Tech Letter Archives - Mad Hedge Fund Trader

Splunk's Swan Dive

The data analytics stock Splunk (SPLK) was downgraded from outperform to neutral with a $127 target by an analyst yesterday morning.

On Wednesday, Splunk reported Q2 beats with upside revenue outlook and announced the $1.1B acquisition of SignalFx.

The stock was down 11% yesterday morning offering investors a good entry point.

Data and the analytics needed with it is all the rage and here to stay, yesterday was a good day to strap on a call spread, a bet that the stock will stay above $100 by September 20^th.

Splunk Inc. provides software solutions that enable organizations to gain real-time operational intelligence in the United States and internationally.

Its products enable users to investigate, monitor, analyze, and act on data regardless of format or source.

Splunk yesterday announced that it had acquired SignalFx for a total price of about $1.05 billion.

Approximately 60% of this will be in cash and 40% in Splunk common stock. The companies expect the acquisition to close in the second half of 2020.

SignalFx, emerged from stealth in 2015, provides real-time cloud monitoring solutions, predictive analytics and more.

This acquisition will give Splunk an edge in observability and actions per minute (APM) for organizations at every stage of their cloud journey, from cloud-native apps to homegrown on-premise applications.

Splunk will become a power player in the cloud space as it expands its support for cloud-native applications and the modern infrastructures and architectures those rely on.

Big data generates revenue in modern business period.

Dealing for SignalFx directly lifts Splunk in position at the cutting edge of monitoring and observability at massive scale.

SignalFx will support the continued commitment to giving customers one platform that can monitor the entire enterprise application lifecycle.

This deal is about growing a larger pie for everyone, so it's a commendable move that should help Splunk maintain its sales momentum.

Splunk is in an industry expanding fast with global spending on cloud services and infrastructure set to double by 2023, again according to IDC.

Splunk faces a few headwinds such as negative free cash flow and part of the reason is the result of a transition in renewable licensing contracts and subsequent revenue recognition.

Splunk will soon debut their new pricing plans, reducing the cost of its data volume-dependent model to help its customers run more information through the Splunk system.

Free cash flow is now at negative $120 million so far this year, compared to positive $102 million through the first half of last year.

Mushrooming top-line growth for this software company and management giving another upgrade to full-year expectations are the short-term catalysts boosting shares.

Splunk is one of the premium data analytics play out there and a compelling long-term buy.

August 23, 2019 - Quote of the Day

Tech Letter

“Success is a lousy teacher. It seduces smart people into thinking they can't lose.” – Said Co-Founder of Microsoft Bill Gates

August 21, 2019

Tech Letter

Mad Hedge Technology Letter
August 21, 2019
Fiat Lux

Featured Trade:

(DOES ARTIFICIAL INTELLIGENCE WORK?)
(A.I.)

Does Artificial Intelligence Work?

Tech Letter

The untold story of artificial intelligence and why it doesn’t work is a story that doesn’t see the light of day.

But we live in it, around it, and will be deeply affected by it in the future.

The unbridled growth of the market for data labeling passed $500 million in 2018 and it will reach $1.2 billion by 2023.

Companies are spending around 80% of A.I. technology resources building these machine learning databases highlighting how corporations have bet the ranch on this new form of technology.

Online data-labeling services in far-flung lands are taking advantage of cheap labor to assign manual labels to images from anything such as green bottles or milk cartons.

This superhuman effort underpins the technology of machine learning.

These low paid foot soldiers could eventually hollow out the mid-level job market where upper management find it convenient to rely on software in a hybrid relationship.

Or will they?

This technology called machine learning is effectively constructing a mega library of data and, in many cases, images where it can match and then offer a solution in real-time.

For example, a garbage collector can commission software to construct a garbage item segregator and the green bottle that is captured by cameras can identify whether it is plastic, glass, and should be recycled or not.

The results are then relayed to the system and database with ensuing instructions.

A robust database chronicling thousands of green bottles will offer conclusive evidence delivering a solution to the placement of this green bottle via the machine learning garbage segregation software.

This certain example is one small instance of how machine learning can be incorporated into real life in a successful manner.

