Mad Hedge Technology Letter
December 13, 2019
Fiat Lux
Featured Trade:
(WHY THE FANGS ARE BREAKING INTO YOUR HOME)
(GOOGL), (AAPL), (AMZN), (ALRM), (ADT), (ARLO), (RESI), (PANW), (CRWD), (FTNT), (CSCO), (CMCSA), (BBY)
The house is the new smartphone and I will tell you why.
The projected market growth of 18% in smart home technology sales according to Acumen Researching and Consulting will deliver opportunities to shape and prioritize this sector.
The revenues up for grabs from the smart home mean that internet of things’ (IoT) companies will create systems that mesh together with the bare minimum human participation, meaning that tech will have a dramatic influence in our daily lives.
I get several moans and groans a day that the Mad Hedge Technology Letter only shines the spotlight on the FANGs.
But it is hard not to when it comes to the future of the home.
Just look at recent M&A activity.
Automation and connected smart appliances have consumed Amazon by recently acquiring Eero, producer of routers for apartments, houses, and multi-story homes, and after already paying $1 billion to acquire Ring, a doorbell-camera startup. It had also bought Blink, a smart camera maker in 2017.
Google hasn’t shied away either by investing in smart home products pocketing Nest, a firm producing smart home products, for $3.2 billion.
Nest took a few years to sort out its production phase but finally managed to launch new temperature sensors, a video doorbell, and an outdoor smart camera.
What are the trending IoT products now?
The flavors of the day are smart lights, security, entertainment systems, and temperature control.
They are the low hanging fruit of the smart home industry – a de facto gateway into this world.
Most of these smart devices operate with voice assistants, but because of the nature of competition, certain products are aligned with certain ecosystems and compatibility issues will persist until the competition flushes itself out.
A layman’s example would be Apple’s Homekit dovetailing nicely with Apple’s Siri.
Companies are in the first innings of the product iteration cycle and the variations of smart home products are endless stemming from showers that remember preferred water temperature and flow rates or climate-control systems that change in real-time to suit the user.
Security of home networks and connected devices are still a controversial question mark because the receiver of this type of data has the keys to the most intimate details of personal lives.
Even avid technologists are hesitant to dive in and put up smart home products all over the house, and most are being cautious.
In fact, privacy issues are the most distinct headwind to fresh adoption rates.
Many people simply aren’t willing to make the jump yet until they are more convinced of its use case.
Even with all the reservations, an alternative global shipment company believes smart home devices will post 24% in growth next year.
For the smart home device believers, this cohort averages 6 smart home devices per household and will certainly rise to 7 or 8 by the end of 2020.
Popular items include the Amazon Echo, Google Home, and Apple (AAPL) HomePod.
Smart speakers are already present in 36% of American homes and rising.
Consumers are also worried about technology invading their daily lives along with allowing artificial intelligence to dominate personal decision making.
Others have concluded that items such as smart microwaves are a waste of money and are unneeded when analog devices function admirably.
Another legitimate reason is that the software and technology involve a perceived steep learning curve to operate which many people do not have the patience for.
And some are just burnt out by the volume of technology thrown in our faces.
Who wants to operate 50 apps on their phone to control their smart home devices when there are other pressing needs in life?
Companies with skin in the game are Alarm.com (ALRM), ADT (ADT), Arlo Technologies (ARLO) and Resideo Technologies (REZI) and they will be outsized winners if they can solve many of the industries lingering issues.
The value thesis in the case of home automation companies is that they are financially efficient, time-effective, boost wellness and will be easy to use.
About 11% of U.S. broadband households have smart thermostats and Nest’s smart thermostat is the most popular.
Networked security cameras by Arlo are in 10% of homes.
Video doorbells from Amazon.com (AMZN), Google are in 8% of homes and help deter theft of e-commerce packages.
Smart light bulbs and lighting are at 8% market share while smart door locks are at 7% penetration.
There are several second derivates bet on this as well.
The most common user interface for the smart home is apps on a smartphone or tablet and voice commands to smart speakers are second.
The conundrum of installation complexities leads to the demand of professional installers.
This demand has delivered opportunities for companies like Comcast's (CMCSA) Xfinity and Vivint.
Electronics retailer Best Buy (BBY) has stepped up its footprint in this market as well.
Another stock play would be cybersecurity companies because they will win contracts protecting the software that smart home products rely on.
Hackers are getting more sophisticated and a private cybersecurity company Firewalla can track where data is flowing to and from your devices.
Firewalla management recommends buying devices from reputable home automation companies like Amazon and Google because they have more accountability and are of higher quality.
