Mad Hedge Technology Letter
November 11, 2019
Fiat Lux
Featured Trade:
(WALKING A TIGHT ROPE IN MENLO PARK),
(FB),
The countdown has started.
Will regulation meaningfully hit Facebook (FB) where it hurts in 2020 – the wallet?
There is only so much that Co-Founder Mark Zuckerberg and executives in Menlo Park can do to keep regulators at arm’s length.
The Federal Trade Commission (FTC) and Department of Justice (DOJ) want to rearrange Facebook’s business model potentially making it uncompetitive.
In an unusual move, the California's State Attorney General publicly stated that his office has been investigating Facebook's privacy dealings over the past 18 months and the reason we know that is because Facebook is stonewalling the process and actively avoiding the authorities.
The State Attorney General has asked for additional information related to the Cambridge Analytica scandal that rocked Facebook shares last year and the company has yet to fully recover from that strong blow.
Undoubtedly, Facebook wants to conceal its self-inflicted wounds and actively rebuff document request signals that Facebook is ready to withstand the pain.
This is also after Zuckerberg decided to allow politicians to buy ads without any sort of third-party fact-checker.
My guess is that Facebook management has been blackmailing companies left and right and only working with companies in a reasonable way if they are paying Facebook for digital ads.
This is a massive conflict of interest at the heart of Facebook’s practices.
If any company could be labeled amoral and completely indifferent to the gargantuan social cost piling up in the U.S. because of the fallout from their toxic services, Facebook is at the top of the list.
But as long as Zuckerberg keeps inflating the bottom line, which mind you he definitely is and great at, board members dare to speak up.
It’s not like they can do anything anyways, Zuckerberg cannot be fired because of holding generous voting rights.
Facebook is also at the heart of several lawsuits claiming that as soon as Facebook identified them as a serious competitive threat, Facebook pulled their file and denied access to data.
Many companies cannot function without access to Facebook’s platform.
The attorney general is attempting to scoop up the meatiest part of communications between Mark Zuckerberg and Facebook COO Sheryl Sandberg detailing changes to the social network's privacy settings, as well as documentation of the company's privacy program.
There is no way in hell Facebook will let the cat get out of the bag and certainly there is explosive material that would dig the ditch even deeper.
Recently, Zuckerberg has been on the warpath shouting from the hills urging the government to shut down Softbank funded short-form video app TikTok created by Chinese company Bytedance which has gone viral as a social media alternative to Instagram.
Even with a storm brewing ahead, Facebook continues to be a buy on the regulatory dip as investors should not ignore the cash cow digital ad business.
Digital ad buyers aren’t yet diverting ad budgets elsewhere mostly because there aren’t other places to allocate huge amounts of ad dollars to and Facebook knows this.
Another front has opened up as well in the privacy wars with Facebook suing Israel’s NSO Group for selling software allowing governments to spy by breaking into their WhatsApp chat history.
The tracking software named Pegasus even allows for comprehensive access to the camera and microphone and was meant to “fight terrorism.”
As you might believe, governments have liberally applied this software to individuals across the board for their own zero-sum interests.
These revelations could slow down the rollout of digital ads on WhatsApp which Zuckerberg is hellbent on in the next calendar year to drive revenue growth.
A recent report showed that 93% of global internet users are tracked posing a serious threat to the integrity of the internet.
Not only is the government using it for their own economic and political gains, but Facebook is up there pulling the strings behind the scenes too and Facebook’s shares keep climbing.
Until users refuse to log in to Facebook in droves and stop gifting them free data, Facebook continues to be a buy on any pullback.
Sure, the regulatory pressure could eventually blow up in Facebook’s face, but until we receive meaningful signals that Facebook’s ad model is dead, investors shouldn’t write off Zuckerberg and his digital ad money-making machine.
“By giving people the power to share, we're making the world more transparent.” – Said Co-Founder and CEO of Facebook Mark Zuckerberg
Mad Hedge Technology Letter
November 8, 2019
Fiat Lux
Featured Trade:
(WANDERLUST TAKES A HIT),
(TRIP), (EXPE)
I have slaughtered travel tech nonstop for quite a while now and today is the day that the bearishness turned ugly.
Let’s take a look at why.
I believe travel tech is a vulnerable group waiting to be taken to the emergency room.
We are approaching the dying embers of the economic bull cycle for better or worse, mostly the latter.
Europe is already mired in a recessionary-like environment and hiring has ground to a halt.
When German automobile manufacturers aren’t doing well, usually the rest of the continent follows suit.
No new jobs mean no new money to travel with and austerity usually whacks off luxuries like hotel stays and cross border travel.
Reading the tea leaves, it’s hard not to think that travel tech could be in for a rough next year with revenue growth sliding like Expedia’s vacation rental business in the third quarter.
The company is signaling slowed momentum in its high growth category leading to a lowered profit forecast for 2020.
The short-term rental unit reported revenue growth of 14% to $467 million, lower than the 17% rate in the previous period and missed analysts’ estimates of $462.4 million.
Total revenue grew 8.6% to $3.56 billion, in line with consensus but as we turn the page, there’s not much to like.
Expedia attempts to juice up home-sharing division, VRBO, in a quest to unseat rivals Airbnb Inc. and Booking Holdings Inc. in the booming home-share market will fall flat.
While VRBO is strong in the U.S. for purely vacation rentals, Airbnb and Booking capture a much larger share of the broader global $34 billion alternative accommodation market, which also includes non-traditional hotels and home-sharing.
Expedia is now set for 2020 adjusted Ebitda growth of 5% to 9%, down from a previous forecast of 15% growth.
