Mad Hedge Technology Letter
December 4, 2019
Fiat Lux
Featured Trade:
(THE RUSH TO BUY ONLINE),
(AMZN), (WMT), (TGT), (W), (ETSY), (SHOP), (ADOBE)
There are several overarching seminal tech trends that I swear by.
The generational broad-based migration from analog to digital is a critical foundation that underpins the success of not only tech stocks as a unified sector, but the outperformance of the Mad Hedge Technology Letter.
You’ll be pleased to discover that 2019 is right on queue with digital sales exploding by the American consumer over the holiday shopping period and Americans ditching brick and mortar stores in droves.
Amazon (AMZN) broke records on Cyber Monday bragging that in terms of the number of items sold, it had its "single biggest shopping day."
Black Friday was a big success too selling “hundreds of millions" of products between Thanksgiving and Cyber Monday.
Consumers scooped up the toys, home, fashion and health, and personal care products on Amazon’s e-commerce platform.
Hot ticket items on Black Friday included Amazon's own Echo Dot and Fire TV Stick with Alexa Voice Remote, Play-Doh Sweet Shoppe Cookie Creations, Keurig K-Cafe Coffee Maker and LEGO City Ambulance Helicopter Kit.
Adobe (ADBE) Analytics estimates that the sales for the shopping bonanza easily eclipsed $29 billion, or 20% of total revenue for the full holiday season.
This is the aha moment when digital integration into shopping forced a paradigm shift to the business environment by capturing the focal point of American wallets.
Digital used to be the minority, but going forward, it will dictate the terms of engagement.
What does this mean in the bigger scope of things?
Mobile is the biggest winner of this brave new world.
Shopping apps gave consumers the platform to use their phones as a digital wallet.
Salesforce data discovered that Thanksgiving sales as a proportion of U.S. digital sales grew 17% and mobile sales rose 35% on Black Friday with 65% of total e-commerce executed through a mobile device.
“Black Friday broke mobile shopping records and even when shoppers went to stores, they were now buying nearly 41% more online before going to the store to pick up,” said Taylor Schreiner, principal analyst and head of Adobe Digital Insights.
Shopify (SHOP) did over $900 million in sales this year and 69% were from phones and only 31% from desktop computers.
Black Friday was "the biggest day ever for mobile," tracking $2.9 billion in sales from smartphones alone, or 39% of all e-commerce sales, a 21% increase year over year.
The data also showed that smaller e-commerce outfits had a harder time driving sales than large e-commerce platforms.
The network effect truly works both ways and the success of the biggest and best also correlated to a meaningful decline of physical shopping visit to stores of 6% on Black Friday.
According to The NPD Group's Holiday Purchase Intentions Survey, 20% of sales were picked up in the store. This click-and-collect business has been a huge winner for the likes of Walmart (WMT).
E-commerce leaders are having enormous success introducing omnichannel approaches to the selling channels.
The average order value on Black Friday rose 5.9% year over year to $168, a new record, in part because shoppers have become more comfortable buying expensive items online because the sales are even juicier.
Unfortunately, the rise in volume has meant lower margins.
Discounts averaged between 37% to 47% and home and consumer electronics products were popular.
With all the rumblings of tariff trauma and an approaching recession, the American consumer displayed robustness that largely met the consensus of analysts.
The takeaway is that e-commerce is as healthy as ever and should prolong not only the strength in e-commerce companies but the overall American economy.
The winners are the behemoths of Amazon, Target (TGT), Shopify, and Walmart. Shares should receive a moderate tailwind through the New Year.
Avoid smaller niche players like Etsy (ETSY) and Wayfair (W).
“We want Google to be the third half of your brain.” – Said Co-Founder of Google Sergey Brin
Mad Hedge Technology Letter
December 2, 2019
Fiat Lux
Featured Trade:
(THE DRONE WARS HAVE STARTED),
(DJI), (AMZN), (WMT), (UBER), (GOOGL), (FDX), (UPS)
Drones whip by like mini whirling dervishes but are actually hardworking aerial robots that carry out surveillance and inspections for utilities, construction sites, airplanes, and trains from onboard cameras.
Drone delivery appears to be the next transportation bottleneck in the e-commerce wars as Amazon (AMZN) and Uber (UBER) pile capital investment into the technology.
In 2013, Founder and CEO of Amazon Jeff Bezos audaciously said that Amazon would have drone delivery operational by 2018.
But the Federal Aviation Administration (FAA) did not acquiesce to Bezos’s ambitious timeline.
Progress has been slow.
When it comes to consumer appetite, the demand for drones will be voracious but only if delivered in a way to add value to the customer experience.
The last thing the world needs is billions of unmanned drones polluting the sky and parked in the sky.
More than 60% of consumers would accept the delivery of dry goods through a drone delivery service, it contrasts to only 26% of fresh produce or meat.
Clearly, fresh foods are more complicated to deliver because of temperature requirements to accommodate the products, and more R&D will need to take place to find a solution.
