pain is forcing sellers to take risk off the table at almost any price.
To hammer my point home, in the time of writing this article, the global number infected by coronavirus jumped from 180,000 to 196,000.
From that quick bump up, the coronavirus cases in the U.S. jumped from 4,538 to 5,853.
The revenue softness will bleed into earnings season and some tech stocks will experience a 20% decline in quarterly revenue and others will fare better with a 2% decline.
A broader problem is the disorderly market malfunctioning pervading through market trading.
Desperate rate cuts and multiple circuit breakers halting the flow of trading are ravaging investor confidence in an American economy that is known for its interconnectedness and integration.
The health solution must have a strong element of isolation and disconnection, meaning the U.S. economy will be sacrificed in the short-term.
Just as baffling, the Central Bank is out of ammunition and will not be able to cure future crises.
The U.S. has no choice but to throw financial stimulus after stimulus to keep companies afloat.
The tech firms facing a larger drop off will be Alibaba Group Holding (BABA), the giant China-based e-tailer, and online travel agency stocks Booking.com (BKNG), Expedia Group (EXPE) and TripAdvisor (TRIP).
Online travel companies face dramatic demand reduction and are the first tech product that gets hacked off in a global and fast-spreading pandemic.
Borders are closed, airlines are practically shuttered, and there is no use case for online travel apps when people are “hunkered down” and advised not to leave their homes.
Alibaba bears the brunt of the COVID-19 crisis, given its entrenched operations in the epicenter of the virus’ initial outbreak, they simply won’t be able to access supplies when factories are locked down and logistics are delayed.
Even Amazon noted that their Prime 1-day delivery was in bad shape because of the same reasons, but they have done well selling out of most household products so don't quite face the same trials of poor tech earnings.
Online ad platforms face a reckoning as well, such as Pinterest (PINS), Twitter (TWTR), and Snap (SNAP) who are dependent on brand advertising and will likely face pullbacks.
These second-tier online ad companies face a slide of around 10% year over year.
The heavy hitters will experience their own type of weakness, with Alphabet (GOOGL) and Facebook facing a 5% revenue drop.
Google’s brand advertising business will face pressure and its travel advertising segment (10-15% of total revenue) will endure significant downside.
Amazon.com (AMZN) will only endure low single-digit number weakness in revenue because many consumers turn to e-commerce ordering at home instead of going out.
Netflix (NFLX) and Spotify Technology (SPOT) are likely to experience immaterial disruptions as well as any top of the line premium digital content that can be devoured at home.
“Artists work best alone.” – Said Co-Founder of Apple Steve Wozniak
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