VRBO only pulls in just over 10% of Expedia’s overall revenue, but its growth prospects revolve around this one asset.
To reach its targets, Expedia will need a greater dependence on higher-cost marketing channels in a secular flat hotel ADR (average daily rate) environment while grappling with the uncertainty around VRBO weathering a change in brand name.
Many tech companies are finding out that now is the wrong time to champion growth at any costs and travel tech is grossly reliant on exorbitant marketing costs to drive incremental home-sharing revenue.
I can’t say what TripAdvisor (TRIP) is doing is much better than Expedia because it is certainly not.
They have just announced a joint venture and global licensing agreement with China’s Trip.com Group which includes assets Ctrip, Trip.com, Qunar, and Skyscanner.
This is probably the worst time in the past 30 years for an online travel company to dive straight into China.
As I read through the detail, there was one red flag that stood out and that was the bit about “sharing inventory.”
I am doubtful that TripAdvisor is able to have an enforceable mechanism for misbehavior.
For example, if a hotel booked through TripAdvisor China is rerouted into the Trip.com portfolio and executed by the Chinese mainland array of digital assets, how would TripAdvisor respond?
There are too many lurking risks that could easily result in Trip.com Group gaming this agreement to tilt the benefits in their favor.
A cynical part of me tells me that this is just a ruse for Trip.com Group to use TripAdvisor’s brand name which dominates in western developed countries to siphon away foreign tourism revenue.
On a personal level, I have found that Trip.com Group has subsidized its prices which is a boon to consumers but is a way to undercut and pervert competition.
TripAdvisor can’t operate freely in China as it stands, but I wouldn’t desperately decide on a joint venture just to get a shoe in the door.
Better off looking elsewhere or keeping their ammunition dry.
Whether its weakness in VRBO in Expedia or a poor licensing agreement between TripAdvisor and China’s Trip.com Group, there is a lack of good ideas since Airbnb created this industry out of thin air.
Probably better to wait for Airbnb to go public if you want to get into travel tech, they have revolutionized the industry and are profitable or invest in Google who is stealing market share from the old guard.
The higher competition will certainly lead to higher marketing costs, lower growth, and a race to zero commissions.
“If there's lots of technology, we won't understand it.” – Said American Investor Warren Buffett
Mad Hedge Technology Letter
November 6, 2019
Fiat Lux
Featured Trade:
(THE NIGHTMARE THAT IS UBER),
(UBER), (LYFT)
As I stare at my trading screen, Uber (UBER) is down over 10% intraday after a better than horrendous earnings report.
I thought share prices go up if companies beat consensus estimates?
In most cases – yes.
But the market is telling us that they do not believe in Uber’s story.
Just because a company loses $1.2 billion which bettered last quarter’s loss of $5.2 billion doesn’t mean investors will handpick the stock and save it from falling through the cracks.
Parsing through the rest of the earnings report, there is not much to really hang your hat on.
First, Lyft (LYFT), its smaller and more targeted competitor, turned up the pressure on Uber claiming they will become profitable on an adjusted earnings basis at the end of 2021, which is a year ahead of its original projection.
This forced Uber CEO Dara Khosrowshahi to hesitantly explain on a call that Uber’s management “hasn’t finalized planning” but is targeting being profitable for financial year 2021.
The claim is farfetched bordering on disingenuous and forcibly made because growth companies are effectively dead if they say it will take three years or more to become profitable.
The investing climate has changed that quickly thanks to Adam Neumann and the fallout at The We Company.
I would be more inclined to say that if Uber has a string of miraculous years with no adverse regulation against them, then there is a fractional chance they might become profitable by 2021.
Honestly, there was nothing that Uber showed me to make me think that I should consider investing in the company.
Momentum keeps slipping as we head into the day when 1.7 billion shares will become eligible for sale, roughly 90% of the total, and my guess is that investors will cut their losses.
Uber will have to gut many parts of the model to get to profitability and they have started the process by slashing employee costs cutting over 1,000 employees over the last quarter, or 2% of its entire workforce.
They will have to slash another 30% to get numbers on their side.
They might have to kill the parts of the business that aren’t delivering enough like Uber Freight and the autonomous driving unit.
The company still hasn’t found a solution for competing with taxi drivers without subsidizing each ride at a loss.
No matter how you dress it up, if the company can’t create solutions for this fundamental barrier to profits, investors will stay away.
It’s also a good reason for you and your money to stay away no matter how cheap Uber becomes.
It’s easy to envision if the state of California rebuffs the online food delivery firms' desire to put a cap on driver costs, that the stock could drop into the high teens.
Dara Khosrowshahi’s thesis of the scale and brand power working in Uber’s favor is flat out false.
Scale can be technology companies’ friend and savior, but when your company is literally a loss-making chauffeur service with zero competitive advantage, what is great about scaling that?
Sure, Uber is great for consumers especially in cities which have horrid public transport which is most of America.
I get that.
But Uber will either be forced to raise prices because they will pay the drivers more due to California law or because they lose too much money.
Who wants to hold a stock with these two crappy options on the near-term horizon?
If a gunman put a pistol to my head and asked me to invest in one, Lyft is the better option, it’s the lesser of two evils.
Yes, sadly we are at this point with these types of companies.
“If you don't optimize for the consumer on the Internet, you're dead.’” – Said CEO of Uber Dara Khosrowshahi
Mad Hedge Technology Letter
November 4, 2019
Fiat Lux
Featured Trade:
(THE CHICKENS COME HOME TO ROOST WITH SMALL TECH),
(AAPL), (MSFT), (AMZN), (GOOGL), (WDC), (TXI), (ANET), (PINS)
