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)
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)
