Mad Hedge Technology Letter
October 2, 2019
Fiat Lux
Featured Trade:
(IT’S TIMES UP FOR GRUBHUB)
(GRUB), (UBER)
The jury is out, and heads could roll.
That is what the tech market has been telling us and that is why I am slapping a conviction sell rating on the struggling online food delivery company GrubHub (GRUB).
The gig economy has been found out and the industry is about to have their free lunch taken away.
Many tech companies handling cheap labor by employing key workers as independent contractors are about to lose their shirt.
Considering that GrubHub cannot make the unit economics work in their favor when times are good, what do you think will happen if they have to start paying overtime, healthcare, and bonuses to full-time drivers?
Unfortunately for GrubHub, you cannot just strip out the driver in the business model, someone needs to get the hot tacos from point A to point B and back.
Along with higher labor costs, delivery fees are on the verge of cratering because of elevated competition.
GrubHub doesn’t have a monopoly in this industry and restaurants continue to complain that the likes of Postmates, DoorDash, GrubHub and Uber (UBER) Eats rip them off leaving the restaurants with their necks just above water.
GrubHub is so pitiful that they have had to resort to nefarious tactics condemning a failing business model.
Investors should aggressively short the stock or avoid it at all costs.
What type of tricks has GrubHub been up to?
If you hadn’t heard already, Senator Chuck Schumer was in contact with the CEO of GrubHub Matt Maloney over fraudulent fees the food-delivery giant has been charging restaurants nationwide and demands full refunds for cheated customers.
GrubHub was charging restaurants fees for phone calls that didn’t result in food orders and the company admitted wrongdoing.
The company responded by offering only 60 days’ worth of refunds even though this dark practice had taken place for years.
The exploitation took place because of in-house algorithms that calculate fees, which restaurants say can range between $5 and $9 for a single phone call.
GrubHub recently refunded one New York City restaurant vendor over $10,000 for the fraud, covering fees going back to 2014.
GrubHub agreed to extend the refund to 120 days of ill-gotten fees, but many regulators have said this is still not enough.
Then if you didn’t think that was bad, GrubHub had its hand in anti-competitive tactics that sum up the plight of the company.
GrubHub has been creating fake websites, impersonating third party restaurants by undercutting them to take control over their own web sites then taking a larger cut of commissions.
The company says that the fake websites are “a service” for clients, but when the cybersquatting has been to the detriment to the restaurant, using this point of leverage to swindle restaurants out of more fees and sometimes charging them more than 400% of the actual cost.
This insane move has strained relations and murdered trust between GrubHub and outside vendors while making it extraordinarily difficult to take back control over their website.
As you would expect, GrubHub is monetarily incentivized to control the thoroughfare.
A GrubHub spokesman commented saying there would be “no changing of our algorithm” but from how I see it, the writing is on the wall, the equity in the company is in a vicious spiral downward.
It’s hard to make money in restaurants but GrubHub is overreaching big time.
Invest in this company at your peril and avoid all online food delivery platforms, they are simply ghastly investments.
“Computers are useless. They can only give you answers.” – Said Artist Pablo Picasso
Mad Hedge Technology Letter
September 30, 2019
Fiat Lux
Featured Trade:
(COMMISSION-FREE TRADING IS HERE)
(IBKR), (ETFC), (SCHW), (AMTD)
It’s been a long time coming since I first started trading 50 years ago and was charged 25 cents a share to place an order.
The race to zero is over in internet discount brokering world as Interactive Brokers Group, Inc. (IBKR) announced IBKR Lite, a new offering that will provide commission-free, unlimited trades on US exchange-listed stocks and Exchange Traded Funds (ETFs).
It was just a matter of time before one of the big internet brokerages started to offer zero commissions and this move will force the likes of Charles Schwab (SCHW), E-trade (ETFC), TD Ameritrade (AMTD) to follow suit in order to stay competitive.
I’ve written numerous times that this was going to happen and Robinhood, the millennial broker of choice, was the trendsetter coming out the gates with zero commissions and forcing the traditional broker’s hand.
The future is now and welcome to the funeral of trading commissions.
IBKR Lite is for traders seeking a simple, cost-free way to trade US exchange-listed stocks and ETFs and will complement Interactive Brokers’ existing services, which will be rebranded as IBKR Pro. IBKR Lite will be available in October.
I am not surprised that it is Interactive Brokers that is first to roll out a no-commission product.
They are, by far and away, the king of big volume trading and their commissions weren’t that high in the first place.
The customer they deal with is not like the Schwab’s or Fidelity’s who hardly generate large volumes.
Interactive Brokers is able to provide superior pricing because they specialize in data and automating.
This will enable the firms to offer no account minimums and means it will be free to maintain an account for IBKR Lite for professional and retail investors.
