“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)
Don’t blame the weatherman for the weather forecast.
The writing is on the wall.
Television is dead as the latest iteration of the Emmy’s bombed, reaching just 10.2 million viewers who tuned in to watch Amazon's "The Marvelous Mrs. Maisel" win best comedy and "SNL's" Michael Che and Colin Jost charm the audience.
The paltry numbers were a follow-up to last month's MTV Video Music Awards which reached a record low of 5.23 million viewers, scoring lower ratings than that night's network evening news broadcasts.
Why are viewers dropping like a dead fly on the wall?
It’s difficult to deduce but live TV events including the Super Bowl have lost viewership across the board.
I would attribute part of the blame to the death of the shared center in the American experience.
There are just too many content alternatives.
Viewers have a bevy of channels to choose from and if they aren’t watching television, they have already cut the cord.
This development has removed many millennials out of the traditional TV viewership pool.
To economize time, many consumers review the highlights through a truncated version on YouTube too.
As for the Emmys, the high quantity of content available online means that many people do not even know what shows are up for awards anymore.
We are at “peak tv.”
And the development of content could simply mean that award shows aren’t interesting anymore.
Nobody has time to sit around for hours of commercials when Netflix is one click away.
We have never had so much content before.
Does that mean investors should all buy Netflix and the world is all well and good?
It did before but we need to revisit their narrative.
Netflix doesn’t exist in a vacuum and the internet content space is a fluid situation.
They scooped up the lion shares of the spoils when on-demand streaming content was a monopoly which in fact was an industry created by them.
But the launch of services that could threaten its top position has crashed Netflix’s (NFLX) shares and they are now negative for 2019.
Shares were trading around a comfortable $380 just three months ago and have parachuted down to $250 today.
The alarming underperformance in shares goes hand in hand with an avalanche of negative news engulfing the company.
One of its most popular legacy show “The Office” was sent packing back to its originators NBC, then Netflix followed off that nasty bit with an earnings report that showed negative domestic new subscriber growth for the first time since 2011.
The growth in the international part of the business was underwhelming too, to say the least.
Without much time to recover, Apple (AAPL), Disney (DIS), NBC, and AT&T (T) announced plans to debut new streaming services that would peel off a substantial amount of Netflix demand.
This news, in effect, puts a cap on Netflix raising the price for their streaming service while confronted with the dreadful future of needing to pay higher prices to generate premium content.
The premise behind Netflix was always the super growth engine that superseded any negative aspects.
To add a little more color, most of these new streaming services are priced to undercut Netflix and investors must wonder how Netflix will be able to overcome these various headwinds at a time when growth companies are getting punished by an outsized rotation to value.
I believe that a dead cat bounce should be met with selling short Netflix.
“Broadcast TV is like the landline of 20 years ago.” – Said CEO and Founder of Netflix Reed Hastings
Mad Hedge Technology Letter
September 23, 2019
Fiat Lux
Featured Trade:
(THE COMING REVOLUTION IN 5G)
(MSFT), (TSM), (AVGO)
5G is overhyped but that doesn’t mean everyone will be a loser.
The shift to fifth-generation wireless technology, or 5G, will offer investors numerous compelling investment opportunities.
It has been predicted that 5G phone shipments will rise from 17 million this year to 130 million in 2020 and 327 million in 2021.
However, on the flip side of it, 5G, especially for the technically astute consumer and at current prices, is oversold.
At least for 2020.
Some percentage of teens and students will want to watch movies and play high-bandwidth games on their phones but when they discover the data costs, they will retreat from such purchases.
Also, many who hype 5G aren't aware of the technical limitations especially for those outside of certain metro areas.
It could turn out to be a vanity buy for some or most.
It will benefit businesses, of course, but not the majority of the cell phone market. Certainly not in the US.
Even for me, everything I use on my smartphone wouldn’t need 5G.
If there is no noticeable effect, then do consumers really need this technology?
I would say not until something more comes out that requires us to need 5G and I do not see that on the horizon.
Back in the world of the stock market, many analysts understand that RF (radio frequency chip) supply chain companies are compelling in their new growth opportunities for 5G phones.
Even if many consumers do not need 5G, many device makers will splurge on their supply chain to get there, meaning chip companies who sell 5G components will gain.
The marketing of 5G entails the standard hyping-up of the shift to 5G.
And industry participants would say it is substantially important to the semiconductor and telecom industries, but it will take time to absorb on the consumer side.
Analysts expect 5G to deliver speeds 10 to 40 times faster than current 4G LTE networks. Its lower latency promises to enable new applications from augmented reality and automated factories to self-driving and cloud gaming.
But as I referenced above, there are only a handful of consumers that need cloud gaming and augmented reality.
Automated factories work with the current speed of technology and in a global slowdown, corporates will want to wait for a healthier environment to initiate a new CAPEX cycle.
Here are some chip stocks that supply chain could benefit from.
Taiwan Semiconductor Manufacturing (TSM) is a stock with thematic drivers that can potentially benefit from the upcoming 5G renaissance and global supply chain shifts.
TSM has a large foundry and advanced chip-making technology leadership.
Broadcom (AVGO) will also become a vital winner of 5G smartphone adoption while supplying specialized processors for 5G front and back haul.
Broadcom will supply chips to both Apple and Samsung for their 5G smartphones.
The rapid run of chip shares could have more to go for the end of the year as investors have front-run chip stocks for the past few months.
However, I do believe that the downdraft in smartphone demand and connected devices will hurt the end product sales.
Consumers will hold off on buying 5G-supported Huawei, Samsung, and Apple products, meaning chip stocks could stall out after this nice run.
Mad Hedge Technology Letter
September 20, 2019
Fiat Lux
Featured Trade:
(MICROSOFT’S BOLT FROM THE BLUE)
(MSFT)