There will be a huge onramp of cybersecurity contracts doled out to the likes of Palo Alto Networks, Inc. (PANW), CrowdStrike Holdings, Inc. (CRWD), Fortinet, Inc. (FTNT), and Cisco Systems, Inc. (CSCO).
We are in the first mile of a marathon and smart home product manufacturers, cybersecurity companies, 5G internet, and semiconductor companies will all benefit from the broad-based integration of these next-generation home consumer products.
What we saw in the 4G era was enormous innovation coming with that greater coverage and that speed over 3G. It’s going to be the same with 5G for sure.” – Said CEO of Verizon Communications Hans Vestberg
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Hook Me Up to John Thomas
Mad Hedge Technology Letter
December 11, 2019
Fiat Lux
Featured Trade:
(CHERRY-PICKING IN TECH TODAY)
(ZM), (CRM), (GOOGL), (AAPL)
The valedictorian of the IPO class Zoom Video Communications, Inc. (ZM) is finally on sale at a discount.
If readers want to indulge themselves in a high caliber tech growth stock to buy and hold stock, this is the one for you.
This one has no regulatory headwinds as well as an added bonus.
Zoom’s share price has dropped 40% since hitting the heights of $102 in July which was coincidentally the high for most post-IPO tech stocks of 2019.
It’s been an elevator straight down to no man’s land since then, but investors would be foolish to paint all hyper-growth companies with the same brush.
Filtering out the wheat from the chaff is critical and Zoom is the stock that still has the gloss on its outside package buttressed by its best in show video conferencing software.
There are no other proper alternatives in this sub-sector of software.
A few days ago, the stock slid 9% even though the company crushed expectations with its latest quarterly result and outlook.
Zoom generated revenue of $166.6 million representing a growth rate year on year of 85%.
The company then offered a forecast of $175 million next quarter when analysts only estimated $165 million.
Remember that this company grew 96% just 2 quarters ago and it would be illogical to believe that the stock is being penalized from faltering to 85% today.
Any tech company would give a left leg for 85% growth.
Zoom was trading at 33.5 times my calendar 2020 estimates compared to the fast growth software as a service (SaaS) median at 12.9 times.
Then software stocks started indiscriminately selling off on earnings over the past few weeks irrelevant to the quality of news because of worries to the broader bull market in tech stocks.
It’s true that tech stocks aren’t cheap now, and the skittishness rears its ugly head when bullet-proof earnings’ results are met with a cascade of selling.
Salesforce (CRM) was a software company that was penalized for pricey M&A because the company has been unable to organically grow forcing them to buy growth.
Buying growth is not necessarily a bad strategy but buying growth at this point in the economic cycle naturally means that companies will need to overpay for growth because of expensive valuations.
Zoom is perfectly positioned to outperform in the next 2-3 years.
The advancing runway is wide open with no competition in sight and a generous growth trajectory is firmly on their side.
We Company singlehandedly destroyed positive biased market momentum for any tech growth stock this summer, but on the bright side, quality post-IPO growth stocks are more reasonably priced with compelling entry points.
At around $60, Zoom looks appetizing and is a convincing buy and hold. At some point, this software company could become a takeover target for a larger corporate because companies such as Google (GOOGL) and Apple (AAPL) will need to acquire growth moving forward.
I am impressed with Zoom's superior products, growth prospects, and scalable business model, and the stock’s near-term risk/reward trade-off is attractive after the 9% haircut this past week.
There is an actionable and manageable clear path to a $2 billion revenue run rate with strong margin expansion potential and with its flagship product growing around 80-90%, its next growth driver in Zoom Phone could translate well into a meaningful revenue stream.
Zoom Phone is the next springboard to further success for this company.
Anyone that has used Zoom as a product can confirm the veracity of its superior performance standards.
This isn’t the type of stock to trade short-term, the volatility undermines any potential entry points.
If the broader market holds up in 2020, and Zoom isn’t a $100 stock by yearend, then the stars should align by 2021 because the value extraction potential is substantially robust in Zoom’s business model.
We finally have a reasonable level to scale into Zoom, and if it drops into the $50 range, it’s not just a scale-in type of scenario, investors should buy as much as they can with two hands.
Growth stocks can only be pinned down for so long and the best and brightest have been unfairly penalized with the rest. And let me remind you, this patch of softness in shares is only ephemeral and now is the time to act.
“When we launch a product, we're already working on the next one. And possibly even the next, next one.” – Said CEO of Apple Tim Cook
Mad Hedge Technology Letter
December 9, 2019
Fiat Lux
Featured Trade:
(THE BEYOND MEAT BOMB),
(BYND), (TSN), (KRL), (K), (CAG)
Food tech stock Beyond Meat, Inc. (BYND) went from euphoric to absolute dud when shares surged above $240 at the end of July only to crash.
