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.
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2019-11-04 04:02:572020-05-11 12:23:03The Chickens Come Home to Roost with Small Tech
“I'd rather Apple cannibalize Apple than somebody else cannibalize Apple.” – Said Current CEO of Apple Tim Cook
https://www.madhedgefundtrader.com/wp-content/uploads/2019/11/tim-cook.png229247Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2019-11-04 04:00:442019-11-02 16:15:18November 4, 2019 - Quote of the Day
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.
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2019-11-01 13:02:022020-05-11 12:19:54Zoom Zooms in the IPO Market
“My goal was never to make Facebook cool. I am not a cool person.” – Said Co-Founder and CEO of Facebook Mark Zuckerberg
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2019-11-01 13:00:002019-11-01 13:05:34November 1, 2019 - Quote of the Day
That’s how long it took for my bearish call on desperate online food delivery company, GrubHub (GRUB) to come to fruition.
I wrote an overly negative report on the company which was published on October 2nd explaining why this company and its terrible unit economics were set for a rude awakening.
I usually don’t revisit the same company within the same month in this newsletter, but when I looked at the price this morning, it took me a few minutes to wrap my head around the 44% daily decline.
I will go one more step now and profusely recommend that nobody in their right mind should currently take any bullish positions on any company reliant on employing the gig economy.
The gig economy has been found out for what it is – an elaborate scheme enriching tech stakeholders while shorting American blue-collar labor.
Instead of proper wages flowing to the Uber driver or in this case the GrubHub driver, management has maneuvered its way through some nifty alternative classifications enabling companies to divert a chunk of capital back into the business model.
If these companies can’t make money with skimping on driver pay, how will they make money when American law mandates them to cover sick leave, paid vacations, health insurance, and overtime pay which could soon be coming?
And on top of the subsidies which add to the overall unit cost, how on earth will they piece together a solution that would satisfy shareholders?
Then mix the unworkable unit economics and fuse it with a boatload of competition and my conclusion is clear - profitability is a pipedream.
Buttressing my claims of unprofitability and market stagnation in a note to shareholders, the company admitted, “supply innovations in online takeout have been played out.”
The pitiful food delivery company slashed fourth-quarter revenue projections to between $315 million and $335 million making a mockery of the $387.3 million consensus.
The house of cards is finally collapsing.
Who is the competition?
There are three fierce contestants in UberEats, DoorDash and PostMates.
And to add even more spice inside the fajita, PostMates has recently shelved a planned 2019 IPO because of “market conditions,” a testament to the poor growth prospects for online food deliveries.
I believe no food delivery stock will ever go public again unless they revalue themselves 65% lower from today’s prices.
Much of the value in these companies is a mirage.
To give GrubHub credit, they didn’t put up Chinese walls in their guidance and mentioned that competition is wreaking havoc detailing that their customers are not “extremely loyal.”
They should expect investors to not be extremely loyal either.
Existing customers are now price-shopping by surfing around different apps to take advantage of price promotions proving my point that these gig economy companies contribute minimal incremental value to the end user.
Their secret sauces are hardly secret.
These apps are commodities and yes, there is value in their proprietary algorithms, but by no means are the barriers of entry so colossal that it would take North Korean engineers 10 years to reverse-engineer these same algos.
And with wielding low-grade tech and resigned to “low double-digit” growth, the bullish case behind this stock and the industry as a whole becomes almost laughable.
Don’t bring a knife to a gunfight!
If Uber can perform miracles and reach $40 or if Lyft can snake its way up to $55, these would be the perfect entry points to scale into these cash burn disasters from the short side.
As for GrubHub, don’t buy the dead cat bounce.
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2019-10-30 10:42:572020-05-11 13:27:29GrubHub's Toxic Meal
“It would be nice to design a real briefcase - you open it up and it's your computer but it also stores your books.” – Said Co-Founder of Apple Steve Wozniak
https://www.madhedgefundtrader.com/wp-content/uploads/2019/10/wozniak.png370406Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2019-10-30 10:40:552019-10-30 10:41:05October 30, 2019 - Quote of the Day
Publishing magnate and self-described populist William Randolph Hearst was a deep admirer of Adolph Hitler and did not shy away from using his newspapers as a de-facto mouthpiece spouting off der Fuhrer's propaganda.
Hearst created content sympathizing with the Nazi ethos and even mobilized an embedded secret agent from the German government to act as a correspondent that followed hot, daily scoops inside Germany.
Hearst also used his publishing clout to pull the strings in the 1932 presidential election backing candidate John Nance Garner or "Cactus Jack" who later agreed to be Franklin D. Roosevelt's running mate.
The fusion of politics and media has been chiseled into human DNA since antiquity. However, the purpose of newspapers has evolved significantly since it became impossible to break even about 10 years ago.
Print newspapers are a lot like the United States Postal Service (USPS) - it specializes in losing money.
However, the (USPS) was never politicized as was the publishing industry until the administration managed to commingle the loss-making mail outfit and Amazon as a joint problem roiling society.
The politicization comes at a cost to society.
All the well-intentioned journalists involved in earnest and quality journalism lose out because the new normal for newspapers has evolved into a William Hearst-like blatant tool promoting targeted interests.
Do you ever wonder why the Washington Post hardly ever publishes content harmful to the image and interests of Amazon?
Because it is owned by the same man, Jeff Bezos, who founded Amazon (AMZN) in 1994, as he cruised in his car cross-country from New York to Seattle where he would establish his tech empire.
Effectively, Jeff Bezos has the ear of each corner of the political power grid in Washington and even more so as he establishes another Amazon headquarter in the state capitol.