“When we (Amazon) have a full drone fleet, you'll be able to order anything and get it in 30 minutes if you live near a hub that's serviced by drones," said Amazon’s CEO of Worldwide Consumer Jeff Wilke
Amazon has spent more than six years developing drones which may one day drop packages in backyards assuming regulators green light it.
Timely delivery is important but the diversity of products that can be delivered is just as important.
This is not a one-size-fits-all solution.
Amazon has already ravaged through more than $35 billion on shipping costs this year, more than double what it spent two years ago.
It is yet to be determined whether the four-wheeled delivery robots they are testing that roll on sidewalks will ultimately be slipped into the delivery process, but at least they are making headway and allocating new resources to it by announcing plans for a new facility outside Boston to design and build robots.
Major companies such as Alphabet (GOOGL), FedEx (FDX) and UPS (UPS) are all investing in drone delivery all hoping to be the ones to lead this industry in the future.
The drone battles are taking place under the backdrop of military and political gamesmanship because drones have a large and legitimate role in military affairs.
Even though America’s e-commerce companies hope to take drones and nicely fit it into their delivery service, America is not even close to dominating.
One word – China.
The US-China Economic and Security Review Commission recommended that the US government promote advanced manufacturing and robotics technologies, monitor China’s advances, review bilateral investments and cooperation, and consider closely vetting proprietary academic research.
The Shenzhen, China-based drone company DJI Technology is the dominant worldwide market leader in the civilian drone industry, accounting for over 75% of the global drone market.
In 2017, the U.S. Army banned the military application of DJI drones because the Pentagon was worried that DJI would leak data to the Chinese government.
In 2018, the Defense Department banned the purchase of all commercial off-the-shelf unmanned aircraft system (UAS).
An amendment from Sen. Chris Murphy in the 2020 defense policy bill would ban all Chinese-made drones and Chinese-manufactured parts from military purpose.
DJI’s dramatic rise in the drone race has been nothing but breathtaking dwarfing Western competitors such as France’s Parrot.
They are cost-effective, making them the go-to product for individual consumers.
China has not only succeeded in pulling ahead in the drone wars, but are also pushing the envelope in areas like hypersonic weapons, artificial intelligence, and 5G.
The U.S. military has limited options now because of a generation of underinvestment and inactivity causing a dwindling of U.S. supply of the smallest class of unmanned aerial systems (UASs) that are needed for reconnaissance missions.
DJI has a near-monopoly for one of the most important pieces of technology moving forward.
“We don’t have much of a small UAS industrial base because DJI dumped so many low-price quadcopters on the market, and we then became dependent on them,” said Ellen Lord, the Pentagon’s chief weapons buyer. “We want to rebuild that capability,” she added.
China’s DJI was hit by the recent tariff tsunami levied by the U.S. administration and the drone maker has decided to pass on the cost to the consumer.
DJI has also been banned from bidding for any U.S. military contracts because the Trump administration has concerns that DJI is a national security threat.
DJI reacted to the move by commenting that they are “obviously false” and is “unsubstantiated speculation.”
The second tranche of tariffs, which is scheduled to go live on December 15th, will put an additional 15% tariff on virtually everything that comes to the United States from China, including laptops, smartphones, and drones.
The DJI Mavic Air, now costs $919 on Best Buy instead of $799. Similarly, the DJI Mavic 2 Pro which I have crowned as the best drone to buy in 2019 will cost $1,729, up from $1,499.
Apart from DJI, China has state money pouring into the sector with the most cutting-edge drone technology in the works called Tianyi quadcopter built by a subsidiary of a state aerospace corporation.
It is designed to carry out ground-level reconnaissance and hyper-targeted strikes in cities.
The unmanned aerial vehicles (UAV) are still in the works, but once ready, could be available on the international market as a cheap and versatile option widening the gulf between America’s military in drone technology.
The drone is designed to be controlled by soldiers on the ground, has an operational distance of 5km (3 miles) and has a vertical range of 6km.
It will be loaded with infrared and laser detectors to enable night surveillance operations and is armed with two 50mm rockets designed to strike from up to 1km.
Sadly, there are no quality drone plays on the American public markets that I can confidently recommend.
The seriousness of the lack of investment really appears in the weakness of U.S. military drone capabilities and on the consumer side of things, drones will be a supercharger input to revenue growth for the likes of Walmart (WMT), Amazon, and the e-commerce companies.
It might be time to wake up and support the creation of a national champion in this critical technology then spin off the commercial synergies in similar fashion to how the personal computer and the internet developed.
The longer we wait, the further we fall behind.
DJI Mavic Air for $919
“We made an entry-level product to prevent competitors from entering a price war.” – Said CEO of DJI Frank Tao
Mad Hedge Technology Letter
November 27, 2019
Fiat Lux
Featured Trade:
(THE SAD TRUTH ABOUT DIGITAL MARKETING),
(FB), (YELP), (GOOGL)
Granted that technology companies have been the mule carrying the load for the broader market, beneath it is an ugly underbelly of venomous spirits.
