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)
The tech story is still intact, but the edges are losing its shine.
That is the takeaway from the recent slew of earnings reports from many of the prominent yet second-tier tech companies.
On one hand, companies like Apple (AAPL) have been holding the fort as it blasts through to new highs even amid the backdrop of the Chinese trade war that has dragged many of the strong tech names into the mud.
What we did see lately was a magnificent swan dive by chip names like Western Digital (WDC) and Texas Instruments (TXI) which were blindsided by 10-15% haircuts because of lackluster guidance.
The agony didn’t stop there with second rate cloud names like Pinterest (PINS) and Arista Networks, Inc. (ANET) reaching for scapegoats for their weak guidance. These took instant 20% haircuts.
The problem with smaller stocks like these besides having narrower spreads, they are slaves to just a few contracts and when one goes, their guidance and revenue estimates implode in their faces.
Arista slid more than 25% on news that they expect quarterly revenue of $540 million-$560 million, with the midpoint about 20% below the previous Street consensus at $686.2 million.
Arista CEO Jayshree Ullal said in a statement that the company expects “a sudden softening in Q4 with a specific cloud titan customer.”
That is Facebook who comprise about 10% of Arista’s revenue composition because Facebook has pulled back the reigns on cloud spend to cut costs amid a murky global backdrop and regulatory minefield.
Unfortunately, second tier cloud names must accept that they do not offer the best pricing when directly competing with the superior cloud names of Google Cloud, Microsoft Azure, and Amazon Web Services (AWS) because they simply can’t scale as well to the extent these monopolistic FANGs can.
Data storage often comes down to whoever has the cheapest cost of capital to pile into server farms allowing pricing to be ultra-cheap and these three companies win out.
If these firms lose one contract like Walmart’s switch over to Microsoft Azure from Amazon, it’s not a big deal.
It doesn’t put a 10% black hole in the revenue stream like for Arista.
Pinterest was one of the most overhyped IPOs of 2019 promising growth, growth and more growth.
Its digital ad business needs to deliver accelerating growth for its share price to rise and when the latest earnings report showed year-over-year growth slow from 62% to 47%, investors saw the writing on the wall.
The company only grew its users 8% in the lucrative North American market and 38% abroad.
But the foreign markets were tainted by the gruesome underbelly of earning only 13 cents per foreign users.
There is user growth but at the cost of an inferior quality of growth.
Analysts can clearly observe the accelerated erosion of Pinterest, and I can say from a personal point of view that the website isn’t that useful.
Management’s excuse was a tough comparison to the prior year but if a growth firm has a superior model, they should be able to grow past any minor problems if the secular trends stay hemmed in.
Weak excuses now and probably weak excuses next quarter as the global tech landscape gets squeezed even more at the periphery.
What does this all mean?
There has been a flight to tech quality into the Teflon names like Microsoft and Apple.
Names that are showing growth headaches saddled with too much competition and structural softness are getting killed.
Don’t even think about investing in the marginal names like Pinterest and Arista.
Better to be safe on your perch inside the moat than outside isolated from the drawbridge.
Not all tech is created equal and it's rearing its ugly face in a frothy market.
“I'd rather Apple cannibalize Apple than somebody else cannibalize Apple.” – Said Current CEO of Apple Tim Cook
Mad Hedge Technology Letter
November 1, 2019
Fiat Lux
Featured Trade:
(ZOOM ZOOMS IN THE IPO MARKET),
(ZM)
The 2019 IPO class delivered some charlatans but Zoom Video Communications (ZM) is by far and away the valedictorian of this cohort.
It’s not even close.
Sadly, the rest of the IPO class of 2019 is littered with failures and overhyped companies dumped onto the retail investors by the venture capitalists.
Let’s explore why Zoom Video Communications is a best of breed firm in their sub-sector.
Zoom Video is a video conferencing service headquartered in San Jose, California and founded by Eric Yuan.
Eric was previously vice president of engineering at Cisco for collaboration software development and realized there was no high-end video conferencing software at the time.
He took his show on the road and was able to nab 1 million users within the first 2 years after starting Zoom.
This is a real tech company with legitimate proprietary technology and unique source code.
The revaluation from growth to value has hit the entire class of software growth stocks who over-rely on growth as a mechanism to boost shares.
Some have been unfairly punished like Zoom in the downgrade even though the company delivered a strong second-quarter earnings report.
Revenue exploded 96% to $145.8 million, which destroyed expectations of $130.3 million, and management boasted that the number of customers spending more than $100,000 annually on the cloud-based platform more than doubled, a signal that customers are juicing up their use of the service.
Most of the carnage from the rerouting out of growth stocks were specifically in loss-making, high cash burn stocks with the absence of sensible unit economics.
Well, Zoom easily passes this acid test as they have been profitable since the day they went public and even before then.
Even though Zoom has yet to tap the profitability Gods, the $5 million of profits last quarter is just the beginning and as they scale up, the bottom line will beef up.
Therefore, Zoom will not be reliant on outside capital to survive.
In another harbinger of a higher future stock price, adjusted earnings per share rose from $0.02 to $0.08, which also easily beat estimates of $0.01.
Zoom audaciously hiked their outlook for the year at a time when many companies of its ilk are guiding lower to insulate themselves from the global uncertainty permeating throughout the global corporate landscape.
The consolidation in this best of breed software stock will only be temporary aided by the fact that We Company has bottomed out and found a value after its horrendously botched IPO.
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 recent sell-off.
There is an obvious and manageable clear path to a $2 billion revenue run rate with strong margin expansion potential and with its flagship product growing around 100%, its next growth driver in Zoom Phone could translate well into a meaningful revenue stream.
Companies are increasingly allowing remote workers to traverse into a mobile lifestyle and Zoom Phone slots seamlessly into this equation.
Anyone that has used Zoom as a product can verify its superior performance standards which is head and shoulders above any competition.
If shares float down to the low 60s, it would be a great buy and hold stock, since actively trading new IPOs are often too volatile to lock in proper entry points.
“My goal was never to make Facebook cool. I am not a cool person.” – Said Co-Founder and CEO of Facebook Mark Zuckerberg
Mad Hedge Technology Letter
October 30, 2019
Fiat Lux
Featured Trade:
(GRUBHUB'S TOXIC MEAL),
(GRUB), (UBER), (LYFT)
