“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)
It took me precisely 28 days and not a day more.
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.
“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