And while the administration attacked Bezos as a job destroyer repeatedly, Amazon has in fact been the largest private job CREATOR in the U.S. It added a staggering 130,000 new jobs in 2017, and an eye-popping 560,000 jobs over the past 10 years.
Laurene Powell Jobs, widow to Steve Jobs, acquire the Boston-based American magazine The Atlantic.
The Atlantic earns more than $10 million per year in revenue and lures in over 33 million readers per month.
Billionaire biotech investor Patrick Soon-Shiong reached a deal with Tribune Publishing Co. (TPCO), a portfolio of a vast array of various legacy media assets, to take over the Los Angeles Times and San Diego Union-Tribune for $500 million.
Tribune Publishing Co is a potential investment for SoftBanks' (SFTBY) Masayoshi Son, looking to scoop up parts of the extensive portfolio.
Private equity group Apollo and media firm Gannett Company are also in the mix to acquire Tribune Publishing Co
Some of Tribune Publishing Co.'s crown assets are the Chicago Tribune, the New York Daily News, and the Baltimore Sun among other regional newspapers with a large audience base.
The courting of these news media assets comes at a time when Google (GOOGL) is funding a project to automate more than 30,000 stories per month for the local media as a cost-effective way to advance the business model.
Quality journalism written by a human is the last thing in which these mega-tech companies are interested.
Tech is about automating and then scaling the automation. This bodes ill for personalized authors, and newspaper journalists are the lowest rung on the totem pole. They will be the first to be replaced by automation.
The first thought that came into my head when I heard about SoftBank's vision fund swooping in for another company was data grab.
We have seen this story time and time again.
Newspapers and how an online subscriber behaves on a digital newspaper platform offer valuable data points unfound elsewhere.
The data will reveal the political ideas, topics of interest, and other sensitive information deduced into a comprehensive data profile.
Effectively, a company such as SoftBank will be able to create a functional shadow profile for almost anyone.
The concept of shadow profiling emerged from the acrimony of Mark Zuckerberg's testimony in Washington and could be the next point of heated contention.
What are shadow profiles?
Shadow profiles are digital profiles crafted from data not directly handed over to Facebook (FB) by the user.
This data is extracted through fringe third parties, other friends on Facebook if they post content unique to you, and specifically through the "find your friends" function that recommends the uploading of an entire digital address book giving Facebook access to everyone you know.
Scarily, there is no opt-out for shadow profiling, and there probably won't be another congressional testimony about this topic anytime soon.
If Facebook wanted to turn into the FBI, it would be easy.
The treasure trove of data would give insight on the subtle nuances of authentic human behavior and how to best manipulate it.
This artificial profile would seem real.
If you are an Android user like most of the world, Google could fill out the most comprehensive profile with a high degree of accuracy on most people.
The scandalous bit about shadow profiling is that these profiles are whipped up even if a user has never signed up for Facebook.
Shadow profiling, along with other data, becomes more precise as the volume of data piles up. To understand the behavior, trends, and tastes of most of the world's population is incredibly valuable.
Facebook could use this shadow profiling data to understand the wide range of non-Facebook user behavior.
This way of monetizing data would be highly illegal if leaked to an actionable third party and would be significantly worse than the Cambridge Analytica scandal.
This data should be deleted immediately, but Facebook has a backdoor way to keep the data in the system.
If Facebook got slammed for data leakage then others are in danger, too. That's because Facebook is not the only player mining data for money.
It wouldn't be surprising if other large-cap tech companies started to create these shadow profiles to get dirt on their competitors as well as other use cases.
Tech is evolving at such a fast pace. It subconsciously encourages the never-give-up mentality that coerces firms to stay one step ahead which Amazon has been able to do since its inception.
Newspaper companies are next in line to be absorbed by large-cap techs continuously expanding web assets that hyper-focus on exponential data generation.
These newspapers will defend tech's interests in the economy similar to how newspapers were used as William Hearst's rallying cry for politics.
Jeff Bezos has chosen silence to react to the administration's vendetta against him but he could easily mobilize his assets to protect Amazon's interests.
Bezos just shrugs his shoulders and goes about his day because he knows Washington cannot do anything to prevent Amazon's dominance at the top of the tech food chain.
Better take the high road.
Not only do these big tech companies know who you talk to, what you buy, and where you are, but now they are given deeper access into the identity of users.
Be on the lookout for these assets to get cherry-picked and look forward to reading your future newspaper owned by Google, Facebook, and the usual cast of characters.
Stay away from legacy newspaper stocks. Only weigh up the media stocks that have already pivoted to the online streaming business model of scaling original premium content.
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00MHFTRhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMHFTR2019-10-28 08:32:462020-05-11 13:27:17Newspapers Really Know Who You Are
Legal Disclaimer
There is a very high degree of risk involved in trading. Past results are not indicative of future returns. MadHedgeFundTrader.com and all individuals affiliated with this site assume no responsibilities for your trading and investment results. The indicators, strategies, columns, articles and all other features are for educational purposes only and should not be construed as investment advice. Information for futures trading observations are obtained from sources believed to be reliable, but we do not warrant its completeness or accuracy, or warrant any results from the use of the information. Your use of the trading observations is entirely at your own risk and it is your sole responsibility to evaluate the accuracy, completeness and usefulness of the information. You must assess the risk of any trade with your broker and make your own independent decisions regarding any securities mentioned herein. Affiliates of MadHedgeFundTrader.com may have a position or effect transactions in the securities described herein (or options thereon) and/or otherwise employ trading strategies that may be consistent or inconsistent with the provided strategies.