Digital tech companies are frauds.
This could crater the broader market if the worst-case scenarios play out.
What do I mean by labeling them frauds?
Well, first, not all tech companies are charlatans. The ones producing components like semiconductor companies and others creating hardware are not the target of my wrath.
Since content has migrated into an all-out assault on traditional media, there is a dirty little secret that is festering because the new online media isn’t regulated.
The numbers are all a lie.
Much of the analytics and calculus involved with crafting cost to the other side is being entirely gamed by tech companies quoting prices based on fake analytics.
Instagram switched over its algorithm to displaying photos chronologically, to now display posts that engage the most, more specifically, what gets clicked the most.
Consumers have complained about it being significantly harder to gain likes and followers because, for the ones that don’t have many clicks, it’s harder to get those added clicks if your post is relegated down the feed.
The platform has also been a breeding ground for fabricating likes, friends, views, clicks and so on. Companies can be hired per like, resulting in a beefed-up profile built on fantasy.
Ad companies gauge each Instagram profile by the amount of engagement generated and if most of them are fraudulent likes, there will be weak follow-through in sales after ad purchases since a good chunk of the potential audience is a mirage.
Instagram is the preferred social platform of most influencers and Facebook is attempting to merge both assets into one in order to claim to regulators that they can’t be separated.
Much of digital marketing has migrated down the path of growing a large following for the reason to qualify as an effective brand ambassador and siphon off influencer marketing budgets from corporates who desperately want to penetrate a target audience.
In an age of automated robocalls and strict email rules, companies hesitantly confess that the only way to reach their end buyer is through social media channels.
Corporates are wasting billions of dollars because they aren’t getting what they really pay for and are basically being fleeced by tech companies.
And if you think this is mutually exclusive to Facebook (FB) and Instagram, it happens in every tech company that involves data.
Tech companies are monetarily incentivized to flat out lie about their data, partially because the penalties are minimal or absent in many cases.
Marginal tactics to fast-track the process by buying likes should be rooted out of the eco-system.
They are not only hurting the trust users have with the platform, but misrepresenting the brand that associates with a product.
Tech firms ward off anyone and everything from taking a peek at internal data by claiming it is their proprietary IP causing them to effectively police themselves.
That is not even the worst part of it all.
Parent company Facebook is turning a blind eye to something that could crash the company.
Mark Zuckerberg's old classmate Aaron Greenspan published a report complaining that over 50% of Facebook accounts are fake.
Facebook is on record admitting that between 2-3% of accounts are fake, but that number is a dream and artificially low by a country mile.
If it is true that half of Facebook accounts are fake, this would mean that Facebook sits on over 1 billion fake accounts.
Never mind the fake likes or clicks issue, Facebook shareholders could lose most of their worth in this stock if the truth is ever discovered.
Remember, the network effect works on the way down just like it works on the way up as a de-facto force multiplier.
Facebook and many other tech firms are a black box just like the Google (GOOGL) search algorithm.
Yelp (YELP), the online review company, could potentially sub-contract out fake reviews and never disclose how many of them are truly fake, they have no incentive to.
I recently stayed in an Airbnb rental whose active management was sub-contracted to a local property manager.
When I met him, he told me “This apartment was just bought and you are the first guest to stay in this apartment, so if there are any issues, please contact us as soon as possible.”
Wait, hold on, in my head, I am thinking, how did I see 45 great reviews from the apartment’s profile if I am the first guest?
I logged on to reread some reviews and some of the responses were completely inaccurate about the apartment.
It was clear these were made up and paid for and I was, in fact, the first to stay in this apartment like the property manager said.
Expectedly, there was more wrong with the apartment than just the fake reviews.
The television, stove, and hot water didn’t work, the key to the apartment was half broken and I had to perform miracles just to get the front door open.
There is a reckoning coming to technology companies because of the rampant misuse of the technology by nefarious actors monetizing the platform while perverting it.
Companies look the other way because they don’t want a revaluation of their business model which would add costs and, in some cases, bankrupt a company if the problem isn’t fixable.
As we move forward, the problems enlarge.
In a nutshell, this is why everyone hates tech now and its already stomach-churning enough that these firms steal your personal data and sell it to whomever they want.
A harsh reckoning will eventually hit the involved companies, but until then, tech business models are manipulated to the extreme and they continue to print real and fake growth mixed together as one.
One day, that fake growth will vanish and these companies will have to explain why to their shareholders.
In the meantime, just assume all online reviews are fake and enjoy the bull market in tech.
“This is a huge amount of responsibility and I think we are all coming to terms with this responsibility.” – Said Co-Founder and CEO of Airbnb Brian Chesky
Mad Hedge Technology Letter
November 25, 2019
Fiat Lux
Featured Trade:
(AI HAS REACHED FARTHER THAN YOU THINK),
(AMZN), (MSFT), (AAPL)