What will happen is that Interactive Brokers will sell off your data to analytic companies who know how to scrape the value out of these numbers.
Investors can choose between using IBKR Lite and IBKR Pro and switch between the two levels of service up to three times and then once per quarter.
The broker will re-route the orders of IBKR Lite clients to market makers in exchange for receiving payment for order flow.
Clients that prefer IBKR Pro will continue to receive the best prices generated from a sophisticated algorithm.
So, it becomes a backdoor revenue-generating function like Facebook who resells personal data to third-party analytics companies and in turn allow users to use their platform.
Order flow is inherently valuable for many high-frequency traders (HFT).
But I would say offering trade execution is an actual service where Facebook doesn’t offer anything of note.
A platform to “share” your personal information is not an actual product in my world no matter how you tweak the verbiage.
Either way, the price to the trader is now zero and anyone who trades large volumes is incentivized to go sign up with Interactive Brokers.
This industry has been getting away with highway robbery for years by not only selling order flow but also charging $4.95 or more to trade stocks and ETFs on top of the order flow revenue.
Once the best of the rest see trading volume evaporating as order flow migrates to IBKR, what other options do they have?
I predict that not every broker will be able to execute in this new model and consolidation will be ripe in the future as the weak perish.
As long as these other broker’s stick with the $4.95 per trade of yore, I hate to do it, but slapping on a sell rating is justified.
Welcome to the brave new world of discount stockbroking.
“I am so disturbed by kids who spend all day playing videogames.” – Said Founder of Oracle Larry Ellison
Mad Hedge Technology Letter
September 27, 2019
Fiat Lux
Featured Trade:
(THE REBIRTH OF WESTERN UNION)
(WU), (PYPL), (SQ)
This is not your father’s Western Union (WU).
Western Union (WU), the payment remittance service, is a legacy company that is going to harvest the most from a full migration to digital.
That is exactly what is currently happening.
Part of the 25% gain in the stock this year is a nod of approval in the direction the company is heading to.
At its most recent investors’ day presentation, the firm boosted its positive earnings guidance, which was primarily driven by its growth strategy on different verticals.
Western Union’s revamped growth strategy is buttressed by its ability to meet increasing demand from global consumers and businesses for fast and reliable cross-border money transfer and payment solutions.
The company is shying away from the brick-and-mortar operations of yore and choosing a strategy that leverages Western Union’s continued investment in key capabilities such as digital, real-time account payout, compliance, and artificial intelligence.
These nice additions have positioned the company to show strength in one of the most holistic and versatile payment engines in the world.
Western Union has its eyes set on expanding its core consumer-to-consumer business as well as other payment segments where global organizations can utilize its cross-border solutions to expand into fresh markets or better serve existing customers.
Western Union predicts a 23% operating margin by 2022 and a low-double-digit EPS CAGR through 2022.
The operating margin and EPS targets presume a 2020-2022 revenue CAGR of 2% to 3%, compared with the 2019 revenue base excluding divestitures.
The revenue ramp up signals growth in consumer money transfer, driven by its website westernunion.com and other third-party digital services and mid-single-digit growth from Business Solutions.
Operating profit margin and EPS targets also reflect $150 million in total annual savings expected by 2022.
The company expects to succeed in operating efficiencies from initiatives aimed at optimizing commissions and reducing third-party spending.
These initiatives will boost the bottom line an extra $50 million in annual savings to operating profit by 2022.
From 2020 to 2022, Western Union expects to extract more than $3 billion of operating cash flow and return approximately $2.5 billion to $3 billion to shareholders through dividends and share repurchases.
The company is a cash cow and attractive for many traditional investors who value this type of cash flow.
Other pathways to higher revenue include partnerships that provide customized payments solutions to organizations such as e-Commerce businesses expanding into emerging markets, end-to-end cross-border solutions to third-party organizations to solve consumer money transfer needs, and cross-border services, such as foreign exchange and cash management.
Slagging off the brick-and-mortar payments model for the digital platform is the low-lying fruit here and Western Union has a phase of overperformance in them before they will be thwarted with substantial revenue resistance.
Could this one day turn into a legitimate and mature fintech payment platform such as PayPal Holdings (PYPL) and Square (SQ)?
Offering low cost and efficient services is the first step in the right direction and I can say I’ve seen weirder things happen in the world.
Western Union certainly is in a position of strength as it cruises into the first innings of its digital migration and I believe there is more room to run for the stock until $30.
“New technology is not good or evil in and of itself. It's all about how people choose to use it.” – Said Writer Jason Pargin
Mad Hedge Technology Letter
September 25, 2019
Fiat Lux
Featured Trade:
(WHAT’S BEHIND THE NETFLIX SLIDE)
(DIS), (NFLX), (AAPL), (T)