Human labor through an army of image labelers is needed to undertake this project.

One of the factors that make this particular example favorable to machine learnable achievement is operating in absolutes.

The green bottle must be composed of a certain material.

Software will indicate whether a bottle is glass and then categorize the green bottle through verification in the database.

A positive actionable result is the most likely outcome with this green bottle.

This is the type of data through image labeling that feeds artificial intelligence software to work in ways the creators of these projects hoped for.

But where does machine learning fantastically fail?

The database is a historical snapshot of what the world used to be and the second a database is updated, it also becomes more historical.

Artificial Intelligence cannot predict future change.

The velocity of change to the world in 2019 has picked up steam with every type of phenomenon transforming through new iterations manifested in corporations and other business in shorter time spans.

A historical database does not reflect the world in which we live now but can only record what happened in the past.

If climate change rears its ugly head through stringent policy and banned green bottle production in the world, a backward-looking database would have no need for useless green bottle data leftover in the system.

This is a shortcoming of machine learning.

Then as policymakers or technology entrepreneurs naturally pursue their goals, paradigm shifts that quickly rush in to distort old databases cannot be accounted for in the new software causing the error-rate to mushroom.

Since machine learning is inherently reliant on tedious human labor to develop a database, these databases cannot be fixed in days.

The best entrepreneurs are on top of the pulse of future development and can tailor-make a business whether it is software or physical product to capture the potential demand.

Nimbleness and adaptability are in vogue and machine learning cannot provide these important skills.

Machine learning software can be applied in certain niche situations like facial recognition.

These programs will never become skilled enough to make the critical decisions or be the x-factor in a business.

Training your company to be like the past and not the future is a kamikaze mission.

The world moves on and business needs to capture that.

August 21, 2019 - Quote of the Day

Tech Letter

“I started the site when I was 19. I didn't know much about business back then.” – Said Co-Founder and CEO of Facebook Mark Zuckerberg

August 19, 2019

Tech Letter

Mad Hedge Technology Letter
August 19, 2019
Fiat Lux

Featured Trade:

(ZILLOW’S BAD MOVE)
(Z),

Zillow's Bad Move

Tech Letter

If you think Zillow posting lower guidance for the third quarter was a one-off event then open your eyes a little bigger – real estate conditions for selling homes will most likely worsen even though interest rates have dropped in a rapid fashion of late.

In fact, the velocity of the recent interest rate drop is a harbinger for an upcoming recession or the best we can hope for is a mild slowdown even if not recessionary.

Who is that company that leveraged up to make big bets at the top of the economic cycle?

Zillow.

There are smart times to do risky business and times to sit on your hands and wait.

Timing couldn’t have been more abysmal.

Zillow also confided to investors that their business that facilitates agents to connect with potential home buyers for a fee will burn $80 million in the third quarter before EBITDA.

But Zillow didn’t stop there.

They have mobilized a good chunk of their chips betting that house flipping is a good idea when the global economy is decelerating at warp speed and price appreciation in property value is slowing meaningfully.

They even broke off around 41.5% of its revenue from selling homes in the three months ending June 30 which could be the high watermark.

Precisely $248.9 million of $599.6 million in revenue came from Homes segment which is described as buying up property and selling them on for a profit.

Investors must calculate whether Zillow will get stuck with thousands of properties and the cost of carry.

Zillow could enter a situation where nobody will buy their properties and must sell them for deep discounts.

That is the end game and Zillow and its audacious management is barreling right ahead.

This worse case scenario would put heavy pressure on their ability to service debt.

Other signs have gone unnoticed like the recent canary in the coal mine of recessionary data from manufacturing in the U.S.

The slowdown in the volume of housing sales has been pronounced too.

In the current market, many buyers and particularly homebuyers are priced out of the market supported by the lack of buyers even with historically lower rates.

Refinancers took advantage of these rates to cut their debt load but there has been a lukewarm response and no flurry of new homebuying that economist had predicted.

As the global slowdown veers closer and closer to the American economy, Zillow could be in for a hard landing and whoever is caught out with too many properties in the wrong markets is doomed too.