In general, tech stocks have had a successful year, but the second half of the year has been inordinately unkind to growth stocks and Beyond Meat bore the full brunt of the change in market sentiment.
Let me remind you that I am not saying this is a bad company or a bad stock like Uber (UBER) or Lyft (LYFT).
Hardly so.
Investors can take away many positives from their overarching story and even more so as the stock has come down from the heavens settling in the mid-70’s range.
First, plant-based food is not going away anytime soon and is intertwined with the Millennial ethos of living healthier and protecting the planet.
Nonprofit organization The Good Foods Institute has forecasted that the plant-based food market is valued at more than $4.5 billion in the U.S. and grew 11% year over year.
Plant-based meat rose 10% last year, a substantial decrease of 25% year over year, but industry experts believe there is a significant pipeline of international revenue just waiting there for the taking.
More than one-third have tried at least one plant-based meat product, a low figure, but of those that have tasted, 57% make a repeat purchase.
Internationally, sales are expected to go from a $12.1 billion market in 2019 to a $27.9 billion market by 2025. In 2018, plant-based meat sales comprised 1% of all dollar sales in total retail meat in the U.S. and that number is only going to rise.
Let’s compare it with another successful plant-based product that has matured into a winner – milk.
This market has developed into a $1.86 billion market and plant-based milk is further ahead than the plant-based dairy and meat market.
Fortunately, these juxtaposed markets represent substantially overlap and positive demographic correlation of plant-based milk and meat consumers could mean that plant-based meat companies could achieve a similar rise like the plant-based milk companies experienced.
Domestically, plant-based milk now has a 13% share of the overall retail milk market, exploding by 61% from the years 2012 to 2017 and a further 6% rise in 2018.
If plant-based meat enters into the same trajectory as their cousins’ plant-based milk, grabbing 10% of market share from the overall retail meat market is feasible.
The special sauce that initially propelled the share price to the Himalayan highs of July was the insane growth rate which last quarter came in at 211.5% year-over-year.
The company is also surprisingly profitable eking out a $4.10 million performance last quarter on almost $92 million of quarterly revenue.
But I would like to bring investors back to reality and remind them that the company only does $92 million of revenue per quarter and the one before that a touch above $67 million.
This company is still in its infancy and just because it bursts with life in its formative stages does not mean investors can extrapolate that for years ahead.
What are the headwinds and how far off are they?
The most unstable variable rearing its ugly head is intense competition imminently barreling towards Beyond Meat.
An outsized dosage of competition would take an axe to profit margins with minimal chance of a quick reversal even if Beyond Meat manages to offer an outperforming product.
Beyond Meat is the disruptor and reaped a dividend from the first-mover advantage and the subsequent network effects.
But that doesn’t mean larger companies can’t copy them and that is exactly what is happening as we speak.
The competition is rapidly intensifying, specifically from big box protein processors and packaged food players who plan to undercut Beyond Meat price points using excess capacity and a lower gross margin rate profile.
The companies coming for Beyond’s bacon are Tyson Foods Inc. (TSN), Kellogg Co. (K), Hormel Foods Corp. (HRL), and Conagra Brands Inc. (CAG).
These big players will dump volume onto the plant-based food market and Kroger Co. just announced it would introduce 58 plant-based items under its private label Simple Truth in 2020.
Beyond Meat’s strategic position could suffer if consumers prove less brand loyalty and more price-conscious, then Beyond Meat’s first-mover advantage could dissipate and dynamics could revert closer to commodity industry profit margins.
Investors are laser-like focused if Beyond Meat can maintain gross margins over 35% by layering strategic partnerships with businesses that have a widespread addressable audience base.
If Beyond Meat fails in this respect, the competition will gradually destroy its competitive advantage and tank its share price.
The quality of the product has a large role to play in this too.
Another possible headwind is that Impossible Foods’ Impossible Burger is favored by many taste experts in taste tests diminishing Beyond’s product to the second tier.
But If the company can mimic the taste of a high-quality burger and replicate at least 80% of that experience, the products are likely to stick leading to more investment to capture that last 20% of the taste experience.
It is yet to be determined if Beyond Meat can muscle itself through the gauntlet of rigmaroles, and technically, its overhyped beginnings have given way to a more modest share price as of late.
If the stock enters into the $50 price range, it would be an advantageous price point to scale into this leader of food tech, but I would monitor it closely because the narrative could change on a dime and the story could sour if their strategy begins to fail.
“You may think using Google's great, but I still think it's terrible.” – Said Co-Founder of Google Larry Page