Then there are other risks such as climate change and a wildfire season that is about to grow fiercer by the year.

Can Zillow absorb another hurricane in Houston or New Orleans?

Zillow has not only levered up on the type of business but as well as dipping into the M&A sphere by gobbling up StreetEasy for $50 million in 2013 and Trulia for $3.5 billion the following year.

The company has been caught asleep at the wheel by a stagnating digital ads business which was once the bread and butter.

Management’s response of electing to go for a riskier business instead of the lower hanging fruit of ramping up the digital ad business is a head-scratcher.

Digital ads can be scaled easier than buying physical homes, and 2020 could be a year to forget for Zillow and it is too late to sell on these assets without a deep discount.

Any tech company scaling their tech know-how has been an outsized winner.

Everybody and their mother are preparing for a global slowdown and American recession except Zillow.

I am bearish Zillow for the rest of the year and 2020.

August 19, 2019 - Quote of the Day

Tech Letter

“Being the richest man in the cemetery doesn't matter to me. Going to bed at night saying we've done something wonderful, that's what matters to me.” – Said Co-Founder and Former CEO of Apple Steve Jobs

August 16, 2019

Tech Letter

Mad Hedge Technology Letter
August 16, 2019
Fiat Lux

Featured Trade:

(CISCO’S CHINA HIT)
(WEWORK), (CSCO), (FXI)

Cisco's China Hit

Tech Letter

If you believe that the trade war developments have had a negligible effect on the tech companies that operate in mainland China, then you are dead wrong.

Cisco is a cautionary tale highlighting that things aren’t running smoothly with its decrease of 25% in annualized revenue from operations in mainland China.

Many of the profit models in China have been swallowed up by the friction between the two governments at the highest level.

The Cisco employee count was sacrificed stateside with the San Jose, California branch implementing a second round of layoffs that will sweep aside 500 more Cisco engineers.

The most damming set of words that epitomized the dire situation that Cisco face is when management said, “we’re being uninvited to bid …We’re not being allowed to even participate anymore.”

The Chinese government has disengaged Cisco from competing in China and that means a whole channel of revenue will be effectively offline for the foreseeable future unless there is substantial rapprochement from the two governments.

Perusing the files of venture capitalist heartthrob WeWork that plans to go public proved that relations with China and doing business is a financial high-wire act.

I will explain.

WeWork’s 350-plus-page IPO prospectus offered insight into the treacherous nature of business exposure in the Middle Kingdom.

Any investor who rummaged through the prospectus has to be dreading the worse because the boobytraps are plentiful.

A cynical take of WeWork’s business tells me they are doomed in China.

Property is in control of a huge swath of Chinese wealth vehicles and commercial property is part of that equation.

According to the filing, WeWork is contracted to 115 buildings across 12 cities in Greater China, about 15% of its total number of facilities.

I envision property law skirmishes of the foreign WeWork against local property landlords and by historical standards, the court system has not been kind to non-Chinese who seek justice in the Chinese court system against Chinese national interests.

WeWork’s management references “higher tariffs, capital controls, new adverse trade policies or other barriers to entry” as possible counterpunches to an already delicate working environment.

The pressure cooker could explode at any point with the higher-ups making heads roll at the corporate level to prove a point at a macrolevel.

Foreign companies are easy targets and WeWork is an American company – a double whammy that could make it a convenient target for the Chinese communist party.

Summing it up, this is not an advantageous time to lever up on the Chinese economy.

Risk control is needed and this smells like a ticking time bomb.

It really shows how the tech landscape has disintegrated for American companies in China.

They were once welcomed with grandeur and hospitality plus the forced technology transfers.

CEOs bit their tongue because the revenue growth surpassed the cons of cyberespionage and outright theft.

With the accumulation of generations of free knowhow, China is now locked and loaded with a tech industry that rivals anyone in the world.

The last item left on the menu are high-grade semi chips which the Chinese have not mastered yet and that might be the last stand for the Americans if they hope to salvage a stunning comeback victory.

If WeWork does manage to go public without the equity market raining down on its parade, it’s an outright sell and stay away.

It’s nothing but a glorified property manager and its interests in China could open up pandora box.